F E R R E X P O P L C 2 0 1 7 A N N U A L R E P O R T & A C C O U N T S FERREXPO PLC 2017 ANNUAL REPORT & ACCOUNTS WELCOME TO FERREXPO Ferrexpo is an iron ore pellet producer with mining and processing operations in Ukraine and sales offices around the world. The Group has had a premium listing on the Main Market of the London Stock Exchange since its IPO in June 2007 and it is currently a constituent of the FTSE 250 Index and the FTSE4Good Index. Ferrexpo is the largest exporter of iron ore pellets in the Former Soviet Union (the “FSU”) and currently the third largest supplier of blast furnace pellets to the global steel industry. See pages 12–16. Our long life resource base and well invested production process enables us to be a low cost producer of a high-quality iron ore product. This, combined with our established logistical infrastructure, allows us to deliver to our diversified, global customer base. See pages 2–7. Ferrexpo plc 2017 Annual Report & Accounts CONTENTS GROUP PERFORMANCE 2017 1 STR ATEGIC REPORT Welcome to Ferrexpo Group Performance 2017 Ferrexpo’s Business Model A Long Life Resource Well Invested Production Process High Quality Product Low Cost Producer Established Logistics High Quality Customer Base Chairman’s Statement Market Review Performance Review Strategic Framework Key Performance Indicators Risk Management Principal Risks Viability Statement A Responsible Business CORPOR ATE GOVERNANCE Board of Directors Executive Committee Corporate Governance Report Nominations Committee Report Audit Committee Report Relations with Shareholders Remuneration Report Directors’ Report Statement of Directors’ Responsibilities FINANCIAL STATEMENTS Independent Auditor’s Report to the Members of Ferrexpo plc Consolidated Income Statement Consolidated Statement of Comprehensive Income Consolidated Statement of Financial Position Consolidated Statement of Cash Flows Consolidated Statement of Changes in Equity Notes to the Consolidated Financial Statements Parent Company Statement of Financial Position Notes to the Parent Company Financial Statements Additional Disclosures Alternative Performance Measures Glossary Shareholder Information IFC 01 02 04 05 06 06 07 07 08 12 18 28 30 32 34 40 41 50 52 53 59 61 66 67 82 86 88 96 97 98 99 100 101 145 146 149 150 153 IBC LOST-TIME INJURY FREQUENCY R ATE TOTA L PRODUCTION 1.17x Group LTIFR in line with 2016 (2016: 1.17x) 1 fatality during the year (2016: 2) 10.4MT 95% of production of 65% Fe pellets (2016: total production 11.2Mt, 94% of production 65% Fe pellets) RE V ENUE +21% US$1.2BN (2016: US$986M) UNDERLYING EBITDA A +47% US$551M (2016: US$375M) PROFIT FOR THE Y E A R +108% US$394M (2016: US$189M) UNDERLYING DILU TED EP S A DILU TED EP S +109% 66.85¢ (2016: 31.91¢) NE T DEBT TO EBITDA A <1.0x 0.73x (2016: 1.57x) +110% 66.91¢ (2016: 31.91¢) NE T CASH FLOW FROM OPER ATING ACTIVITIE S +6% US$353M (2016: US$332M) INTERIM A ND FIN A L DIVIDEND +100% 3.3¢ + 3.3¢ = 6.6¢ (2016 interim and final dividend: 3.3¢) SPECIA L DIVIDEND (INTERIM & FIN A L) +200% 9.9¢ (2016: 3.3¢) A LTERN ATIV E PERFORM A NCE ME ASURE S Words with the symbol A are defined in the Alternative Performance Measures section of the Annual Report on pages 150–152. Ferrexpo plc 2017 Annual Report & AccountsFINANCIAL STATEMENTSSTRATEGIC REPORTCORPORATE GOVERNANCE 2 FERREXPO’S BUSINESS MODEL HOW WE ADD VALUE LONG LIFE IRON ORE MAGNETITE DEPOSIT IN UKRAINE c.28% Fe content MAGNETITE IRON ORE CAN BE UPGRADED AND ENRICHED THROUGH A CAPITAL INTENSIVE PROCESS OTHER KEY INPUTS FOR PRODUCTION PROCESS: – SKILLED LABOUR FORCE – RELIABLE SUPPLY OF WATER, ELECTRICITY AND GAS ESTABLISHMENT OF: – MINE – PROCESSING PLANT – PELLETISING PLANT FERREXPO HAS INVESTED OVER US$2.15BN SINCE 2007 HIGH QUALITY 65% FE IRON ORE PRODUCT (IN THE FORM OF PELLETS) – CENTRAL EUROPE – WESTERN EUROPE – NORTH EAST ASIA – CHINA & SOUTH EAST ASIA – TURKEY, MIDDLE EAST & INDIA – GLOBAL LOGISTICS CAPABILITY – REGIONAL MARKETING OFFICES FERREXPO SELLS PELLETS TO A DIVERSIFIED GLOBAL CUSTOMER BASE CONSISTING OF THE BEST STEEL MILLS IN THE WORLD WHO ARE “CRISIS RESISTANT” STRATEGIC REPORTFerrexpo plc 2017 Annual Report & Accounts 3 WELL INVESTED PRODUCTION PROCESS LOW COST COMPETITIVE PRODUCER CASH GENERATIVE THROUGHOUT THE COMMODITIES CYCLE CASH UTILISED TO ENSURE: 1 STRONG BALANCE SHEET TO WITHSTAND INHERENT RISK, OPERATING IN AN EMERGING MARKET AND A VOLATILE COMMODITIES INDUSTRY 2 CONTINUED DEVELOPMENT OF OPERATIONS AND IMPROVEMENT TO PRODUCT 3 CONSISTENT DIVIDENDS TO SHAREHOLDERS SUSTAINABLE STAKEHOLDER RELATIONSHIPS – LONG-TERM CUSTOMER RELATIONSHIPS – STABLE EMPLOYER THROUGHOUT THE COMMODITIES CYCLE – REGULAR PAYMENT OF TAXES TO LOCAL AND CENTRAL GOVERNMENT AUTHORITIES – RELIABLE PARTNER AND CONSUMER OF NATIONAL LOGISTICS AND ENERGY INFRASTRUCTURE – ENCOURAGE AND SUPPORT LOCAL SUPPLIERS – KEY FINANCIAL CONTRIBUTOR TOWARDS COMMUNITY PROJECTS – POSITIVE CONTRIBUTION TO UKRAINE’S TRADE BALANCE – GROUP EXPORTS REPRESENT C.2% OF THE COUNTRY’S EXPORT REVENUE – LONG-TERM SHARE PRICE APPRECIATION TO SHAREHOLDERS AND CONSISTENT DIVIDENDS Ferrexpo plc 2017 Annual Report & AccountsFINANCIAL STATEMENTSSTRATEGIC REPORTCORPORATE GOVERNANCE 4 FERREXPO AT A GLANCE A LONG LIFE RESOURCE Ferrexpo’s significant resource base is situated along a single ore body, which allows for efficient expansion through brownfield developments. 4.0BT BROVARKIVSKE 3.4BT MANUILIVSKE 1.4BT VASYLIVSKE 1.7BT BILANIVSKE 3.4BT GORISHNE-PLAVNINSKE- LAVRYKIVSKE (“GPL”) 0.3BT GALESCHYNSKE JORC CLASSIFIED RESOURCES CLASSIFIED RESOURCES 2.8BT KHARCHENKIVSKE 1.5BT ZARUDENSKE 1.1BT YERYSTIVSKE JORC Reserve Statements as at 1 January 20181 Deposit Gorishne-Plavninske-Lavrykivske (“GPL”) Yerystivske JORC Reserves JORC Resource Statements as at 1 January 2018² Proved MT Fe total % Fe magnetic % Probable MT Fe total % Fe magnetic % 180 207 387 27 34 31 17 27 22 523 416 939 30 32 31 22 25 23 Deposit Gorishne-Plavninske-Lavrykivske (“GPL”) Yerystivske Bilanivske Galeschynske JORC Resources Measured MT Fe total % Fe mag % Indicated MT Fe total % Fe mag % Inferred MT Fe total % Fe mag % 323 212 336 – 871 30 34 31 – 31 20 27 24 – 23 1,653 556 1,149 268 3,626 31 33 31 55 33 23 26 23 – 22 1,445 364 217 58 2,084 31 30 30 55 31 23 23 21 – 22 1 2 The reserve estimates for the GPL deposits were calculated based on a review conducted by SRK in March 2008 less the volume of ore mined from the GPL deposit between 2008 and 31 December 2017. The reserve estimates are based on a report by SRK (UK) dated 15 June 2007. The mineral resource estimate for Yerystivske has been depleted in line with the volume of ore mined between September 2013 and 31 December 2017. STRATEGIC REPORTFerrexpo plc 2017 Annual Report & Accounts WELL INVESTED PRODUCTION PROCESS 5 +US$2.15BN Capital Investment (US$ Million) 430 378 276 278 232 167 105 86 103 65 48 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 Overview of Ferrexpo’s operations in Ukraine Since 2007, Ferrexpo has invested to upgrade and modernise its processing facilities, developed a new open pit mine (the first in the CIS since Independence) and completed a quality upgrade programme to enhance the quality of its pellets. ORE EXTRACTION CRUSHING BENEFICIATION PELLETISING Open cut, hard rock iron ore mining, using truck and shovel. Average Fe content of 28%. The ore is crushed and screened before entering one of two crushing plants. The ore is ground to produce concentrate which is then upgraded to 67% Fe content. Waste material is removed to the tailings storage area. Four kiln grate units heat and form the pellet feed into pellets of around 16mm. DRILLING BLASTING EXCAVATION HAULAGE ORE TO CRUSHER COARSE CRUSHING MEDIUM CRUSHING SCREENING FINE CRUSHING DRY MAGNETIC SEPARATION GRINDING CLASSIFICATION HYDRO SEPARATION MAGNETIC SEPARATION FLOTATION UPGRADE TAILINGS THICKENING FILTRATION BALLING INDURATION Ferrexpo plc 2017 Annual Report & AccountsFINANCIAL STATEMENTSSTRATEGIC REPORTCORPORATE GOVERNANCE 6 FERREXPO AT A GLANCE HIGH QUALITY PRODUCT Increasing Quality of Pellet Production (thousand tonnes) 12,000 10,000 8,000 6,000 4,000 2,000 0 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 ■ Total pellet production % of 65% Fe pellet production In 2015, the Group completed its Quality Upgrade Programme to increase the iron content of its pellets to 65% Fe. As such, production of 65% Fe pellets has increased from 53% of total output in 2014 to 95% of total output in 2017, a record for the Group. 100 80 60 40 20 0 LOW COST PRODUCER Breakeven Cost Curve of Pellet Exports with Delivery to China y-axis: Business costs for pellet exports, 2017, CFR China, US$/t x-axis: Cumulative pellet exports, 2017, Mt Definition: Business costs are the sum of realisation costs and site costs. Realisation costs include the cost of getting the material to market, the marketing of the material and the financing cost of selling the material. The power of business costs is that by adjusting all product qualities relative to the same benchmark (62% Fe fines product delivered to North China) it allows all mines to be compared on a cost curve on a like-for-like basis. This also means that by subtracting the benchmark price from the business costs for a mine you get an estimate of cash flow from that operation. STRATEGIC REPORTFerrexpo plc 2017 Annual Report & Accounts 7 ESTABLISHED LOGISTICS The Group’s logistics infrastructure enables it to transport its pellets by rail, from its mines in the Poltava region to the western border of Ukraine to connect with the European rail network and to the TIS Ruda Terminal in the southern port of Yuzhny for seaborne shipments via capesize vessels. M OS T Y S K A L V IV K Y IV U Z H H O R O D C H OP B A T ’ O V O P OL T A V A F E R R E X PO Z OL O T N I S H I NO Z N A M E N KA BA RGE S 150 19 CA PE SIZE SHIP S LOADED D A N U B E R I V E R P OR T Y U Z H NY P OR T O D E SA D N I E P E R R IV E R S E A O F A Z OV 2,252 R AIL CA RS P OR T I Z M A IL C R I M EA P OR T C O N ST A N T A HIGH QUALITY CUSTOMER BASE 16 SAILING DAYS ( F ROM U K R A I N E TO M I D DL E E A S T ) 35 SAILING DAYS ( F ROM U K R A I N E TO C H I N A ) CENTRAL EUROPE 49% WESTERN EUROPE TURKEY, MIDDLE EAST & INDIA 15% 8% CHINA & SOUTH EAST ASIA 12% NORTH EAST ASIA 16% Ferrexpo plc 2017 Annual Report & AccountsFINANCIAL STATEMENTSSTRATEGIC REPORTCORPORATE GOVERNANCE 8 CHAIRMAN’S STATEMENT A HIGH QUALITY IRON ORE SUPPLIER Another excellent set of results demonstrating strong demand for Ferrexpo’s high-quality iron ore pellets from the world’s leading steel manufacturers. Introduction I am very pleased to report that in 2017 the Group almost doubled its pre-tax profit to US$450 million (2016: US$231 million) while underlying EBITDAA US$551 million (2016: US$375 million). increased by 47% to Net debt was reduced by 32% to US$403 million, its lowest level since 2011, with the net debt to EBITDAA ratio falling comfortably below 1 times to 0.73 times compared to 1.57 times as of 31 December 2016. Ferrexpo achieved a record pellet premium for its product in 2017. Its average received price outperformed the average Platts 62% Fe iron ore fines price by 40%. Driving the improvement in pricing was an increasing divergence during the year for prices paid for different qualities of iron ore, with high-quality iron ore producers, including pellet producers, receiving significant premiums to the benchmark iron ore price, while low-quality producers realised substantial discounts. Ferrexpo, as a pellet producer, was very well placed to benefit from this market development given its long-held strategy of producing and selling a high-quality iron ore product to the best steel mills in the world. Although Ferrexpo’s cost of pellet production per tonne did increase during the year, it is still a low cost producer relative to its peers, and remains in the bottom quartile of the pellet cost curve. Dividends In view of this increase in profitability, the Board was pleased to declare an interim ordinary dividend (3.3 US cents) DUE TO THE GROUP’S PAST INVESTMENT PROGRAMME TO INCREASE THE QUALITY OF ITS PELLETS, AND STRONG DEMAND FOR HIGH- QUALITY IRON ORE IN 2017, FERREXPO ACHIEVED A RECORD PELLET PREMIUM FOR THE YEAR. IN 2018, PELLET PREMIUMS ARE EXPECTED TO INCREASE FURTHER COMPARED TO 2017. STEVE LUCAS CHAIRMAN, FERREXPO PLC GOVERNANCE HIGHLIGHTS – Recruited a new Senior Independent Director to the Board – Board refreshment programme now complete for the time being For more information see the Corporate Governance Report on page 53. STRATEGIC REPORTFerrexpo plc 2017 Annual Report & Accounts 9 US$450M +95% PRE-TAX PROFIT (2016: US$231 million) 66.85 US CENTS +109% DILUTED EPS (2016: 31.91 US cents) 16.5 US CENTS PER SHARE 2017 TOTAL RECOMMENDED DIVIDEND (2016: 6.6 US cents per share) and a special dividend (3.3 US cents) during the year, and today we have announced a final ordinary dividend of 3.3 US cents per share as well as a special dividend of 6.6 US cents per share. If the final ordinary dividend is approved by shareholders, the total dividend relating to 2017 will be 16.5 US cents per share (2016: 6.6 US cents per share).1 its operations to access additional ore, upgrade its processing facilities to improve the quality of its pellet, and establish reliable and cost-effective transportation routes to European and seaborne markets. As a result, it has more than doubled production of its high-quality 65% Fe pellets, and today it is the third largest exporter of blast furnace pellets by volume. Over the past two years, the Group has focused on strengthening its balance sheet and during this time has reduced net debt by US$465 million. Given this strong reduction and the improvement in Group profitability, total dividends of 16.5 US cents per share have been declared for 2017. Going forward, the Group will continue to focus on debt reduction. Following the reduction in capital investment in 2015, due to the low iron ore price environment, investment was gradually increased in 2017. Ferrexpo is implementing a project to increase output of pellet feed by approximately 1.5 million tonnes. Once completed in 2020, it will allow the Group to produce sufficient concentrate to feed all four of its pelletising lines and increase pellet production to 12 million tonnes per annum. Ferrexpo also commenced detailed engineering studies regarding the expansion of its pelletising capacity. Capital will be invested subject to cash flows and market conditions. Looking to the future, I am confident that Ferrexpo will make further progress by improving the quality of its product and increasing production volumes within the constraints of its capital allocation strategy. At the same time, Ferrexpo is one of the lowest cost pellet producers in the world. Going forward, the Group will look to maintain its low cost position within the industry, further improve the quality of its output and increase its production volume. In 2017, production volumes were primarily impacted by the refurbishment of one of the Group’s pelletising lines as well as a general increase in maintenance levels. The Group’s refurbishment programme of its pellet lines will continue into 2018 and 2019. For further information on production, see page 25. Ferrexpo, however, has compelling brownfield projects to incrementally increase its production volumes subject to available cash flows. The Group’s capital allocation strategy is to maintain an appropriate balance between a strong balance sheet, attractive shareholder returns (in the form of dividends) and investment in growth opportunities. This strategy has been designed to reduce the risks inherent in operating in an emerging market while selling our product in a volatile commodities market. Health and Safety We deeply regret a fatality at Ferrexpo Poltava Mining (“FPM”) in 2017 (2016: two). Our goal remains firmly focused on achieving zero fatalities or injuries. On behalf of the Group, I would like to express our sincere condolences to the family of our valued colleague. For further information on health and safety performance, see pages 25 and 44. Industry The steel industry experienced strong profitability in 2017 primarily due to global demand growth and capacity rationalisation in the Chinese steel sector. As such, steel mills looked to increase their utilisation rates, while in China mills also sought to decrease their air emissions by reducing sintering and using higher quality inputs. These factors resulted in increased demand for high-grade ore, including pellet. Meanwhile, additional supply of high grade iron ore, including pellet, was limited, resulting in pellet premiums trading at nine-year highs. For further information on the market environment, see the Market Review on pages 12–16. Strategy Since its IPO in 2007, Ferrexpo has established itself as a high quality producer and exporter of iron ore pellets to the best steel mills in the world. It has done this by investing more than US$2.15 billion into 1 The special dividend will be paid on 16 April 2018 to shareholders on the register at the close of business on 3 April 2018. Subject to approval at the Group’s AGM, payment of the final ordinary dividend will be made on 27 June 2018 to shareholders on the register at the close of business on 1 June 2018. The dividend will be paid in UK Pounds Sterling with an election to receive US Dollars. Ferrexpo plc 2017 Annual Report & AccountsFINANCIAL STATEMENTSSTRATEGIC REPORTCORPORATE GOVERNANCE 10 CHAIRMAN’S STATEMENT CONTINUED Board Changes During 2017, Sir Malcolm Field and Oliver Baring retired as planned. The Board is most grateful to both of them for the valuable contributions they have made. Simon Lockett, who has wide experience of natural resource operations in emerging markets, joined the Board in June and took over as Senior Independent Director in September. The Board’s refreshment programme is now complete. Social Responsibility For the year ended 2017, it is expected that Ferrexpo’s pellet exports will be approximately 1.9% of Ukraine’s total export revenue. The Board believes it is fundamental to ensure that Ferrexpo continues to make a positive contribution to the society in which it operates, aiding the long-term development of Ukraine and creating a stable operating environment for the Group. Ferrexpo provides financial support for a broad array of social programmes across the country and in 2017 invested approximately 2.4% of total Group revenue in these programmes, in line with 2016. These programmes underpin Ferrexpo’s licence to operate and ensure that the community is supported when required. For further information see Responsible Business on pages 41–49. Ukraine The National Bank of Ukraine expects 2017 GDP growth of approximately 2%, in line with 2016. Over the year, there were various encouraging developments. The government implemented several reforms to reduce the regulatory burden on businesses operating within the country. The World Bank’s Doing Business report for the period from 30 June 2016 to 30 June 2017 ranked Ukraine four places higher at 76th out of 190 countries in terms of overall ease of doing business. In August 2017, Moody’s rating agency upgraded Ukraine’s sovereign rating from Caa3 to Caa2 with a positive outlook. The driver for the upgrade was based on the cumulative impact of structural reforms that, if sustained, are expected to improve the government’s financial position. The rating upgrade was constrained by the government’s heavy debt maturity profile over the next several years that is expected to require additional foreign currency lending. In terms of IMF funding, Ukraine received a US$1 billion tranche in April 2017, as part of the US$17.5 billion programme agreed in March 2015. To date, US$7.7 billion has been paid out. The IMF has stressed that further progress is required in the fight against corruption, including the establishment of an independent anti-corruption court. Against this background of GDP growth, improvements to the regulatory environment and a credit rating upgrade, the Board of Ferrexpo believes Ukraine is gradually moving in the right direction although challenges remain. Outlook In 2018, Ferrexpo expects further rationalisation of steel capacity in China which should support global steel margins, and, in turn, is likely to encourage a continued focus on iron making productivity. These dynamics, together with a continued focus by Chinese authorities on the environment and a reduction of air emissions, provide a favourable environment for higher quality iron ore, including pellets. Ferrexpo expects to benefit from higher pellet premiums compared to 2017, reflecting agreements already reached with customers and the prevailing strength in demand for high-quality pellets. From an operational point of view, costs remain subject to commodity prices, the Hryvnia exchange rate and inflation levels in Ukraine. Production volumes will reflect a 65-day pellet line shutdown in the second quarter of 2018. As such, first half 2018 production is expected to be in line with the first half of 2017. Production in the second half of 2018 is expected to be ahead of the second half of 2017. Strategic Report The 2017 Strategic Report, from pages 2 to 49, was reviewed and approved by the Board on 20 March 2018. Steve Lucas Chairman STRATEGIC REPORTFerrexpo plc 2017 Annual Report & Accounts 11 CAT 793D truck operating in FYM pit Ferrexpo plc 2017 Annual Report & AccountsFINANCIAL STATEMENTSSTRATEGIC REPORTCORPORATE GOVERNANCE 12 MARKET REVIEW SERVICING THE DEMAND FOR PELLETS EXTERNAL TRENDS 1 RATIONALISATION OF CHINESE STEEL INDUSTRY 2 IMPLEMENTATION OF STRICT ENVIRONMENTAL CONTROLS IN CHINA 3 STRONG DEMAND FOR HIGHER GRADE IRON ORES 4 CONTINUED SHORTAGE OF PELLETS ON THE WORLD MARKET 5 RECORD PELLET PREMIUMS Capesize vessel waiting for loading at Ferrexpo’s berth in Port Yuzhny STRATEGIC REPORTFerrexpo plc 2017 Annual Report & Accounts 13 Ferrexpo’s pellets are used for high quality steels Steel and Iron Ore Production (million tonnes) 2,000 1,500 1,000 500 0 2016 2017 China steel production World steel production Graph 1: Price Graph for Different Grades of Iron Ore (US$ per tonne) 160 140 120 100 80 60 40 20 Jan 2016 Apr 2016 Jul 2016 Oct 2016 Jan 2017 Apr 2017 Jul 2017 Oct 2017 Jan 2018 Platts 58% Fe fines Platts 62% Fe fines Platts 65% Fe fines 65% Fe pellets1 improving steel profitability (at a high since the global financial crisis in 2007). In terms of the markets most important to global iron ore, besides China, European steel output (including CIS countries) increased 3.8% to 313 million tonnes while North East Asia increased steel production by 1.7% to 175 million tonnes (Source: WSA). Higher steel production combined with high rates of productivity meant demand for iron ore pellet was strong throughout the year. While a limited supply of seaborne pellet resulted in pellet premiums trading at nine-year highs. The average Platts 62% Fe iron ore fines price rose 22% in 2017 to US$71 per tonne (2016: average US$58 per tonne). While the average Platts 65% index increased 35% to US$88 per tonne (2016: average US$65 per tonne), implying strong demand for high grade products through the year. Conversely, the Platts 58% Fe price index decreased 4% in 2017 to an average of US$43 per tonne for the year (2016 average: US$45 per tonne) as low grade products were heavily discounted through most of the year. Graph 1: Price Graph for Different Grades of Iron Ore above shows the growing price differential through the year. Overview of the Iron Ore Market in 2017 Key developments in the steel and iron ore industry in 2017 included: (1) a significant increase in the anti-dumping duties imposed on steel products by many countries around the world; (2) ongoing Chinese government rationalisation of the steel industry as well as implementation of environmental controls to reduce emissions from the local production of pig iron and sintering; and (3) a widening price differential between low grade and high grade raw materials. While anti-dumping duties gave traditional steel-producing countries good reason to lift their own steel production, in China around 50 million tonnes of steel capacity was closed during the year. At the same time, World Steel Association (“WSA”) figures show that China increased its overall crude steel production to 832 million tonnes in 2017 (up from 787 million tonnes in 2016), which included a 30% reduction in steel exports, indicating healthy domestic demand. The elimination of less efficient capacity in the Chinese steel industry increased the profitability of incumbent mills. Higher profitability led mills to maximise their steelmaking capacity, demanding higher quality inputs which also help to limit emissions. Overall, global crude steel production expanded in 2017 by approximately 5.3% due to strong industrial demand and Source: Bloomberg1 65% Fe pellet price is calculated as 62% Fe CFR fines price + Atlantic pellet premium + Fe premium (based on 62% Fe fines price).Ferrexpo plc 2017 Annual Report & AccountsFINANCIAL STATEMENTSSTRATEGIC REPORTCORPORATE GOVERNANCE 14 MARKET REVIEW CONTINUED The Iron Ore Pellet Market According to CRU, in 2017, iron ore pellets accounted for approximately 22% (443 million tonnes) of total iron ore consumption, while lump accounted for 16% (321 million tonnes) and fines 62% (1.2 billion tonnes), see Table 1: Iron Ore Consumption. The proportion of actively traded pellets on global markets, however, comprises only around 8% of total exported iron ore, or the equivalent of 124 million tonnes in 2017. The majority of pellets are captive to certain steel mills or regions, while iron ore fines and lump are mined remotely and predominantly traded on the open (seaborne) market. The largest consumers of pellets are in China, Russia, India, the USA and Iran (accounting for 65% of total pellet consumption in 2017). The largest importers of pellets are China, Japan, Germany, Saudi Arabia and Turkey, with Europe importing approximately 47 million tonnes, followed by North East Asia, which imported approximately 21 million tonnes in 2017. Despite representing approximately 28% of global pellet usage, the 124 million tonne pellet export market sets the price for pellets through negotiations between a limited supply of independent pellet producers and steel mills. The supply of actively traded pellets increased by a net 5 million tonnes in 2017 (2016: 119 million tonnes) from producers in India, Russia and Brazil, while pellet premiums were trading at a nine-year high. This would suggest that most pelletising plants elsewhere were already operating near capacity and could only increase production marginally despite attractive pellet premiums. Table 1: Iron Ore Consumption Pellets Lump Fines (incl. pellet feed) Total iron ore consumption Source: CRU Market Outlook January 2018 2017 global consumption (Mt) 2017 % of total iron ore consumption 2017 exports (Mt) Exports as a % of consumption 443 321 1,230 1,994 22% 16% 62% 100% 124 260 1,130 1,514 28% 81% 92% 76% The table below shows that since 2010 exports of lump and fines have increased by 62% and 44% respectively while the supply of pellets has decreased by nearly 20%. 2010 marked the peak of pellet availability on the export market with 151 million tonnes, 27 million tonnes higher than 2017 levels, of which Samarco accounted for 25 million tonnes. Table 2: Iron Ore Exports Exports of pellet Exports of lump Exports of fines Total iron ore exports Source: CRU Market Outlook January 2018 2010 exports (Mt) 2017 exports (Mt) % change since 2010 2016 exports (Mt) 151 160 787 1,098 124 260 1,130 1,514 -18% 62% 44% 38% 119 260 1,164 1,543 Graph 2: Breakeven Pellet Cost Curve – Delivery to Europe y-axis: Business costs for pellet exports, 2017, CFR Rotterdam, US$/t x-axis: Cumulative pellet exports, 2017, Mt Definition: Business costs are the sum of realisation costs and site costs. Realisation costs include the cost of getting the material to market, the marketing of the material and the financing cost of selling the material. The power of business costs is that by adjusting all product qualities relative to the same benchmark (62% Fe fines product delivered to North China) it allows all mines to be compared on a cost curve on a like-for-like basis. This also means that by subtracting the benchmark price from the business costs for a mine you get an estimate of cash flow from that operation. STRATEGIC REPORTFerrexpo plc 2017 Annual Report & Accounts 15 Table 3: Global Pellet Exporters shows that of the 124 million tonnes of pellet exported in 2017, approximately 30% went to DRI production while the remaining 70% was utilised in blast furnace steel operations. DR pellets are typically higher grade and receive a US$5 to US$10 per tonne premium above the blast furnace pellet premium. Graphs 2 and 3 detail the breakeven pellet cost curve for delivery to Europe and China respectively. Market concentration in the pellet export market is high, with the two largest suppliers of pellets by volume (coloured red and pink in Graphs 2 and 3) holding a market share of approximately 45%. In terms of their breakeven cost, both these exporters sit in the first, second, third and fourth quartile of the cost curve while the higher cost pellet producers require a breakeven 62% Fe CFR fines price of around US$70 per tonne. Ferrexpo is well positioned in the bottom half of the cost curve. In order to satisfy high demand, the largest supplier has announced that it will bring back capacity in 2018 with the restart of operations which have been idled since 4Q 2012, and sit in the fourth quartile of the cost curve. CRU expects that this could add an additional 8 million tonnes to the seaborne market once in full operation (approximately 5 million tonnes in 2018). The capacity restart of further seaborne supply remains uncertain in terms of timing and the volume to be produced. Barriers to entry into the pellet market are high, with significant capital investment required. When developing a greenfield pellet operation it is usually necessary to invest in mining, beneficiation, pelletising and logistics capability. Table 4: Recent Capacity Additions to the Pellet Market shows the cost of the most recent capacity additions to the seaborne pellet market. As a pellet exporter, which has established operations and is well positioned geographically to supply major import markets, Ferrexpo benefits from operating in a niche sub-sector of the iron ore market with high barriers to entry, at a low cost relative to the competition. Graph 3: Breakeven Pellet Cost Curve – Delivery to China y-axis: Business costs for pellet exports, 2017, CFR China, US$/t x-axis: Cumulative pellet exports, 2017, Mt Definition: Business costs are the sum of realisation costs and site costs. Realisation costs include the cost of getting the material to market, the marketing of the material and the financing cost of selling the material. The power of business costs is that by adjusting all product qualities relative to the same benchmark (62% Fe fines product delivered to North China) it allows all mines to be compared on a cost curve on a like-for-like basis. This also means that by subtracting the benchmark price from the business costs for a mine you get an estimate of cash flow from that operation. Table 3: Global Pellet Exporters Million tonnes Vale (Brazil & Oman) LKAB (Sweden) Ferrexpo (Ukraine) Rio Tinto (IOC, Canada) Severstal (Russia) Metalloinvest (Russia) ArcelorMittal (QCM Canada) Metinvest (Ukraine) CMP (Chile) Bahrain Steel Grange (Australia) Evraz US Exports Sub-total Other Total pellet exports 2017 (BF+DR) 2016 Blast furnace 21.6 12.0 11.7 8.0 4.9 4.0 5.1 3.4 2.4 3.0 2.7 0.4 – 79.2 2016 Direct reduction 16.3 6.5 – 1.8 – – 0.8 – – – – – 8.4 33.8 2017 Blast furnace 2017 Direct reduction 17.1 7.0 – 2.6 – 0.1 0.6 – – – – – 7.9 35.3 20.8 11.8 10.5 7.7 6.0 5.6 5.6 4.8 2.8 2.8 1.8 0.5 – 80.7 8 124 Ferrexpo’s share of total export market 8.5% Sources: CRU, government statistics, Bloomberg, Ferrexpo analysis. Ferrexpo plc 2017 Annual Report & AccountsFINANCIAL STATEMENTSSTRATEGIC REPORTCORPORATE GOVERNANCE 16 MARKET REVIEW CONTINUED Table 4: Recent Capacity Additions to the Pellet Market New pellet capacity Duration Tonnes Cost Samarco 2011-2014 8.3Mt R$6.459bn Cost/tonne of pellet capacity Description US$391/ tonne (US$3.251bn equivalent) Construction of 9.5Mt concentrator Construction of slurry pipeline with 20Mt capacity Construction of 8.3Mt pelletiser 9Mt increase in port capacity Construction of pellet plant Construction of pellet plant Construction of pellet plant US$680m or US$113/tonne Expanded mining and beneficiation capacity Vale Tubarão VIII 2011-2015 7Mt US$1.3bn Metalloinvest 2012-2015 5Mt RUB16bn (US$460m equivalent) NMLK 2011-2016 6Mt RUB41bn (US$1.4bn equivalent) US$176/ tonne US$92/ tonne US$233/ tonne Source: Company announcements Table 5: Consumption of Iron Ore per tonne of Hot Metal Kg of Fe/tonne of hot metal Europe % of mix NE Asia % of mix China % of mix Pellets Lump Fines Total 522 119 949 1,590 33% 7% 60% 171 371 1,069 1,611 11% 23% 66% 180 213 1,271 1,664 11% 13% 76% Source: CRU statistical review January 2018 Pellet Utilisation Rates and Forecast Pellet Demand Growth Pellet utilisation rates in a blast furnace vary regionally across the world. Table 5: Consumption of Iron Ore per tonne of Hot Metal shows the consumption of pellet, lump and fines per tonne of hot metal in Europe, North East Asia and China. Europe remains a large and globally important market for pellets whilst the proportion of sintering in China is high at close to 80% and North East Asia utilises a higher proportion of lump. Sintering is generally the most polluting part of steelmaking and has been targeted as part of the Chinese government’s anti- pollution controls. In Europe and North East Asia, steel plants have limited sintering capacity while lump contains a higher level of impurities compared to pellets and, given it is naturally occurring, has an inconsistent form, making it a less reliable input compared to pellet. These factors limit the overall proportion of lump that can be used in a blast furnace and support the consumption of pellets going forward. As with fines and lump, the largest consumer of pellets is China, consuming 144 million tonnes in 2017 compared to 135 million tonnes in 2016. In 2017, China produced approximately 125 million tonnes of pellet internally (2016: 120 million tonnes) and imported 19 million tonnes (2016: 15 million tonnes). China’s own production of pellets peaked in 2010 at 140 million tonnes. CRU estimates that since 2016 China has closed approximately 60 million tonnes of pelletising capacity which was considered to be obsolete. Ferrexpo believes there is a large range of mining operations in China with a wide spectrum of cost structures; however, the marginal cost to produce concentrate in China is estimated to be approximately US$70 per tonne compared to the average 62% Fe fines price in 2017 of US$71 per tonne. As China is a large consumer of pellet, the high local cost of marginal pellet supply should support demand for imports of pellet. The consumption of iron ore in 2017 was approximately 2 billion tonnes (see Table 1: Iron Ore Consumption on page 14); a 1% increase in the proportion of pellet in the blast furnace burden mix would lead to an additional 20 million tonnes of pellet demand. STRATEGIC REPORTFerrexpo plc 2017 Annual Report & Accounts 17 Ferrexpo rail cars Ferrexpo plc 2017 Annual Report & AccountsFINANCIAL STATEMENTSSTRATEGIC REPORTCORPORATE GOVERNANCE 18 PERFORMANCE REVIEW A HIGH QUALITY IRON ORE SUPPLIER The Group’s Quality Upgrade Programme, completed in 2015, allowed Ferrexpo to fully capture the increase in market premiums for high quality iron ore, with its 65% Fe pellet product. KOST YANTIN ZHEVAGO, CEO THE GROUP’S CAPITAL ALLOCATION STRATEGY IS TO MAINTAIN AN APPROPRIATE BALANCE BETWEEN A STRONG BALANCE SHEET, ATTRACTIVE SHAREHOLDER RETURNS AND INVESTMENT IN GROWTH OPPORTUNITIES. THIS STRATEGY HAS BEEN DESIGNED TO REDUCE THE RISKS INHERENT IN OPERATING IN AN EMERGING MARKET WHILE SELLING OUR PRODUCT IN A VOLATILE COMMODITIES MARKET. CHRIS MAWE CHIEF FINANCIAL OFFICER CHRIS MAWE, CFO STRATEGIC REPORTFerrexpo plc 2017 Annual Report & Accounts 19 21% INCREASE IN REVENUE to US$1.2 billion 47% INCREASE IN UNDERLYING EBITDA A to US$551 million 108% INCREASE IN PROFIT FOR THE YEAR to US$394 million Given its improved profitability and cash generation, the Group was pleased to announce an increase in dividends, and if the final ordinary dividend is approved by shareholders, dividends will total 16.5 US cents per share for the full year. Revenue Group revenue increased 21% to US$1.2 billion compared to US$986 million in 2016. The Group’s long-term contracts are all based on a spot index iron ore fines price using various reference periods and takes into account the cost of international freight, typically the C3 index from Brazil to China. Pellet premiums are typically negotiated annually, half-yearly or quarterly. Ferrexpo’s achieved price in 2017 increased by US$27 per tonne compared to 2016. This takes into account price movements in the benchmark Platts 62% Fe iron ore fines price as well as movements in pellet premiums and C3 freight. In 2017, the 62% Fe iron ore fines spot price increased 22% with an average price of US$71 per tonne compared to US$58 per tonne in 2016. Due to strong market demand for high grade pellets, the Group achieved a record average pellet premium. Overall, the Group’s net pellet premium increased 86% compared to 2016 levels. FINANCIAL RESULTS Summary Strong demand for high quality iron ore in 2017 enabled Ferrexpo to achieve a record pellet premium for its product. The Group’s Quality Upgrade Programme, completed in 2015, allowed it to fully capture the increase in market premiums for its 65% Fe pellet product, which represented a record 95% of total pellet output during the year. While pellet premiums reached a record for the Group, costs per tonne increased from a ten-year low in 2016. The increase reflected higher costs for commodity priced inputs as well as the impact of a 7% decline in production volumes due to maintenance activities. Underlying EBITDAA increased by 47% to US$551 million (2016: US$375 million) reflecting higher revenue partly offset by cost inflation. Profit for the year increased by US$205 million to US$394 million (2016: US$189 million). This was driven by the US$176 million increase in underlying EBITDAA as well as a lower net finance expense and lower reduction in write-offs and special items. Ferrexpo continued to focus on further debt reduction in 2017. During the year, the Group repaid US$239 million of debt and net debt declined by US$186 million to US$403 million as of 31 December 2017 (31 December 2016: US$590 million). Net debt has reduced by US$465 million since it peaked at US$868 million as of 31 December 2015, while net debt to underlying EBITDAA is at a six-year low and sits comfortably below 1x at 0.73x (2016: 1.57x). Flotation cells in the beneficiation plant Ferrexpo plc 2017 Annual Report & AccountsFINANCIAL STATEMENTSSTRATEGIC REPORTCORPORATE GOVERNANCE CAT 793D truck in FYM pit 20 PERFORMANCE REVIEW CONTINUED The cost of international freight increased in 2017 due to strong demand and rising oil prices. The average C3 freight rate increased US$6 per tonne to US$15 per tonne. As such, turnover from international freight services increased to US$73 million compared to US$66 million in 2016. Sales volumes for the year were 10.5 million tonnes compared to 11.7 million tonnes in 2016. Sales volumes in 2016 benefitted from a one-off destocking of approximately 400,000 tonnes of pellets which did not repeat in 2017. Sales volumes in 2017 were also impacted by lower production volumes. Pellet stocks as of 31 December 2017 were 390,000 tonnes compared to 369,000 tonnes at the end of 2016. Costs Cost of Goods Sold Ferrexpo’s total cost of goods sold was US$411 million in 2017 compared to US$400 million in 2016. The 3% increase primarily reflected higher commodity price inputs and an increase in maintenance activities and costs partly reduced by lower production levels. C1 Cash Cost of ProductionA The Group’s C1 cash cost of production was US$32.3 per tonne compared to a ten-year low of US$27.7 per tonne in 2016. The US$4.6 per tonne increase reflected higher commodity prices, increased maintenance activity, increased mining activity and lower production volumes. Costs of approximately US$53 million (or US$5 per tonne of pellet output) were incurred in the mining of lean (lower grade) ore which is currently being stockpiled and has, therefore, not been reported within the C1 cash cost of production, but is reflected in working capital. It is planned that this lean ore will be utilised once the Group has installed additional processing capacity. For further information see Capital Investment on page 27. The C1 Cash Cost of Production is regarded as an Alternative Performance Measure (“APM”). For further information see page 150. Selling and Distribution Costs Selling and distribution costs were US$220 million compared to US$210 million in 2016. The increase primarily reflected higher seaborne freight rates (see Revenue). As such, international freight increased by US$7 million to US$73 million. Rail costs to transport pellets to border points for export increased marginally during the year, reflecting a 15% increase in domestic railway tariffs. This increase was partially offset by a slight depreciation of the Ukrainian Hryvnia against the US Dollar. Currency Ferrexpo prepares its accounts in US Dollars, whereas the functional currency of the Ukrainian operations is the Hryvnia. During 2017 the Hryvnia devalued 3% from UAH27.19 per US Dollar as of 1 January 2017 to UAH28.07 per US Dollar as of 31 December 2017. Ukrainian Hryvnia vs. US Dollar 1 January 2017 31 December 2017 Average 2017 Average 2016 UAH per US$ 27.19 28.07 26.60 25.55 Source: National Bank of Ukraine. Local balances at 31 December 2017 are converted into the Group’s reporting currency at the prevailing exchange rate. The devaluation of the Hryvnia during the financial year 2017 resulted in a US$41 million reduction in net assets, as reflected in the translation reserve. STRATEGIC REPORTFerrexpo plc 2017 Annual Report & Accounts 21 Operating Foreign Exchange Gains/Losses Given the functional currency of the Ukrainian subsidiaries is the Hryvnia, a devaluation of the Hryvnia against the US Dollar results in foreign exchange gains on the subsidiaries’ US Dollar denominated receivable balances (from the sale of pellets). The lower operating foreign exchange gains in 2017 of US$6.7 million (2016: US$13.8 million) reflected a relatively stable Hryvnia against the US Dollar during the year. Non-operating Foreign Exchange Gains/Losses Non-operating foreign exchange gains/ losses are mainly due to the conversion of loans in currencies different to the functional currency of certain subsidiaries of the Group, and are the net effect from a lower devaluation of the Hryvnia to the US Dollar in 2017 compared to 2016 and a significantly stronger appreciation of the Euro to the US Dollar. The Euro appreciated from 0.956 per US Dollar to 0.838 per US Dollar in 2017. Profit Before Tax and Finance Profit before tax and finance increased by US$187 million to US$496 million compared to US$309 million in 2016, principally reflecting a US$177 million increase in operating profit to US$490 million (2016: US$314 million) due to higher sales prices partly offset by lower sales volumes and cost inflation. Interest and Debt Gross debt reduced by 32% in 2017 and as of 31 December 2017 was US$501 million (31 December 2016: US$734 million). This reflected repayment of US$194 million of the Group’s outstanding Pre-Export Finance (“PXF”) facility, US$26 million Export Credit Agency debt and a US$19 million repayment of trade finance facilities. In November 2017, the Group secured a new PXF facility of US$195 million. The interest rate on this facility is 450 basis points + 3-month US LIBOR. Ferrexpo plc 2017 Annual Report & AccountsFINANCIAL STATEMENTSSTRATEGIC REPORTCORPORATE GOVERNANCE 22 PERFORMANCE REVIEW CONTINUED Due to the fall in gross debt, finance expense was US$55 million during the period (2016: US$67 million). The average cost of debt for the period ended 31 December 2017 was 8.0% (average 2016: 6.7%). The increased average rate reflected amortisation of the Group’s PXF facilities which have a lower cost compared to the Group’s outstanding US$346 million Eurobond, partly offset by lower average borrowings. With the first redemption of the Group’s Eurobond in April 2018 for US$173 million (the second and final redemption is in 2019 for US$173 million) Ferrexpo expects its interest expense to reduce in 2018 and 2019 subject to increases in LIBOR. As of 31 December 2017, approximately 24% of its debt was floating and 76% fixed. For further details, see Liquidity and Debt Maturity Profile on page 23. Tax In 2017, the Group’s tax charge was US$55 million, resulting in an effective tax rate of 12.3% compared to 18.2% in 2016, or US$42 million. The effective tax rate in 2017 reflected a partial de-recognition of the deferred tax asset on the provision for restricted cash balances as well as recognition of a deferred tax asset at Ferrexpo Yeristovo Mining (“FYM”) related to losses incurred in prior periods. This was partially consumed in 2017 and is expected to be fully offset against future taxable profits. For further information see Note 12 of the financial statements. Profit for the Year from Continuing Operations Profit for the year increased by US$205 million to US$394 million (2016: US$189 million). This was primarily driven by a strong year-on-year increase in EBITDA of US$176 million, as well as a US$12 million reduction in net finance expense, a US$19 million year-on- year increase in non-operating forex gains, and a US$11 million reduction in write-offs and allowances (recorded as special items) offset by a US$13 million increase in corporate profit taxes. For further information on special items see Note 7 and Note 10 respectively of the financial statements. Cash Flows Net cash flows from operating activities were US$353 million in 2017 compared to US$332 million in 2016. This reflected a working capital outflow of US$110 million during the year compared to an inflow of US$9 million in 2016. In 2017, working capital included an outflow of US$53 million (2016: US$42 million) related to the increase in stocks of lower grade iron ore. This ore is expected to be processed once the Group has additional beneficiation capacity in place. In 2016, working capital benefitted from a US$29 million pre-payment from two customers. This pre-payment was reversed in 2017 and, in addition, balances due from customers increased by US$3 million during the year due to higher market prices and timing of sales which were weighted towards December. Inventories increased by US$26 million in 2017 partly due to higher commodity cost inflation as well as higher spare parts and raw materials due to an increase in maintenance activities and a restocking of items to normal levels following a destocking in 2015 and 2016. During the year, Ferrexpo received all VAT outstanding on a regular monthly basis. In 2016, Ferrexpo received a refund of US$27 million of pre-paid corporate profit tax relating to prior years which was reflected in a decrease in VAT recoverable and other taxes recoverable and payable in the cash flow statement. Capital InvestmentA Capital expenditureA in 2017 was US$103 million compared to US$48 million in 2016. Of this, US$79 million was sustaining capex (2016: US$48 million) with US$20 million related to development stripping at FYM. Investment into growth projects was US$24 million (2016: nil). In 2017, the Group re-commenced Phase 1 of its concentrate expansion programme which was postponed in 2015. The project will increase production of pellet feed by approximately 1.5 million tonnes per annum and is expected to cost an additional US$65 million to complete by 2020. The total cost of the project is US$120 million, of which US$48 million was incurred prior to deferment and US$7 million was incurred in 2017. During 2017, Ferrexpo invested US$4.4 million in the development and exploration of the Belanovo, Galeschyno and the Northern Deposits (2016: US$0.5 million). Ferrexpo also commenced engineering studies to expand its pelletising capacity above its current nameplate capacity of 12 million tonnes per annum. For further information see Strategy in the Chairman’s Statement on page 9 and Capital Investment in the Performance Review on page 27. Dividends A final ordinary dividend of 3.3 US cents per share is being proposed (2016: 3.3 US cents), as well as a final special dividend for the year of 6.6 US cents (2016: 3.3 US cents). If the final ordinary dividend is approved by shareholders, the total dividend related to 2017 will be 16.5 US cents per share (2016: 6.6 US cents per share). The special dividend will be paid on 16 April 2018 to shareholders on the register at the close of business on 3 April 2018. Subject to approval at the Group’s AGM, payment of the final ordinary dividend will be made on 27 June 2018 to shareholders on the register at the close of business on 1 June 2018. The dividend will be paid in UK Pounds Sterling with an election to receive US Dollars. STRATEGIC REPORTFerrexpo plc 2017 Annual Report & Accounts 23 Overview of FYM operations LiquidityA and Debt Maturity Profile As of 31 December 2017, Ferrexpo’s total available liquidityA was US$312 million (2016: US$145 million) consisting of US$98 million cash and US$214 million in committed facilities (including a new US$195 million PXF and available facilities of US$19 million on an existing PXF). In addition, the Group has up to US$80 million of unused trade finance facilities. Net debt declined by US$186 million to US$403 million as of 31 December 2017 (31 December 2016: US$589 million). Net debt to underlying EBITDAA for the last 12 months was 0.73x compared to 1.57x as of 31 December 2016. Total debt outstanding, as of 31 December 2017, was US$501 million (31 December 2016: US$734 million). This comprised of US$113 million drawn under a 2013 PXF facility with three quarterly instalments of US$38 million remaining (completing in 3Q 2018); a US$346 million Eurobond maturing in equal parts in April 2018 and April 2019, and US$39 million of Export Credit Agency (“ECA”) funding maturing over the next four years. In 2018, the Group has US$309 million of debt amortisations consisting of a US$173 million Eurobond redemption, US$113 million PXF repayment and US$23 million of ECA amortisations. The PXF facility of US$195 million will amortise over eight quarters with final repayment on 31 December 2020. During 2017, Ferrexpo considerably strengthened its balance sheet and improved its liquidity. This was reflected by credit rating upgrades on Ferrexpo’s long-term corporate and debt rating from B- to B with a positive outlook from Fitch and stable outlook for S&P. S&P, Fitch and Moody’s all rate Ferrexpo’s debt one notch above the Ukraine sovereign rating. Following the successful closure of a new PXF in 2017, Ferrexpo may look to further extend its debt maturity profile in 2018 using the PXF market or other debt capital markets. Ferrexpo plc 2017 Annual Report & AccountsFINANCIAL STATEMENTSSTRATEGIC REPORTCORPORATE GOVERNANCE 24 PERFORMANCE REVIEW PERFORMANCE REVIEW CONTINUED CONTINUED Part of the beneficiation plant at FPM OPERATIONAL REVIEW Marketing Total sales volumes in 2017 were 10.5 million tonnes (2016: 11.7 million tonnes) with the Group’s premium 65% Fe pellet representing a record 95% of total pellet output during the year (2016: 94%). Completion of the Group’s Quality Upgrade Programme in 2015 has allowed Ferrexpo to improve its price realisations and has led to a narrowing of the price gap between itself and the benchmark pellet price. Due to lower production levels in 2017, Ferrexpo focused on servicing its existing long-term customer portfolio. Table 1: Sales Volume by Market Regions shows that the customer mix remained stable compared to 2016. The countries the Group sells the most to are Austria, Germany and Japan. Table 1: Sales Volume by Market Regions Central Europe Western Europe North East Asia China and South East Asia Turkey, the Middle East, India Total sales volume (million tonnes) 2017 49% 15% 16% 12% 8% 2016 48% 17% 16% 13% 6% 10,467 11,697 The Group’s pricing formula for its long- term contracts are all based on a spot index iron ore fines price, usually the Platts 62% Fe iron ore fines price, for various reference periods, and takes into account the cost of international freight, typically the C3 index, as well as a pellet premium which is typically negotiated. Table 2: Sales Volume by Average Reference Period for Iron Ore Fines Calculation shows the split of sales volume agreed according to the average reference period used for the iron ore fines price calculation. Most of the Group’s contracts are based on the average iron ore fines price for the month of sale or for the quarter of sale. Table 2: Sales Volume by Average Reference Period for Iron Ore Fines Calculation Current month One month forward Current quarter Lagging three- month quarter Spot fixed on day Total sales volume (million tonnes) 2017 61% 8% 20% 9% 2% 2016 66% 12% 11% 10% 1% 10,467 11,697 In terms of the reference period used for the calculation of pellet premiums in the sales price formula, it is common practice in the industry for long-term pellet supply contracts to fix a pellet premium on annual basis. There are some exceptions, for example spot sales; however, in 2017 and historically, the majority of Ferrexpo’s pricing has been based on annual pellet premiums. STRATEGIC REPORTFerrexpo plc 2017 Annual Report & Accounts 25 Pellet Production Pellet production in 2017 was 10.4 million tonnes, compared to 11.2 million tonnes in 2016. The Group’s 65% Fe pellet represented a record 95% of total pellet output during the year (2016: 94%); however, overall production levels were impacted by constraints in the processing and pelletising plants. In 2017, production was impacted by an increase in required maintenance (planned and unplanned). In the first half of the year, output reflected a 55-day refurbishment of pellet line number 4. This is part of a programme to refurbish all four of the Group’s pellet lines, as is required approximately every 15 to 20 years. FPM completed the refurbishment of line number 3 in 2014. Due to the low iron ore price environment in 2015 and 2016 further refurbishments were deferred until 2017. The third line will be refurbished over approximately 65 days in 2Q 2018 and the refurbishment of the remaining line is planned for the first half of 2019. The Group has a project underway to expand its concentrate capacity to increase its output of pellets to nameplate capacity of 12 million tonnes per annum. For further details see Capital Investment on page 27. The table below summarises production in 2017 and 2016. Table 4: Production Statistics (000’t unless otherwise stated) Iron ore processed Average Fe content Concentrate produced (“WMS”) Average Fe content Pellets produced from own ore FBP Average Fe content FPP Average Fe content FPP+ Average Fe content 2017 2016 Change 27,230 29,335 -7.2% 33.69% 33.74% -0.05ppt 12,807 14,006 -8.6% 63.12% 62.78% 0.34ppt 10,394 11,071 -6.1% 559 666 -16.1% 62.58% 62.44% 0.14ppt 6,789 7,070 -4.0% 64.85% 64.88% -0.03ppt 3,046 3,336 -8.7% 64.85% 64.88% -0.03ppt Pellets produced from purchased concentrate 50 129 -61.2% Total pellet production Total Group stripping volume (million m3) 10,444 11,201 33,826 22,623 -6.8% 49.5% Note: Ferrexpo Basic Pellets (“FBP”), Ferrexpo Premium Pellets (“FPP”) and Ferrexpo Premium Pellets plus (“FPP+”). In 2017, Ferrexpo produced 37,000 tonnes of pellet feed for sale with an average Fe content of 67.2% (2016: 123,000 tonnes, average FE 67.5%). In July 2017, FPM’s mining licence was renewed for a further 20 years until 2037. FYM’s mining licence was renewed in 2012 and will expire in 2032. For further information regarding sales prices and freight rates see Financial Results, Revenue on page 19. For further information see Overview of the Iron Ore Market in 2017 on page 13. PRODUCTION Health and Safety Most regrettably there was a fatality at FPM during the year when a truck driver was fatally injured whilst performing maintenance. The circumstances have been thoroughly investigated, with findings shared across the Group and further safety procedures put in place. In 2016, there were two work-related fatalities at the Group’s operations. There were a total of 23 lost-time injuries (“LTIs”) across the Group in 2017 (2016: 22), equating to an LTI frequency rate (“LTIFR”) of 1.17, in line with 2016. Table 3 below details the LTIFR as per million man hours worked across the Company’s mining and processing operations in Ukraine and its barging subsidiary for 2017 and 2016. FYM was LTI free for 19 months from February 2016 to August 2017, while the Group’s barging subsidiary, DDSG, was LTI free for nine months from October 2016 to June 2017, a record for DDSG. Unfortunately, the barging operations experienced five minor accidents in the second half of 2017, with the principal cause being slips, trips and falls. DDSG is working to eliminate such incidents. Table 3: Lost-Time Injury Frequency Rate LTIFR – FPM – FYM – FBM Mining entities Barging Group 2017 1.03 0.74 0.00 0.98 4.32 1.17 2016 1.14 0.38 0.00 1.01 3.70 1.17 Most of the accidents reported have been traced back to non-compliance with internal safety procedures. The Group leadership is focused on improving understanding of safety protocols and adherence to standards, combined with training to ensure better awareness of the consequences of risk-taking in the operational environment. Ferrexpo plc 2017 Annual Report & AccountsFINANCIAL STATEMENTSSTRATEGIC REPORTCORPORATE GOVERNANCE 26 PERFORMANCE REVIEW CONTINUED Graph 1: C1 Cash Cost Per TonneA Through the Commodities Cycle (US$ per tonne) 200 150 100 50 0 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 C1 62% Fe iron ore fines price The table below shows the Group’s C1 cash costA by raw material input. Breakdown of C1 cash cost per tonne Electricity Fuel Gas Materials Spare parts Maintenance Personnel Grinding bodies Royalties Explosives 2017 28% 9% 10% 14% 7% 8% 8% 9% 5% 2% 2016 31% 7% 12% 16% 6% 6% 6% 8% 5% 3% Production Costs The Group’s C1 cash cost of production was US$32.3 per tonne compared to a ten- year low of US$27.7 per tonne in 2016. Graph 1: C1 Cash Cost Per TonneA shows how the Group’s C1 cash cost of production has moved relative to the iron ore fines price since 2007. Approximately 60% of Ferrexpo’s C1 cash cost of production is commodity related, including fuel, electricity, gas, explosives and steel grinding media. In times of relatively high iron ore prices, the cost of production tends to increase due to commodity cost inflation; however, during periods of low commodity prices the cash cost is reduced. Of the US$4.6 per tonne increase in the C1 cash cost in 2017 compared to 2016, approximately 36% (or US$1.65 per tonne) reflected higher commodity prices, while increased maintenance activity represented 20% (or US$0.90 per tonne) of the increase and approximately 16% (or US$0.73 per tonne) was due to lower production volumes. Increased stripping activity at FYM, in preparation for future expansion, represented c.18% (or US$0.83 per tonne) of the cost increase. Ukrainian producer price inflation was approximately 16.5%1 on average compared to 2016. Local cost inflation, specifically related to higher electricity tariffs and wages, increased the C1 cost by US$1.3 per tonne. The Hryvnia was relatively stable against the US Dollar, depreciating by 3%, and it did not impact costs of production materially. Approximately half of the Group’s cost of sales is incurred in Hryvnia, with electricity costs the largest component. However, the electricity cost also has exposure to the US Dollar as approximately 35% of electricity generation in Ukraine comes from thermal coal which is priced in US Dollars. In terms of logistics costs incurred within Ukraine, approximately 90% are in Hryvnia. Overall, roughly 55% of the Group’s total cost base is denominated in Hryvnia. 1 Source: www.ukrstat.gov.ua STRATEGIC REPORTFerrexpo plc 2017 Annual Report & Accounts 27 CO2 Emissions The table below shows the Group’s CO2 intensity ratio was 242 kilograms per tonne of pellets produced in 2017 compared to 235 kilograms per tonne of pellets produced in 2016. Emissions in tonnes Total CO2 emissions Scope 1 (direct emissions generated by Ferrexpo from natural gas, diesel, coal, oil, explosives etc) Scope 2 (indirect emissions purchased by 2017 2016 2,614,449 2,703,272 Change -3.3% 554,763 550,591 0.76% Ferrexpo from electricity and steam) 1,974,997 2,079,329 Pellets produced (thousand tonnes) 10,444 11,201 -5.0% -6.8% Intensity ratio (kilogram per tonne of pellets produced) (Scope 1 & 2 only) 242.22 234.79 3.2% Scope 3 (emissions derived from living matter such as biofuels) 84,689 73,352 15.5% Note: Calculation for the Group’s Scope 2 CO2 emissions for 2016 has been amended due to a correction to the conversion factor applied for the calculation of emissions from steam. Electricity, which the Group purchases from the national grid in Ukraine, represented approximately 75% of the Group’s total emissions in 2017. CO2 from this source reduced 5% due to increased use of lower carbon inputs in Ukraine’s electricity generation (as calculated by EBRD1), such as nuclear and hydro power, as well as due to a 7% decline in production levels. Gas, which represented 9% of the Group’s total emissions in 2017, reduced 14% due to lower production volumes as well as an increase in substitution with sunflower husks. In 2017, sunflower husks replaced 19% of gas consumption with the Group consuming 116,000 tonnes of husks compared to 100,000 tonnes in 2016. Diesel consumption represented 8% of the Group’s total CO2 emissions in 2017. Emissions from diesel increased 22% during the year due to increased mining activities. Overall, Ferrexpo’s intensity ratio increased 3% year-on-year due to higher mining activity, while production volumes reduced, reflecting increased maintenance activities in the processing plant. Mining and Production Efficiencies The Group has several projects underway which contribute to cost savings, efficiency improvements and enhanced health and safety standards. These include efficiency gains in shovel and dragline dig rates as well as a transition to 100% liquid emulsion blasting media. The transition to emulsion blasting media has resulted in increased rock fragmentation. This has improved excavator and shovel dig rates and reduces equipment wear and tear. It also yields power savings and reduced maintenance cost in the crushing plant. Other efficiency projects include the use of automatic pit drills, drones for automatic surveys of the pit area and the commencement of the creation of a centralised mining control hub for FYM and FPM. This follows the consolidation of FPM and FYM’s maintenance centre for mobile equipment. The Group is also focused on improving its fixed plant maintenance processes and procedures to ensure they are best in class and deliver improved reliability. Ferrexpo will continue to implement small-scale projects aimed at improving productivity and efficiency to reduce operating costs. Capital InvestmentA Capital investment during the year focused primarily on sustaining capex, including refurbishment of pelletiser line number 4. For further information see Pellet Production on page 25. In 2017, following deferral of growth projects in 2015, FPM recommenced Phase 1 of its concentrate expansion programme to address bottlenecks in the concentrator. Once completed, by 2020, the Group will be able process an additional 6 million tonnes of raw ore, producing approximately 1.5 million tonnes of pellet equivalent concentrate. To date, approximately US$55 million has been spent on purchase of equipment and long- lead items and it is expected that it will cost an additional US$55 million to complete. Exploration and initial pre-stripping activities at Ferrexpo Belanovo Mine, the Group’s next mining deposit to be developed, occurred during the year. The project will be accelerated subject to market conditions and demands for additional high quality ore, in line with requirements of the Group’s growth projects. Ferrexpo has initiated studies to expand its pelletising capacity from 12 million tonnes to over 20 million tonnes by increasing the capacity of each of its four pelletising lines, together with the required increases to mining and concentrate capacity to support a higher level of production. The Group has multiple options to increase its mining, processing and pelletising capacity. However, any investment will be subject to cash flows and market conditions. 1 European Bank for Reconstruction and Development Ferrexpo plc 2017 Annual Report & AccountsFINANCIAL STATEMENTSSTRATEGIC REPORTCORPORATE GOVERNANCE 28 STRATEGIC FRAMEWORK Ferrexpo’s strategy is to produce and export high quality pellets to premium steel mills around the world who produce sophisticated steel products. It aims to be a low cost, efficient producer with a reliable logistics infrastructure. TOP FIVE STR ATEGIC PRIORITIES WH AT WE SAID WE WOULD DO IN 2017 WH AT WE DID WH AT WE AIM TO DO IN 2018 producer quality pellets customer portfolio 1 Produce high 2 Be a low cost – Continue to produce 65% Fe pellets (“FPP”) with consistent quality – Production of 65% Fe pellet represented a record 95% of total – Maintain consistent quality in line with customer expectations and low variability pellet output in 2017 – Overall production fell 7% due to maintenance in the pelletiser – Complete refurbishment of pellet line number 1 – Maintain a competitive cost of production – Optimise fleet management system to further enhance mining fleet productivity – Dragline boom monitoring programme in conjunction with Monash University to increase working load – Mill to mine optimisation programme to improve mill operation and throughput and reduce power consumption – Consolidate Group functions to service “one” Ferrexpo – Maintain a diverse customer base between Europe and Asia – Consolidate market share gains in premium markets – Eliminate fatal accidents and reduce the LTIFR – Support the community through various initiatives – Reduce consumption of key inputs such as electricity and gas, and reduce emissions per tonne – Exceeded benchmark effective dig rates on shovels and draglines – Increase production levels to improve efficiencies and reduce – Transitioned to 100% emulsion blasting, improving rock C1 cash cost fragmentation, reducing equipment wear and tear, and yielding – Continue to implement small-scale projects to improve power savings and lower maintenance costs productivity and reduce operating costs – Consolidated FPM and FYM’s mobile maintenance centre – Continued to improve fixed plant maintenance processes and procedures – The Group focused on servicing its existing long-term customer – Continue to focus on servicing the Group’s long-term customer portfolio split between Central Europe, Western Europe, North East Asia, China and South East Asia, and Turkey, Middle East and India base customers – Maintain a geographically diversified portfolio of crisis-resistant – Most regrettably, there was one fatality in 2017 – The LTIFR was in line with 2016 at 1.17x – Support the community through various initiatives – Eliminate fatal accidents and target zero lost time injuries – Continued to provide financial support to community initiatives – Reduce consumption of key inputs such as electricity and gas, and reduce emissions per tonne – CO2 emissions fell 4% in 2017 due to lower use of electricity and gas. Due to lower overall production, emissions per tonne increased 3% – Increased Group liquidity to US$312 million (2016: US$145 million) debt maturity profile – Reduced net debt to US$403 million (31 December 2016: – Subject to cash flows, continue to pay dividends – Subject to cash flows, further resume development capex to expand the Group’s concentrate and pelletising capacity – Last 12 months net debt to EBITDA 0.73x as at 31 December US$589 million) 2017 (2016: 1.57x) – Increased dividends to 16.5 US cents per share (2016: 6.6 US cents) – Increased capital investment to US$103 million (2016: US$48 million) 5 Maintain appropriate capital allocation between a strong balance sheet, returns to shareholders and investment for growth – Access the bank or debt markets if required – Secured a US$195 million pre-export credit facility – If market conditions are appropriate, look to extend the Group’s 3 Sell to a world class 4 Maintain a social licence to operate STRATEGIC REPORTFerrexpo plc 2017 Annual Report & Accounts 29 Over the medium to long term, and subject to cash flows and adequate financial return, the Group intends to increase its pellet output to over 20 million tonnes. The Group looks to consistently reduce business risk and deliver sustainable value to all stakeholders over the long term. TOP FIVE STR ATEGIC PRIORITIES WH AT WE SAID WE WOULD DO IN 2017 WH AT WE DID WH AT WE AIM TO DO IN 2018 – Continue to produce 65% Fe pellets (“FPP”) with consistent quality – Production of 65% Fe pellet represented a record 95% of total pellet output in 2017 – Overall production fell 7% due to maintenance in the pelletiser – Exceeded benchmark effective dig rates on shovels and draglines – Transitioned to 100% emulsion blasting, improving rock fragmentation, reducing equipment wear and tear, and yielding power savings and lower maintenance costs – Consolidated FPM and FYM’s mobile maintenance centre – Continued to improve fixed plant maintenance processes and procedures – Maintain consistent quality in line with customer expectations – Complete refurbishment of pellet line number 1 – Increase production levels to improve efficiencies and reduce C1 cash cost – Continue to implement small-scale projects to improve productivity and reduce operating costs – The Group focused on servicing its existing long-term customer portfolio split between Central Europe, Western Europe, North East Asia, China and South East Asia, and Turkey, Middle East and India – Continue to focus on servicing the Group’s long-term customer base – Maintain a geographically diversified portfolio of crisis-resistant customers – Most regrettably, there was one fatality in 2017 – The LTIFR was in line with 2016 at 1.17x – Continued to provide financial support to community initiatives – CO2 emissions fell 4% in 2017 due to lower use of electricity and gas. Due to lower overall production, emissions per tonne increased 3% – Secured a US$195 million pre-export credit facility – Increased Group liquidity to US$312 million (2016: US$145 million) – Reduced net debt to US$403 million (31 December 2016: US$589 million) – Last 12 months net debt to EBITDA 0.73x as at 31 December 2017 (2016: 1.57x) – Increased dividends to 16.5 US cents per share (2016: 6.6 US cents) – Increased capital investment to US$103 million (2016: US$48 million) – Support the community through various initiatives – Eliminate fatal accidents and target zero lost time injuries – Reduce consumption of key inputs such as electricity and gas, and reduce emissions per tonne – If market conditions are appropriate, look to extend the Group’s debt maturity profile – Subject to cash flows, continue to pay dividends – Subject to cash flows, further resume development capex to expand the Group’s concentrate and pelletising capacity For more on our Key Performance Indicators, see pages 30–31 For more on our Principal Risks, see pages 34–39 For more on being a Responsible Business, see pages 41–49 1 Produce high quality pellets 2 Be a low cost producer 3 Sell to a world class customer portfolio 4 Maintain a social licence to operate 5 Maintain appropriate capital allocation between a strong balance sheet, returns to shareholders and investment for growth and low variability – Maintain a competitive cost of production – Optimise fleet management system to further enhance mining fleet productivity – Dragline boom monitoring programme in conjunction with Monash University to increase working load – Mill to mine optimisation programme to improve mill operation and throughput and reduce power consumption – Consolidate Group functions to service “one” Ferrexpo – Maintain a diverse customer base between Europe and Asia – Consolidate market share gains in premium markets – Eliminate fatal accidents and reduce the LTIFR – Support the community through various initiatives – Reduce consumption of key inputs such as electricity and gas, and reduce emissions per tonne – Access the bank or debt markets if required Ferrexpo plc 2017 Annual Report & AccountsFINANCIAL STATEMENTSSTRATEGIC REPORTCORPORATE GOVERNANCE 30 KEY PERFORMANCE INDICATORS The Group has refined its reporting of KPIs to focus on those most relevant to the Annual Report. It has also provided a clearer linkage between financial and operational KPIs. FINANCIAL KPIs UNDERLYING EBITDA A The Group calculates underlying EBITDA as profit from continuing operations before tax and finance plus depreciation, amortisation, share-based payments and special items. Underlying EBITDA measures the Group’s ability to generate cash as well as provides a useful measure of operating performance excluding certain non-cash items. In 2017, EBITDA increased by US$176 million, principally due to higher sales prices partly offset by cost inflation. PROFIT FOR THE YEAR In addition to Alternative Performance Measures, Ferrexpo considers the IFRS results of the Group to be an important measurement of profitability. In 2017, profit for the year was up 108% to US$394 million. 2017 2016 2015 STRATEGIC LINK 1 2 3 4 5 US$ million 551 375 313 2017 2016 2015 STRATEGIC LINK 1 2 3 4 5 US$ million 394 189 81 NET DEBT TO UNDERLYING EBITDA A Ferrexpo uses net debt to underlying EBITDA to monitor its debt levels relative to profitability. It is an industry standard measurement used to determine relative levels of indebtedness. In 2017, net debt to underlying EBITDA reduced to 0.73x. NET CASH FLOW FROM OPERATING ACTIVITIES Net cash flow from operating activities represents the cash flow generation ability of the Company and indicates available cash flow for investments, returns to shareholders and debt reduction. In 2017, net cash flow from operating activities increased 6% to US$353 million. 2017 2016 2015 STRATEGIC LINK 1 2 3 4 5 Net debt to EBITDAx 0.73 1.57 2.78 2017 2016 2015 STRATEGIC LINK 1 2 3 4 5 US$ million 353 332 128 STRATEGIC REPORTFerrexpo plc 2017 Annual Report & Accounts 31 NON-FINANCIAL KPIs LOST-TIME INJURY FREQUENCY RATE AND FATALITIES It is the Group’s highest priority to ensure its employees operate in a safe environment. The LTIFR is an industry standard measurement and an important indicator of how safe the work environment is. The LTIFR in 2017 was in line with 2016 at 1.17x. PRODUCTION VOLUME Production volumes measure the Group’s ability to meet customer demand as well as providing an indication of the Group’s operational performance. In 2017, production reduced 7% due to maintenance of the Group’s pelletising lines. 2017 2016 2015 STRATEGIC LINK 1 2 3 4 5 LTIFRx 1.17 1.17 0.96 2017 2016 2015 STRATEGIC LINK 1 2 3 4 5 Mt 10.4 11.2 11.7 C1 CASH COSTSA This is the cash costs of production of iron pellets from own ore, divided by production volume from own ore. This is an industry standard measurement and assesses Ferrexpo’s relative competitiveness compared to other pellet producers. It is an important measure to assess the Group’s ability to withstand periods of volatile iron ore pricing. In 2017, Ferrexpo’s C1 cash cost of production increased by US$4.6 per tonne to US$32.3 per tonne. 2017 2016 2015 STRATEGIC LINK 1 2 3 45 US$ per tonne 32.3 27.7 31.9 SALES VOLUME BY REGION Ferrexpo believes it is important to have a diversified customer base so as to be able to withstand periods of volatility in specific regions. In 2017, Ferrexpo focused on servicing its existing long-term customer portfolio. Turkey, Middle East & India China & South East Asia North East Asia Western Europe Central Europe 2017 2016 2015 2017 2016 2015 2017 2016 2015 2017 2016 2015 2017 2016 2015 STRATEGIC LINK 1 2 3 4 5 % 8 6 6 12 13 22 16 16 12 15 17 11 49 48 49 Ferrexpo plc 2017 Annual Report & AccountsFINANCIAL STATEMENTSSTRATEGIC REPORTCORPORATE GOVERNANCE 32 RISK MANAGEMENT The Group has established risk management and internal control systems which support the identification, understanding and mitigation of the key risks that it faces. Approach The Group’s risk management processes provide a framework to support the identification, prioritisation and management of the risks involved in the Company’s activities. It is not and cannot be designed to eliminate risk, particularly in an emerging market economy. Ferrexpo’s risk management policies and procedures have been established to identify and analyse the risks faced by the Group, to set appropriate limits and controls and take relevant mitigating actions where considered by the Board of Ferrexpo and its executive management to be beneficial. Risk Assessment The Group’s risk matrix is regularly reviewed and monitored by the Executive Committee and its sub-committee, the Finance and Risk Management Committee, as well as the Audit Committee and the Board. This review process includes ensuring that any new risks are identified, their potential impact on the Group assessed and appropriate controls established. The risks identified are ranked based on the potential impact and the probability of occurrence in order to assess their impact on the Group’s operation and viability. The impact and the probability are reassessed on a regular basis based on latest developments in the Group’s macro and micro environment. It is the responsibility of the Group’s Executive Committee to define appropriate actions to adequately monitor those risks and establish an effective control environment. The controls are generally conducted by the Group’s internal audit function or members of the Executive Committee and updates are provided to the Executive Committee and the Board. Risk Governance The Ferrexpo Board is ultimately responsible for defining the Group’s attitude to risk and ensuring that appropriate systems of risk management and internal control are established and embedded across the Group, in conformity with its desired risk management culture. Its responsibility extends to ensuring that the principal risks faced by the Group are robustly assessed and that the Company’s exposure to such risks are aligned with its strategic objectives. The Audit Committee assists the Board in its regular monitoring of risk exposures and the Group’s risk matrix, and is responsible for evaluating the adequacy and effectiveness of the established risk management and internal control systems. It also oversees how management monitors compliance with risk management policies and procedures, with assistance from the Group internal audit function which conducts ad-hoc reviews of risk management controls and procedures as part of its annual programme of work. For more information relating to the Audit Committee’s monitoring and assessment of the effectiveness of the risk management and internal control systems, see the Audit Committee Report on page 61. The Finance and Risk Management Committee oversees the centralised financial risk management structures, while the Corporate Safety and Social Responsibility Committee monitors safety, environment and community risks and the Executive Compliance Committee monitors compliance risks. These three committees assist the Audit Committee and Board in the identification and analysis of risk. Assurance on the internal control and risk management systems is provided in the form of management information, reports and updates from the Group internal audit function, external audits and the oversight by the Executive Committee, Audit Committee and Board. 2017 Risk Assessment The risks set out in the matrix were assessed by the Finance and Risk Management Committee, Executive Compliance Committee and the Audit Committee, as appropriate, and the risks identified as posing the biggest threat to the Company’s operations (based on their potential impact and taking account of the mitigating measures in place) were analysed in order to identify the principal risks faced by the Group for assessment by the Board. The principal risks identified are set out on pages 34 to 39. At each Board meeting throughout the year, the Board reviewed the risk register and assessed the risks facing the Company over both the short and long term. The Viability Statement is set out on page 40. STRATEGIC REPORTFerrexpo plc 2017 Annual Report & Accounts 33 RISK MANAGEMENT PROCESS FERREXPO BOARD – Overall responsibility for maintaining sound risk management and internal control systems – Sets strategic objectives and defines risk appetite – Monitors the nature and extent of risk exposure AUDIT COMMITTEE – Support the Board in monitoring risk exposure and risk appetites – Review effectiveness of risk management and control systems EXECUTIVE COMMITTEE – Assess and mitigate Company-wide risk – Monitor internal controls CSR COMMITTEE – Oversight of CSR matters and performance FINANCE AND RISK MANAGEMENT COMMITTEE – Monitor centralised financial risk management structures EXECUTIVE COMPLIANCE COMMITTEE – Monitor Group compliance – Monitor Group and local compliance officers INTERNAL AUDIT FUNCTION – Support the Audit Committee in reviewing the effectiveness of risk management – Internal control systems OPERATIONAL LEVEL – Risk management processes and internal controls embedded across all Ferrexpo operations RISK MATRIX HEAT MAP The risks identified in the heat map to the right highlight which could have the greatest impact (shaded grey) on the Group’s operations and viability. E R E V E S t c a p m I W O L Y R E V UNLIKELY 5 2.1 1.1 2.3 1.2 3 1.3 2.2 4 Likelihood ALMOST CERTAIN Ferrexpo plc 2017 Annual Report & AccountsFINANCIAL STATEMENTSSTRATEGIC REPORTCORPORATE GOVERNANCE 34 PRINCIPAL RISKS The list of the principal risks and uncertainties facing Ferrexpo’s business that are listed 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. In order to provide a more concise overview of the principal risks facing Ferrexpo, it has grouped the risks into nine categories compared to 17 risks reported in 2016. Most of the principal risks reported in 2016 are still present but have been grouped under more general headings. Interest rate risk, however, is no longer considered to be principal and has been removed. All risks and their mitigations are actively considered monthly at the Group’s Finance and Risk Management Committee meetings based on detailed analysis. In addition, the iron ore fines price (which forms a major component of the Group’s received price) is volatile, while the Group’s asset base is located in Ukraine, an emerging market. As such, Ferrexpo recognises and accepts the risks present in its business and looks to mitigate them where possible. Ferrexpo operates in the mining industry where there is an inherent level of risk present due to the nature of its operations. The Board of Ferrexpo has ultimate responsibility for the identification of risks and associated mitigation strategies. 1. REALISED PRICE The pricing formula used for long-term contracts in the pellet industry is, in general, based on the Platts 62% Fe iron ore fines prices, a negotiated pellet premium (usually agreed annually) and the cost of international freight (usually referenced to the C3 index). Ferrexpo’s achieved price can vary significantly from period to period as it is dependent on the global price for 62% Fe iron ore fines, pellet premiums and freight (all of which Ferrexpo has little or no control over as a price taker). 1.1. LOWER IRON ORE PRICES (EXTERNAL RISK) CHANGE ROOT CAUSE AND IMPACT A decline in the 62% Fe iron ore fines price will reduce Group revenue, profitability and cash generation. A reduction in cash generation could impact the Group’s ability to fund maintenance and development capital investment. Lower levels of maintenance investment could result in lower production volumes, further reducing cash generation and impacting balance sheet strength. RESPONSIBILITY n/a – Ferrexpo’s market share of the total iron ore market is very low and, as such, it is considered a price taker. RISK APPETITE: Medium The iron ore fines price averaged US$71 per tonne in 2017 compared to US$58 per tonne in 2016. Most market analysts expect the price to fall in 2018 and 2019, averaging US$63 per tonne and US$59 per tonne respectively1. For further information on iron ore prices and the market environment see pages 12 to 16. STRATEGIC LINK 1 2 3 4 5 MITIGATION Ferrexpo is a low cost producer and is currently in the lowest quartile of the cost curve. Ferrexpo’s operating costs are partly linked to commodity prices. In times of low prices for the end product, costs are also typically reduced. Furthermore, the Ukrainian Hryvnia is a commodity-related currency and historically it has depreciated during periods of low commodity prices. Ferrexpo regularly reviews options to hedge the price of its output; however, its current strategy is to not enter into hedging agreements. Ferrexpo has maintained positive profit through the iron ore price cycle. 1 As of 14 February 2018 expected average price comprises forecasts from 13 investment banks. STRATEGIC REPORTFerrexpo plc 2017 Annual Report & Accounts We have indicated how our principal risks would impact our ability to deliver against our strategy. 35 1. PRODUCE HIGH QUALITY PELLETS 2. BE A LOW COST PRODUCER 3. SELL TO A WORLD CLASS CUSTOMER PORTFOLIO 4. MAINTAIN A SOCIAL LICENCE TO OPERATE 5. MAINTAIN APPROPRIATE CAPITAL ALLOCATION BETWEEN A STRONG BALANCE SHEET, RETURNS TO SHAREHOLDERS AND INVESTMENT FOR GROWTH 1.2. PELLET PREMIUMS AND PELLET SUPPLY (EXTERNAL RISK) CHANGE ROOT CAUSE AND IMPACT Ferrexpo receives a pellet premium for its product in addition to the iron ore fines price. Currently, a substantial portion of its profitability is due to this premium. The average Atlantic pellet premium from 2011 to 2017 was US$35 per tonne. RESPONSIBILITY Chief Marketing Officer and CEO. RISK APPETITE: Medium Average pellet premiums in 2017 were over 70% higher than 2016 and traded at a nine- year high. The outlook for premiums in 2018 is good, with the average premium expected to increase. STRATEGIC LINK 1 2 3 4 5 Approximately 10 million tonnes of high cost pellet supply is expected to re-enter the market during 2018 and 2019. Steel mills, however, are currently enjoying high levels of demand and profitability, underpinning pellet demand. Post 2018, it is possible that pellet supply which is currently not in production will re-enter the market. This could coincide with a reduction in steel mill profitability, impacting demand for pellets and resulting in an oversupply of pellets to the market. A decrease in the pellet premium would reduce the Group’s revenue, profitability and cash generation. MITIGATION Ferrexpo sells high quality pellets which underpins demand for its product throughout the commodity cycle. Should the pellet premium decline, Ferrexpo has one of the lowest pellet conversion costs in the industry, which should ensure that it is able to remain a competitive producer. For further information on pellet premiums and the market environment see pages 12 to 16. 1.3. SEABORNE FREIGHT RATES (EXTERNAL RISK) CHANGE ROOT CAUSE AND IMPACT As iron ore is a bulk commodity, seaborne freight rates are an important component of the cost to deliver product to a customer. An increase in freight rates will reduce the net price received from a customer while a reduction in freight rates will increase the net price received from a customer. RESPONSIBILITY Chief Marketing Officer and Group Freight Manager. RISK APPETITE: Medium Seaborne freight rates, such as C3, are published by the Baltic Exchange and represents the cost for ocean transportation for iron ore from the Brazilian port of Tubarao (where the largest seaborne pellet supplier is based) to Qingdao, China (the largest steel producer in the world). STRATEGIC LINK 1 2 3 4 5 As Ferrexpo sells to international customers, the price it receives includes reference to C3 or other appropriate global benchmarks. Freight rates are largely influenced by the price of oil. In 2017, the average C3 freight rate increased to US$15 per tonne from US$9 per tonne in 2016. MITIGATION Ferrexpo has its own in-house freight and distribution specialists who procure freight competitively on behalf of the Group. Ferrexpo’s geographic proximity to its European customers is a competitive advantage compared to other iron ore producers. Ferrexpo plc 2017 Annual Report & AccountsFINANCIAL STATEMENTSSTRATEGIC REPORTCORPORATE GOVERNANCE 36 PRINCIPAL RISKS CONTINUED 2. OPERATING RISKS 2.1. OPERATING RISKS AND HAZARDS INCL. MINING, PROCESSING AND LOGISTICS (COMPANY SPECIFIC RISK) CHANGE ROOT CAUSE AND IMPACT Ferrexpo operates large-scale mining operations which can pose significant challenges and environmental risks. This may result in production-related shortfalls or shutdowns due to geotechnical incidents, mining or processing equipment failure as well as logistics bottlenecks. RESPONSIBILITY Chief Operating Officer, Chief Marketing Officer, Operating Committee, Executive Committee, Board of Directors. The Group’s operations require sustaining capital expenditure and repair and maintenance programmes to ensure availability of equipment. A reduction in sustaining capital or repairs and maintenance expenditure can result in equipment failure. Production stoppages will increase costs and lower output. It can also reduce the quality of the product and lead to late delivery to customers. Lower volumes, higher costs, financial penalties due to poor quality and late delivery of product can impact the Group’s cash generation ability, reducing liquidity levels, impacting capital investment levels as well as balance sheet strength. The late delivery of product can also impact the Group’s ability to perform according to customer contracts and impact its ability to renew contracts in the future. MITIGATION RISK APPETITE: Low STRATEGIC LINK 1 2 3 4 5 During the year the Group completed a 55-day refurbishment of pelletiser line number 4. Pelletiser line number 3 was refurbished in 2014. The Group plans to refurbish the final two pellet lines in 2018 and 2019 respectively. See pages 25 to 27, and page 44 for a description of the factors impacting the Group’s operations in 2017. In 1Q 2015, the Group completed a Quality Upgrade Programme which has allowed Ferrexpo to increase the overall quality of its product. Since 2007, Ferrexpo has invested more than US$2.15 billion, which has included modernisation of existing equipment and investment in its logistics capabilities. Where possible, Ferrexpo owns its own logistics infrastructure. This includes 2,252 rail cars, which reduce reliance on state rail cars for transportation of pellets to border points, 150 barges for transportation of pellets into Central Europe, and a 49.5% interest in the port of TIS Ruda on the Black Sea, which guarantees the Group independent access to seaborne markets, avoiding reliance on the state port. STRATEGIC REPORTFerrexpo plc 2017 Annual Report & Accounts We have indicated how our principal risks would impact our ability to deliver against our strategy. 37 1. PRODUCE HIGH QUALITY PELLETS 2. BE A LOW COST PRODUCER 3. SELL TO A WORLD CLASS CUSTOMER PORTFOLIO 4. MAINTAIN A SOCIAL LICENCE TO OPERATE 5. MAINTAIN APPROPRIATE CAPITAL ALLOCATION BETWEEN A STRONG BALANCE SHEET, RETURNS TO SHAREHOLDERS AND INVESTMENT FOR GROWTH 2.2. HEALTH AND SAFETY RISKS (COMPANY SPECIFIC RISK) CHANGE ROOT CAUSE AND IMPACT The mining and processing of iron ore is often associated with a hazardous working environment as it includes the use of explosives and the operation and repair of heavy machinery, amongst other things. Failure to provide a safe working environment for the Group’s workforce and failure to ensure an improved and sustained performance in safety behaviour can impact the Group’s social licence to operate. Fatalities and lost time injuries also result in production stoppages as well as negatively impact employee moral. During 2017, there was one fatality compared to two fatalities in 2016. A total of 23 lost time injuries occurred across the Group during the year compared to 22 in 2016. The lost time injury frequency rate per million man hours worked was 1.17, in line with 2016. RESPONSIBILITY Chief Operating Officer, Operating Committee, Executive Committee, CSR Committee, Board of Directors. RISK APPETITE: Low STRATEGIC LINK 1 2 3 4 5 MITIGATION Safety performance is regularly reviewed throughout the organisation. All accidents are fully investigated, using Incident, Cause and Analysis methodology. To eliminate reoccurrence, the significant incident register is reviewed six-monthly to update controls and develop additional actions. Safety training is regularly provided to employees to instil a culture of accountability. The goal of these safety workshops is to emphasise and ensure that all employees understand and appreciate the importance of strict adherence to safety procedures and that protection of our employees is paramount. A “near miss” reporting process has been established to learn from low consequence events. Employee remuneration is linked to safety performance. Ferrexpo has modernised its mining and production facilities, improving safety and environmental performance. 2.3. OPERATING COST INCREASES (EXTERNAL RISK) CHANGE ROOT CAUSE AND IMPACT The production of iron ore pellets is a more capital intensive process than other types of iron ore production as it requires the enrichment of relatively low grade ore into a high grade product. As such, in general, pellet producers have higher operating costs per tonne of output than producers of iron ore fines or lump. Approximately 60% of Ferrexpo’s C1 cash cost of production is commodity related, including fuel, electricity, gas, explosives and steel grinding media. In times of relatively high iron ore prices the cost of production tends to increase due to commodity cost inflation; however, during periods of low commodity prices the cash cost is reduced. In addition, over half of the Group’s operating costs, including in-land logistics costs, are incurred in Ukrainian Hryvnia. RESPONSIBILITY Chief Operating Officer, Operating Committee, Finance and Risk Management Committee, Executive Committee, Board. RISK APPETITE: Low STRATEGIC LINK 1 2 3 45 As such, the Group’s cost of production is sensitive to local inflation, exchange rate fluctuations between the Hryvnia and the US Dollar and US Dollar commodity cost inflation. In 2017, the Group’s C1 cash cost increased from US$28 per tonne to US$32 per tonne. See page 25 to 27 for a description of the factors impacting operating costs. MITIGATION Ferrexpo sits in the bottom quartile of the pellet cost curve. Many of its costs which relate to commodity prices will impact its peers to a similar extent. As such, in times of higher commodity prices the Group should be able to maintain its cost competitiveness relative to its competitors. Ferrexpo looks to increase production volumes to ensure fixed cost dilution and enable the Group to offset (to some extent) external cost inflation. The Group has a Business Improvement Programme aimed at increasing efficiencies and reducing costs by 1% to 2% per annum. The Ukrainian Hryvnia is a commodity-related currency and historically has depreciated during periods of low commodity prices. Ferrexpo plc 2017 Annual Report & AccountsFINANCIAL STATEMENTSSTRATEGIC REPORTCORPORATE GOVERNANCE 38 PRINCIPAL RISKS CONTINUED 3. UKRAINE COUNTRY RISK (EXTERNAL RISK) CHANGE RESPONSIBILITY Ferrexpo Board of Directors and CEO. RISK APPETITE: Medium STRATEGIC LINK 1 2 3 4 5 ROOT CAUSE AND IMPACT Ukraine has been an independent country since 1991. During this time, the country has witnessed two revolutions, in 2004 and in 2014. It has also been subjected to the annexation of Crimea, and there is an ongoing conflict in Eastern Ukraine. The general political instability has negative social and economic consequences and is capable of damaging Ferrexpo’s ability to operate without disruption in Ukraine. Economic weakness can reduce the government’s ability to fund social services, leading to tensions within local communities. It can also impact the government’s ability to meet payment obligations to exporters (such as VAT refunds) and/or lead to higher taxes (including increased royalty payments). Services provided by state monopolies such as the supply of electricity, gas and freight transportation can also be disrupted in this environment. This can affect Ferrexpo’s ability to export product reliably. Transparency International ranks Ukraine as 130th out of 176 countries in terms of the level of perceived corruption (with 176th being regarded as the most corrupt). There is a risk that counterparties are involved in activities that are not in compliance with relevant international standards. Further, a weak judicial system can be susceptible to outside influences and can take an extended period of time for courts to reach final judgment. The Group holds mining licences and the other permits required to carry out mining operations. If mining licences were to be revoked or not renewed, Ferrexpo’s ability to continue to produce pellets would be at risk. Ukraine is a recipient of IMF funding for which, in return, the government has undertaken to implement a number of systemic reforms. In August 2017, Moody’s rating agency upgraded Ukraine’s sovereign rating from Caa3 to Caa2 with a positive outlook. The driver for the upgrade was based on the cumulative impact of structural reforms that, if sustained, are expected to improve the government’s financial position. The rating upgrade was constrained by the government’s heavy debt maturity profile over the next several years that is expected to require additional foreign currency lending. In 2017, Ferrexpo raised new debt facilities, extended FPM’s mining licence for 20 years and received all outstanding VAT. Also see “Debt maturity profile – impact”. MITIGATION Ferrexpo prioritises sufficient liquidity levels and strong credit metrics to ensure smooth operations should geopolitical or economic weakness disrupt the financial system of the country. Ferrexpo makes meaningful contributions to national and local communities. Ferrexpo invests in energy efficiency, including alternative fuels to augment gas consumption, and maintains close contact with electricity suppliers. Ferrexpo has established several sources of suppliers for key products as well as several supply routes. Ferrexpo maintains and invests in its logistics capabilities to ensure available capacity to better service its customers, lower costs and reduce reliance on state providers. Ferrexpo prioritises a strong internal control framework including high standards of compliance and ethics. Ferrexpo monitors its commitments under its various mining licences in order to ensure conditions contained within the licences are fulfilled or the appropriate waivers are obtained. For further information on Ukraine see page 10 of the Strategic Report. STRATEGIC REPORTFerrexpo plc 2017 Annual Report & Accounts We have indicated how our principal risks would impact our ability to deliver against our strategy. 39 1. PRODUCE HIGH QUALITY PELLETS 2. BE A LOW COST PRODUCER 3. SELL TO A WORLD CLASS CUSTOMER PORTFOLIO 4. MAINTAIN A SOCIAL LICENCE TO OPERATE 5. MAINTAIN APPROPRIATE CAPITAL ALLOCATION BETWEEN A STRONG BALANCE SHEET, RETURNS TO SHAREHOLDERS AND INVESTMENT FOR GROWTH 4. TAX (EXTERNAL RISK) ROOT CAUSE AND IMPACT Ferrexpo is a large taxpayer in Ukraine and also pays tax internationally. The growing complexity of tax legislation around the world can result in unforeseen tax payments. Ferrexpo is subject to transfer pricing regulations both locally and internationally. The Base Erosion and Profit Shifting (“BEPS”) project initiated by the G20 and OECD is likely to increase scrutiny of cross-border tax transactions and may result in challenges from different jurisdictions. Legislation and regulations are not always clearly written and are subject to varying interpretations and inconsistent enforcement by local, regional and national Ukrainian tax authorities, and other governmental bodies. The uncertainty of application and the evolution of Ukrainian tax laws, including those affecting cross-border transactions, could result in additional tax payments having to be made by the Group which would reduce cash flows and impact liquidity levels. For further information see Note 12 of the financial statements. MITIGATION CHANGE RESPONSIBILITY Chief Financial Officer, Finance and Risk Management Committee. RISK APPETITE: Medium STRATEGIC LINK 1 2 3 45 Ferrexpo conducts transparent and open dialogue with local, regional and national tax authorities. Its tax strategy is in line with best international standards and it is in compliance with all known requirements. The Group regularly takes advice on tax matters from Ukrainian and international tax experts. 5. DEBT MATURITY PROFILE (EXTERNAL RISK) CHANGE RESPONSIBILITY Chief Financial Officer, Finance and Risk Management Committee. RISK APPETITE: Medium STRATEGIC LINK 1 2 3 4 5 ROOT CAUSE AND IMPACT Ferrexpo operates in a volatile commodity market while the majority of its assets are based in Ukraine, which has a weak country credit profile as defined by international credit rating agencies. From 2013 until 2016, the debt capital markets for commodity producers with assets in Ukraine were closed due to geopolitical factors as well as low commodity prices. As such, the Group can experience periods where the capital markets are closed or where the cost of funding increases significantly. In 2018, Ferrexpo has US$309 million of debt amortisations falling due, and in 2019 US$283 million of amortisations fall due. In November 2017, Ferrexpo raised a new bank facility of US$195 million at 450 basis points + US LIBOR compared to the Group’s 2017 average cost of debt of 8%. As of 31 December 2017, the Group had strong credit metrics with total liquidity of US$312 million (including the new bank debt facility) and net debt to EBITDA of 0.73x. If the 62% Fe iron ore fines price or the pellet premium was to fall significantly in 2018 or 2019 without any offsetting impact from cost reductions, it could affect the Group’s cash generation and its ability to meet debt amortisations. MITIGATION Ferrexpo has a strong balance sheet with prudent credit metrics, enabling it to attract additional debt facilities should it be required. Ferrexpo is a low cost producer and has maintained positive profit through the iron ore price cycle, including an average EBITDA margin of 36% from 2007 to 2017. Ferrexpo plc 2017 Annual Report & AccountsFINANCIAL STATEMENTSSTRATEGIC REPORTCORPORATE GOVERNANCE 40 VIABILITY STATEMENT The Board monitors the Group’s risk management and internal control systems on an ongoing basis, and confirms that during the year it carried out a thorough assessment of the principal risks facing the Group, their potential impact and the mitigating strategies in place, as described on pages 32 to 39. The principal risks include those that would threaten the Group’s business model, future performance, liquidity or solvency. Time Horizon The Board has reviewed the long- term prospects of the business. which remain aligned with Ferrexpo’s life of mine assumptions. For the purposes of assessing the Group’s viability in the medium term, the Directors have chosen a five-year time period given the long-life nature of mining assets, including the period required to invest in such assets and taking into account the cash flows generated by those assets, as well as the cyclical nature of the commodities industry. As such, a five-year time period was considered an appropriate length for the Board’s strategic planning period. Stress Testing In determining the viability of the business, the Directors have stress tested the individual risks and combination of risks that could materially impact the future viability of the business. The Group is primarily exposed to changes in global iron ore prices (the 62% Fe iron ore fines CFR China price and the pellet premium). A US$1 per tonne fall in the received price for the Group’s iron ore pellets would, if not mitigated, reduce the Group’s annual EBITDA by approximately US$10 million. Other stress test scenarios included operational incidents that have a significant impact on production volumes, a deterioration in the Group’s long-term cost position on the industry cost curve or other operating constraints due to Ukrainian country risk. The scenario analysis includes severe situations outside the normal course of business, such as a breakdown in the linkage between the movements of the iron ore price with other commodity prices, notably the oil price which forms a significant component of the Group’s cost base or an appreciation of the Ukrainian Hryvnia when the iron ore price is weak. Mitigating actions include a reduction or cancellation of discretionary expenditure such as capital investment, dividends or other operating costs, adjusting capital allocation, reducing working capital requirements, altering mining schedules and accessing additional funding. The Directors take comfort in the Group’s historic cash generation ability, particularly in 2015 and 2016 at a time when the iron ore price was trading at a cyclical low. Since 1 January 2016, the Group has reduced its net financial indebtedness by US$465 million and currently has strong credit metrics. Prospects The Directors believe the viability of the Group under these scenarios remains sound, principally due to Ferrexpo’s low cost position on the iron ore cost curve, its high quality product that commands a price premium, a first class customer portfolio, a well invested asset base together with supportive industry fundamentals for iron ore pellet consumption. STRATEGIC REPORTFerrexpo plc 2017 Annual Report & Accounts A RESPONSIBLE BUSINESS ENSURING A LONG-TERM SUSTAINABLE FUTURE 41 Responsible business covers Ferrexpo’s interaction with its workforce, surrounding communities, natural environment and ethical business practices, and is key to the long-term success of its business model. This year Ferrexpo celebrated its 40th year of continuous operation, and the 10th year since the Group listed on the London Stock Exchange. Since listing, Ferrexpo has invested more than US$2.15 billion in its operations to maintain and extensively modernise its equipment and expand production. It has continued to train and develop a skilled and diverse workforce, and engaged with stakeholders to ensure a successful partnership with local communities, with the Company’s continued uninterrupted operations seen as evidence of this partnership working. As an important business both within Ukraine and the global iron ore pellet market, Ferrexpo’s high quality pellet supply represents approximately 8.5% of the global seaborne trade in iron ore pellets, making the Company the third largest exporter. Within Ukraine, Ferrexpo Poltava Mining was recognised in 2017 as being one of the largest taxpayers and is one of the largest employers in the Poltava Region, with the Group employing over 9,000 people at its operations and directly engaging with a further 1,600 contractors. The Group supported various charities and contributed US$28 million for national and local community projects in action during 2017, representing over 2% of Group revenue. Ferrexpo was proud to be recognised in 2017 for its efforts to present its Responsible Business Report with inclusion in the prestigious FTSE4Good Index, an index measuring the performance of companies demonstrating strong Environmental, Social and Governance (“ESG”) practices, which includes other mining companies such as Anglo American, Rio Tinto and BHP Billiton. Further to previous years, the Company also intends to release a standalone Responsible Business Report later this year. WE ARE DELIGHTED THAT OUR RESPONSIBLE BUSINESS ACTIVITIES HAVE BEEN RECOGNISED THROUGH INCLUSION IN THE FTSE4GOOD INDEX IN 2017, A SERIES OF ETHICAL INVESTMENT STOCK MARKET INDICES DESIGNED TO MEASURE PERFORMANCE OF COMPANIES WITH STRONG ENVIRONMENTAL, SOCIAL AND GOVERNANCE PRACTICES. VIK TOR LOTOUS CHAIRMAN, CORPORATE SAFETY AND SOCIAL RESPONSIBILITY COMMITTEE For more information, see our Responsible Business Report – www.ferrexpo.com Ferrexpo plc 2017 Annual Report & AccountsFINANCIAL STATEMENTSSTRATEGIC REPORTCORPORATE GOVERNANCE 42 A RESPONSIBLE BUSINESS CONTINUED Children at a Ferrexpo-sponsored kindergarten GOVERNANCE AND MANAGEMENT FRAMEWORK A key priority during the year was the development of a reporting system for corporate responsibility performance data. As a result, reporting became centralised and data has been collected through the Group’s accounting system. The CSR Committee, which is accountable for most of the areas covered by the Responsible Business Report, met four times in 2017, and assists the Board in its oversight of responsible business related activities. The diagrams below highlight the CSR governance structure at Ferrexpo and a framework of how responsible business considerations (in green) are fully embedded within the corporate strategy. GOVERNANCE STRUCTURE THE BOARD Oversight of responsible business matters and performance CSR COMMITTEE1 Chairman – Viktor Lotous Members – Steve Lucas, Kostyantin Zhevago, Bert Nacken, Greg Nortje Secretary – David Leonard EXECUTIVE COMMITTEE Focus on priorities and execution of responsible business activities HEALTH & SAFETY COMMUNITY WORKFORCE ENVIRONMENT & SUSTAINABLE RESOURCES STRATEGIC RELATIONSHIPS – LICENCE TO OPERATE Employees and contractors Communities Suppliers Customers Capital providers and shareholders Government and regulators 1 Viktor Lotous – FPM Chief Operating Officer and Head of Managing Board; Steve Lucas – Ferrexpo plc Non-executive Chairman; Bert Nacken – independent Non-executive Director; Greg Nortje – Group Head of Human Resources; Kostyantin Zhevago – CEO. The Group’s Chief Operating Officer, Jim North, though not a member of the CSR Committee, was present at all Committee meetings during the year. STRATEGIC REPORTFerrexpo plc 2017 Annual Report & Accounts 43 ENGAGING OUR STAKEHOLDERS ASSESSING KEY ISSUES Where issues are considered to be material to Ferrexpo stakeholders, they are included in the Group’s priorities and managed as part of the responsible business strategy. The diagram opposite details the key issues: S R E D L O H E K A T S O T N R E C N O C G N I S A E R C N I – Occupational health – Employment and turnover – Contracts and collective bargaining – Health & safety performance – Financial performance – Direct value generated – Learning and development of personnel – Diversity – Resettlement and closure plans – Responsible purchasing – Energy usage – Greenhouse gases and climate change – Community recreational facilities – Sustainable usage of resources and Business Improvement Plan – Emissions – Water management – Waste generation – Community projects – Code of conduct INCREASING CURRENT OR POTENTIAL IMPACT ON FERREXPO OUR APPROACH TO BEING A RESPONSIBLE BUSINESS OUR OPERATIONS OUR RESPONSIBLE APPROACH OUR STAKEHOLDERS LOGISTICS WORKFORCE MARKETING PROCESSING RESOURCE BASE MINING GOVERNMENT INVESTORS SUPPLIERS WORKFORCE COMMUNITIES CUSTOMERS CAPITAL PROVIDERS OUR PEOPLE – Safety – Occupational health – Diversity – Local hiring – Training and development – Employment and turnover – Contracts and collective bargaining ECONOMIC INDICATORS AND BUSINESS ETHICS – Financial performance – Local investment (including purchasing) and recruitment – Direct value generated – Code of conduct – Responsible purchasing COMMUNITY – Community support donations – Government relations – Resettlement and closure plans ENVIRONMENT – Energy – Water – Greenhouse gases – Other air emissions – Land use and rehabilitation Ferrexpo plc 2017 Annual Report & AccountsFINANCIAL STATEMENTSSTRATEGIC REPORTCORPORATE GOVERNANCE 44 A RESPONSIBLE BUSINESS CONTINUED OUR PEOPLE One of Ferrexpo’s core strengths is in its engaged, talented workforce. Ferrexpo’s employees and contractors are key stakeholders in the Company’s continued success, with health and safety, corporate culture and diversity all important factors for retaining a motivated workforce. Mine operators, Ferrexpo Poltava Mining KPIs GOAL To operate fatality free: Maintain injury frequency rate below peers: PERFORMANCE One fatality in 2017 LTIFR remains in line with 2016 and sustained at a level below peers TRAINING WORKFORCE: +49% MORE TRAINING COURSES UNDERTAKEN IN 2017 Health and Safety The health and safety of the Company’s stakeholders is of paramount importance to the business. Health and safety practices are constantly reviewed, with preventative measures taken to ensure a safe working environment and the wellbeing for all employees and contractors. Each year, the Company targets continuous improvement in all safety-related work practices. The Company’s health and safety principles include: – assessing employee exposure to hazards and guarding against harm by providing training and protective equipment and clothing; – ensuring that there are adequate emergency response procedures and equipment; – following all applicable legal and regulatory requirements; Port operators at Yuzhny, Ukraine – providing appropriate resources and training relating to health and safety management; and – investigating harmful incidents, understanding their causes and putting in place risk mitigation measures. The Company regrets to report that safety performance was marred by one fatality in 2017. In February 2017, a truck driver was fatally injured in an accident during routine maintenance of his vehicle in the maintenance department. The Company’s approach is that all injuries are preventable and, accordingly, a thorough investigation has been undertaken and appropriate remedial actions have been implemented to ensure no repeats. The Company measures day-to-day safety performance through recording of lost time injuries (“LTIs”), which are incidents that result in an employee or contractor missing a day of work, per million hours worked, referred to as the Lost Time Injury Frequency Rate (“LTIFR”). Ferrexpo has published its LTIFR since listing in 2007 and continues to do so in order to provide a consistent benchmark for future performance. Ferrexpo’s Group LTIFR for 2017, covering employees and contractors at its operations in Ukraine and at its barging subsidiary, was 1.17, a result in line with 2016. STRATEGIC REPORTFerrexpo plc 2017 Annual Report & Accounts 45 Corporate Culture Ferrexpo strives to train and develop its workforce at all levels. In October 2017, Ferrexpo hosted its second Senior Leadership Conference in Kiev, bringing together the top 60 future leaders of the business to cascade the Group’s long- term business strategy. As part of the Group’s talent management process, an inaugural Business Leadership Programme was launched in 2017, focusing on the development of senior leaders in business critical positions and identified successors, with 19 participants attending a ten-week inaugural programme. The programme was run in partnership with the House of Knowledge, a Kiev- based training organisation affiliated with the Edinburgh Business School. A total of 9,648 vocational training courses were undertaken by employees, a rise of 49% on 2016. The main areas driving this increase was an additional 536 employees undertaking safety training at FPM and the “Master School” programme that commenced in March 2017, whereby 127 employees in first line supervisory roles were trained by specifically selected senior leaders in courses ranging from leadership, project management, finance for non- professionals and risk management. In addition, over 900 employees received training on the prevention of bribery and corruption, the Group’s code of conduct and modern slavery risks. See Ethical Business on page 47. Workforce In 2017, the Ferrexpo Group employed an average of 9,063 employees across the Company’s operations in Ukraine, corporate offices in Switzerland and the UK, and marketing offices in Kiev, Dubai, Tokyo and Shanghai, a decrease of 59 on 2016, with this decrease relating to natural attrition of the Company’s workforce in Ukraine. The average number of contractors at Ferrexpo operations increased by 282 to 1,602 in 2017 as a result of additional contract maintenance of the Company’s pelletiser. It is the Company’s policy to employ a diverse workforce and currently 29% of the Company’s workforce is female, a figure significantly ahead of Ferrexpo’s peers. In addition, 20% of management positions across the Company were held by women (2016: 21%), with the Company targeting an increase in this number to 24% by 2021. Additionally, in gender diversity steps being undertaken, Ukrainian legislation recently changed in December 2017 to DEVELOPING OUR WORKFORCE: 9,648 EMPLOYEE TRAINING COURSES UNDERTAKEN IN 2017 Participants at the Senior Leadership Conference, Kiev (October 2017) MAJOR EMPLOYER: 9,000 NEARLY 9,000 EMPLOYED IN UKRAINE, ONE OF THE LARGEST BUSINESSES IN THE COUNTRY remove restrictions on the deployment of women in specific operational roles, and the Company is now seeking to hire female truck drivers in its operations and is targeting deployment by the end of 2018. Modern Slavery The Company complies with the UK Modern Slavery Act 2015 and has taken steps to ensure human trafficking and slavery are not part of the Company’s supply chain or business. For further details, please see the Company’s statement on the Modern Slavery Act on the Company’s website. Ferrexpo plc 2017 Annual Report & AccountsFINANCIAL STATEMENTSSTRATEGIC REPORTCORPORATE GOVERNANCE 46 A RESPONSIBLE BUSINESS CONTINUED ENVIRONMENT Ferrexpo’s operations cover over 5,000 hectares, and the Company carefully monitors its environmental footprint to manage and mitigate its impact on the natural environment. Examples of monitoring include energy and water usage, emissions and waste generation. PERFORMANCE Direct emissions rose 1% and indirect fell by 5% rose 1 percentage point to 6% KPIs GOAL Reduce direct and indirect CO2 emissions: Increase percentage of renewable energy usage in fuel mix: Reduce carbon footprint: Reducing Carbon Footprint Carbon dioxide is produced as a major byproduct of mining and processing iron ore into pellets, with diesel, natural gas and electricity required to drive the Company’s operations. The Company reduced its emissions of both direct and indirect carbon by over 100,000 tonnes in 2017, representing a 3% decrease. The Company continues to increasingly substitute natural gas in its pelletiser, a project that began in 2015, and has helped reduce natural gas consumption per tonne of pellets by a further 14% in the last 12 months. Direct CO2 production rose by 1% in 2017, reflecting increased mining activity, and indirect CO2 fell by 5% in 2017, reflecting the 7% reduction in pellet production and corresponding reduction in ore volumes processed. Carbon emission intensity (CO2 tonnes per tonne of pellets produced) rose by 3% as a result of scheduled maintenance on the pelletiser, which reduced the final output of pellets. Managing Energy Consumption Mining is an inherently energy intensive activity, requiring large volumes of rock to be moved, processed and heated in order to produce iron ore pellets. Ferrexpo manages its energy consumption through a number of energy saving initiatives, projects to modernise its processing plant and biofuel substitution where possible. Since 2007, Ferrexpo has invested more than US$2.15 billion in updating the equipment used in its operations, with various modernisation projects improving energy efficiency. Total Group energy consumption fell by 2% to 17.9 petajoules in 2017, marking the third successive year that total usage has fallen, particularly natural gas, coal and steam, which fell by 14%, 6% and 12% respectively. Emissions in tonnes CO2 emissions Scope 1 (direct) Scope 2 (indirect) Scope 3 (biofuels) NATURAL GAS SAVINGS: 55% REDUCTION IN NATURAL GAS CONSUMPTION PER PELLET SINCE LISTING INCREASING BIOFUELS: SUNFLOWER HUSKS NOW REPRESENT 6%OF TOTAL ENERGY MIX 38 PROMOTING BIODIVERSITY: NESTING PLATFORMS INSTALLED ON COMPANY’S EASTERN WASTE DUMPS, TO ENCOURAGE RED BOOK RARE BIRD SPECIES 2017 2016 % change 2,614,449 2,703,272 -3.3% 554,763 550,591 +0.76% 1,974,997 2,079,329 -5.0% 84,689 10,444 242 73,352 +15.5% 11,201 -6.8% 235 +3.2% Total CO2 emissions reduced 3% Pellets produced (thousand tonnes) Intensity ratio (Scope 1 and 2) Note: Calculation for the Group’s Scope 2 CO2 emissions for 2016 has been amended due to a correction to the conversion factor applied for the calculation of emissions from steam. STRATEGIC REPORTFerrexpo plc 2017 Annual Report & Accounts 47 SUPPORTING UKRAINIAN ECONOMY: Top 100 COMPANY CONTRIBUTING TO UKRAINIAN NATIONAL BUDGET ACCORDING TO UKRAINIAN STATE FISCAL SERVICE ETHICAL BUSINESS: +98% COMPLETION RATE IN ONLINE TRAINING MODULES IN ANTI-BRIBERY AND CONFLICTS OF INTEREST MAJOR INTERNATIONAL PRODUCER: FERREXPO SHIPS 8.5%OF GLOBAL PELLET EXPORT MARKET ECONOMIC INDICATORS AND BUSINESS ETHICS Ferrexpo represented 1.9% of total Ukrainian exports in 2017. The Company is an important business both on a local and national level. Good corporate governance and ethical practices are therefore key to maintaining the Company’s social licence to operate. Tax Responsibility Ferrexpo is committed to comply with the tax laws in each jurisdiction that it operates in. The Company aims to engage in tax fairness, acting in the spirit of the laws of each operating country, with oversight of tax policy performed by the Company’s Board of Directors. The Company has paid US$566 million in corporate taxes since listing in 2007, and a further US$152 million in royalties; making it one of Ukraine’s largest single tax paying companies. The Company publishes its report on payments to government annually, with the 2016 report published in June 2017. Ferrexpo is one of the largest taxpayers to the Ukrainian economy, with the Ukrainian State Fiscal Service announcing in January 2018 that Ferrexpo was in the top 100 taxpayers in Ukraine during 2017.1 Ethical Business Ferrexpo has a Group Compliance Officer who establishes, reviews and monitors the Group’s Compliance Programme. To address local risks in the most effective manner, the Company’s compliance team, led by the Group Compliance Officer, consists of four local compliance officers in Ukraine, and one at the Group’s barging subsidiary. The Board of Ferrexpo oversees the Group’s Compliance Programme directly and through its committees (to which the Group Compliance Officer reports regularly), as well as through the Executive Compliance Committee. KPIs GOAL Supporting economies where we operate: Educate workforce in code of conduct and best practice principles: PERFORMANCE US$75 million paid in taxes and royalties in 2017 alone Three additional courses unveiled in 2017 In 2017, the main focus areas of Ferrexpo’s Compliance Programme included: – preventing bribery and corruption, – monitoring conflicts of interests, – third party due diligence, – providing compliance training to employees and counterparties. Ferrexpo believes that training is fundamental for effective functioning of compliance programmes. Throughout 2017, over 900 employees, including management and directors, successfully completed online training courses on Preventing Bribery and Corruption, Code of Conduct, and Modern Slavery. In terms of working with third parties, compliance efforts were directed at preventing and mitigating risks by conducting third-party checks, providing training and including compliance-related clauses into contracts to address bribery, sanctions and modern slavery risks. During the year, the Group also focused on addressing new regulatory requirements. This included conducting risk assessments to establish adequate procedures to prevent modern slavery in Ferrexpo’s supply chain and prevent the facilitation of tax evasion. The Group also commenced data protection gap analysis to meet the GDPR and the Swiss DPA requirements in 2018. 1 www.officevp.sfs.gov.ua/media-ark/news-ark/324207.html Ferrexpo plc 2017 Annual Report & AccountsFINANCIAL STATEMENTSSTRATEGIC REPORTCORPORATE GOVERNANCE 48 A RESPONSIBLE BUSINESS CONTINUED COMMUNITY Ferrexpo is an integral part of the local community, employing over 30% of the local working population; it is therefore important that Ferrexpo is an active participant in the community, supporting key institutions such as medical and educational facilities, and acting to preserve local culture. SUPPORTING VULNERABLE CITIZENS: NEARLY 5,000 PEOPLE PER MONTH PROVIDED WITH COMPANY-SUBSIDISED FOOD PACKAGES Eyesight testing event, Vyshgorod, December 2017 +3%INCREASE IN COMMUNITY SUPPORT EXPENDITURE IN 2017 Schoolchildren: Ferrexpo-sponsored school in Horishni Plavni KPIs GOAL Contribute to development, education and skills of local population: Provide targeted assistance: PERFORMANCE Charitable donations increased by 3% in 2017 Over 4,500 local residents surveyed to align charitable activities to needs of local population, in inaugural Ferrexpo survey Ferrexpo in the Community In 2017, Ferrexpo contributed US$28 million, or approximately 2.4% of total Group revenue, for community projects across the country, a 3% increase compared to 2016. Of this amount, approximately 88% of the expenditure related to activities coordinated by the charity organisation Blooming Land. Blooming Land is a charity established to coordinate the Group’s national CSR programme operating independently of Ferrexpo. It focuses on activities related to diabetes awareness and diagnosis, eyesight diagnosis and preventative care, and general support and care for the elderly on a national basis. It is estimated that approximately 3 million people, or 7% of the population, in Ukraine suffer from diabetes, while 40% of these individuals are believed to be unaware of their condition. Through its work to raise awareness and testing for diabetes, 40 events were hosted across Ukraine during 2017, which included talks from endocrinologists, testing of blood sugar levels and the provision of diabetic food products. In addition, 47 events were held to provide health-related consultations and support for the elderly, while 42 events related to eye care. This included free eyesight examinations by opticians using high quality ophthalmology equipment as well as the provision of glasses to suit individual requirements. STRATEGIC REPORTFerrexpo plc 2017 Annual Report & Accounts 49 Blood sugar testing in Pereyaslav-Khmelnitsky, November 2017 SUPPORTING LOCAL COMMUNITIES: 2.4% OF GROUP REVENUE INVESTED IN COMMUNITY PROJECTS, COMPARED TO A PEER GROUP AVERAGE OF 0.4% Art students at Ferrexpo-sponsored school, Horishni Plavni In addition to the funds allocated to Blooming Land, Ferrexpo allocated approximately US$3.2 million (2016: US$2.8 million) to directly finance local community projects within 25 kilometres of the operations through a charity fund controlled by FPM (the “FPM Charity Fund”). Projects include an ongoing programme of modernisation and maintenance of local schools, hospitals, the cultural museum, sports facilities and provision of food and care packages to over 5,000 local vulnerable residents each month. In addition, new projects carried out included the purchase of 20 electric bicycles for local medical professionals to help facilitate the provision of care in rural communities, and the completion of the first phase of the Sports and Recreation Complex, providing indoor tennis courts – one of only two sites for indoor activity during winter months in the local town of Horishni Plavni. For information on controls over community support donations, see the Audit Committee Report on pages 63 and 64. Collaborating with Communities In order to best align Ferrexpo’s strategy in relation to its work in the community to the needs of local residents, Ferrexpo’s local CSR committees designed and implemented a community survey to gather local opinion, with over 4,500 local residents surveyed over a six-week period in 2017. Respondents listed the following as key areas of importance for future work (descending order): city improvement initiatives, medical infrastructure, educational infrastructure, assistance for the vulnerable, and sports and leisure facilities. A number of specific projects were proposed by local residents, with the more popular set to be reviewed and potentially implemented in 2018. Social Partnership Projects In 2017, Ferrexpo began supporting the Center for Municipal Development, a specialist school serving 42 children with disabilities in the City of Kremenchug, located 25 kilometres from Horishni Plavni, where the Company’s mines are located. The Company is providing funds for a specially adapted bus to transport children from Horishni Plavni to the Center, in addition to funding a visit to Kiev for 27 of the Center’s children in April. The charity fund also supported local children with disabilities to attend a rehabilitation centre in Germany. Ferrexpo plc 2017 Annual Report & AccountsFINANCIAL STATEMENTSSTRATEGIC REPORTCORPORATE GOVERNANCE 50 BOARD OF DIRECTORS STE VE LUCAS NON - E X EC U T I V E C H A I R M A N VITALII LISOVENKO I NDE P E NDE N T NON - E X EC U T I V E DI R EC TOR SIMON LOCK ET T S E N IOR I NDE P E NDE N T NON - E X EC U T I V E DI R EC TOR CHRIS MAWE FCA C H I E F F I N A NC I A L OF F IC E R BERT NACK EN I NDE P E NDE N T MARY REILLY I NDE P E NDE N T NON - E X EC U T I V E DI R EC TOR NON - E X EC U T I V E DI R EC TOR KOST YANTIN ZHE VAGO C H I E F E X EC U T I V E OF F IC E R DATE OF A PPOINTMENT 19 May 2016 DATE OF A PPOINTMENT 28 November 2016 DATE OF A PPOINTMENT 15 June 2017 DATE OF A PPOINTMENT 7 January 2008 DATE OF A PPOINTMENT DATE OF A PPOINTMENT DATE OF A PPOINTMENT 1 August 2014 27 May 2015 Appointed as a Non‑executive Director on 14 June 2007 and as Chief Executive on 1 November 2008. He has been the controlling shareholder of Ferrexpo since IPO in June 2007. OTHER A PPOINTMENT S Non‑executive director, Tullow Oil plc since 2012 and Acacia Mining plc since 2013. BACKGROUND A ND E XPERIENCE Steve Lucas is a Chartered Accountant with long and wide‑ ranging financial experience as an executive and non‑ executive director in the energy and extractive industries. – Non‑executive director, Essar Energy plc, 2012–2014 – Finance director, National Grid plc, 2002–2010 – BG Group, 1994–2000, latterly as group treasurer – Shell International Petroleum Co, 1983–1994, in various senior financial roles. Chartered Accountant. OTHER A PPOINTMENT S Non‑executive adviser to the Minister of Finance of Ukraine, having previously served as an executive counsellor to the Minister of Finance. Non‑executive director, Black Sea Trade and Development Bank (Greece) since 2014. OTHER A PPOINTMENT S Non‑executive director and chairman of Remuneration Committee, Triyards Holdings Limited (Singapore) since 2015; Non‑executive director and chairman of Nominations Committee, Pico Petroleum Limited (Egypt) since 2015. OTHER A PPOINTMENT S None. OTHER A PPOINTMENT S OTHER A PPOINTMENT S OTHER A PPOINTMENT S Independent mining consultant. Non‑executive director of Essentra None. plc and Mitie Group plc; Non‑ executive director and the chair of Audit Committee of Travelzoo Inc. BACKGROUND A ND E XPERIENCE Vitalii Lisovenko has spent most of the past 20 years involved in government finance, developing particular expertise in debt negotiation. He has also worked in the private sector. In 2005, he served as the head of the Trade and Economic Mission at the Ukrainian Embassy in London. He was an Associate Professor of Finance at the Kyiv State Economic University from 2010 until 2017. – Executive director, Ukreximbank (Ukraine), 2006–2010 – Executive director, Alfa Bank Ukraine, 2010–2014 – Non‑executive director, Amsterdam Trade Bank, 2013–2014 PhD in Economics, Kiev National Economic University. BACKGROUND A ND E XPERIENCE Simon Lockett has worked for many years in the international upstream oil and gas industry, with an executive career spent with Shell and then the FTSE 250 company Premier Oil plc, where he served as chief executive for over nine years until 2014. BACKGROUND A ND E XPERIENCE Chris Mawe has substantial experience gained in senior financial roles in the mining industry in the UK and continental Europe, together with operational and managerial experience in the engineering industry. – Non‑executive director, Genel – Finance director, UK Coal Energy plc, 2016–2017 – Chairman, Loyz Energy Ltd (Singapore), 2014–2016 – Non‑executive adviser on behalf of the UK government for the UK‑ASEAN Business Council, 2010‑2014 MBA, Manchester Business School. plc, 2004–2007 – Finance director, Carclo plc, 1999–2004 – Finance director of various large subsidiaries of IMI plc, 1992–1999. Chartered Accountant, Coopers & Lybrand, 1991, First‑class honours degree in Engineering, 1987. COMMIT TEE MEMBERSHIP He is the Chairman of the Nominations Committee and a member of the CSR Committee and the Committee of Independent Directors. COMMIT TEE MEMBERSHIP He is a member of the Audit and Remuneration Committees and the Committee of Independent Directors. COMMIT TEE MEMBERSHIP He is the Chairman of the Committee of Independent Directors and a member of the Nominations, Audit and Remuneration Committees. COMMIT TEE MEMBERSHIP None. COMMIT TEE MEMBERSHIP COMMIT TEE MEMBERSHIP COMMIT TEE MEMBERSHIP She is the Chairman of the Audit Committee and a member of the Remuneration Committee and the Committee of Independent Directors. He is a member of the CSR Committee. BACKGROUND A ND E XPERIENCE BACKGROUND A ND E XPERIENCE BACKGROUND A ND E XPERIENCE Bert Nacken is a mining engineer Mary Reilly is a Chartered Accountant Kostyantin Zhevago has substantial with experience of worldwide mining and a former audit partner of Deloitte management and investment operations acquired over a 34‑year career with BHP Billiton and Billiton International Metals, including: LLP, where she worked with a range of industrial and charitable organisations for nearly 40 years – COO, Western Australian Iron Ore, 2009–2011 – Vice‑president, Resources and Business Optimisation, 2007–2009 – President, Minera Escondida (copper), Chile, 2004–2007 prior to retiring in 2013. After leaving Deloitte she chaired the Audit and Risk Committees of the UK Department of Transport until March 2018 and of Crown Agents Ltd until the end of September 2017. – President and COO, American – Non‑executive director, Cape plc, 2016–2017 experience gained over a 25‑year business career in Ukraine. – Non‑executive director, New World Resources plc, 2008–2014 – Member of Parliament, Ukraine, since 1998 – Chairman of the management board and deputy chairman of the supervisory board, Bank Finance & Credit, Ukraine, 1996–2000. Chartered Accountant. Degree in international economics from the Kiev National Economic University, Kiev, 1996. nickel operations and Colombia country manager, 2002–2004 – President Cerro Matoso (ferro‑ nickel), Colombia, 1997–2001 – Posts in Shell/Billiton Research BV in the Netherlands, the USA and Indonesia, 1976–1997. PhD in Chemistry, University of Aachen, Germany 1976. He is the Chairman of the Remuneration Committee and a member of the Audit and CSR Committees and the Committee of Independent Directors. CORPORATE GOVERNANCEFerrexpo plc 2017 Annual Report & Accounts 51 STE VE LUCAS VITALII LISOVENKO NON - E X EC U T I V E C H A I R M A N I NDE P E NDE N T NON - E X EC U T I V E DI R EC TOR SIMON LOCK ET T S E N IOR I NDE P E NDE N T NON - E X EC U T I V E DI R EC TOR CHRIS MAWE FCA C H I E F F I N A NC I A L OF F IC E R BERT NACK EN I NDE P E NDE N T NON - E X EC U T I V E DI R EC TOR MARY REILLY I NDE P E NDE N T NON - E X EC U T I V E DI R EC TOR KOST YANTIN ZHE VAGO C H I E F E X EC U T I V E OF F IC E R DATE OF A PPOINTMENT 19 May 2016 DATE OF A PPOINTMENT 28 November 2016 DATE OF A PPOINTMENT DATE OF A PPOINTMENT 15 June 2017 7 January 2008 DATE OF A PPOINTMENT 1 August 2014 DATE OF A PPOINTMENT 27 May 2015 OTHER A PPOINTMENT S Independent mining consultant. OTHER A PPOINTMENT S Non‑executive director of Essentra plc and Mitie Group plc; Non‑ executive director and the chair of Audit Committee of Travelzoo Inc. DATE OF A PPOINTMENT Appointed as a Non‑executive Director on 14 June 2007 and as Chief Executive on 1 November 2008. He has been the controlling shareholder of Ferrexpo since IPO in June 2007. OTHER A PPOINTMENT S None. BACKGROUND A ND E XPERIENCE Bert Nacken is a mining engineer with experience of worldwide mining operations acquired over a 34‑year career with BHP Billiton and Billiton International Metals, including: – COO, Western Australian Iron Ore, 2009–2011 – Vice‑president, Resources and Business Optimisation, 2007–2009 – President, Minera Escondida (copper), Chile, 2004–2007 – President and COO, American nickel operations and Colombia country manager, 2002–2004 – President Cerro Matoso (ferro‑ nickel), Colombia, 1997–2001 – Posts in Shell/Billiton Research BV in the Netherlands, the USA and Indonesia, 1976–1997. PhD in Chemistry, University of Aachen, Germany 1976. COMMIT TEE MEMBERSHIP He is the Chairman of the Remuneration Committee and a member of the Audit and CSR Committees and the Committee of Independent Directors. BACKGROUND A ND E XPERIENCE Mary Reilly is a Chartered Accountant and a former audit partner of Deloitte LLP, where she worked with a range of industrial and charitable organisations for nearly 40 years prior to retiring in 2013. After leaving Deloitte she chaired the Audit and Risk Committees of the UK Department of Transport until March 2018 and of Crown Agents Ltd until the end of September 2017. – Non‑executive director, Cape plc, 2016–2017 BACKGROUND A ND E XPERIENCE Kostyantin Zhevago has substantial management and investment experience gained over a 25‑year business career in Ukraine. – Non‑executive director, New World Resources plc, 2008–2014 – Member of Parliament, Ukraine, since 1998 – Chairman of the management board and deputy chairman of the supervisory board, Bank Finance & Credit, Ukraine, 1996–2000. Chartered Accountant. Degree in international economics from the Kiev National Economic University, Kiev, 1996. COMMIT TEE MEMBERSHIP She is the Chairman of the Audit Committee and a member of the Remuneration Committee and the Committee of Independent Directors. COMMIT TEE MEMBERSHIP He is a member of the CSR Committee. OTHER A PPOINTMENT S OTHER A PPOINTMENT S OTHER A PPOINTMENT S OTHER A PPOINTMENT S Non‑executive director, Tullow Oil plc since 2012 and Acacia Mining plc since 2013. Non‑executive adviser to the Minister Non‑executive director and chairman None. of Finance of Ukraine, having of Remuneration Committee, previously served as an executive Triyards Holdings Limited (Singapore) counsellor to the Minister of Finance. since 2015; Non‑executive director Non‑executive director, Black Sea Trade and Development Bank (Greece) since 2014. and chairman of Nominations Committee, Pico Petroleum Limited (Egypt) since 2015. BACKGROUND A ND E XPERIENCE BACKGROUND A ND E XPERIENCE BACKGROUND A ND E XPERIENCE BACKGROUND A ND E XPERIENCE Steve Lucas is a Chartered Accountant with long and wide‑ ranging financial experience as an executive and non‑ executive director in the energy and extractive industries. – Non‑executive director, Essar Energy plc, 2012–2014 – Finance director, National Grid plc, 2002–2010 – BG Group, 1994–2000, latterly as group treasurer – Shell International Petroleum Co, 1983–1994, in various senior financial roles. Vitalii Lisovenko has spent most of the past 20 years involved in government finance, developing particular expertise in debt negotiation. He has also worked in the private sector. In 2005, he served as the head of the Trade and Economic Mission at the Ukrainian Embassy in London. He was an Associate Professor of Finance at the Kyiv State Economic University from 2010 until 2017. – Executive director, Ukreximbank (Ukraine), 2006–2010 Simon Lockett has worked for many Chris Mawe has substantial years in the international upstream oil experience gained in senior and gas industry, with an executive financial roles in the mining career spent with Shell and then the industry in the UK and continental FTSE 250 company Premier Oil plc, Europe, together with operational where he served as chief executive and managerial experience in for over nine years until 2014. the engineering industry. – Non‑executive director, Genel – Finance director, UK Coal Energy plc, 2016–2017 – Chairman, Loyz Energy Ltd (Singapore), 2014–2016 – Non‑executive adviser on behalf of the UK government for the UK‑ASEAN Business plc, 2004–2007 – Finance director, Carclo plc, 1999–2004 – Finance director of various large subsidiaries of IMI plc, 1992–1999. Chartered Accountant, Coopers & Lybrand, 1991, First‑class honours Chartered Accountant. MBA, Manchester Business School. degree in Engineering, 1987. – Executive director, Alfa Bank Council, 2010‑2014 Ukraine, 2010–2014 – Non‑executive director, Amsterdam Trade Bank, 2013–2014 PhD in Economics, Kiev National Economic University. COMMIT TEE MEMBERSHIP COMMIT TEE MEMBERSHIP COMMIT TEE MEMBERSHIP COMMIT TEE MEMBERSHIP He is the Chairman of the Nominations Committee and a member of the CSR Committee and the Committee of Independent Directors. He is a member of the Audit and He is the Chairman of the Committee None. Remuneration Committees and the of Independent Directors and a Committee of Independent Directors. member of the Nominations, Audit and Remuneration Committees. Ferrexpo plc 2017 Annual Report & AccountsFINANCIAL STATEMENTSSTRATEGIC REPORTCORPORATE GOVERNANCE 52 EXECUTIVE COMMITTEE NIKOL AY GOROSHKO G E N E R A L DI R EC TOR , F Y M JASON K E YS G RO U P C H I E F M A R K E T I NG OF F IC E R NIKOL AY K L ADIE V C H I E F F I N A NC I A L OF F IC E R , F P M VIK TOR LOTOUS C H I E F OP E R AT I NG OF F IC E R A ND H E A D OF M A N AG I NG BOA R D, F P M Nikolay became Acting Group Chief Financial Officer in April 2007, and Chief Commercial Officer in charge of the Group’s Growth Projects in December 2007. A graduate of the Kiev National Economic University, specialising in Industrial Planning. Jason has significant industry experience in the European and Asian iron ore markets. He was previously global marketing manager for Iron Ore at BHP Billiton for five years, and for the 12 years prior to that he held senior sales and marketing roles within BHP Billiton Coal and Rio Tinto Coal and Iron Ore. Certified Professional Accountant; Bachelor of Commerce degree from the University of Western Australia. Nikolay spent several years as an audit manager with Ernst & Young and CFO of a large Russian factory. Viktor became Chief Engineer in 1997 and General Director and Chief Operating Officer in April 2007. Chartered Accountant (UK); Masters in International Economic Relations from the Kiev National Economic University. A graduate of Kryvy Rih Mining and Ore Institute, and of the Kiev National Economic University, specialising in Finance. CHRIS MAWE FCA G RO U P C H I E F F I N A NC I A L OF F IC E R JIM NORTH G RO U P C H I E F OP E R AT I NG OF F IC E R GREG NORTJE G RO U P H E A D OF H U M A N R E SO U RC E S KOST YANTIN ZHE VAGO C H I E F E X EC U T I V E OF F IC E R See page 50 for details. See previous page for details. Jim was COO of London Mining PLC before joining Ferrexpo in November 2014. He has wide‑ranging operational mining experience at a senior level with Rio Tinto, BHP Billiton and Mount Isa Mines in Africa, South America and Australia covering commodities including iron ore, coal, base metals and aluminium. Advanced Diploma in Metallurgy; Degree in Business Administration. Greg joined Ferrexpo in January 2014. He previously held a variety of international Human Resource leadership positions with Anglo American and BHP Billiton. Advanced management qualifications from the University of Stellenbosch Business School and the Gordon Institute of Business Science; Bachelor of Arts degree and post graduate Diploma in Education from the University of the Witwatersrand. CORPORATE GOVERNANCEFerrexpo plc 2017 Annual Report & Accounts CORPORATE GOVERNANCE REPORT CHAIRMAN’S INTRODUCTION 53 Dear Shareholder, I am pleased to present our Corporate Governance Report which sets out our governance structure and highlights the governance activity of the Board and its principal Committees during the course of the year. The Board remains committed to maintaining good corporate governance practices throughout the Ferrexpo Group. The structure, policies and procedures we have adopted, which are described in this report, the Directors’ Report and the reports of the various Committees, reflect this commitment, but we recognise the need to keep them under review and to make changes where necessary to ensure that standards are maintained. The Board and management of the Group have a policy of conducting all business affairs in a fair and transparent manner and of maintaining high ethical standards in dealings with all relevant parties. Information on Board succession is set out below in the Nominations Committee Report. As expected, the rate of departures slowed in 2017 and, as the longest‑serving Non‑executive Director joined only in August 2014, we can now afford a brief pause in the Board succession process, which we will use in order to take stock before planning the next round of appointments. Steve Lucas Chairman Statement of Compliance (In Accordance with Listing Rule 9.8.6R) During the year to 31 December 2017 the Company applied all Main and Supporting Principles, and complied with the provisions, of the 2016 UK Corporate Governance Code (the “Governance Code”, which is available at www.frc.org.uk) with the exception of: – Provision D.1.1 of the Governance Code which requires that performance‑related remuneration schemes should include malus and clawback provisions. As indicated in the 2017 Remuneration Report, such provisions are being applied to all awards under the LTIP and STIP schemes that take place from 1 January 2018. – Provision B.6.2 of the Governance Code which requires Board evaluation to be externally facilitated at least every three years. An explanation for this non‑compliance is set out in this report under “Performance Evaluation” on page 58. Information Pursuant to the EU Takeover Directive The Company has provided the additional information required by Rule 7.2.6 of the FCA’s Disclosure and Transparency Rules (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. Information Pursuant to the EU Non-financial Reporting Directive The information required by Rule 7.2.8A and B of the FCA’s Disclosure and Transparency Rules (Board diversity policy) is provided in the Nominations Committee Report on page 60. Ferrexpo plc 2017 Annual Report & AccountsFINANCIAL STATEMENTSSTRATEGIC REPORTCORPORATE GOVERNANCE 54 CORPORATE GOVERNANCE REPORT CONTINUED LEADERSHIP GOVERNANCE STRUCTURE SHAREHOLDERS THE BOARD AUDIT COMMITTEE REMUNERATION COMMITTEE NOMINATION COMMITTEE Responsibilities include: – Monitoring integrity of financial statements. – Reviewing internal control and risk management systems. – Relationship with external auditor. Responsible for reviewing and approving all aspects of remuneration for Executive Directors and members of the Executive Committee. Responsible for identifying and nominating (for Board approval) candidates to fill Board vacancies, having due regard to the need for appropriate balance and diversity. More info: Audit Committee Report page 61 More info: Directors’ Remuneration Report on pages 67 to 81 More info: Nominations Committee Report on pages 59 to 60 COMMITTEE OF INDEPENDENT DIRECTORS (“CID”) Responsibilities include: – Ensuring compliance with Chapter 11 of the Listing Rules and the Relationship Agreement. – Authorising (if appropriate) related party transactions on behalf of the Board. – Conflicts of interest procedure under the 2006 Companies Act. See page 55 CORPORATE SAFETY AND SOCIAL RESPONSIBILITY COMMITTEE CHIEF EXECUTIVE OFFICER AND EXECUTIVE COMMITTEE1 Responsible for formulating and monitoring the implementation of the Group’s policy on CSR issues as they affect operations. More info: CSR section on pages 41 to 49 Responsible for: – Execution of Board‑ approved strategies. – Delegated authority levels for senior management. – Development and implementation of Group policies. – All material matters not reserved for the entire Board. See page 52 1 The Executive Compliance Committee, the Finance and Risk Management Committee, and the Executive Related Party Matters Committee all report to the Executive Committee. The Board The Board is responsible for setting the Group’s objectives and policies, providing effective leadership within the framework of prudent and effective controls required for a public company. The Board has a formal schedule setting out the matters requiring Board approval and specifically reserved to it for decision. These include: – approving the Group strategy and budget; – annual and long‑term capital expenditure plans; – contracts for more than a certain monetary amount; – monitoring financial performance and critical business issues; – approval of major projects and contract awards; – approval of key policies and procedures including for dividends, treasury, charitable donations and corporate social responsibility; – approval of procedures for the prevention of fraud and bribery; and – through the Committee of Independent Directors (“CID”), monitoring and authorising related party transactions. Certain aspects of the Board’s responsibilities have been delegated to the Committees shown in the chart above to ensure compliance with the Act, FCA Listing Rules and the Governance Code. The terms of reference for each of the Audit Committee, Nominations Committee, Remuneration Committee and CSR Committee are available on the Company’s website at http://www.ferrexpo.com/about/ corporate‑governance/board‑committees. It is the responsibility of the CEO and the Executive Committee to manage the day‑to‑day running of the Group. Role Descriptions The division of responsibilities between the Chairman and the CEO has been clearly established in writing and is agreed by the Board. A summary of the roles of the Chairman, the CEO, the Senior Independent Director, the independent Non‑executive Directors and the Company Secretary is set out in the following table. The table also includes an overview of the role of the Executive Committee and of the CID. The roles of the Audit and Nominations Committees are set out later in this Corporate Governance Report, the role of the CSR Committee in the Strategic Report on page 42, and the role of the Remuneration Committee in the Remuneration Report on page 68. CORPORATE GOVERNANCEFerrexpo plc 2017 Annual Report & Accounts 55 Role Chairman CEO Description The Chairman is responsible for leadership of the Board, ensuring its effectiveness, setting its agenda, ensuring that it receives accurate, clear and timely information, 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. Mr Lucas’s other current responsibilities are set out in the biographical notes on page 50. 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. Mr Zhevago has no other directorships of quoted companies. He has other business interests and is a member of the Ukrainian parliament, but devotes the majority of his time to Ferrexpo. Senior Independent Director The Senior Independent Director, Simon Lockett, in conjunction with the other independent Non‑executive Directors, assists in communications and meetings with shareholders concerning corporate governance matters. He also chairs 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. The Senior Independent Director is available to discuss with shareholders any issues that the Chairman has been unable to resolve to shareholders’ satisfaction. Non‑executive Directors Company Secretary Executive Committee Committee of Independent Directors The Non‑executive Directors provide an independent and objective viewpoint to Board discussions and bring experience from a variety of industry backgrounds. Their role is to provide constructive support and challenge to executive management. Acting either as the Board or as members of its Committees, the Non‑executive Directors: approve budgets; discuss and contribute to strategic proposals and agree on corporate strategy; monitor the integrity, consistency and effectiveness of financial information, internal controls and risk management systems; monitor management’s execution of strategy against agreed targets and determine their remuneration accordingly (see Remuneration Report on page 68); and monitor executive succession planning (for Board succession planning, see Nominations Committee Report on page 59). The Company Secretary 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 and for ensuring, with the Chairman, that information reaches Board members in a timely fashion, so that they are alerted to issues and have time to reflect on them properly before deciding how to address them. All Directors have access to the advice and services of the Company Secretary. The Executive Committee is a key decision‑making body of the Group, responsible for managing and taking all material decisions relating to the Group, apart from those set out in the Schedule of Matters Reserved for the Board. It has delegated responsibility from the Board 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. The Executive Committee meets regularly during the year. The CID is composed of the Senior Independent Director, the Chairman of the Board and the 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 Conduct 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, approve transactions where there is a risk of a conflict of interest for any member of the Board under the Companies Act 2006. The CID keeps under review the authorisation and approval process relating to such transactions (which have previously been reviewed in detail by the ERPMC (see “Conflicts of Interest” below under “Effectiveness”)) and satisfies itself that, as required under the Relationship Agreement, related party transactions have been properly conducted at an arm’s length basis on normal commercial terms and in compliance with Chapter 11, and that no disclosures have been omitted or misstated in the financial statements. Board Composition As at the date of this report, the Board (excluding the Chairman) comprises two non‑independent Executive Directors and four Non‑ executive Directors, all of whom are considered by the Board to be independent in accordance with Provision B.1.1. of the Governance Code. This structure ensures that the Executive Directors are subject to appropriate independent and constructive challenge by the Non‑ executive Directors, and that no single Director can dominate or unduly influence decision making. Composition of the Board and Committees as at the date of this report is illustrated in the table below: Board member S Lucas K Zhevago C Mawe S Lockett Role Non‑executive Chairman Chief Executive Officer Chief Financial Officer Senior Independent Non‑executive Director V Lisovenko Independent Non‑executive Director B Nacken M Reilly Independent Non‑executive Director Independent Non‑executive Director 1 CSR Committee also includes some members of senior management; see Strategic Report on page 42. • Committee member. •• Committee Chairman. Audit Remuneration Nominations •• • • • • •• • • •• • CSR1 • • • CID • •• • • • The Board considers that it is of a sufficient size to ensure that the requirements of the business are met without placing undue reliance on any one Director. Biographical details of the Directors at the date of this report are set out on pages 50 and 51. Ferrexpo plc 2017 Annual Report & AccountsFINANCIAL STATEMENTSSTRATEGIC REPORTCORPORATE GOVERNANCE 56 CORPORATE GOVERNANCE REPORT CONTINUED Board Activity in 2017 Five scheduled Board meetings were held in 2017, all in Switzerland, and the regular matters discussed at these meetings included: – oral reports from the Chairmen of the Committees meeting before the Board meeting, and minutes of earlier meetings of the Committees; – Chief Executive Officer’s report including production and operations, iron ore market conditions, and updates on the position in Ukraine; – Chief Financial Officer’s report including status vs. budget, forecasts, cash flow position, and funding update; – Bank F&C: update on attempts to recover funds held at the bank following its insolvency; – related party matters (including Directors’ interests/conflicts); – investor relations report (including shareholder feedback); – strategy, business plan and budget; – formal risk review; – compliance matters; – CSR matters, including health and safety, and community spending; and – Board refreshment/succession planning/independence/Committee composition. Matters reviewed as required included: – review of half year or annual results, going concern and viability, dividend policy/recommendations, investor presentation; – Board/Chairman/Director performance evaluation; – review of AGM statement, and proxy agency comments/recommendations; – annual review of bank relationships within and outside Ukraine; and – annual review of treasury policy. The Board also held sessions at which the relevant executive heads of department led a more detailed discussion on aspects of operations, finance, HR and management succession planning, sales and marketing, and communications. The Board visited the Group’s operations in Horishni Plavni (formerly known as Komsomolsk) between 27 and 29 September 2017. During that time the Board inspected various parts of the operations and community projects in the local area, received various presentations from executive management in respect of operations and strategy, and held an informal meeting at which many of its standard agenda items were covered. The Board meets for dinner on the evening immediately prior to each scheduled Board meeting. This provides an opportunity for Directors to discuss key matters in a more informal setting, and therefore assists in promoting an open and constructive relationship between members of the Board. 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. EFFECTIVENESS Board Balance and Independence The composition of the Board is regularly reviewed by both the Nominations Committee and the Board itself. The Board is considered to have maintained, throughout the period of refreshment between 2014 and 2017, a proper balance in terms of skills, experience, independence and knowledge of the Company. There is now a Chairman, two Executive Directors and four independent Directors, and the Board and Committee structure is such that decision making is not dominated by a single individual or small group. Controlling Shareholder – Relationship Agreement Kostyantin Zhevago is a beneficiary of The Minco Trust, which owns 100% of Fevamotinico S.a.r.l., the majority shareholder in the Company. Consequently he, The Minco Trust and Fevamotinico S.a.r.l. (collectively “the Controlling Shareholder”) have entered into a Relationship Agreement with the Company in order 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”) (under the Relationship Agreement Mr Zhevago would be entitled, if he was not the CEO, to appoint himself or another person as his representative Director). The Relationship Agreement terminates if, inter alia, the shareholding of Mr Zhevago and his associates in the Company falls below 24.9%. This Relationship Agreement complies fully with the UK Listing Rules. The Board monitors compliance with the Relationship Agreement through the Committee of Independent Directors (see under “Conflicts of Interest” below), which reviews the work of the Executive Related Party Matters Committee (“ERPMC”) (both bodies are independent of Mr Zhevago), with the CID reviewing the minutes of the ERPMC and all related party transactions with regard to the Class Tests and the potential need to consult the Sponsor. The ERPMC is authorised to approve transactions that are in the ordinary course of business, without unusual terms; others are referred to the CID. More generally, the CID keeps under review the independence of the Board and compliance with the Governance Code, as the Relationship Agreement requires. CORPORATE GOVERNANCEFerrexpo plc 2017 Annual Report & Accounts 57 Statement of Compliance with UK Listing Rules, Rule 9.8.4 (14) – Ferrexpo has entered into a Relationship Agreement with its Controlling Shareholder, as required by LR 9.2.2A R (2)(a). – Ferrexpo has complied with the independence provisions contained in the Relationship Agreement during 2017. – So far as Ferrexpo is aware, the Controlling Shareholder and its associates have also complied with the independence provisions during 2017. – So far as Ferrexpo is aware, the procurement obligation set out in LR 9.2.2B R (2)(a) (which requires the Controlling Shareholder to procure the compliance of the “non‑signing Controlling Shareholders” (in this case, the other beneficiaries of The Minco Trust) and their associates with the independence provisions) has also been complied with during 2017. Conflicts of Interest The Board has an established procedure (see “Controlling Shareholder – Relationship Agreement” above) 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 Articles 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 ERPMC (which is composed of certain members of the Executive Committee and other members of senior management not including Mr Zhevago) and the Committee of Independent Directors (“CID”). Any changes to the schedules are noted, and confirmed as correct, at 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 in identifying potential conflicts and ensuring that they are managed appropriately and that conflicted individuals are not involved in the relevant decision‑making process. The Group aims to follow emerging best practice in this area. Training and Professional Development The Chairman is responsible for agreeing training and development requirements with each Director to ensure they have the necessary skills and knowledge to continue to contribute effectively to the Board’s discussions. All Directors receive updates given to the Board as a whole on changes and proposed changes in laws and regulations affecting the Group, as and when necessary. During 2017 separate training sessions were held for the members of the Audit and Remuneration Committees on recent developments in regulation and recommended practice. Site visits are held for the whole Board annually, so as to ensure that all Directors are familiar with the Group’s operations, and Directors may visit the operations of the Group independently to the extent to which they feel this is necessary. During the year, as in previous years, the Board spent two days visiting the site in Ukraine. In addition, training may be provided by the Group’s advisers in respect of specific areas of interest to the Board, including general economic and market conditions, developments in corporate governance regulations and best practice and any other matters as agreed by the Chairman. All Directors may take independent professional advice at the expense of the Group in the furtherance of their duties. Induction 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 each Director upon appointment, taking into consideration the individual qualifications and experience of the Director. Following their appointments to the Board at the end of 2016 and in June 2017 respectively, Vitalii Lisovenko and Simon Lockett received an induction briefing that took account of their previous experience and their responsibilities at Ferrexpo. Where relevant, these inductions included meetings with other Directors and key members of the senior management team. They were also provided with relevant information, including the Company’s most recent financial reports, Board briefing packs and Group policies and procedures. Information Flow The Chairman is responsible for ensuring that all Directors receive timely and accurate information in order to enable them to discharge their obligations effectively. Working with the Company Secretary, the Chairman ensures that agendas, briefing notes and reports for each Board meeting are agreed and distributed to the Board in advance and in sufficient time to allow proper consideration of their contents. The papers include reports on the Group’s operations, and take into account the factors set out in section 172 of the Companies Act 2006 (Directors’ duty to promote the success of the Company), and such factors are also 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. Minutes of each Board and Committee meeting are prepared shortly after the meeting and their contents agreed with the Chairman (or relevant Committee Chairman) before being circulated more widely to the Board where appropriate. Actions arising from the meetings are recorded and communicated as appropriate, and updates on outstanding actions are discussed at subsequent meetings. Directors have the right to request that any concerns they have are recorded in the appropriate Committee or Board minutes. Ferrexpo plc 2017 Annual Report & AccountsFINANCIAL STATEMENTSSTRATEGIC REPORTCORPORATE GOVERNANCE 58 CORPORATE GOVERNANCE REPORT CONTINUED Time Commitment Non‑executive Directors would normally expect to spend at least two days a month, on average, on Ferrexpo’s affairs, and in the case of the Senior Independent Director, the Committee Chairmen and in particular the Chairman of the Board, considerably more than that. The attendance of the Directors at Board and Committee meetings during 2017 is shown in the table below. The Non‑executive Directors are required to confirm at least annually that they are able to commit sufficient time to the affairs of the Company, and all of our Non‑executive Directors have given this confirmation in respect of 2018. Board and Committee Attendance in 2017 Director S Lucas2 K Zhevago C Mawe O Baring Sir M Field V Lisovenko S Lockett B Nacken3 M Reilly Board1 Scheduled Audit Rem 5/5 5/5 5/5 5/5 3/3 5/5 2/2 4/5 5/5 4/4 4/4 2/2 3/4 4/4 4/4 4/4 2/2 3/4 4/4 Nom 1/1 1/1 CSR 1/4 4/4 4/4 CID 6/6 6/6 4/4 6/6 3/3 5/6 6/6 1 2 Figures show number of meetings attended out of those the Director was eligible to attend; certain Directors joined or left the Board during the year. The timing of three CSR Committee meetings was changed at short notice due to unforeseen circumstances, and Steve Lucas was unable to attend; on each occasion he reviewed and, where relevant, commented on the papers considered at the meeting. 3 Bert Nacken was unable to attend the Board and Committee meetings in November 2017 as he was recovering from an operation. Performance Evaluation The annual performance evaluation of the Board and its Committees was carried out internally in 2016–2017 by the Chairmen of these bodies. The evaluation process involved the completion of questionnaires by Board and Committee members, with responses collated and analysed by the Chairmen with assistance from the Company Secretary. The Chairman of the Board then discussed the feedback from the questionnaires, and the comments made, with each Director individually before relaying the conclusions to the Board. The last externally facilitated evaluation (the Company’s first) was conducted in 2013 and was reported on in the 2013 Annual Report. In line with the Governance Code, the Board had intended to conduct an externally facilitated performance evaluation process during 2016–2017, but later decided in view of the number of changes to the Board during the year that it was preferable to postpone this until 2017–2018. The 2016–2017 evaluation concluded that the Board and its Committees continued to work well after significant changes in their composition; that Board‑level relationships were generally good, with effective communication and open discussion of the various challenges that Ferrexpo faced. The process revealed a demand for more training in order to ensure that Directors keep abreast of changing regulatory requirements, and training sessions were arranged for the Audit and Remuneration Committees towards the end of 2017 (this was also in line with one of the Bank F&C review sub‑committee’s recommendations for improvements in corporate governance). The Senior Independent Director and the other Non‑executive Directors have evaluated, and will continue to monitor, the performance of the Chairman. CORPORATE GOVERNANCEFerrexpo plc 2017 Annual Report & Accounts 59 Nominations Committee Report Dear Shareholder, I am pleased to present the Nominations Committee Report for 2017. The Committee met formally once during the year, but its main activity was conducting the search for a new Non‑executive Director. This search culminated in the Committee recommending the appointment to the Board of Simon Lockett who, after a short period of introduction, succeeded Oliver Baring as Senior Independent Director at the beginning of September. The Nominations Committee remains composed of an independent Non‑executive Director and the Chairman of the Board. STEVE LUCAS CHAIRMAN OF THE NOMINATIONS COMMITTEE 20 March 2018 Membership and Meetings The Nominations Committee is chaired by Steve Lucas and its other member is Simon Lockett; Oliver Baring also served on the Committee during 2017. The Nominations Committee meets at least once a year, as required by its terms of reference, and met formally on one occasion in 2017 besides holding periodic meetings with search agents and interviews with candidates. Appointment Process and Succession Planning The Committee is aware of the Governance Code recommendation that non‑executive membership of the Board should not extend beyond nine years in an independent capacity. The search for new Directors to replace the existing Directors as they gradually retire was completed (for the time being) during 2017 with the appointment in June of Simon Lockett as a Non‑executive Director. He succeeded Oliver Baring as Senior Independent Director in September, and Oliver Baring retired from the Board in November. Additionally, Sir Malcolm Field retired at the AGM in May. In the case of Simon Lockett, after consulting the Nominations Committee about the skills and experience required, the executive search consultants Odgers Berndtson (who have no other connection with the Company) drew up a long list of candidates from which a shortlist were chosen to be invited for interview by the Nominations Committee. The Nominations Committee then recommended Simon Lockett as the preferred candidate, and he was interviewed by other members of the Board before being formally appointed on 15 June 2017. As indicated last year, in future the Committee intends to pursue a more gradual process of Board succession than has been possible in the recent past, and in the coming year will be developing plans for future succession. Ferrexpo plc 2017 Annual Report & AccountsFINANCIAL STATEMENTSSTRATEGIC REPORTCORPORATE GOVERNANCE 60 CORPORATE GOVERNANCE REPORT CONTINUED Re-election In accordance with the provisions of the Governance Code, it is expected that all Directors will stand for re‑election by shareholders at the Company’s 2018 AGM. Board Diversity Policy The Nominations Committee and the Board recognise the importance of boardroom diversity in terms of cultural and professional background, expertise and gender, and believe that the present composition of the Board is satisfactory according to those criteria. The Committee seeks to apply this policy by ensuring that all available suitable candidates are taken into account when drawing up shortlists of candidates for appointment to the Board, and seeks only to engage executive search consultants who have signed up to the Voluntary Code of Conduct for executive search firms. The final decisions to make appointments to the Board are, however, made on merit against objective criteria, so as to ensure that the strongest possible candidates for the role are recruited. The Committee will continue to ensure that gender and other diversity is considered when conducting future searches for Board positions, and will take account of the recommendations of the Hampton‑Alexander and Parker reviews regarding gender balance and ethnic diversity on boards. Management and Staff Diversity As stated under “Workforce” in the “Our People” section of the Strategic Report on page 45, Ferrexpo’s policy is to employ a diverse workforce. Gender Diversity Currently 29% of the workforce is female. 20% of management positions are held by women, and it is intended to increase this figure to 23% by 2021. Efforts to increase the representation of women more generally are expected to be assisted by a recent change in Ukrainian law to allow women to be employed in certain operational roles from which they were previously excluded. Ferrexpo is currently training a number of female staff with the aim of having the first two of them driving trucks in the pit by the end of 2018. Additionally, it is planned to direct some of our community support donations towards programmes aimed at helping women. Disability In Ukraine, Ferrexpo is required by law to ensure that registered disabled people make up at least 4% of its workforce. This requirement was met in 2017. CORPORATE GOVERNANCEFerrexpo plc 2017 Annual Report & Accounts 61 Audit Committee Report I am pleased to present to you the Report of the Audit Committee for 2017. As usual, and in accordance with Provision C.3.4 of the Governance Code, the Board asked the Audit Committee to advise it as to whether the Annual Report and Accounts are fair, balanced and understandable and provide the information necessary for shareholders to assess the Company’s position and performance, business model and strategy. In providing our advice (which is set out under “Financial Reporting” on page 65) we were mindful of ensuring that the Annual Report and Accounts are read in the context of the current circumstances facing the Company. This report sets out the following information: – The composition of the Audit Committee and the balance of skills and experience represented on it. – The Committee’s activities in 2017. – Key estimates and critical judgements exercised by the Committee. – Ferrexpo’s systems of internal controls and risk management. – The assessment of the external auditors’ independence and effectiveness. – The “fair, balanced and understandable” assessment. Our Viability Statement is set out in the Strategic Report on page 40. During the year, the Audit Committee met four times and reviewed the Annual Report and associated preliminary year‑end results and the interim results, focusing on key areas of judgement and complexity and accounting policies. The internal control and risk management procedures at Ferrexpo are set out later in this report and the main risks themselves are on pages 34 to 39 of the Strategic Report. Throughout the year, the Committee has robustly assessed the principal risks facing the business. The significant issues and judgements considered by the Committee in respect of the 2017 Annual Report are set out on page 63. In considering these matters, the Committee took into account the regular financial and internal audit reports made to the Board throughout the year, as well as discussing the issues with management and the external auditors at intervals throughout the year. Detailed disclosure is given in the relevant notes to the financial statements of the significant areas in which estimates and critical judgements had to be made. In order to satisfy itself that the accounting for these issues was reasonable and appropriate, and that disclosure in the financial statements was suitable and clear in each case, the Committee reviewed the papers setting out the procedures followed by the auditors and the responses of management, and questioned and debated them with the CFO, the Group Financial Controller and, if relevant, operational management, and with the auditors at the Committee’s meetings. These discussions were also informed by the Committee members’ own expertise, particularly with regard to the economic and financial situation in Ukraine and operating practice in other large mining companies. At the end of this process, the Committee was satisfied with the accounting treatment and disclosure of each issue and with management’s exercises of critical judgement as disclosed in Note 4 on page 103. Our auditors, Deloitte, were appointed at the AGM in May 2017, and to date we are satisfied with their performance, independence and objectivity. We will conduct a more formal review when their first annual reporting cycle is complete. MARY REILLY CHAIRMAN OF THE AUDIT COMMITTEE 20 March 2018 Ferrexpo plc 2017 Annual Report & AccountsFINANCIAL STATEMENTSSTRATEGIC REPORTCORPORATE GOVERNANCE 62 CORPORATE GOVERNANCE REPORT CONTINUED Membership and Meetings The Audit Committee currently comprises four independent Non‑executive Directors: Mary Reilly (Chairman of the Committee), Simon Lockett, Vitalii Lisovenko and Bert Nacken. Oliver Baring also served on the Committee until November 2017. All members of the Audit Committee (and especially Bert Nacken with his long experience of the mining industry) are considered to possess appropriate knowledge and skills relevant to the activities of the Group, and Mary Reilly is considered to have recent and relevant financial experience, including of accounts and auditing, due to her career as an audit partner with Deloitte LLP and her experience as a member of the audit committees of other companies. The Audit Committee met on four occasions during 2017. The attendance record of the Committee members is shown in the table on page 58. In addition to its members, other individuals and external advisers, and the Chairman of the Board, may be invited to attend meetings of the Committee at the request of the Committee Chairman. The Committee regularly meets the external auditors at the end of its scheduled meetings, without Executive Directors or management being present. Activity During 2017 Key activities of the Audit Committee during 2017 are set out below. Date March May July Matters discussed – Reviewed and approved, with input from Ernst & Young, the external auditors at the time, the Viability Statement for inclusion in the 2016 Annual Report – Reviewed impact on the accounts of the liquidation of Bank F&C – Reviewed the valuation of lean and weathered ore stocks and confirmed the Group’s intention to process it in due course – Reviewed the Annual Report and financial statements for the year ended 31 December 2016 (and concluded that they were fair, balanced and understandable), and the draft preliminary announcement and recommended Board approval of: – Financial statements – Audit Committee Report – Internal controls disclosures – Going concern assessment – Reviewed Ernst & Young’s report on the 2016 financial statements and the management representation letter – Reviewed risk register – Reviewed community support donation disclosures, controls and audit reports – Reviewed compliance report – 2016 year‑end review (including review of external audit process and Ernst & Young management letter) – Reviewed Deloitte’s planning report for 2017 interim and Annual Reports – Reviewed the possible applicability of Ukrainian withholding tax to intra‑group interest payments – Reviewed risk register – Reviewed community support donations and recommendations of Ernst & Young for improvements in the control environment – Reviewed compliance report – Internal audit update, including review of performance against plan and audit of Group compliance – Review of half‑year results, including: – Discussing findings of Deloitte’s review of the results – Financial statements – Going concern assessment – Reviewed Modern Slavery Act compliance statement – Reviewed risk register – Reviewed community support donations and progress on implementing administrative improvements at the charities – Reviewed compliance report November – 2017 year‑end planning – Review of Deloitte planning report – External auditor fees proposal – Reports from the external and internal auditors and Ferrexpo’s IT department on the impact of the cyber attack on Ukraine in June 2017, and on remedial action – Internal audit update including progress against 2017 internal audit plan, approval of 2018 plan, and a review of whistleblowing line statistics – Briefing on the Criminal Finances Act 2017 – Reviewed risk register – Reviewed community support donations including year‑end audit plan and outstanding matters previously requested by the Board – Reviewed compliance report – Audit Committee performance evaluation (taken at the Board meeting): the previously identified need for more frequent training and briefing on developments in regulation and practice had been addressed with a training session for the Committee in November. No further needs had been identified in the 2017 evaluation CORPORATE GOVERNANCEFerrexpo plc 2017 Annual Report & Accounts 63 Key Estimates and Critical Judgements The significant issues and judgements considered by the Committee in respect of the 2017 Annual Report are set out below. Issues Judgements/actions taken Taxation: recoverability of deferred tax assets (Accounts Note 12) Taxation: tax legislation in Ukraine (Accounts Note 12) Property, plant and equipment: deferred stripping costs (Accounts Note 14) Property, plant and equipment: determination of cash‑generating unit (Accounts Note 14) Inventories: lean and weathered ore (Accounts Note 17) Share capital and reserves: net investments in foreign operations (Accounts Note 32) The Committee accepts management’s estimates regarding the recoverability of these assets. Having considered the background to this matter and having kept it under review during the year, the Committee shares management’s confidence that Ferrexpo will continue to be successful in defending any claims made by the Ukrainian authorities. The Committee endorses the estimates underlying management’s decision to capitalise US$22.7 million of pre‑production stripping costs as at 31 December 2017. The Committee agrees that it is appropriate to assess the Group’s assets for impairment on a single cash‑ generating unit (“CGU”) basis. The Committee notes that stocks of “lean” and weathered ore have continued to increase, but accepts that it is still the Group’s intention to process them in due course. The Committee supports management’s view that the balance of the loans granted by the Group to its Ukrainian subsidiaries qualifies as net investment in its foreign operations. Internal Control and Risk Management The Board has overall responsibility for the Group’s system of internal control, which includes risk management, and monitoring 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 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, Finance and Risk Management Committee (“FRMC”), CSR Committee and Audit Committee. On behalf of the Board, the Executive Committee and FRMC have established a process for identifying, evaluating and managing the significant risks faced by the Group. This process was followed throughout 2017 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. Controls over Community Support Donations In 2017 Ferrexpo continued to support communities on a local and national basis (see the section on social responsibility in the Chairman’s Statement on page 10, the “A Responsible Business” section of the Strategic Report on pages 41 to 49, and Note 7 to the financial statements on page 106). Community support activities take place exclusively in Ukraine, and donations are made within a Board‑approved framework agreed annually at the time of setting the budget; they are subject to the internal control and approval limits applicable within the individual subsidiaries of the Group, which are set by the Board. The Board exercises control of the local charitable spending via its CSR Committee, which oversees and directs these activities. As in the prior year, the Group has continued to fund national charitable activities via Blooming Land, a charity established primarily to coordinate the Group’s national CSR programme independently of Ferrexpo. The Board has made progress in improving the control environment surrounding the fund and continues to do so. In relation to Blooming Land, controls include: – Board approval of the use of the relevant charity. – Board approval of the annual budgeted expenditure. – Board approval of disbursements on a bi‑monthly basis. – Confirmation by Blooming Land of application and use of funds for relevant community support purposes for each payment, typically US$500,000. – Confirmation by Blooming Land, its three sub‑funds and the sub‑contracted event managers, of compliance with relevant local and international legislation. – Consideration of relevant due diligence on the charities involved, including third‑party checks on the relevant managers and funds. – Receipt and consideration of reporting by an independent firm of Ukrainian auditors on the financial statements of Blooming Land. – Reviewed reporting from the external auditor in relation to their procedures on CSR as part of their audit of the Group. – Verification of expenditures on a sample basis. – Attendance at charitable events. Ferrexpo plc 2017 Annual Report & AccountsFINANCIAL STATEMENTSSTRATEGIC REPORTCORPORATE GOVERNANCE 64 CORPORATE GOVERNANCE REPORT CONTINUED During 2017 the Board continued to receive reports from the funds concerning their activity, and has continued to exercise oversight to ensure that community support funds are applied as directed. As part of its reporting, Blooming Land detailed 129 charitable events which took place in 83 locations relating to activities which consumed the majority of its funding. As part of the control procedures, on a sample basis, Group employees attended four events and received reports and analysis of expenditure for ten events. The relevant charitable activities are supported directly by the Group’s subsidiary Ferrexpo Poltava Mining and approval, including compliance with local and taxation legislation, is confirmed at the local level via the relevant management board. The controls in place have developed following the increase in the need for community support donations due to the political upheaval of four years ago. Charities which operate independently of Ferrexpo are inherently more difficult to monitor and oversee, than the Group’s own charitable funds. However, these charities are a normal, efficient and appropriate channel for donations in Ukraine. The Board is confident that the controls in place within the Group are appropriate. Ferrexpo is a large employer in Ukraine and makes substantial community support donations. The Board will continue to exercise close oversight of these and will, if necessary, further enhance controls during 2018. Internal Controls – General Key elements of the internal control and risk management system 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. – The Executive Compliance Committee (“ECC”), an executive sub‑committee which meets regularly (six times in 2017) is charged, on behalf of the Executive Committee or Audit Committee, as appropriate, with ensuring that systems and procedures are in place to comply with laws, regulations and ethical standards. The ECC is attended by the Group Compliance Officer and, as necessary, by the local compliance officers from the operations, who present regular reports and ensure that the ECC is given prior warning of regulatory changes and their implications. The ECC enquires into the ownership of potential suppliers deemed to be “high risk”, and oversees the management of conflicts of interests below Board level and general compliance activities (including under the UK Bribery Act 2010, the Modern Slavery Act, the Criminal Finances Act, and the EU General Data Protection Regulation). – Clearly defined organisational and reporting structure and limits of authority for transaction and investment decisions, including any with related parties. – Clearly defined information and financial reporting systems, including regular forecasts and an annual budgeting process with reporting against key financial and operational milestones. – Investment appraisal underpinned by the budgetary process, where capital expenditure limits are applied to delegated authority limits. – The Investment Committee (an executive sub‑committee) which meets as required in order to consider and approve capital expenditures within limits delegated by the Executive Committee and the Board. – A budgetary process and authorisation levels to 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. – The Finance and Risk Management Committee (“FRMC”) (an executive sub‑committee) reviews financial information and management accounts, and meets regularly. – Clearly defined treasury policy (details of which are given in Note 27 to the financial statements on pages 130 to 136) 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 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 Chairman of the Audit Committee, and to the CFO for line management purposes. – 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 internal security department operating in the Group’s key operating subsidiaries. – A whistleblowing policy is in place under which staff may in confidence, via an independent, secure website, raise concerns about financial or other impropriety, which are followed up by internal audit and reported on to the Audit Committee. The Board, with assistance from the Audit Committee, regularly reviews the policies and procedures making up the internal control and risk management system, and any significant matters reported by the Executive Committee. The risk register, which includes details of the controls in place to manage and mitigate identified risks, is considered at every scheduled Board and Audit Committee meeting, with specific risks discussed in detail as and when required. The Board has delegated its responsibility for reviewing the effectiveness of the internal control and risk management system to the Audit Committee. In making its assessment, the Audit Committee considers the reporting provided to it during the year in relation to internal control systems and procedures, including the risk register, and may request more detailed investigations into specific areas of concern if appropriate. The Committee and the Board continued to keep the Bank F&C situation under review throughout the year (see Note 30 to the financial statements on page 140). Full details of the Group’s policy on risk and uncertainties are set out in Note 27 to the financial statements on pages 130 to 136. See also the Principal Risks section of the Strategic Report on pages 34 to 39. CORPORATE GOVERNANCEFerrexpo plc 2017 Annual Report & Accounts 65 Internal Audit There is an internal audit function with a Group‑wide remit, and the Head of Internal Audit, who has mining and international experience, reports directly to the Chairman of the Audit Committee and the CFO. The Committee reviews at least annually the effectiveness of the internal audit function by assessing outcomes against plan targets, and is satisfied, following its 2017 assessment, with the rigour of the audit projects and with management’s response to the Head of Internal Audit’s findings. An internal audit programme for 2018 was approved by the Audit Committee in November 2017. An internal audit programme for 2017, approved by the Audit Committee, focused on the compliance process; the operational risks relating to the availability of iron ore; IT; and the Ukrainian subsidiary DP Ferrotrans. The Committee received a report from the Head of Internal Audit twice during the year, and reviewed the progress of the internal audit plan with the auditors and the Head of Internal Audit. The reports include the Head of Internal Audit’s assessment of the operation and effectiveness of relevant elements of the Group’s internal control systems, and therefore form part of the Committee’s ongoing monitoring and assessment of such systems. External Audit Auditor Independence and Assessment of Audit Process Effectiveness The Audit Committee and the Board place great emphasis on the independence and objectivity of the Group’s external auditors 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 at the end of the annual reporting cycle by the Audit Committee, taking into account the views of management. The outcome of the March 2017 review was relayed to the relevant partners of Ernst & Young LLP. This review takes the form of an assessment (using a questionnaire) of the auditors’ performance under various headings: the robustness of the audit, the quality of delivery, and the calibre of the audit team. The auditors also 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. Deloitte LLP were appointed as auditors at the AGM in May 2017 with Christopher Thomas as lead partner, and to date the Audit Committee and the Board are satisfied with their performance, independence and objectivity. A formal review will take place when their first annual reporting cycle is complete. Non-audit Services The Audit Committee operates policies in respect of the provision of non‑audit services and the 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 under EU guidance. 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$20,000 must first be approved by the Audit Committee or its Chairman (who are routinely notified of all non‑audit services). Fees for audit‑related and non‑audit‑related services performed by the external auditors during 2017 are shown in Note 7 to the financial statements on page 106. Financial Reporting The Board has asked the Committee to advise whether it considers the 2017 Annual Report and Accounts, taken as a whole, to be fair, balanced and understandable and that it provides the information necessary for shareholders to assess the Company’s position and performance, business model and strategy. In providing its advice, the Committee noted that the factual content of the Annual Report and Accounts has been carefully checked internally, and that the document has been reviewed by senior management in order to ensure consistency and overall balance. The Committee has also conducted its own detailed review of the disclosures in the Annual Report and Accounts taking into account its own knowledge of Ferrexpo’s strategy and performance, the consistency between different sections of the report, the accessibility of the structure and narrative of the report, and the use of key performance indicators. The Committee is satisfied that, taken as a whole, the Annual Report and Accounts is fair, balanced and understandable and that it provides the information necessary for shareholders to assess the Company’s position and performance, business model and strategy and has advised the Board accordingly. The Committee has also advised the Board on the process which has been undertaken in the year to support the longer‑term viability statement required under the Governance Code. The Viability Statement is set out in the Strategic Report on page 40 and a statement setting out the Board’s assessment of the Company as a going concern is contained in the Directors’ Report on page 85 and Note 2 to the accounts on page 101. Whistleblowing Policy The Audit Committee is responsible for reviewing the Group’s whistleblowing arrangements, and receives regular reports from the Head of Internal Audit which detail any new whistleblowing incidents and, where appropriate, steps taken to investigate such incidents. MARY REILLY CHAIRMAN OF THE AUDIT COMMITTEE Ferrexpo plc 2017 Annual Report & AccountsFINANCIAL STATEMENTSSTRATEGIC REPORTCORPORATE GOVERNANCE 66 RELATIONS WITH SHAREHOLDERS The Chairman is responsible for ensuring that the views of shareholders are communicated to the Board as a whole, and reports on his discussions with shareholders as part of the standard agenda for scheduled Board meetings. 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. 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. The Executive Directors and other senior executives maintain appropriate contact with institutional shareholders on a range of issues affecting the Group’s performance, and meet with institutional investors and analysts following the announcement and presentation of the annual and interim results. The Chairman, the CEO, the CFO, and the Head of Investor Relations meet major shareholders and analysts regularly to discuss performance, strategy and governance, and the Senior Independent Director and other Non‑executive Directors are available for discussions with shareholders if required. 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 normally attend the AGMs and are ready to answer questions from shareholders, as required. 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 20 March 2018. STEVE LUCAS CHAIRMAN CORPORATE GOVERNANCEFerrexpo plc 2017 Annual Report & Accounts REMUNERATION REPORT 67 A Statement to Shareholders from the Chairman of the Remuneration Committee1 On behalf of the Board, I am pleased to introduce the Directors’ Remuneration Report for the year ended 31 December 2017. As in recent years, this report is split into two distinct sections. The first sets out Ferrexpo’s remuneration policy for Executive and Non-executive Directors, which was approved by shareholders at the 2017 AGM and is reproduced in full for ease of reference and to provide context to the decisions taken by the Committee during the year. The second reviews how the Company’s remuneration policy was implemented in 2017, and will be subject to an advisory vote at the forthcoming AGM. The elements subject to audit are highlighted throughout. During the year, and in advance of the expiry in May 2018 of the existing Ferrexpo Long Term Incentive Plan (“LTIP”), the Committee reviewed our Executive Director remuneration arrangements to ensure that they remain appropriate, and concluded that they do. The Company will therefore seek shareholder approval at the 2018 AGM for the renewal of the LTIP to accommodate future grants in line with the current remuneration policy. In 2017, demand for iron ore pellet was strong with pellet premiums at a nine-year high. This enabled the Group to almost double its pre-tax profit and considerably strengthen its balance sheet. However, production output was impacted by necessary plant maintenance which meant lower pellet production and higher cost per tonne. The Committee believes that this performance is fairly reflected in executive remuneration outcomes for the year, as set out in this report and taking into consideration the specific arrangements regarding Mr Zhevago (the CEO) outlined below. 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 CEO’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, all of which is donated to charity. The Board considers that his large shareholding in the business is 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 Mr Zhevago and Mr Mawe (the Executive Directors) is disclosed in local currency and allows year-on-year comparison, uninfluenced by exchange rate fluctuations on notional conversion into US Dollars. Mr Mawe’s (the CFO) salary is unchanged for the year commencing 1 January 2018. STIP awards continue to be settled in cash to help ensure the Company continues to attract, motivate and retain key talent in a challenging operating environment, and to aid simplicity. As foreshadowed in last year’s Remuneration Report and in line with market practice, the Committee has introduced clawback provisions to STIP awards in order to provide further alignment with shareholder interests. We will also introduce a two-year holding period on vested LTIP shares with clawback provisions, for awards granted from 2018 onwards, which extends incentive time horizons and provides further alignment with shareholder interests. In total, this results in a five-year combined LTIP vesting and holding period. No other significant changes are expected in the implementation of the remuneration policy for the year ahead. The Committee strives to align the incentives of the executives with shareholder interests, and the Board keeps under review the structure and level of remuneration afforded through share-based incentives and ownership in relation to variable and fixed pay. BERT NACKEN CHAIRMAN OF THE REMUNERATION COMMITTEE 1 This report has been prepared by the Remuneration Committee (the “Committee”) on behalf of the Board in accordance 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) (Amendment) Regulations 2013 and the UK Corporate Governance Code. Ferrexpo plc 2017 Annual Report & AccountsFINANCIAL STATEMENTSSTRATEGIC REPORTCORPORATE GOVERNANCE 68 REMUNERATION REPORT CONTINUED PART A: POLICY SECTION (NOT SUBJECT TO AUDIT) COMMITTEE Terms of reference for the 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 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 Group. The composition of the Committee and its terms of reference comply with the provisions of the Corporate Governance Code and are available for inspection on the Group’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; – link a high proportion of remuneration to performance; – reward based on a balanced portfolio of performance measures (e.g. Total Shareholder Return (“TSR”) relative to sector peers, annual business priorities, financial and operational targets and individual performance); and – provide rewards that are competitive in the relevant markets to help attract, motivate and retain talented executives. In determining the Company’s remuneration policy, the Committee takes into account the particular business context of the Group, the industry segment, the geography of its operations, the relevant talent market for each executive, the location of the executive and remuneration in that local market and best practice guidelines set by institutional shareholder bodies. The 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. Executive Director Policy Table This section of our report summarises the policy for each component of Executive Director remuneration which was effective from the date of the 2017 AGM for both current and future Executive Directors (but see also “Remuneration Policy for New Appointments” on page 71). The framework governing the LTIP was approved by shareholders at the 2008 AGM and will expire in May 2018. The Company is therefore seeking approval at the 2018 AGM for a new LTIP to accommodate future grants. The framework being presented does not propose any change to the remuneration policy approved by shareholders at the 2017 AGM. The Chief Executive takes a salary of US$240,000 per year which is donated to charity (net of applicable income taxes) with no performance-related pay as described earlier in this report, and his incentive is derived entirely from his shareholding in the Company. 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. At the current time, most of the policies set out below, other than those related to benefits and pensions, are therefore not applicable to the current CEO and apply exclusively to the CFO. The principles below are, however, also considered as a framework for any future Executive Director appointments and apply where appropriate to the members of the Executive Committee. CORPORATE GOVERNANCEFerrexpo plc 2017 Annual Report & Accounts 69 Purpose and link to strategy Operation Opportunity Performance metrics Fixed Pay Base Salary To attract and retain talent by ensuring base salaries are competitive in the market in which the individual is employed. 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. Pension To provide retirement benefits. Executive Directors will, as appropriate, be offered membership of a scheme which complies with relevant legislation (where necessary, additional pension entitlements will be provided) or cash in lieu of pension. Base salary increases are applied in line with the outcome of the review, which will not exceed 5% p.a. (or, if higher, the applicable inflation rate) on an annualised basis over the period over which this policy applies. Increases above this level may be applied where appropriate to reflect changes in the scale, scope and responsibility attaching to the role and market comparability. The employer contribution will be a percentage of pensionable salary and associated benefits (excluding variable pay). The employer contribution will normally be up to 15% of salary subject to compliance with local statutory requirements. Benefits Competitive in the market in which the individual is employed. Benefits are paid to comply with local statutory requirements and as applicable to attract or retain executives of a suitable calibre. They include life insurance and medical insurance. Where appropriate, additional benefits may be offered, including, but not limited to, allowances for accommodation, relocation, tax advice and legal advice. Benefits’ values vary by role and eligibility and costs are reviewed periodically. Increases to the existing benefits will not normally exceed applicable inflation. Increases above this level may be applied, where appropriate, to reflect changes in role, scope, location and responsibility. Business and, where relevant for current Executive Directors, individual performance are considerations in setting base salary. Not performance related. Not performance related. Maximum opportunity of 150% of salary. The target opportunity is up to two-thirds of maximum and the threshold opportunity is up to one-third of maximum. Variable Pay Short-Term Incentive Plan (“STIP”) To focus management on delivery of annual business priorities which tie into the long-term strategic objectives of the business, which include, but are not limited to, developing the reserve base, increasing production, reducing costs, reducing the risk profile of the business, expanding the customer portfolio, expanding geographically. Targets are set at the start of the year against which performance is measured. The Committee determines the extent to which these have been achieved. The Committee can exercise discretion to adjust the formulaic outcome within the limits of the plan for factors outside of management control where it believes the outcome is not truly reflective of performance or in line with overall Company performance. Payments are typically made in cash; however, the Committee may determine that a portion of the bonus be deferred and be in the form of cash or shares. Malus and clawback provisions will apply in the event of a material misstatement of results, material calculation error or gross misconduct. Long-Term Incentive Plan (“LTIP”) 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. The LTIP framework was approved by shareholders at the 2008 AGM and will expire in May 2018. The Company is seeking renewal of the framework at the 2018 AGM for a new LTIP to accommodate future grants in line with the current policy. The LTIP provides for annual awards of performance shares, options or cash up to an aggregate limit of 200% of salary in normal circumstances. This limit may be exceeded in exceptional circumstances but will not exceed 300% of salary. To the extent that an LTIP award vests, this will include the applicable dividends on the shares earned during the vesting period. The threshold opportunity is 20% of maximum. The Remuneration Committee has discretion to introduce a two-year holding period to Executive Directors’ vested LTIP shares for future awards. This will apply for LTIP awards made from 2018. Malus and clawback provisions will apply in the event of a material misstatement of results, material calculation error or gross misconduct. Performance related. Performance measures can include financial, non-financial and personal achievement criteria measured over one financial year. Details of the performance measures and weightings for the STIP in 2017 are set out in Part B under “2017 STIP outcome”. The Committee has discretion to make changes in future years to reflect the evolving nature of the strategic imperatives that may be facing the Company. Vesting of LTIP awards is subject to the Company’s relative TSR against a comparator group over a period of at least three years and continued employment. 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. Details of the performance targets for the LTIP are set out in Part B under “LTIP granted in 2017”. The Committee reviews the LTIP performance conditions, in advance of granting each LTIP cycle. Over the life of this policy relative TSR will be retained as the primary performance measure. Ferrexpo plc 2017 Annual Report & AccountsFINANCIAL STATEMENTSSTRATEGIC REPORTCORPORATE GOVERNANCE 70 REMUNERATION REPORT CONTINUED Rationale for Performance Measures The STIP is based on performance categories that are key to delivering on our long-term strategy. Performance measures are set at the beginning of the financial year to reflect business priorities and other corporate objectives, and can include financial, non-financial and personal achievement criteria. Performance targets are set at such a level as to be stretching but achievable, with regard to the particular strategic priorities and economic environment in a given performance period. The STIP target is based on the annual budget approved by the Board. Where appropriate, the Committee sets a performance zone (threshold to stretch) around the target, which it considers provides an appropriate degree of “stretch” challenge and an incentive to outperform. The Committee believes that using multiple targets for the purposes of the STIP provides for a balanced assessment of performance over the year. For the LTIP, the Committee believes that relative TSR is the most objective external measure of the Company’s success over the longer term. Relative TSR helps align the interests of Executive Directors with shareholders by incentivising share price growth and, in the Committee’s view, provides an objective measure of long-term success. 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. Details of the comparator group will be set out in Part B of the Remuneration Report for the year immediately following the year in which the grant is made. With effect from the grant of 2010 LTIP awards (which vested in 2013), Executive Directors and members of the Executive Committee are encouraged, in line with the practice among FTSE-listed companies, to build up a holding of shares of equivalent value to a year’s base salary (in the case of Executive Directors) or six months’ base salary (for other members of the Executive Committee). Executives are encouraged to retain their vested LTIP shares on an after-tax basis until the applicable guideline level is achieved. This is in addition to a mandatory two-year holding period on vested LTIP shares for awards granted from 2018 onwards. 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 of the Executive Directors. Senior executives participate in the LTIP with the same performance measures applied as for the CFO. Long-term incentive awards may be granted to participants below the Board without performance conditions, for example, if it is considered necessary to attract executives of the appropriate calibre. Payments Resulting from Existing Awards The Executive Director concerned is eligible to receive payment resulting from the vesting of any award made prior to the approval and implementation of the remuneration policy detailed in this report. Non-executive Director Policy Table This section of our report summarises the policy for each component of Non-executive Director remuneration. Purpose and link to strategy Operation Opportunity Performance metrics Fees To attract and retain talent by ensuring fees are market competitive and reflect the time commitment required of Non-executive Directors in different roles. Annual fee for the Chairman. Annual base fee for Non-executive Directors. Additional fees are paid to the Senior Independent Director and the Chairmen of the Committees as well as for representation on subsidiary Boards, where appropriate, to reflect additional responsibility. Fees are reviewed from time to time, taking into account the time commitment, responsibilities and fees paid by comparable companies, and also taking into consideration geography and risk profile. Not performance related. Changes to Non-executive Director fees are applied in line with the outcome of the review. The maximum aggregate fees, per annum, for all Non-executive Directors allowed by the Company’s Articles of Association is £5,000,000. Additional fees may be payable to Non-executive Directors in exceptional circumstances, e.g. if there is a material increase in time commitment. Non-executive Directors are not eligible to participate in any incentive plans, or receive benefits or any additional elements of remuneration to that stated above. CORPORATE GOVERNANCEFerrexpo plc 2017 Annual Report & Accounts 71 Pay-for-Performance: Scenario Analysis The CEO does not participate in any incentive plan, for the 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 CFO, who is 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 “Maximum”. CFO CHF (’000s) Maximum Target Below threshold 0 Fixed STIP LTIP 37% 54% 100% 500 41% 22% 2,389 40% 6% 1,641 885 1,000 1,500 2,000 2,500 In illustrating potential reward opportunities, the following assumptions have been made: STIP LTIP Fixed pay Scenario Maximum Target Maximum STIP (150% of salary) Performance warrants full vesting1 On-target STIP (100% of salary) Performance warrants threshold vesting (20%)1 Below threshold No STIP payable Threshold not achieved (nil) 1 Excludes increase in value arising from share price growth. Base salary, pension and benefits as at 1 January 2018 Potential reward opportunities illustrated above are based on the policy and current practice, applied to the base salary in force at 1 January 2018. For the STIP, the amounts illustrated for the CFO are those potentially receivable in respect of performance for 2018. For the LTIP, awards do not normally vest until the end of three years following the beginning of the year in which they were granted. The LTIP award opportunity for the CFO above is assumed to be of similar monetary value as in 2017. However, it should be noted that the Committee reviews the efficacy of the LTIP prior to grant each year, which could affect the LTIP awards made to the CFO in 2018. Remuneration Policy for New Appointments The Committee’s approach to setting remuneration for new Executive Directors is to ensure that the Company’s pay arrangements are in the best interests of Ferrexpo and its shareholders. To do this, the Company takes into account internal pay levels, the external market, location of the executive and remuneration received at the previous employer. The Committee reserves discretion to offer appropriate pension and benefit arrangements, which may include the continuation of benefits received in a previous role. Variable pay awards (excluding any potential “buy-out” awards, described below) for a newly appointed Executive Director will be as described in the policy table, subject to the same maximum opportunities. Different performance measures may be set initially for the STIP and LTIP awards, taking into account the responsibilities of the individual, and the point in the financial year at which he or she joined, and subject to the rules of the plan. The rationale will be clearly explained in each case. In addition, the Committee may make an award in respect of a new appointment to “buy out” existing incentive awards forfeited on leaving a previous employer. In such cases, the compensatory award would typically be on a like-for-like basis with similar time to vesting, performance measures and likelihood of the targets being met. The fair value of the buy-out award would not be greater than the awards being replaced. To facilitate such a buy-out the Committee may grant a bespoke award under the Listing Rules exemption available for this purpose. In cases of appointing a new Executive Director by way of internal promotion, the Group will honour any contractual commitments made prior to his or her promotion to Executive Director. In every case, the Board will pay both the appropriate, but also the necessary, rate of pay to attract an executive who in the view of the Board will contribute to shareholder value. The approach to setting Non-executive Director fees on appointment is in line with the approach taken for the fee review set out in the Non-executive Director policy table earlier in this report, and will also take into account fee levels for existing Non-executive Directors. Ferrexpo plc 2017 Annual Report & AccountsFINANCIAL STATEMENTSSTRATEGIC REPORTCORPORATE GOVERNANCE 72 REMUNERATION REPORT CONTINUED Details of Executive Directors’ Service Contracts The Executive Directors are employed under contracts of employment with Ferrexpo AG, a Group company (the “employer”). The 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) not otherwise set out in this report are as follows: save in circumstances justifying summary termination, Mr Zhevago’s service contract with the employer is terminable on not less than six months’ notice to be given by the employer or by Mr Zhevago, and Mr Mawe’s service contract with the employer is terminable on not less than 12 months’ notice to be given by the employer or not less than six months’ notice to be given by Mr Mawe. Executive Director K Zhevago C Mawe Position CEO CFO Notice period Date of contract From employer From employee 1 November 2008 7 January 2008 6 months 12 months 6 months 6 months Under the service contracts, the Executive Directors are entitled to 25 working days’ paid holiday per year. 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 employer 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 base salary, accrued but untaken holiday and expenses for the extent of the notice period, including for Mr Mawe a pro-rated performance-related payment under the STIP (where the employer terminates employment), which reflects the practice in the Group at the time when Mr Mawe was appointed. Mr Mawe’s entitlement to a pro-rated performance-related payment where the employer terminates his employment will not be replicated in the service contracts of future Executive Directors. In addition to the contractual rights to a payment on loss of office, any employee, including the Executive Directors, may have additional statutory and/or common law rights to certain additional payments, for example in a redundancy situation. Policy for Loss of Office Payments The following principles apply when determining payments for loss of office for the Executive Directors and any new Executive Directors. The employer will take account of all relevant circumstances on a case-by-case basis including (but not limited to): the sums stipulated in the service contract (including base salary during his or her notice period, accrued but untaken holiday, and allowances/benefits but excluding STIP (save in the case of Mr Mawe); whether the Executive Director has presided over an orderly handover; the contribution of the Executive Director to the success of the Company during his or her tenure; and the need to compromise any claims that the Executive Director may have. The Company may, for example, if the Committee considers it to be necessary: – enter into agreements with Executive Directors which may include the provision of legal fees or the settlement of liabilities in return for a single one-off payment or subsequent payments subject to appropriate conditions; – terminate employment other than in accordance with the terms of the contract (bearing in mind the potential consequences of doing so); or – enter into new arrangements with the departing Executive Director (for example, consultancy arrangements). 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 Committee in its absolute discretion permits) any outstanding LTIP awards will be pro-rated for time and performance conditions will be measured. The 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. In considering the exercise of discretion as set out above, the Committee will take into account all relevant circumstances which it considers are in the best interests of the Company; for example, ensuring an orderly handover, performance of the executive during his tenure as Director, performance of the Company as a whole and perception of the payment amongst the shareholders, general public and employee base. In the event of a change of control, the vesting period under the LTIP ends and awards may be exercised or released to the extent to which the performance conditions have, in the Committee’s opinion, been achieved up to that time. Pro-rating for time applies but the Committee has discretion to allow awards to be exercised or released to a greater or lesser extent if it considers it appropriate having regard to the circumstances of the transaction and the Company’s performance up to the date of the transaction. It is the Committee’s policy to review contractual arrangements prior to new appointments in the light of developments in best practice. The Executive Directors’ service contracts are available to view at the Company’s registered office. CORPORATE GOVERNANCEFerrexpo plc 2017 Annual Report & Accounts 73 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 CEO and Chairman of the Board and which should be notified to the Board. No external directorships of quoted companies are currently held by Executive Directors. Details of Non-executive Directors’ Letters of Appointment The Chairman and Non-executive Directors have each 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 Non-executive Directors. The key terms of current letters of appointment are as follows: Non-executive Director Position Date of first appointment Date of re-election S Lucas B Nacken V Lisovenko M Reilly S Lockett Chairman Non-executive Director 19 May 2016 1 August 2014 Annual re-election Annual re-election Non-executive Director 28 November 2016 Annual re-election Non-executive Director Non-executive Director 27 May 2015 15 June 2017 Annual re-election Annual re-election Employee Context In making remuneration decisions, the Committee also considers the pay and employment conditions throughout the Group. Prior to the annual pay review and throughout the year, the Committee receives reports from the CEO setting out the circumstances surrounding, and potential changes to, broader employee pay. The CEO consults as appropriate with key employees and the relevant professionals throughout the Group. This forms part of the basis for determining increases in Executive Director and senior executive remuneration which also takes into consideration factors detailed earlier in this report. Consideration of Shareholder Views The Committee takes into consideration views expressed by shareholders regarding remuneration, either at the AGM, or by correspondence, or at one-to-one or group meetings and shareholder events or otherwise by considering these views at the relevant Committee meetings which are subsequently reported to and considered by the Board as a whole. The Committee takes shareholder feedback into careful consideration when reviewing remuneration and regularly reviews the Directors’ remuneration policy in the context of key institutional shareholder guidelines and best practice. It is the Committee’s policy to consult with major shareholders prior to making any major changes to its executive remuneration structure. Ferrexpo plc 2017 Annual Report & AccountsFINANCIAL STATEMENTSSTRATEGIC REPORTCORPORATE GOVERNANCE 74 REMUNERATION REPORT CONTINUED PART B: REMUNERATION IN 2017 (SUBJECT TO AUDIT) The following section provides details of how the remuneration policy was implemented during the year. Committee Membership in 2017 The Committee comprises four independent Non-executive Directors. Bert Nacken is the Chairman of the Committee. The other members are Mary Reilly, Vitalii Lisovenko and Simon Lockett (since 15 June 2017). Oliver Baring retired from the Committee and the Board on 23 November 2017. The Committee met four times during the year. Attendance at meetings by individual members is detailed in the Corporate Governance Report on page 58. A summary of the topics discussed at meetings in 2017 is detailed below: – Review of remuneration of members of the Executive Committee, including salaries, STIP and LTIP policy. – Review of incentive outcomes. – Review of feedback from 2017 AGM voting season. – Review of general market considerations surrounding executive remuneration packages and structure. – Performance evaluation of the Committee. – Review of the LTIP framework and performance measures ahead of the proposed renewal in 2018. The CEO and the Group Head of Human Resources usually attend meetings of the Committee at the invitation of the Chairman of the Committee, and the Company Secretary acts as secretary to the Committee. No Director is present when his own remuneration is being discussed. Advisers The Committee retains Mercer | Kepler to provide advice on remuneration policy, with particular emphasis on the structure of long-term incentives for senior management and the provision of benchmark reports on executive and non-executive remuneration. Mercer | Kepler is a member of the Remuneration Consultants Group and adheres to its code of conduct. To help ensure a consistent approach to remuneration across the Group, Mercer | Kepler also provided advice to the Company in respect of matters relating to the remuneration of other employees. Other than remuneration advice, no other services were provided by Mercer | Kepler. Kepler’s parent company, Mercer, advised the Group on international healthcare plans. The fees paid to Mercer | Kepler in respect of work carried out for the Committee in 2017 totalled £34,730 based on time and materials. The Committee evaluates the support provided by its advisers periodically and is satisfied that Mercer | Kepler provide independent and objective remuneration advice to the Committee and do not have any connections with Ferrexpo which may impair their independence. The CEO and the Group Head of Human Resources provide guidance to the Committee on remuneration packages of senior executives employed by the Group (but not in respect of their own remuneration). Single Total Figure of Remuneration – Audited 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 2017 and the prior year. All figures shown in currency of payment K Zhevago (CEO) 2017 2016 C Mawe (CFO) 2017 1 Salary 2 Benefits 3 STIP 4 LTIP 5 Pension Total US$240,000 US$240,000 nil – – nil – – CHF14,662 CHF3,110 CHF651,525 CHF167,790 CHF728,644 £395,685 CHF65,326 2016 CHF651,525 CHF167,790 CHF726,621 £41,964 CHF59,023 US$240,000 plus CHF14,662 US$240,000 plus CHF3,110 CHF1,613,285 plus £395,685 CHF1,604,959 plus £41,964 6 Total (single currency) US$254,891 US$243,157 CHF2,115,062 CHF1,657,579 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 STIP: this is the total bonus earned on performance during the year. Further details are provided on pages 76 and 77. 4 LTIP: the market value of shares that vested on performance to 31 December of the relevant year (2017: 100% vested on performance; 2016: 24% vested on performance). The market value is based on the share price on the date of vesting: 31 December 2017 of 293.10 pence. Further details are provided on page 78. 5 Pension: valued in accordance with sections 230 to 232 of the Finance Act 2004 for cash balance arrangement schemes. Other formulae (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 and Other Benefits” below), and for expatriate staff the pension is repaid as a lump sum on leaving the country. 6 Average exchange rates: 2017 – US$1 = CHF0.9846, CHF1 = £0.7890; 2016 – US$1 = CHF0.9850, CHF1 = £0.7512. CORPORATE GOVERNANCEFerrexpo plc 2017 Annual Report & Accounts 75 The table below sets out in a single figure for each currency of payment the total remuneration received by each Non-executive Director for the year ending 31 December 2017 and the prior year. Non-executive Directors1 S Lucas2 M Reilly3 B Nacken4 V Lisovenko5 S Lockett6 Former Non-executive Directors M Field7 O Baring8 All figures shown in currency of payment, US$000 2017 2016 Fees Total Fees Total 440 170 170 135 92 73 158 440 170 170 135 92 73 158 137 185 170 12 – 223 198 137 185 170 12 – 223 198 The Non-executive Director base fee is US$135,000 p.a. and US$35,000 p.a. for Chairmanship of a Committee. This fee structure became effective on 1 September 2016. 1 2 Steve Lucas joined the Board on 19 May 2016 and was appointed Chairman on 28 November 2016. He receives a Chairman fee of US$440,000 p.a. 3 Mary Reilly receives an additional fee of US$35,000 p.a. for her role as Chairman of the Audit Committee. 4 Bert Nacken receives an additional fee of US$35,000 for his role as Chairman of the Remuneration Committee. 5 6 Simon Lockett joined the Board on 15 June 2017. In addition to the Non-executive Director base fee, he receives additional fees of US$55,000 p.a. for his role as Senior Independent Director since Vitalii Lisovenko joined the Board on 28 November 2016. 1 September 2017. 7 Sir Malcolm Field joined the Board on 10 March 2016 and during 2017 he received a time pro-rated additional fee of US$35,000 p.a. for his role as Chairman of the Bank F&C Review Committee. He also received a fee of US$4,625 in 2017, calculated on a time spent basis, in respect of work carried out on the Bank F&C review. He retired from the Board on 25 May 2017. 8 Oliver Baring retired from the Board on 23 November 2017. He received, in addition to the Non-executive Director’s base fee until his retirement, additional fees of US$60,000 p.a. for his role as Senior Independent Director until 30 August 2017. Implementation of Remuneration Policy 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 with executives based in similar geographic locations. Following this review the Committee decided not to increase executive salaries in 2017. Mr Zhevago’s salary, which he donates to Ukrainian charities, also remained unchanged at US$240,000. Executive Director K Zhevago C Mawe Position CEO CFO Base salary at: 1 January 2018 1 January 2017 US$240,000 CHF651,525 US$240,000 CHF651,525 Increase 0% 0% Pensions and Other Benefits – Audited The Group does not operate a separate pension scheme for Executive Directors. Mr Mawe and Mr 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. Contributions operate according to a sliding scale, increasing as the employee gets older to a maximum of 10%. K Zhevago C Mawe No additional benefit is receivable on early retirement. Normal retirement date 07.01.2039 31.01.2027 Mr Zhevago is entitled to, but in 2017 made no claim in respect of, furnished accommodation in Switzerland (and elsewhere in Europe if necessary for the performance of his duties), and up to US$5,000 for professional tax advice. Ferrexpo AG provides Mr Mawe with CHF167,790 of accommodation allowance per annum which is subject to periodic review in line with CPI inflation. Pension and other benefits will operate as set out in the Executive Director Remuneration Policy set out earlier in the report. Increase in value for 2017 less Director’s contribution (CHF000) Total cash value at end of 2017 (CHF000) 14 65 71 793 Ferrexpo plc 2017 Annual Report & AccountsFINANCIAL STATEMENTSSTRATEGIC REPORTCORPORATE GOVERNANCE 76 REMUNERATION REPORT CONTINUED 2017 STIP Outcome – Audited The Company, as a single product producer of iron ore pellets with a focused customer portfolio, sets its performance targets to ensure that the CFO and senior executives are motivated to enhance shareholder value both in the short term and over the longer term. Key performance targets for 2017 were set at the start of the year for the CFO and senior executives and were weighted to reflect the contribution of the individual to the achievement of that target. Targets during the year related to financial performance, operational performance, safety (behavioural safety initiatives and improvements in lost-time accident statistics), and cost improvement activities, as well as personal targets relating to operational and financial management objectives. In last year’s report, detailed targets and objectives were not disclosed prospectively as they were considered to be commercially sensitive at that time. We indicated that retrospective disclosure of these targets would be given in this year’s report where this is no longer the case, and this is included in the table below. Financial and operational targets were normalised, as in previous years, to take account of market and raw material cost price developments and mining plans as appropriate, to the extent that these were not under the direct control of management. Target STIP opportunity (as a percentage of salary) may be varied as appropriate to take account of changes in role, responsibility or scope. No payment is made under the STIP if performance is below threshold. For the CFO, threshold performance earns a bonus of 50% of salary, on-target performance 100% and stretch performance 150%. The level of achievement against each of the targets for 2017 as determined by the Committee for the CFO is summarised below. Business scorecard (60% of STIP) KPI Measure/target Weighting for CFO % Threshold 50% Financial Underlying cash EBITDA (US$) 12.5% NOPAT (US$) 7.5% 428 359 Stretch 150% Scorecard outcome Assessment Max as a % of salary Bonus awarded as a % of salary 522 453 477.7 Above target 18.8% 12.9% 393.0 Above threshold 11.3% 6.5% Target 100% 475 406 CSR and Safety Safety programme and standards implementation (%) 5.0% 50% 75% 100% 100% Stretch achieved 7.5% 7.5% Zero fatalities/improvement in LTIFR1 5.0% 0% 1.0% 2.0% -1.0% Zero due to fatality Operational Production volume (Mt) 2.5% 11,100 11,300 11,700 10,394 Below threshold Full cash costs (C1) (US$/t) 2.5% 39.6 38.7 36.7 39.1 Above threshold 7.5% 3.8% 3.8% 0.0% 0.0% 1.9% FPM Total movement cost (US$/t) FYM Total movement cost (US$/t) 2.5% 1.60 1.52 1.36 1.46 Above target 3.8% 3.0% Sales and Marketing Operational improvement projects Realised DAP/FOB price (US$) 2.5% -10.0 5.0% 1.39 1.34 -7.5 1.24 -5.0 1.26 Above target 7.5% -0.60 Stretch achieved 3.8% Seaborne freight per wmt compared to C3 (US$/t) 2.5% 5.0 3.5 2.0 2.1 Above target 3.8% Sales volume (Mt) 5.0% 10,184 10,384 10,584 10,427 Above target 7.5% 7.0% 3.8% 3.7% 5.5% Mobile maintenance relocation (% completed) Plant maintenance improvement (% implementation) Effective organisation design headcount reduction (FTE)2 2.5% 80% 90% 100% 90% Target 3.8% 2.5% 2.5% 80% 90% 100% 95% Target 3.8% 3.1% 2.5% 600 800 1000 0.0 Below threshold 3.8% 60.0% 90.0% Discretionary modifier Scorecard outcome 0.0% 57.3% 1.5% 58.8% 1 2 LTIFR: number of work-related lost time injuries per million man hours (not including contractors). FTE: full-time equivalent is a unit to measure the number of employees on full-time schedules and employees on part-time schedules converted to full-time basis. CORPORATE GOVERNANCEFerrexpo plc 2017 Annual Report & Accounts 77 The Committee considered the CFO’s performance against Financial, Operational, CSR and Safety, Sales and Marketing, and Operational improvement targets during 2017, and decided to add 1.5% to the overall business scorecard result. In doing so, the Committee noted that the outcome of the scorecard for the CFO reflected the impact of planned pellet plant maintenance which had not been fully foreseen when the pellet volume targets were set at the start of the year. The Committee also considered that the normalisation of financial targets to take account of market and raw material cost price developments beyond the direct control of management had in effect raised the scorecard financial targets, resulting in only an above target outcome being achieved. This result did not reflect the fact that the Group’s pre-tax profit increased by 110% while net debt was reduced by 32%. Taking into consideration all these factors, the Committee determined an overall business scorecard result for the CFO of 58.8% of salary. Personal objectives (40% of STIP) KPI Objectives Weighting for CFO % Threshold 50% Target 100% Stretch 150% Scorecard outcome Assessment Max as a % of salary Bonus awarded as a % of salary Personal objectives Refinancing risk 20.0% Reduced Substantially eliminated Eliminated Above target 30.0% 25.0% Refinancing risk substantially eliminated plus new PXF achieved Address compliance internal audit findings 5.0% Partially – rating remains sufficient Mostly – rating remains sufficient All key points – rating upgraded Stretch achieved All internal audit findings addressed 7.5% 7.5% Reduce interest charge 5.0% US$1 million below budget US$2 million below budget US$3 million below budget Above target US$2.2 million achieved 7.5% 5.5% Reduce Group taxation – no cross-border claims FME/FAG – manage transfer pricing and Board independence 5.0% 5.0% 40.0% Total Total STIP 20% of Group PBT 19% of Group PBT 18% of Group PBT Stretch achieved Tax charge expected at 16% 7.5% 7.5% FAG FME Both Stretch achieved Issues for both FAG and FME addressed 7.5% 7.5% 60.0% 53.0% 150.0% 112.0% The Committee considered the CFO’s personal performance against his personal targets during 2017 as shown above and confirmed a result of between target and stretch of 53.0%. The Committee confirmed that the CFO had achieved all his personal targets relating to the deleveraging the Group’s balance sheet, managing the Group’s overall tax position, reducing working capital and various compliance- related targets. It was also noted that the CFO had through various personal actions contributed towards an increase in the Group’s credit rating by the main rating agencies and had enhanced relationships with banking partners, thus enabling a new PXF facility to be arranged. Taking into account his overall scorecard results and achievement of specific personal targets, the Committee awarded a total bonus of 112% of salary to the CFO. STIP Framework for 2018 The STIP framework for 2018 is in line with the principles of the remuneration policy and the 2017 framework. Financial and operational targets, including cost reduction measures and personal KPIs, continue to be set as in previous years. Mr Mawe’s 2018 STIP opportunity is 150% of salary for maximum performance, and 100% for target performance. The measures and weightings for the STIP in 2018 are shown in the table below. Due to commercial sensitivity, details of performance targets will be disclosed retrospectively and in certain instances may be aggregated. The CEO does not participate in the STIP. KPI Financial (EBITDA, NOPAT) Operational (Production, sales volume) Personal Total Weighting for CFO 30.0% 30.0% 40.0% 100% Ferrexpo plc 2017 Annual Report & AccountsFINANCIAL STATEMENTSSTRATEGIC REPORTCORPORATE GOVERNANCE 78 REMUNERATION REPORT CONTINUED 2015 LTIP Award Vesting – Audited The performance period for the 2015 LTIP awards ended on 31 December 2017. The 2015 LTIP rewarded TSR outperformance of a tailored comparator group, as set out below. Under the 2015 LTIP, 20% of maximum vests for TSR performance in line with the Index, with full vesting for TSR outperformance of 8% p.a. Ferrexpo’s TSR performance relative to the weighted index was assessed by Mercer | Kepler. From 1 January 2015 to 31 December 2017, Ferrexpo’s TSR outperformance was 45.7% p.a. resulting in 100% of the 2015 LTIP awards vesting. LTIP Granted in 2017 – Audited The 2017 LTIP grant to Mr Mawe is outlined below. Date of grant Number of shares Face value (£) Face value (% salary) Vesting for minimum performance (% of maximum) End of performance period C Mawe 02.05.2017 150,000 £176,1751 34%1 20% 31.12.2019 1 Based on average share price for the last three months of 2016 of 117.45 pence and average exchange rate of CHF1 = £ 0.7890. The constituents of the Index for the last three cycles are summarised in the table below: Focused iron ore miners Assore Atlas Iron Cliffs Fortescue Metals Kumba Iron Ore Mount Gibson Weighting 2015 60% 20161 60% 2017 60% Global diversified miners Weighting 40% 40% 40% Anglo American2 BHP Billiton Rio Tinto Vale Glencore 1 The Committee reviewed the constituents of the comparator index and their weightings prior to the grant of 2015 LTIP awards and decided to increase the weighting on the focused iron ore miners from 50% to 60% by dropping the single commodity/emerging market miners component from the comparator group, increasing the weighting on our closest comparators to improve the relevance of the benchmark and aid simplicity. 2 Removed from the peer group because the company is the majority shareholder of Kumba Iron Ore (already in the peer group) which the Committee regarded as the more relevant of the two comparators. TSR is calculated on a common currency basis to ensure that comparisons with international comparators listed overseas are fair, with a TSR share price averaging period of six months 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. No performance shares vest if Ferrexpo’s TSR underperforms the comparator index. 20% vest if Ferrexpo’s TSR is equal to Index TSR; full vesting occurs only if Ferrexpo’s TSR exceeds the Index by at least 8% p.a.; there is straight-line pro rata vesting in between these 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. Dividends accrue on performance shares over the vesting period and are paid on shares that vest. LTIP Framework for 2018 This Directors’ Remuneration Report is published prior to the grant date of awards under the LTIP, which are normally made in April. In advance of grant, the Committee will review the efficacy of the LTIP to ensure that it remains relevant. Details of awards made in 2018 will be set out in next year’s Annual Report on Remuneration. CORPORATE GOVERNANCEFerrexpo plc 2017 Annual Report & Accounts 79 Non-executive Directors (Including the Chairman) 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 Mercer | Kepler. Fees payable were reviewed in 2016 and reduced, effective 1 September 2016. The Committee Chairman’s fee was only reduced on 1 January 2017. A further review was undertaken in 2017 and the fee payable to the Senior Independent Director was reduced, effective 1 September 2017, as shown below: Role Chairman fee Non-executive Director base fee Committee Chairman fee Senior Independent Director fee From 1 September 2017 Annual fee From 1 January 2017 Annual fee From 1 September 2016 Annual fee Before 1 September 2016 Annual fee US$440,000 US$135,000 US$35,000 US$55,000 US$440,000 US$440,000 US$135,000 US$135,000 US$35,000 US$60,000 US$40,000 US$60,000 US$500,000 US$150,000 US$40,000 US$60,000 Directors’ Shareholdings – Audited Total interests of the Directors in office (and connected persons) as at 31 December 2017: K Zhevago1 C Mawe S Lucas O Baring2 B Nacken M Reilly V Lisovenko M Field S Lockett At 31 December 2017 At 31 December 2016 296,077,944 296,077,944 115,437 0 16,130 20,000 0 0 0 0 238,217 0 20,130 20,000 0 0 0 – 1 Mr Zhevago is interested in these shares as a beneficiary of The Minco Trust, which is the ultimate shareholder of Fevamotinico S.a.r.l., which owns 296,077,944 shares in the Company. 2 As at date of retirement from the Board on 23 November 2017. 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 20 March 2018, being a date not more than one month prior to the date of notice of AGM, the Executive Directors’ shareholdings are as follows: K Zhevago C Mawe Shareholding requirement (% salary) 100% 100% Owned outright Subject to performance1 Current shareholding2 (% salary) Guideline met? 296,077,944 – 115,437 300,000 – 66% Yes No 1 Performance awards are nil-cost options. Further details of shares subject to performance are provided below. 2 Based only on shares owned outright at 31 December 2017 and share price of 293.10 pence. Details of LTIP awards held by Mr Mawe (which are subject to performance) are provided below. C Mawe Total At 1 January 2017 Granted (2017 award) Exercised Lapsed Total at 31 December 2017 Price on date of award (pence) Date from which exercisable Expiry date 130,0001 135,0002 150,000 150,000 31,200 98,800 0 155 01.01.17 22.04.24 135,000 150,000 150,000 435,000 67 37 01.01.18 21.04.25 01.01.19 25.04.26 148.6 01.01.20 04.05.27 1 2 This award has vested 24% under the TSR performance condition described above. At the date of vesting (31 December 2016) the market price of a share was 134.50 pence. This award has vested 100% under the TSR performance condition described above. At the date of vesting (31 December 2017) the market price of a share was 293.10 pence. With the exception of the reinvestment of the January 2018 special dividend to purchase 251 shares for Mr Mawe, there have been no changes in the interests of the Directors from the end of the period under review to 20 March 2018. Total outstanding (i.e. awarded but not yet vested) awards granted under the LTIP as at the end of 2017 are equivalent to 0.22% of issued share capital. Ferrexpo plc 2017 Annual Report & AccountsFINANCIAL STATEMENTSSTRATEGIC REPORTCORPORATE GOVERNANCE 80 REMUNERATION REPORT CONTINUED Exit Payments Made in Year – Audited No payments for loss of office were paid to or receivable by any Director or former Director in the financial year. Payments to Past Directors – Audited Lucio Genovese and Wolfram Kuoni retired from the Board on 1 August 2014 and 28 November 2016 respectively. They remain respectively a Non-executive Director and the Chairman of Ferrexpo AG, for which they respectively receive fees of US$40,000 p.a. and US$87,500 p.a. No other payments were made to past Directors in the year. Percentage Change in CEO Remuneration Compared to Other Employees The table below sets out the percentage increase in salary, taxable benefits, and annual bonus for the CEO between 2016 and 2017 compared to that for other employees. Salary Taxable benefits Annual bonus 1 Refers to senior executives. CEO 0% 0% n/a Other employees1 50% 0% 30% Relative Importance of Spending on Pay The table below shows Ferrexpo’s dividend and total employee pay expenditure (this includes pension and variable pay, including STIP and fair value of LTIP, but not social security) for the financial years ended 31 December 2016 and 31 December 2017, and the percentage change. US$ million All-employee remuneration Distributions to shareholders1 1 Includes dividends and share buybacks. 2017 55 58 2016 45 40 Year-on-year change 22% 45% Comparison of Company Performance and Executive Director Pay The graph below shows the value, at 31 December 2017, of £100 invested in Ferrexpo’s shares on 31 December 2008 compared with the current value of the same amount invested in the FTSE 250 and All-Share indices or in the shares of the LTIP comparator group. The FTSE 250 and All-Share indices are chosen because Ferrexpo was a constituent member of the FTSE 250 for most of the period. HISTORICAL TSR PERFORMANCE Growth in the value of a hypothetical £100 holding over the nine years to 31 December 2017. 1,500 1,200 900 600 300 0 31 Dec 2008 31 Dec 2009 31 Dec 2010 31 Dec 2011 31 Dec 2012 31 Dec 2013 31 Dec 2014 31 Dec 2015 31 Dec 2016 31 Dec 2017 Ferrexpo 2017 LTIP Index FTSE 250 Index FTSE All-Share Index CORPORATE GOVERNANCEFerrexpo plc 2017 Annual Report & Accounts 81 Chief Executive Officer’s Pay US$000 K Zhevago 2009 2010 2011 2012 2013 2014 2015 2016 2017 Single figure total remuneration 322 341 348 291 243 243 243 243 255 STIP vesting (% max) LTIP vesting (% max) K Zhevago did not participate in the STIP K Zhevago did not participate in the LTIP Statement of Shareholder Voting The following table shows the results of the binding vote on the Remuneration Policy and the advisory vote on the 2016 Annual Report at the 2017 AGM. Remuneration Policy (at 2017 AGM) 2016 Annual Report on Remuneration (at 2017 AGM) For No. 434m 436m % 97.4% 97.8% Against Withheld No. 12m 10m % 2.6% 2.2% No. 1.4m 1.3m Other transactions involving Directors are set out in Note 34 (related parties) to the financial statements. This report was approved by the Board on 20 March 2018. Signed on behalf of the Board BERT NACKEN CHAIRMAN OF THE REMUNERATION COMMITTEE Ferrexpo plc 2017 Annual Report & AccountsFINANCIAL STATEMENTSSTRATEGIC REPORTCORPORATE GOVERNANCE 82 DIRECTORS’ REPORT Introduction 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 All-Share Index. The Directors present their Annual Report on the affairs of the Group, together with the financial statements and auditors’ report, for the year ended 31 December 2017. There have been no significant events since the balance sheet date, other than the proposed dividend disclosed in Note 13 to the financial statements. An indication of likely future developments in the business of the Group is included in the Strategic Report. Information about the use of financial instruments by the Group is given in Note 27 to the financial statements. Additional disclosures which are incorporated by reference into this Directors’ Report, including any information required in accordance with Listing Rule 9.8.4R of the FCA’s Listing Rules or the Act, can be located as set out in the following table: Page Capitalised interest and tax relief (LR 9.8.4 R(1)) See financial statements Note 14 Details of long-term incentive schemes (LR 9.8.4R (4)) Remuneration Report Contracts of significance (LR 9.8.4R (10)) Details of waivers of dividends by shareholders (LR 9.8.4R (12) and (13)) See financial statements Note 34. Transactions with FC Vorskla are considered to be contracts of significance under the Listing Rules The employee benefit trust contains 2.9 million Ferrexpo Ordinary Shares for satisfying existing and future awards under management incentive schemes. A dividend waiver is in place in respect of these shares Relationship Agreement with controlling shareholder (LR 9.8.4R (14)) Corporate Governance Report Disclosures concerning greenhouse gas emissions Strategic Report Financial instruments The Group does not hold any derivative financial instruments. Group policy on financial instruments is set out in Note 27 to the financial statements Events since the balance sheet date See financial statements Note 35 Statement of Directors’ responsibilities in respect of the Annual Report and Accounts Information that fulfils the requirements of DTR 7.2 (other than DTR 7.2.6) Corporate Governance Report Dividends Results for the year are set out in the consolidated income statement on page 96. 114 67-81 142 – 56 46 130 144 86 53 The Directors recommend a final dividend of 3.3 US cents per Ordinary Share. Subject to shareholders approving this recommendation at the Annual General Meeting (“AGM”), the dividend will be paid in UK Pounds Sterling on 27 June 2018 to shareholders on the register at the close of business on 1 June 2018. 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 progress made by the business in 2017, the Directors have also announced a special dividend of 6.6 US cents per share, amounting to US$38 million, for payment on 16 April 2018 to shareholders on the register at the close of business on 3 April 2018. 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: – Oliver Baring (retired 23 November 2017) – Sir Malcolm Field (retired 25 May 2017) – Vitalii Lisovenko – Simon Lockett (appointed 15 June 2017) – Steve Lucas – Chris Mawe – Bert Nacken – Mary Reilly – Kostyantin Zhevago All of the Directors will retire at the forthcoming AGM and, being eligible, will offer themselves for re-election. CORPORATE GOVERNANCEFerrexpo plc 2017 Annual Report & Accounts 83 Further details about the Directors and their roles within the Group are given in the Directors’ biographies on pages 50 and 51. 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 67 to 81. 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 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 each 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. Disclosures Required by Statute Employees Information on the Group’s employment policies can be found in the Strategic Report on pages 44 to 45. Employee numbers are stated in Note 29 to the financial statements. The Group employs fewer than 250 staff in the United Kingdom and so does not disclose its policies on employee involvement or employing disabled people. However, it will give fair consideration to applications for employment from disabled people. Political Donations The Group made no political donations during the year. 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 relevant institutional investor guidelines. Details of the issued share capital of the Company are shown in Note 31 to the financial statements. 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. The Company is not aware of any agreements between holders of securities that may result in restrictions on the transfer of securities or that may result in restrictions on voting rights. Ferrexpo plc 2017 Annual Report & AccountsFINANCIAL STATEMENTSSTRATEGIC REPORTCORPORATE GOVERNANCE 84 DIRECTORS’ REPORT CONTINUED 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 25 May 2017. This authority will expire at the conclusion of the Company’s 2018 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 2017. 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 than 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. Substantial Shareholdings As at 31 December 2017, the Company had been advised, in accordance with the Disclosure and Transparency Rules, of the following notifiable interests in its voting rights. Name of shareholder % of the Company’s total voting rights at date of notification Number of voting rights Ordinary Shares Fevamotinico S.a.r.l.1 296,077,944 296,077,944 50.30% 1 Fevamotinico S.a.r.l. is a wholly owned subsidiary of The Minco Trust of which Kostyantin Zhevago is a beneficiary. As at 4 March 2018, the latest practicable date prior to publication of the Annual Report, no changes in these interests in voting rights had been notified to the Company. 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. CORPORATE GOVERNANCEFerrexpo plc 2017 Annual Report & Accounts 85 Bank Loan Facilities Under the US$195 million revolving pre-export finance (“PXF”) facility with BNP Paribas and other banks entered into in November 2017, 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 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 and a lender may upon notice cancel its commitment and declare the amount owing to it immediately due and payable. As at 31 December 2017 the facility was undrawn. Under the US$350 million revolving PXF facility with Deutsche Bank and other banks entered into in September 2013, 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 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 and a lender may upon notice cancel its commitment and declare the amount owing to it immediately due and payable. As of 31 December 2017, total committed PXF facilities available were US$326.25 million, of which US$112.5 million had been drawn under the 2013 facility. Of the remaining US$213.75 million, US$18.75 million is available under the 2013 facility and US$195 million under the 2017 facility. Corporate Bonds Due 2018 and 2019 Under the conditions of the Notes issued in February and July 2015, if Kostyantin Zhevago or certain related persons ceases to own directly or indirectly at least 30% of the issued and allotted share capital of the Company; if any person (other than Kostyantin Zhevago or certain related persons) becomes the beneficial owner of shares in the Company carrying more than 50% of the voting rights normally exercisable at a general meeting; or if the allotted share capital of the Company ceases to be listed on certain approved markets, 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 56). The Relationship Agreement ceases to apply if Ferrexpo’s shares cease to be listed and traded on the London Stock Exchange, or if the holding of Fevamotinico S.a.r.l., The Minco Trust or Mr Zhevago individually or collectively falls below 24.9% of the issued share capital of the Company and they are no longer a controlling shareholder for the purposes of the UK Listing Rules. 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 18 to 39. The Viability Statement is set out in the Strategic Report on page 40. The financial position of the Group, its cash flows, liquidity position and borrowing facilities are described in the Performance Review on pages 18 to 27. In addition, Note 27 of the notes to the consolidated financial statements on pages 130 to 136 sets out the Group’s objectives, policies and processes for managing its capital; its financial risk management objectives and details of its financial instruments; its exposure to credit risk, liquidity risk, as well as currency risk and interest rate risk. The Directors have reviewed the Group’s cash flow projections, liquidity and debt maturity profile for the period from the approval of the accounts to the end of March 2019 and also considered events and conditions beyond the period of management’s going concern assessment, in particular the debt repayments totalling US$177,022 thousand in April and May 2019. The Directors are of the view that the Group is a going concern and the consolidated financial statements have been drawn up on this basis. 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 (as defined in the Act) of which the Group’s auditors are unaware, and that each Director has taken all steps that he/she ought to have taken as a Director in order to make himself/herself aware of any relevant audit information (as defined) and to establish that the Group’s auditors are aware of that information. 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 Friday 25 May 2018 at Deutsche Bank, Winchester House, 75 London Wall, London EC2N 2DB. 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. The Strategic Report on pages 1 to 49 and this Directors’ Report have been drawn up and presented in accordance with, and in reliance upon, applicable English company law, and any liability of the Directors in connection with these reports shall be subject to the limitations and restrictions provided by such law. The Directors’ Report was approved by the Board on 20 March 2018. For and on behalf of the Board STEVE LUCAS CHAIRMAN CHRIS MAWE CHIEF FINANCIAL OFFICER Ferrexpo plc 2017 Annual Report & AccountsFINANCIAL STATEMENTSSTRATEGIC REPORTCORPORATE GOVERNANCE 86 STATEMENT OF DIRECTORS’ RESPONSIBILITIES Statement by the Directors under the UK Corporate Governance Code The Directors are responsible for preparing the Annual Report and the financial statements in accordance with applicable law and regulations. Company law requires the Directors to prepare such financial statements for each financial year. Under that law the Directors are required to prepare the Group financial statements in accordance with International Financial Reporting Standards (“IFRS”) as adopted by the European Union and Article 4 of the IAS Regulation, and have also chosen to prepare the Parent Company financial statements in accordance with Financial Reporting Standard 101 (Reduced Disclosure Framework). 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 the Parent Company and of their profit or loss for that period. In preparing the Parent Company financial statements, the Directors are required to: – select suitable accounting policies and then apply them consistently; – make judgements and estimates that are reasonable and prudent; – state whether Financial Reporting Standard 101 (Reduced Disclosure Framework) has 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 preparing the Group financial statements, International Accounting Standard 1 requires that the Directors: – properly select and apply accounting policies; – present information, including accounting policies, in a manner that provides relevant, reliable, comparable and understandable information; – provide additional disclosures when compliance with the specific requirements in IFRSs is insufficient to enable users to understand the impact of particular transactions, other events and conditions on the entity’s financial position and financial performance; and – make an assessment of the Group’s ability to continue as a going concern. The Directors are responsible for keeping adequate accounting records that are sufficient to show and explain the Parent Company’s transactions and disclose with reasonable accuracy at any time the financial position of the Parent Company and enable them to ensure that its financial statements comply with the Companies Act 2006. They are also responsible for safeguarding the assets of the Group and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities. The Directors are responsible for the maintenance and integrity of the corporate and financial information included on the Company’s website. Legislation in the United Kingdom governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions. Responsibility Statement of the Directors in Respect of the Annual Report and Accounts We confirm that to the best of our knowledge: (a) the financial statements, prepared in accordance with the relevant financial reporting framework, give a true and fair view of the assets, liabilities, financial position and profit or loss of the Company and the undertakings included in the consolidation taken as a whole; and (b) the Strategic Report includes a fair review of the development and performance of the business and the position of the Company and the undertakings included in the consolidation taken as a whole, together with a description of the principal risks and uncertainties that they face; and (c) the Annual Report and financial statements, taken as a whole, are fair, balanced and understandable and provide the information necessary for shareholders to assess the Group’s position and performance, business model and strategy. This responsibility statement was approved by the Board of Directors on 20 March 2018 and is signed on its behalf by: STEVE LUCAS CHAIRMAN CHRIS MAWE CHIEF FINANCIAL OFFICER 20 March 2018 CORPORATE GOVERNANCEFerrexpo plc 2017 Annual Report & Accounts FINANCIAL CONTENTS 87 Notes Content Independent Auditor’s Report Primary Statements Consolidated Income Statement Consolidated Statement of Comprehensive Income Consolidated Statement of Financial Position Consolidated Statement of Cash Flows Consolidated Statement of Changes in Equity Notes to the Consolidated Financial Statements Section 1: Basis of Preparation Corporate Information Basis of Preparation New accounting Policies Use of Critical Estimates and Judgements Section 2: Results for the Year Segment Information Revenue Operating Expenses Before Special Items Other Income Foreign Exchange Gains and Losses Special Items Net Finance Expense Taxation Earnings Per Share and Dividends Paid and Proposed Section 3: Assets and Liabilities Property, Plant and Equipment Goodwill and Other Intangible Assets Other Non-current Assets Inventories Trade and Other Receivables Prepayments and Other Current Assets Other Taxes Recoverable and Payable Trade and Other Payables Pension and Post-employment Obligations Provisions Accrued Liabilities and Deferred Income Section 4: Financial Instruments and Financial Risk Management Cash and Cash Equivalents Interest-bearing Loans and Borrowings Financial Instruments Section 5: Other Share-based Payments Employees Commitments, Contingencies and Legal Disputes Share Capital and Reserves Consolidated Subsidiaries Investments in Associates Related Party Disclosure Events After the Reporting Period Parent Company Financial Statements Additional Disclosures Alternative Performance Measures Glossary Shareholder Information 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 Page 88 96 97 98 99 100 101 101 102 103 103 104 106 107 107 108 109 109 113 114 117 119 120 121 122 122 123 123 127 128 128 129 130 137 138 138 140 141 142 142 144 145 149 150 153 IBC Ferrexpo plc 2017 Annual Report & AccountsFINANCIAL STATEMENTSSTRATEGIC REPORTCORPORATE GOVERNANCE 88 INDEPENDENT AUDITOR’S REPORT TO THE MEMBERS OF FERREXPO PLC REPORT ON THE AUDIT OF THE FIN A NCI A L STATEMENTS Opinion In our opinion: – the financial statements give a true and fair view of the state of Ferrexpo plc (the “Parent Company”) and its subsidiaries’ (together the “Group”) affairs as at 31 December 2017 and of the Group’s profit for the year then ended; – the Group financial statements have been properly prepared in accordance with International Financial Reporting Standards (“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 including Financial Reporting Standard 101 “Reduced Disclosure Framework”; and – the financial statements have been prepared in accordance with the requirements of the Companies Act 2006 and, as regards the Group financial statements, Article 4 of the IAS Regulation. We have audited the financial statements of Ferrexpo plc (the “Parent Company”) and its subsidiaries (the “Group”) which comprise: – the consolidated income statement; – the consolidated statement of comprehensive income; – the consolidated and Parent Company statements of financial position; – the consolidated and Parent Company statement of cash flows; – the consolidated and Parent Company statement of changes in equity; – the accounting policies; – the related consolidated Notes 1 to 35; and – the related Parent Company Notes 1 to 8. The financial reporting framework that has been applied in the preparation of the Group financial statements is applicable law and 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, including FRS 101 “Reduced Disclosure Framework” (United Kingdom Generally Accepted Accounting Practice). Basis for opinion We conducted our audit in accordance with International Standards on Auditing (UK) (“ISAs (UK)”) and applicable law. Our responsibilities under those standards are further described in the auditor’s responsibilities for the audit of the financial statements section of our report. We are independent of the Group and the Parent Company in accordance with the ethical requirements that are relevant to our audit of the financial statements in the UK, including the FRC’s Ethical Standard as applied to listed public interest entities, and we have fulfilled our other ethical responsibilities in accordance with these requirements. We confirm that the non-audit services prohibited by the FRC’s Ethical Standard were not provided to the Group or the Parent Company. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion. Summary of our audit approach Key audit matters The key audit matters that we identified in the current year were: – Charitable payments – Taxation – Related party disclosure Our assessment of the Group’s key audit matters is consistent with 2016 except for: i) “Going Concern”, which is no longer considered a key audit matter as a result of improved iron ore pellet prices and increased actual and forecast cash flow generation; ii) “Impact of Bank F&C liquidation”, which is no longer considered a key audit matter as the amounts relating to Bank F&C have been fully provided for in 2016; and iii) “Taxation”, which is a new key audit matter due to the significance of a judgement in relation to whether or not to recognise a deferred tax asset for the previous Bank F&C losses, and ongoing challenges from the State Fiscal Service of Ukraine (“SFS”), including the commencement of a transfer pricing audit in 2017. Materiality The materiality that we used for the Group financial statements was US$16.5 million, which was determined as 5% of the two-year average of profit before tax (“PBT”) and special items. Ferrexpo plc 2017 Annual Report & AccountsFINANCIAL STATEMENTS 89 Scoping We utilised Deloitte global member firms (“Component Auditors”) to report on the operations of the five material subsidiaries comprising the three mining and processing entities in Ukraine and the Swiss and Middle East marketing companies. Material subsidiaries were determined based on i) financial significance of the component to the Group as a whole, and ii) assessment of the risk of material misstatements applicable to each component. First year audit transition Our audit scope results in all major operations of the Group being subject to audit work, covering in excess of 94% of the Group’s revenue, 95% of the Group’s profit and 85% of the net assets. We developed a detailed audit transition plan, designed to deliver an effective transition from the Group’s predecessor auditor, Ernst & Young LLP (“EY”). Our audit planning and transition commenced on 1 January 2017. Our transition activities were performed for components located in the UK, Switzerland and Ukraine, which included (but were not limited to) meeting relevant partners and senior staff from EY, shadowing EY in the audit close meetings, attending the February 2017 Audit Committee meeting where the final report on the audit was provided, and reviewing EY’s 2016 audit work papers. Our transition focused on obtaining an understanding of the Group’s system of internal control, evaluating the Group’s accounting policies and areas of accounting judgement, and meeting with management across all major divisions. Conclusions relating to going concern, principal risks and viability statement Going concern We have reviewed the Directors’ statement in Note 2 to the financial statements about whether they considered it appropriate to adopt the going concern basis of accounting in preparing them and their identification of any material uncertainties to the Group’s and Parent Company’s ability to continue to do so over a period of at least 12 months from the date of approval of the financial statements. We are required to state whether we have anything material to add or draw attention to in relation to that statement required by Listing Rule 9.8.6R(3) and report if the statement is materially inconsistent with our knowledge obtained in the audit. We confirm that we have nothing material to report, add or draw attention to in respect of these matters. Principal risks and viability statement Based solely on reading the Directors’ statements and considering whether they were consistent with the knowledge we obtained in the course of the audit, including the knowledge obtained in the evaluation of the Directors’ assessment of the Group’s and the Parent Company’s ability to continue as a going concern, we are required to state whether we have anything material to add or draw attention to in relation to: – the disclosures on pages 34 to 39 that describe the principal risks and explain how they are being We confirm that we have nothing material to report, add or draw attention to in respect of these matters. managed or mitigated; – the Directors’ confirmation on page 61 that they have carried out a robust assessment of the principal risks facing the Group, including those that would threaten its business model, future performance, solvency or liquidity; or – the Directors’ explanation on page 40 as to how they have assessed the prospects of the Group, over what period they have done so and why they consider that period to be appropriate, and their statement as to whether they have a reasonable expectation that the Group will be able to continue in operation and meet its liabilities as they fall due over the period of their assessment, including any related disclosures, drawing attention to any necessary qualifications or assumptions. We are also required to report whether the Directors’ statement relating to the prospects of the Group required by Listing Rule 9.8.6R(3) is materially inconsistent with our knowledge obtained in the audit. Key audit matters Key audit matters are those matters that, in our professional judgement, were of most significance in our audit of the financial statements of the current period and include the most significant assessed risks of material misstatement (whether or not due to fraud) that we identified. These matters included those which had the greatest effect on: the overall audit strategy, the allocation of resources in the audit; and directing the efforts of the engagement team. These matters were addressed in the context of our audit of the financial statements as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters. Ferrexpo plc 2017 Annual Report & AccountsFINANCIAL STATEMENTSSTRATEGIC REPORTCORPORATE GOVERNANCE 90 Charitable payments Key audit matter description How the scope of our audit responded to the key audit matter INDEPENDENT AUDITOR’S REPORT TO THE MEMBERS OF FERREXPO PLC CONTINUED In order to maintain its social licence to operate, the Group operates a CSR programme in Ukraine. In 2013, the programme expanded and, also in 2013, Blooming Land, a local charity based in Ukraine, was established with the primary function of coordinating the Group’s CSR programme. In 2017, this programme included Ferrexpo making charitable payments totalling US$28.4 million (as disclosed in Note 7) out of which US$25.0 million (2016: US$25.2 million) was paid to Blooming Land. These activities are further described on page 48 of the Strategic Report and the Group oversight is described on page 63 of the Corporate Governance Report. Blooming Land managed its activities via three related charitable funds (the “Sub Funds”) who carried out charitable activities by subcontracting individual event managers. During the year 129 health-related events were reported to Ferrexpo as having taken place. We identified a risk that the payments could be misappropriated or misapplied once the funds have been received by the Sub Funds. Depending on the nature of any such misappropriation or misapplication, the risk is that the Group’s financial statements i) might not fairly present the nature of the expenditures made; ii) might omit liabilities for any related breaches of laws and regulations involving the Group; and/or iii) might omit related party or other disclosures that ought to have been made. Given the importance of transparent reporting and compliance, CSR payments to Blooming Land were considered as a significant risk area due to potential fraud and a key audit matter. We have reviewed the procedures performed and reporting provided to the Board of Directors from the Group’s Compliance Officer as required by the Group’s CSR policy. We agreed CSR payments made to Blooming Land to bank statements. We reviewed Board minutes of Ferrexpo Poltava Mining to ensure all CSR payments made to Blooming Land were approved. We performed background checks on the beneficiary (the effective administrator) of Blooming Land and the Sub Funds. We also performed background checks of the directors of the four funds and the individual event managers contracted by the Sub Funds. We obtained and reviewed confirmations received by the Company from the individual event managers, the trustee of Blooming Land and the three Sub Funds that the funds had been received and applied for health- related charitable activities in Ukraine in compliance with local and international legislation. We challenged management as to whether Blooming Land and the Sub Funds were independent or controlled by Ferrexpo. We reviewed management’s analysis that evaluated whether IFRS 10 criteria were met and whether these entities were controlled by the Group. We determined that audit evidence was required from the Sub Funds and the individual event managers to evidence the nature and validity of the expenditure funded by Ferrexpo. From the breakdown of costs by event, we sampled 12 events (including four which we attended), for which we requested selected primary documents including invoices paid and bank transfer documentation. We attended four events which occurred in 2017. We made follow-up enquiries regarding the volumes of items ordered relative to the number of observed attendees and the treatment of significant surplus inventory. We reconciled the cash balance in the four funds from the opening balance, plus funds received from Ferrexpo, less the total amount per the breakdown of costs by event in the year prepared by Blooming Land to the reported closing cash balance. Key observations The results of our testing were sufficient and appropriate audit evidence as a basis for our audit opinion. We consider management’s presentation and disclosures in relation to charitable payments to be appropriate. Ferrexpo plc 2017 Annual Report & AccountsFINANCIAL STATEMENTS 91 Taxation Key audit matter description How the scope of our audit responded to the key audit matter The key audit matter related to taxation includes the following specific areas: Deferred tax assets: In 2017, the Group implemented a new commercial structure in its operations in Ukraine. As a result, the Group recognised a deferred tax asset (“DTA”) at one of its Ukrainian subsidiaries of US$28.8 million, of which US$24.0 million relates to previously unrecognised tax losses and the remainder to previously unrecognised deferred tax assets on property, plant and equipment. The Group also derecognised the deferred tax asset of US$25.4 million previously recognised in relation to the losses which arose on deposits held with Bank Finance and Credit (“Bank F&C”) which was declared as insolvent and commenced liquidation proceedings in 2015. This was on the basis that the liquidator of Bank F&C has not recognised the Group’s claims to losses of US$132.6 million against the bank (refer to Note 30). Assessing the probability to the claim being recognised is highly subjective given the complex nature of the court proceedings and the further passage of time. There is a risk that other deferred tax assets will not be recovered in the future due to (i) restrictions imposed by the Ukrainian government, or (ii) insufficient future profits. Transfer pricing: The Group prices its sales between its subsidiaries using international benchmark prices for comparable products covering product quality and applicable freight. The Group judges these to be on terms which comply with applicable legislation. In August 2017, the State Fiscal Service of Ukraine (“SFS”) commenced a tax audit at the Group’s major subsidiary in Ukraine with a focus on cross-border transactions in terms of its pellet sales to another subsidiary of the Group. The audit can take up to 18 months and there have been no findings to date. This matter is described in Note 12 to the financial statements. Significant judgement is required in applying the transfer pricing rules and in determining the probability of any loss in connection with the Ukrainian tax audit. The taxation disclosure including accounting policies and description of key sources of estimation uncertainty are set out in Note 12 and considered by the Audit Committee on page 63 of the Annual Report. Deferred tax assets: We involved specialists in Ukrainian tax legislation to review the commercial structure to determine whether such structures were common in Ukraine and acceptable under Ukrainian tax legislation. We have evaluated the projected profitability for the Ukrainian subsidiaries for purposes of evaluating the recoverability of the tax losses recognised in the current period. We considered the appropriateness of forecast taxable profits and the consistency of these forecasts with the Group’s budgets to support the recognition of the remaining deferred tax assets. We have evaluated the latest developments in the litigation relating to Bank F&C including a review of correspondence received from the external legal counsel and discussed with them the potential outcomes for this matter. Transfer pricing: We have involved transfer pricing tax specialists in Ukraine to assess appropriateness of the transfer pricing policies and documentation in place prepared by management. On a sample basis, we verified the calculation of prices for transactions that occurred in 2017 to be in line with the transfer pricing policy. We have reviewed the correspondence with SFS and calculation of the assessed risk with assistance from UK tax and transfer pricing specialists. In addition, we have reviewed recent similar cases in Ukraine and the results of the court proceedings. Ferrexpo plc 2017 Annual Report & AccountsFINANCIAL STATEMENTSSTRATEGIC REPORTCORPORATE GOVERNANCE 92 Taxation (continued) Key observations INDEPENDENT AUDITOR’S REPORT TO THE MEMBERS OF FERREXPO PLC CONTINUED Deferred tax assets: The liquidator still has not recognised the Group’s claims and therefore we concur with the Group’s derecognition of the deferred tax asset. Transfer pricing: The SFS has set out a comprehensive information request in relation to transactions and period in scope and management has delivered all the required information. No specific claim or findings have been communicated as of the date of this report. The results of our testing were satisfactory and we concur that the recorded tax assets, tax provisions and disclosures are appropriate. Related party disclosure Key audit matter description The Group enters into a substantial number of related party transactions, recording an expense of US$40.0 million and other income of US$0.5 million, of which US$21.6 million and US$0.5 million, respectively, relates to transactions with counterparties that are controlled by the Group’s majority shareholder and CEO. There is a risk of undisclosed related party transactions and transactions entered into that are not transacted on an arm’s length basis and not disclosed as such. How the scope of our audit responded to the key audit matter The related party disclosures are set out in Note 34 to the financial statements. We reviewed and evaluated management’s process for identifying and recording related party transactions and reviewed the design and implementation of management’s controls around the approval of related party transactions both at the level of the Group and individual entities. We have reviewed the minutes of meetings of the Board of Directors and relevant sub-committees and confirmed there are no new related party transactions entered into in 2017 that are significant or outside the normal course of business. For a sample of new counterparties in 2017 we searched for evidence of any related party relationships with the Group. We did independent searches of the majority shareholder/CEO’s other business interests to test the completeness of the related party list. We obtained the list of related parties confirmed by the Board of Directors and did not identify any counterparties on the list which were not included in the related party disclosures. We have reviewed underlying contracts to understand the nature and commerciality of any new or significant related party transactions and assess whether they are executed on an arm’s length basis. We reviewed disclosure of related party balances and transactions to determine whether they were in compliance with IAS 24. Key observations The results of our testing were satisfactory and we concur that the related party transactions and balances are appropriately disclosed in the financial statements. Ferrexpo plc 2017 Annual Report & AccountsFINANCIAL STATEMENTS 93 Our application of materiality We define materiality as the magnitude of misstatement in the financial statements that makes it probable that the economic decisions of a reasonably knowledgeable person would be changed or influenced. We use materiality both in planning the scope of our audit work and in evaluating the results of our work. Based on our professional judgement, we determined materiality for the financial statements as a whole as follows: Materiality US$16.5 million (2016: US$12.0 million by the previous auditors) Group financial statements Basis for determining materiality Rationale for the benchmark applied We have determined materiality by using 5% of a two-year average (2016–2017) of profit before tax (“PBT”) and special items which comprised US$0.4 million of inventory and property, plant and equipment write-offs in 2017 and US$2.5 million of inventory, property, plant and equipment, receivables and prepayments and other write-offs and US$8.5 million of allowance for the Bank Finance & Credit restricted cash balance in 2016. In 2016, the previous auditors used approximately 5% of adjusted profit before tax. The profit before tax for the years 2016–2017 has been normalised in determining materiality to exclude items which, due to their variable financial impact and/or expected infrequency of the underlying events, are not considered indicative of continuing operations of the Group. These items do not form part of the Group’s internally or externally monitored primary key performance indicators, and which if included, would distort materiality year-on-year. We consider this approach of using a two-year average to be more appropriate than an assessment based on current year results alone given the nature of the mining industry, which is exposed to cyclical commodity price fluctuations and to therefore provide a more stable base reflective of the scale of the Group’s size and operations. We agreed with the Audit Committee that we would report to the Committee all audit differences in excess of US$0.825 million (2016: US$0.6 million was used by the previous auditors) for the Group as well as differences below that threshold that, in our view, warranted reporting on qualitative grounds. We also report to the Audit Committee on disclosure matters that we identified when assessing the overall presentation of the financial statements. PBT US$450 million Parent Company financial statements US$14.4 million 1.5% of Parent Company’s net assets We consider the chosen benchmark appropriate due to the nature of the Parent Company’s operations being a holding company of the Group. Group materiality US$16.5 million Component materiality range from US$6.6 million to US$10.7 million Audit Committee reporting threshold US$0.825 million PBT Group materiality An overview of the scope of our audit Our Group audit was scoped by obtaining an understanding of the Group and the Parent Company and their environments, including internal control, and assessing the risks of material misstatement. The Group’s Parent Company and finance company are UK based, while the head office and marketing companies are based in Switzerland and the primary mining operations are located in Ukraine. Considering operational and financial performance and risk factors, we focused our assessment on the significant components and performed full scope audits of the Swiss FAG and FME, Ukrainian FPM, FYM and FBM components and Ferrexpo plc company only, along with specified audit procedures at Ferrexpo Finance plc. Our full scope and specified audit procedures cover revenue (94% of Group total), profit before tax (95% of Group total) and net assets (85% of Group total). The remaining 23 components represent 5% of Group’s profit before tax and individually do not contribute more than 5% of the Group’s profit before tax. There were no significant risks of material misstatement of the aggregated financial information of the remaining components not subject to audit or audit of specified account balances. We have performed analytical procedures for these companies as well as testing of consolidation journal entities. The work performed by the component audit teams is guided by the Group audit team and is executed at levels of materiality applicable to each individual entity, which were lower than Group materiality and ranged from US$6.6 million to US$10.7 million. Ferrexpo plc 2017 Annual Report & AccountsFINANCIAL STATEMENTSSTRATEGIC REPORTCORPORATE GOVERNANCE 94 INDEPENDENT AUDITOR’S REPORT TO THE MEMBERS OF FERREXPO PLC CONTINUED For full scope overseas components, the Group audit team was involved in the audit work performed by the component auditors in Ukraine and Switzerland through a combination of our global planning conference call meetings, in-country technical training, provision of referral instructions, review and challenge of related component inter-office reporting and of findings from their work (which included the audit procedures performed to respond to risks of material misstatement), attendance at component audit closing conference calls and weekly interaction on audit and accounting matters which arose. Ferrexpo plc company only and Ferrexpo Finance plc are registered in the United Kingdom, hence the audit and specified procedures were carried out by the Group audit team. At the parent entity level we also tested the consolidation process and carried out analytical procedures to confirm our conclusion that there were no significant risks of material misstatement of the aggregated financial information of the remaining components not subject to audit or audit of specified account balances. Other information The Directors are responsible for the other information. The other information comprises the information included in the Annual Report, other than the financial statements and our auditor’s report thereon. Our opinion on the financial statements does not cover the other information and, except to the extent otherwise explicitly stated in our report, we do not express any form of assurance conclusion thereon. We have nothing to report in respect of these matters. In connection with our audit of the financial statements, our responsibility is to read the other information and, in doing so, consider whether the other information is materially inconsistent with the financial statements or our knowledge obtained in the audit or otherwise appears to be materially misstated. If we identify such material inconsistencies or apparent material misstatements, we are required to determine whether there is a material misstatement in the financial statements or a material misstatement of the other information. If, based on the work we have performed, we conclude that there is a material misstatement of this other information, we are required to report that fact. In this context, matters that we are specifically required to report to you as uncorrected material misstatements of the other information include where we conclude that: – Fair, balanced and understandable – the statement given by the Directors that they consider the Annual Report and financial statements taken as a whole is fair, balanced and understandable and provides the information necessary for shareholders to assess the Group’s position and performance, business model and strategy, is materially inconsistent with our knowledge obtained in the audit; or – Audit Committee reporting – the section describing the work of the Audit Committee does not appropriately address matters communicated by us to the Audit Committee; or – Directors’ statement of compliance with the UK Corporate Governance Code – the parts of the Directors’ statement required under the Listing Rules relating to the Company’s compliance with the UK Corporate Governance Code containing provisions specified for review by the auditor in accordance with Listing Rule 9.8.10R (2) do not properly disclose a departure from a relevant provision of the UK Corporate Governance Code. Responsibilities of Directors As explained more fully in the Directors’ responsibilities statement, the Directors are responsible for the preparation of the financial statements and for being satisfied that they give a true and fair view, and for such internal control as the Directors determine is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error. In preparing the financial statements, the Directors are responsible for assessing the Group’s and the Parent Company’s ability to continue as a going concern, disclosing as applicable matters related to going concern and using the going concern basis of accounting unless the Directors either intend to liquidate the Group or the Parent Company or to cease operations, or have no realistic alternative but to do so. Auditor’s responsibilities for the audit of the financial statements Our objectives are to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor’s report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with ISAs (UK) will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these financial statements. A further description of our responsibilities for the audit of the financial statements is located on the Financial Reporting Council’s website at: www.frc.org.uk/auditorsresponsibilities. This description forms part of our auditor’s report. Ferrexpo plc 2017 Annual Report & AccountsFINANCIAL STATEMENTS 95 Use of our report This report is made solely to the Company’s members, as a body, in accordance with Chapter 3 of Part 16 of the Companies Act 2006. Our audit work has been undertaken so that we might state to the Company’s members those matters we are required to state to them in an auditor’s report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the Company and the Company’s members as a body, for our audit work, for this report, or for the opinions we have formed. REPORT ON OTHER LEG A L A ND REGUL ATORY REQUIREMENTS Opinions on other matters prescribed by the Companies Act 2006 In our opinion, the part of the Directors’ Remuneration Report to be audited has been properly prepared in accordance with the Companies Act 2006. In our opinion, based on the work undertaken in the course of the audit: – the information given in the Strategic Report and the Directors’ Report for the financial year for which the financial statements are prepared is consistent with the financial statements; and – the Strategic Report and the Directors’ Report have been prepared in accordance with applicable legal requirements. In the light of the knowledge and understanding of the Group and the Parent Company and their environment obtained in the course of the audit, we have not identified any material misstatements in the Strategic Report or the Directors’ Report. Matters on which we are required to report by exception Adequacy of explanations received and accounting records Under the Companies Act 2006 we are required to report to you if, in our opinion: – we have not received all the information and explanations we require for our audit; or – 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 are not in agreement with the accounting records and returns. We have nothing to report in respect of these matters. Directors’ remuneration Under the Companies Act 2006 we are also required to report, if in our opinion, certain disclosures of Directors’ remuneration have not been made or the part of the Directors’ Remuneration Report to be audited is not in agreement with the accounting records and returns. We have nothing to report in respect of these matters. Other matters Auditor tenure Following the recommendation of the Audit Committee, we were appointed by the members at the Annual General Meeting on 27 May 2017 to audit the financial statements for the year ending 31 December 2017 and subsequent financial periods. The period of total uninterrupted engagement of the firm is therefore one year. Consistency of the audit report with the additional report to the Audit Committee Our audit opinion is consistent with the additional report to the Audit Committee we are required to provide in accordance with ISAs (UK). CHRISTOPHER THOMAS (SENIOR STATUTORY AUDITOR) For and on behalf of Deloitte LLP Statutory Auditor London, United Kingdom 20 March 2018 Ferrexpo plc 2017 Annual Report & AccountsFINANCIAL STATEMENTSSTRATEGIC REPORTCORPORATE GOVERNANCE 96 CONSOLIDATED INCOME STATEMENT US$000 Revenue Operating expenses Other operating income Operating foreign exchange gains Operating profit Non-operating special items Share of profit from associates Profit/(loss) before tax and finance Net finance expense Non-operating foreign exchange gains/(losses) Profit/(loss) before tax Income tax (expense)/credit Profit/(loss) for the year Profit/(loss) attributable to: Equity shareholders of Ferrexpo plc Non-controlling interests Profit/(loss) for the year Earnings/(loss) per share: Basic (US cents) Diluted (US cents) Notes Before special items Special items Year ended 31.12.17 Before special items Special items Year ended 31.12.16 6 1,197,494 – 1,197,494 986,325 – 986,325 5/7/10 (716,947) (407) (717,354) (687,060) (2,501) (689,561) 8 9 10 33 11 9 3,238 6,661 – – 3,238 2,914 6,661 13,832 – – 2,914 13,832 490,446 (407) 490,039 316,011 (2,501) 313,510 – 5,527 – – – – (8,525) (8,525) 5,527 3,726 – 3,726 495,973 (407) 495,566 319,737 (11,026) 308,711 (54,766) 9,033 – – (54,766) (67,002) 9,033 (10,311) – – (67,002) (10,311) 450,240 (407) 449,833 242,424 (11,026) 231,398 12 (58,787) 3,426 (55,361) (43,733) 1,535 (42,198) 391,453 3,019 394,472 198,691 (9,491) 189,200 389,675 3,254 392,929 196,770 (9,416) 187,354 1,778 (235) 1,543 1,921 (75) 1,846 391,453 3,019 394,472 198,691 (9,491) 189,200 13 13 66.53 66.30 0.56 0.55 67.09 66.85 33.60 33.51 (1.60) (1.60) 32.00 31.91 The presentation of the income statement has been simplified in the current period, with the comparative information re-presented to be on a consistent basis, as set out in Note 2. There has been no restatement of the underlying financial information. Ferrexpo plc 2017 Annual Report & AccountsFINANCIAL STATEMENTS CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME 97 US$000 Profit for the year Items that may subsequently be reclassified to profit or loss: Exchange differences on translating foreign operations Income tax effect Net other comprehensive loss that may be reclassified to profit or loss in subsequent periods Items that will not be reclassified subsequently to profit or loss: Remeasurement (cost)/gains on defined benefit pension liability Income tax effect Net other comprehensive (loss)/income not being reclassified to profit or loss in subsequent periods Other comprehensive loss for the year, net of tax Total comprehensive income for the year, net of tax Total comprehensive income attributable to: Equity shareholders of Ferrexpo plc Non-controlling interests Notes Year ended 31.12.17 Year ended 31.12.16 394,472 189,200 (41,415) (126,365) 12 4,557 16,607 (36,858) (109,758) 22 12 (9,172) 1,075 1,556 (7,616) (246) 829 (44,474) (108,929) 349,998 80,271 348,686 79,650 1,312 621 349,998 80,271 Ferrexpo plc 2017 Annual Report & AccountsFINANCIAL STATEMENTSSTRATEGIC REPORTCORPORATE GOVERNANCE 98 CONSOLIDATED STATEMENT OF FINANCIAL POSITION US$000 Assets Property, plant and equipment Goodwill and other intangible assets Investments in associates Inventories Other non-current assets Income 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 Total current assets Total assets Equity and liabilities Issued capital Share premium Other reserves Retained earnings Equity attributable to equity shareholders of Ferrexpo plc Non-controlling interests Total equity Interest-bearing loans and borrowings Defined benefit pension liability Provision for site restoration Deferred tax liabilities Total non-current liabilities Interest-bearing loans and borrowings Trade and other payables Accrued liabilities and deferred income Income taxes payable Other taxes payable Total current liabilities Total liabilities Total equity and liabilities The financial statements were approved by the Board of Directors on 20 March 2018. KOST YANTIN ZHEVAGO CHIEF EXECUTIVE OFFICER CHRISTOPHER MAWE CHIEF FINANCIAL OFFICER Notes As at 31.12.17 As at 31.12.16 14 15 33 17 16 12 12 17 18 19 12 20 25 31 31 5/26 22 23 12 5/26 21 24 12 20 623,359 36,858 5,947 574,839 35,220 2,165 175,831 130,357 10,501 5,454 40,408 898,358 96,645 88,327 17,514 14 23,192 97,742 323,434 2,984 5,630 52,818 804,013 78,935 90,568 12,564 10,757 21,389 144,751 358,964 1,221,792 1,162,977 121,628 185,112 121,628 185,112 (2,020,864) (1,984,758) 2,310,226 2,002,153 596,102 324,135 370 596,472 186,294 20,514 2,070 381 209,259 314,770 48,428 18,196 23,715 10,952 416,061 625,320 (847) 323,288 505,641 15,489 1,071 586 522,787 228,061 28,807 42,584 11,780 5,670 316,902 839,689 1,221,792 1,162,977 Ferrexpo plc 2017 Annual Report & AccountsFINANCIAL STATEMENTS CONSOLIDATED STATEMENT OF CASH FLOWS 99 US$000 Profit before tax Adjustments for: Depreciation of property, plant and equipment and amortisation of intangible assets Interest expense Interest income Losses on disposal of property, plant and equipment Cash elements included in losses on disposal of property, plant and equipment Operating special items Non-operating special items Share of profit from associates Movement in allowance for doubtful receivables Movement in site restoration provision Employee benefits Share-based payments Operating foreign exchange gains Non-operating foreign exchange (gains)/losses Other adjustments Operating cash flow before working capital changes Changes in working capital: Increase in trade and other receivables Increase in inventories (Decrease)/increase in trade and other accounts payable (Increase)/decrease in other taxes recoverable and payable (incl. VAT) Cash generated from operating activities Interest paid Income tax (paid)/refunded Post-employment benefits paid Net cash flows from operating activities Cash flows from investing activities Purchase of property, plant and equipment and intangible assets Proceeds from disposal of property, plant and equipment and intangible assets Interest received Dividends from associates 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 Net cash flows used in 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 Notes Year ended 31.12.17 449,833 Year ended 31.12.16 231,398 46,392 53,044 (372) 7,754 (2,953) 407 – (5,527) 576 1,070 (1,632) 586 (6,661) (9,033) (6,458) 527,026 (3,024) (78,892) (27,317) (511) 417,282 (48,576) (13,721) (1,539) 353,446 (102,953) 138 358 4,982 (97,475) – (238,670) (4,042) (58,316) (301,028) (45,057) 144,751 (1,952) 97,742 11 11 10 10 33 10 23 22 29 9 9 20 12 14/15 26 26 25 50,671 64,975 (175) 4,446 – 2,501 8,525 (3,726) 252 (308) 3,192 389 (13,832) 10,311 – 358,619 (3,578) (41,540) 30,066 24,345 367,912 (58,793) 24,438 (1,466) 332,091 (48,176) 47 168 4,203 (43,758) 19,115 (195,918) – – (176,803) 111,530 35,330 (2,109) 144,751 Ferrexpo plc 2017 Annual Report & AccountsFINANCIAL STATEMENTSSTRATEGIC REPORTCORPORATE GOVERNANCE 100 CONSOLIDATED STATEMENT OF CHANGES IN EQUITY US$000 At 1 January 2016 Profit for the year Other comprehensive (loss)/income Total comprehensive (loss)/income for the year Effect from increase of shareholding in subsidiary Share-based payments (Note 28) Attributable to equity shareholders of Ferrexpo plc Issued capital (Note 31) Share premium (Note 31) Other reserves (Note 31) Retained earnings 121,628 185,112 (1,876,624) 1,814,598 – 187,354 Total capital and reserves Non-controlling interests (Note 32) Total equity 244,714 187,354 (783) 243,931 1,846 189,200 – – – – – – – – – – (108,523) 819 (107,704) (1,225) (108,929) (108,523) 188,173 79,650 621 80,271 – 389 (618) – (618) 389 (685) (1,303) – 389 At 31 December 2016 121,628 185,112 (1,984,758) 2,002,153 324,135 (847) 323,288 Profit for the year Other comprehensive loss Total comprehensive (loss)/income for the year Effect from increase of shareholding in subsidiary Share-based payments (Note 28) Equity dividends to shareholders of Ferrexpo plc – – – – – – – – – – – – – 392,929 392,929 1,543 394,472 (36,692) (7,550) (44,242) (230) (44,472) (36,692) 385,379 348,687 1,313 350,000 – 586 26 – 26 586 – (77,332) (77,332) (96) – – (70) 586 (77,332) At 31 December 2017 121,628 185,112 (2,020,864) 2,310,226 596,102 370 596,472 Ferrexpo plc 2017 Annual Report & AccountsFINANCIAL STATEMENTS NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 101 Note 1: Corporate information Ferrexpo plc (the “Company”) is incorporated and registered in England, which is considered to be the country of domicile, with its registered office at 55 St James’s Street, London SW1A 1LA, UK. Ferrexpo plc and its subsidiaries (the “Group”) operate two mines and a processing plant near Kremenchug in Ukraine, have an interest in a port in Odessa and sales and marketing activities around the world including offices in Switzerland, Dubai, Japan, China, Singapore and Ukraine. The Group also owns logistics assets in Austria which operate a fleet of vessels operating on the Rhine and Danube waterways and an ocean-going vessel which provides top off services and operates on international sea routes. 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 Kremenchug Magnetic Anomaly and are currently being extracted at the Gorishne-Plavninske and Lavrykivske (“GPL”) and Yerystivske deposits. The majority shareholder of the Group is Fevamotinico S.a.r.l. (“Fevamotinico”), a company incorporated in Luxembourg and 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 50.3% (2016: 50.3%) of Ferrexpo plc’s issued share capital. Note 2: 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”). The consolidated financial statements have been prepared on a historical cost basis, except for post-employment benefits measured in accordance with IAS 19 revised 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 Group made changes to the presentation of its consolidated income statement in the consolidated financial statements. These changes included: i) the aggregation of “Cost of sales”, “Selling and distribution expenses”, “General and administrative expenses”, “Other expenses”, “Write-offs”, and “Losses on disposal of property, plant and equipment” into a single line item “Operating expenses”; and ii) the removal of references to “adjusted items” and “continued operations”. These changes simplify the presentation, enhance the understandability of the financial statements and better align with industry practice of other listed mining companies. As a result, comparative period balances have been represented to align with these changes. This presentation was already applied for the interim condensed consolidated financial statements for the period ended 30 June 2017. The detailed accounting policies are included in the disclosure notes to the specific financial statement accounts. Going concern The Group has assessed that, taking into account: i) its available cash and cash equivalents available at the date of authorisation of the consolidated financial statements; ii) its cash flow projections for the period of management’s going concern assessment; and iii) events and conditions beyond the period of management’s going concern assessment, in particular the debt repayments totalling US$177,022 thousand in April and May 2019, it has sufficient liquidity to meet its present obligations and cover working capital needs for the aforementioned period and will remain in compliance with its financial covenants throughout this period. Therefore, the Group continues to adopt the going concern basis of accounting for the preparation of this set of financial statements. See also the Directors’ Report on page 85 for further information. 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 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 obtaining or losing 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 combinations 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. 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. The functional currency of Ukrainian subsidiaries, which is where the Group’s main operations are based, is the Ukrainian Hryvnia. Ferrexpo plc 2017 Annual Report & AccountsFINANCIAL STATEMENTSSTRATEGIC REPORTCORPORATE GOVERNANCE 102 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS CONTINUED Note 2: Basis of preparation continued 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 the Group’s 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 based on the officially published rates by the National Bank of Ukraine (“NBU”). The foreign exchange differences arising are taken directly to a separate component of equity. On disposal of a foreign entity the deferred cumulative amount of exchange differences recognised in equity relating to the particular foreign operation is recognised in the income statement. Note 3: New accounting policies New standards and interpretations adopted The accounting policies and methods of computation 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 2016 except for the adoption of new amendments and improvements to IFRSs effective as of 1 January 2017. These new standards and interpretations had no effect on reported results, financial position or disclosure in the financial statements: – Amendment to IAS 7 Statement of cash flow – Disclosure initiative – Amendment to IAS 12 Income taxes – Recognition of deferred tax assets for unrealised losses – Annual Improvements to IFRSs 2014-2016 cycle New standards and interpretations not yet adopted The Group has elected not to adopt early any revised and amended standards or interpretations that are not yet mandatory in the EU. The standards and interpretations below could have an impact on the consolidated financial statements of the Group. IFRS 9 Financial instruments The complete standard was issued in July 2014 including the requirements previously issued and additional amendments and becomes effective for financial years beginning on or after 1 January 2018. The new standard replaces IAS 39 and includes a new expected loss impairment model, changes to the classification and measurement requirements of financial assets as well as to hedge accounting. The impact of an expected loss impairment model does not materially impact the Group’s consolidated financial statements on the basis (i) the Group does not have a history of credit losses; and (ii) there has not been a significant change in the mix, credit terms, or credit quality of the underlying counterparties as at 31 December 2017. The changes to classification and measurement of financial instruments is unchanged on application of the new standard. The Group does not apply hedge accounting under IAS 39 and does not intend to apply it under IFRS 9. IFRS 15 Revenue from contracts with customers The new standard was issued in May 2014 and outlines a single comprehensive model of accounting for revenue arising from contracts with customers and supersedes the current revenue recognition standard. The new standard establishes the principles for the disclosure of useful information in the financial statements about the nature, amount, timing and uncertainties of revenue and cash flows arising from contracts with customers. The Group has assessed the impacts of transitioning to IFRS 15. Under IFRS 15 the revenue recognition model will change from one based on the transfer of risk and reward of ownership to the transfer of control of ownership. The Group’s revenue is predominantly derived from sales of iron pellets, where the point of recognition is dependent on the contractual sales terms based on the International Commercial terms (“Incoterms”). As the time of the transfer of risks and rewards coincides with the transfer of a control, the timing and the amount of revenue recognised is unlikely to be materially affected for the majority of sales. For the Incoterms Cost, Insurance and Freight (“CIF”), and Cost and Freight (“CFR”), the seller must contract for and pay the freight necessary to bring the goods to the named port of destination. Consequently, the freight service on sales contracts with CIF and CFR Incoterms will meet the criteria of a separate performance obligation and a portion of the revenue earned under these contracts, representing the obligation to perform freight service, is deferred and recognised over time as this obligation is fulfilled, along with the associated costs. The Group has assessed the impact of the CIF and CFR sales for the year ending 31 December 2017. If the new standard were applied as of 31 December 2017, freight-related revenue of US$6,006 thousand would have been deferred, reducing revenue and the operating result by the same amount, and US$63,447 thousand would have been disclosed as freight-related revenue in Note 6, without an effect on the operating result. The Group will apply IFRS 15 for the annual reporting periods beginning on 1 January 2018, with the cumulative effect of initially applying IFRS 15, recognised at the date of initial application. Apart from the impact stated above, the Group does not anticipate the application of IFRS 15 to have a material impact on the financial position and/or financial performance. IFRS 16 Leases The new standard was issued in January 2016, replacing the previous leases standard, IAS 17 Leases, and related interpretations. IFRS 16 establishes the principles for the recognition, measurement, presentation and disclosure of leases for the customer (“lessee”) and the supplier (“lessor”). IFRS 16 eliminates the classification of leases as either operating or finance as is required by IAS 17. Instead, it introduces a single lessee accounting model requiring a lessee to recognise assets and liabilities for all leases unless the underlying asset has a low value or the Ferrexpo plc 2017 Annual Report & AccountsFINANCIAL STATEMENTS 103 Note 3: New accounting policies continued lease term is 12 months or less. Currently, the Group leases land and buildings under operating leases. The vast majority of these operating leases are for land used for the extraction of ore and are not within the scope of IFRS 16 and will be accounted for under IFRS 6 Exploration for and evaluation of mineral resources. The Group expects that the new standard will primarily result in the recognition of right-of-use assets and liabilities in respect of the long-term rental contracts for its office premises in London, Dubai and Tokyo, land not used for the direct extraction of ore as well as for lease equipment. This new standard applies to annual reporting periods beginning on or after 1 January 2019 subject to EU endorsement and the Group does not intend to early adopt this standard. If the new standard were applied as of 31 December 2017, right-of-use assets and corresponding lease liabilities of US$15,167 thousand, before the effect from discounting, would have been recognised without an effect on the operating result. IFRIC 23 Uncertainty over income tax treatments The interpretation was issued in June 2017 and clarifies the accounting treatment for uncertainties in income taxes. The new interpretation is to be applied to the determination of taxable results, tax bases, unused tax losses, unused tax credits and tax rates, when there is uncertainty over income tax treatments under IAS 12, and becomes effective for financial years beginning on or after 1 January 2019 subject to EU endorsement. The Group is in the process of performing the impact assessment and does not intend to apply early the new interpretation. The Group does not expect an impact on its consolidated financial statements from all other standards, interpretations and amendments issued at the reporting date, but not yet to be adopted for these financial statements. Note 4: Use of critical estimates and judgements The preparation of consolidated financial statements in conformity with IFRS requires management to make estimates and judgements that affect the amounts reported in the consolidated financial statements and accompanying notes. These estimates and judgements are based on information available as at the date of authorising the consolidated financial statements for issue. Actual results could therefore differ from those estimates and judgements. The Group identified a number of areas involving the use of critical estimates and judgements made by management in preparing the consolidated financial statements and supporting information is embedded within the following disclosure notes: Critical estimates – Note 12 Taxation – recoverability of deferred tax assets – Note 14 Property, plant and equipment – deferred stripping costs – Note 17 Inventories – lean and weathered ore Critical judgements – Note 12 Taxation – tax legislation in Ukraine – Note 31 Share capital and reserves – net investments in foreign operations Note 5: Segment information The Group is managed as a single segment, 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 monitored at a more detailed level, 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. Management monitors the operating result of the Group based on a number of measures, including underlying EBITDA, gross profit and net debt. Underlying EBITDA and gross profit The Group presents the underlying EBITDA as it is a useful measure for evaluating its ability to generate cash and its operating performance. The Group’s full definition of underlying EBITDA is disclosed in the Glossary on page 156. US$000 Profit before tax and finance Losses on disposal of property, plant and equipment Share-based payments Operating special items Non-operating special items Depreciation and amortisation Underlying EBITDA Notes Year ended 31.12.17 Year ended 31.12.16 495,566 308,711 28 10 10 7,754 586 407 – 4,446 389 2,501 8,525 46,392 50,671 550,705 375,243 Ferrexpo plc 2017 Annual Report & AccountsFINANCIAL STATEMENTSSTRATEGIC REPORTCORPORATE GOVERNANCE 104 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS CONTINUED Note 5: Segment information continued US$000 Revenue Cost of sales Gross profit Notes Year ended 31.12.17 Year ended 31.12.16 6 1,197,494 986,325 7 (411,490) (400,333) 786,004 585,992 Net debt Net debt as defined by the Group comprises cash and cash equivalents less interest-bearing loans and borrowings. US$000 Cash and cash equivalents Interest-bearing loans and borrowings – current Interest-bearing loans and borrowings – non-current Net debt Notes As at 31.12.17 As at 31.12.16 25 26 26 97,742 144,751 (314,770) (228,061) (186,294) (505,641) (403,322) (588,951) The Group made debt repayments of US$238,602 thousand during the year ended 31 December 2017 (2016: US$195,918 thousand). Net debt is an Alternative Performance Measure (“APM”). Further information on the APMs used by the Group, including the definitions, is provided on pages 150 to 152. Disclosure of revenue and non-current assets The Group does not generate significant revenues from external customers attributable to the United Kingdom, the Company’s 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 Company. The vast majority of the non- current assets are located in Ukraine. Note 6: Revenue Accounting policy 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 are to be met before revenue is recognised: Sale of goods including sales of pellets and fuel from bunker business 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 pass 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 DAP terms, revenue is recognised when goods arrive at the agreed destination or at the border crossing, whereas under the other above mentioned terms the title passes on the date of the bill of lading. 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. Revenues related to provisionally priced sales are initially recognised at the estimated fair value of the consideration receivable based on the forward price at each reporting date for the relevant period outlined in the different contracts. See Note 3 in terms of the impact of the new accounting standard IFRS 15 Revenue from contracts with customers that becomes mandatory for financial years beginning on or after 1 January 2018. 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. Ferrexpo plc 2017 Annual Report & AccountsFINANCIAL STATEMENTS 105 Note 6: Revenue continued Other sales Other sales and services provided include predominantly the revenue generated from the sale of other materials and repair and maintenance works provided to third parties. The revenues are recognised when the title passes for material sold or services provided are completed. Revenue for the year ended 31 December 2017 consisted of the following: US$000 Revenue from sales of iron ore pellets and concentrate: Export Total revenue from sale of iron ore pellets and concentrate Revenue from logistics and bunker business Revenue from other sales and services provided Total revenue Year ended 31.12.17 Year ended 31.12.16 1,126,318 921,861 1,126,318 921,861 68,449 61,207 2,727 3,257 1,197,494 986,325 Export sales of iron ore pellets and concentrate by geographical destination showing separately countries that individually represented more than 10% of export sales in either the current or prior year were as follows: US$000 Central Europe Austria Others Western Europe Germany Others North East Asia Japan Others China & South East Asia China Others Turkey, Middle East & India Turkey Total exports Year ended 31.12.17 Year ended 31.12.16 536,836 425,079 328,377 215,479 208,459 209,600 170,295 153,932 155,508 143,281 14,787 10,651 198,165 155,443 120,053 96,257 78,112 59,186 142,812 129,391 123,531 125,788 19,281 3,603 78,210 58,016 78,210 58,016 1,126,318 921,861 The Group markets its products across various regions. The disclosure of the segmentation reflects how the Group makes its business decisions and monitors its sales. Information about the composition of the regions is provided in the Glossary on pages 153 to 156. During the year ended 31 December 2017 sales made to three customers accounted for 45% of the revenues from export sales of ore pellets and concentrate (2016: 40.0%). Sales to one customer that individually represented more than 10% of total sales in either the current or prior year amounted to US$328,377 thousand (2016: US$215,479 thousand). Ferrexpo plc 2017 Annual Report & AccountsFINANCIAL STATEMENTSSTRATEGIC REPORTCORPORATE GOVERNANCE 106 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS CONTINUED Note 7: Operating expenses before special items Accounting policy Operating expenses arise in the course of the ordinary activities of the Group and are recognised in the income statement when a decrease in future economic benefits related to a decrease in an asset or an increase of a liability has arisen that can be measured reliably. Expenses are recognised in the income statement on the basis of a direct association between costs incurred and specific items of income. When economic benefits are expected to arise over several accounting periods and the association with income can only be broadly or indirectly determined, expenses are systematically allocated to the accounting period in which the economic benefits are expected to arise. Operating expenses for the year ended 31 December 2017 consisted of the following: US$000 Cost of sales Selling and distribution expenses General and administrative expenses Other operating expenses Total operating expenses before special items Operating expenses include: US$000 Inventories recognised as an expense upon sale of goods Employee costs Inventory movements Depreciation of property, plant and equipment Amortisation of intangible assets Royalties and levies Costs of logistics and bunker business Audit and non-audit services Community support donations Losses on disposal of property, plant and equipment Year ended 31.12.17 Year ended 31.12.16 411,490 400,333 219,703 209,530 41,954 38,647 43,800 38,550 716,947 687,060 Year ended 31.12.17 Year ended 31.12.16 367,161 360,503 53,293 47,284 (1,846) 11,311 45,920 50,233 472 438 19,610 15,294 63,127 55,363 1,342 1,651 28,384 27,519 7,754 4,448 Special items not included in the operating expenses are shown in Note 10. Information on the Group’s community support donations is provided in the social responsibility paragraph in the Chairman’s Statement on page 10 and the Responsible Business Report on page 48. Auditor remuneration US$000 Audit services Ferrexpo plc Annual Report Subsidiary entities Total audit services Audit-related assurance services Total audit and audit-related assurance services Non-audit services Tax advisory Tax compliance Other services Total non-audit services Total auditor remuneration Year ended 31.12.17 Year ended 31.12.16 1,008 191 1,199 140 1,339 – – 3 3 1,048 379 1,427 154 1,581 60 5 5 70 1,342 1,651 Ferrexpo plc 2017 Annual Report & AccountsFINANCIAL STATEMENTS 107 Note 7: Operating expenses before special items continued Auditor remuneration paid is 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. The auditor’s remuneration balances related to the comparative period ended 31 December 2016 are for audit and non-audit services provided by the previous audit firm of the Group. During the comparative period ended 31 December 2016, non-audit services totalling US$32 thousand have been capitalised as prepaid arrangement fees and are not included in the table above. Note 8: Other income Accounting policy Other income mainly includes lease income generated from rail cars, mining equipment and premises, and the proceeds from the sale of spare parts, scrap metal and fuel and compensations received from insurance companies. Lease income is recognised based on the underlying contractual basis over the term of the lease. Other income from the sale of consumable materials is recognised as revenue when the title passes. Other income for the year ended 31 December 2017 consisted of the following: US$000 Lease income Other income Total other income Year ended 31.12.17 Year ended 31.12.16 386 2,852 3,238 369 2,545 2,914 Note 9: Foreign exchange gains and losses Accounting policy 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 predominantly those associated with the Group’s financing and treasury activities, including the translation of interest-bearing loans and borrowings denominated in currencies different from the respective functional currencies and transactional gains and losses from the conversion of cash balances in currencies different from the local functional currencies at exchange rates different from those at the initial recognition date. Foreign exchange gains and losses for the year ended 31 December 2017 consisted of the following: US$000 Operating foreign exchange gains/(losses) Revaluation of trade receivables Revaluation of trade payables Other Total operating foreign exchange gains Non-operating foreign exchange gains/(losses) Revaluation of interest-bearing loans Conversion of cash and cash equivalents Other Total non-operating foreign exchange gains/(losses) Total foreign exchange gains Year ended 31.12.17 Year ended 31.12.16 7,113 14,240 (394) (58) (388) (20) 6,661 13,832 10,136 (11,577) (1,497) (578) 394 1,844 9,033 (10,311) 15,694 3,521 The translation differences and foreign exchange gains and losses are predominantly dependent on the fluctuation of the exchange rate of the Ukrainian Hryvnia against the US Dollar. The table below shows the closing and average rate of the most relevant currencies of the Group compared to the US Dollar. US$ UAH EUR Average exchange rate Closing exchange rate As at 31.12.17 As at 31.12.16 Year ended 31.12.17 Year ended 31.12.16 26.597 25.551 28.067 0.887 0.903 0.838 27.191 0.956 Exchange differences arising on translation of non-US Dollar functional currency operations (mainly in Ukrainian Hryvnia) are included in the translation reserve. See Note 31 for further details. Ferrexpo plc 2017 Annual Report & AccountsFINANCIAL STATEMENTSSTRATEGIC REPORTCORPORATE GOVERNANCE 108 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS CONTINUED Note 10: Special items Accounting policy Special items Special items include those items, which due to their expected infrequency of the events or non-operational nature giving rise to them, are reported separately on the face of the income statement. These items are excluded from underlying EBITDA, which is an Alternative Performance Measure (“APM”). Further information on the APMs used by the Group, including the definitions, is provided on pages 150 to 152. Special items comprise: – Operating special items are those that relate to the operating performance of the Group and principally include write-offs and impairment losses and restructuring charges, if any. – Non-operating special items are items relating to changes in the Group’s asset portfolio, if any. – Tax special items are significant non-recurring tax items or the tax effect of other special items. Special items for the year ended 31 December 2017 consisted of the following: US$000 Operating special items Write-offs Total operating special items Non-operating special items Allowance for restricted cash Total non-operating special items Total special items before related tax effect Tax effect on special items Total special items after related tax effect Special tax items Notes Year ended 31.12.17 Year ended 31.12.16 407 407 – – 2,501 2,501 8,525 8,525 407 11,026 – (1,535) 407 9,491 3,426 – 30 12 12 Special tax items totalling US$3,426 thousand were recorded during the financial year 2017 (2016: nil), which is the net effect from the following two events: – recognition of a deferred tax asset from available tax loss carry forwards and temporary differences totalling US$28,822 thousand for a Ukrainian subsidiary, which become profitable in 2017 and is expected to be profitable in the future periods following the implementation of a new commercial structure. See Note 12 for further information; and – derecognition of a deferred tax asset of US$25,396 thousand, which was recognised in 2015 in respect of the losses recorded as a result of the insolvency of the Group’s transactional bank in Ukraine. The deferred tax asset was derecognised based on the latest developments of ongoing court proceedings in Ukraine. See Note 12 and Note 30 for further information. During the financial year 2016, a non-operating special item arose in relation to the insolvency of the Group’s transactional bank in Ukraine. See Note 30 for further details. Write-offs for the year ended 31 December 2017 primarily consisted of obsolete inventories and property, plant and equipment as outlined below: US$000 Write-off of inventories Write-off of property, plant and equipment Write-off of receivables and prepayments Other Total write-offs As at 31.12.17 368 39 – – As at 31.12.16 33 1,822 634 12 407 2,501 Ferrexpo plc 2017 Annual Report & AccountsFINANCIAL STATEMENTS 109 Note 11: Net finance expense Accounting policy Finance expense Finance expense is expensed as incurred and includes the interest on loans and borrowings measured at amortised cost and interest on defined benefit plans. Borrowing costs incurred in respect of the financing of construction or production of a qualifying asset are capitalised up to the date when the asset is ready for its intended use. See also Note 14 for further details. Finance expense also includes bank charges, such as arrangement fees, charged in relation to the Group’s major debt facilities. Finance income Finance income comprises of interest income on funds invested and the effect of unwinding discounts recorded in previous periods. Interest income is recognised as it accrues using the effective interest method. Finance expense and income for the year ended 31 December 2017 consisted of the following: US$000 Finance expense Interest expense on loans and borrowings Less capitalised borrowing costs Interest on defined benefit plans Bank charges Other finance costs Total finance expense Finance income Interest income Other finance income Total finance income Net finance expense Year ended 31.12.17 Year ended 31.12.16 (46,547) (54,255) 3,637 5,269 (2,094) (2,203) (9,550) (11,372) (584) (4,616) (55,138) (67,177) 364 8 372 175 – 175 (54,766) (67,002) Fees related to the Group’s refinancing activities totalling US$4,554 thousand were included in other finance costs in the comparative period ended 31 December 2016. There were no such fees for the period ended 31 December 2017. Note 12: Taxation Accounting policy Current income tax Current income taxes are computed based on enacted or substantively enacted local tax rates and laws at the reporting date and the expected taxable incomes of the subsidiaries for the respective period. Current income taxes are recognised as an expense or income in the consolidated income statement unless related to items recognised in the consolidated statement of comprehensive income or directly in equity or if related to the initial accounting for a business combination. 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 generally recognised for taxable temporary differences if it is probable that they will become taxable. Deferred income tax assets are generally recognised for 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. Deferred tax assets and liabilities are measured at the tax rates that are expected to apply in the period 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. No deferred assets or liabilities are recognised if the temporary differences arise from the initial recognition of assets and liabilities in a transaction, other than in a business combination, which affects neither the accounting profit nor taxable profit or loss. Ferrexpo plc 2017 Annual Report & AccountsFINANCIAL STATEMENTSSTRATEGIC REPORTCORPORATE GOVERNANCE 110 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS CONTINUED Note 12: Taxation continued Deferred tax liabilities are recognised in respect of taxable temporary differences associated with investments in subsidiaries, associates and interests in joint ventures, except where the Group is able to control the reversal of the temporary differences and it is probable that the temporary difference will not reverse in the foreseeable future. Deferred tax assets in relation to temporary differences on such investments and interests are recognised to the extent that it is probable that there are sufficient taxable profits available against which the benefits of the temporary differences can be utilised and that they are expected to reverse in the foreseeable future. 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 assets to be utilised. Additionally, 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 assets to be recovered. Income tax effects on items directly recognised in other comprehensive income or equity are also recognised in other comprehensive income or equity. 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. Critical estimates Recoverability of deferred tax assets Deferred tax assets are recognised on temporary differences and available tax loss carry forwards when it is more likely than not that they will be recovered in a future period. 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. This is particularly the case for a deferred tax asset totalling US$28,822 thousand that was recognised for available tax loss carry forwards for a Ukrainian subsidiary during the financial year 2017 and with a carrying value of US$13,847 thousand as at 31 December 2017. According to the currently enacted tax legislation, these available losses do not expire. Assumptions about the generation of expected future taxable profits depend on management’s estimates of future cash flows, which depend on estimates of future production and sales volumes, commodity prices and operating costs. Further, the Group derecognised a deferred tax asset of US$25,396 thousand (Note 10) on the basis that the liquidator of the Group’s former transactional bank in Ukraine has not recognised all of the Group’s claims of cash and deposit balances, for which a loss was recorded by the Group in 2015. The Group is currently in legal dispute to have the claims recognised (Note 30). Assessing the probability of the Group’s claims being recognised is highly subjective and will ultimately depend on the outcome of the court proceedings in Ukraine. Critical judgements Tax legislation in Ukraine The Group prices its sales between its subsidiaries using international benchmark prices for comparable products covering product quality and applicable freight. The Group judges these to be on terms which comply with applicable legislation. In August 2017, the State Fiscal Service of Ukraine (“SFS”) commenced a tax audit at the Group’s major subsidiary in Ukraine with a focus on cross-border transactions in terms of its pellet sales to another subsidiary of the Group. According to the current legislation, the SFS has to complete this audit within 18 months from the commencement. No provision has been booked as at 31 December 2017. Following a tax audit at PJSC Ferrexpo Poltava Mining (“FPM”) claims were made by the Ukrainian tax authorities in relation to allegedly unpaid withholding tax totalling US$6,057 thousand (UAH170 million) and associated fines and penalties of US$1,496 thousand (UAH42 million) in respect of interest paid to a subsidiary of the Group in the United Kingdom in 2013 and 2014. Following the audits for aforementioned years, the Ukrainian tax authorities also initiated tax audits for the years 2015 and 2016. The management of the Group expects to continue to successfully defend any claims made by the tax authorities in the Ukrainian courts. Consequently, no provision has been made for the claimed withholding tax and associated fines and penalties as at 31 December 2017. The income tax expense for the year ended 31 December 2017 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 Total deferred income tax Total income tax expense Year ended 31.12.17 Year ended 31.12.16 45,423 40,542 (4,154) 1,440 41,269 41,982 14,092 14,092 216 216 55,361 42,198 Ferrexpo plc 2017 Annual Report & AccountsFINANCIAL STATEMENTS 111 Note 12: Taxation continued The amounts related to the prior year shown in table on the previous page are predominantly related to effects from final tax assessments received in Switzerland during the year ended 31 December 2017 and in the United Kingdom during the comparative year ended 31 December 2016. As a result of the final tax assessments received, a recorded tax accrual in Switzerland could be released in financial year 2017 whereas in the financial year 2016 an income receivable balance recorded in the United Kingdom in a previous year had to be derecognised. Tax effects on items charged to the statement of other comprehensive income consisted of the following for the year ended 31 December 2017: US$000 Tax effect of exchange differences arising on translating foreign operations Tax effect of remeasurement gains on defined benefit pension liability Total income taxes charged to other comprehensive income Notes 31 Year ended 31.12.17 Year ended 31.12.16 4,557 1,556 6,113 16,607 (246) 16,361 The weighted average statutory corporate income tax rate is calculated as the average of the statutory tax rates applicable in the countries in which the Group operates, weighted by the profits and losses before tax of the subsidiaries in the respective countries, as included in the consolidated financial information. The weighted average statutory corporate income tax rate was 13.5% for the financial year 2017 (2016: 8.9%). 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 2017 is as follows: US$000 Profit before tax Notional tax charge computed at the weighted average statutory tax rate of 13.5% (2016: 8.9%) Derecognition of deferred tax assets1 Reassessment of prior year temporary differences2 Effect from capitalisation of tax loss carry forwards3 Expenses not deductible for local tax purposes4 Income exempted for local tax purposes Income for local tax purposes5 Effect from change in permanent differences Non-recognition of deferred taxes on current year losses6 Tax effect related to previous years7 Effect of higher local tax rate on special items Other (including translation differences) Total income tax expense Year ended 31.12.17 Year ended 31.12.16 449,833 231,398 60,819 20,594 25,396 – (5,919) 1,148 (24,026) – 7,295 7,828 (2,385) (1,588) 1,039 7,767 (1,957) – (4,154) – 4,552 1,440 – (1,003) (747) 1,460 55,361 42,198 1 Derecognition of deferred tax assets includes the effect in the amount of US$25,396 thousand in respect of an allowance recorded on restricted cash and deposits balances. See Note 10 and Note 30 for further information. 2 Reassessment of prior year temporary differences in the year ended 31 December 2017 predominantly relates to previously unrecognised deferred taxes on temporary differences for a Ukrainian subsidiary, which became profitable in 2017. This effect is expected to be non-recurring. The effect from the reassessment in the comparative year relates to interest expenses from previous years that became deductible in Ukraine in 2017 as the subsidiaries are profitable again. Depending on the level of taxable result in future years, additional interest expenses might become deductible.. Effect in the year ended 31 December 2017 is related to the capitalisation of all available tax losses for a Ukrainian subsidiary that become profitable in 2017. As the entire balance of available tax loss carry forwards was recognised as deferred tax asset, the effect is expected to be of a non-recurring nature. Effect in the year ended 31 December 2017 predominantly relates to expenses not deductible in Ukraine and Switzerland. The effect in Switzerland is expected to be non-recurring whereas the one in Ukraine is expected to be recurring to a certain extent as a portion of operating expenses is historically not deductible for tax purposes according to the enacted local tax legislation. 3 4 5 Reconciling item in the year ended 31 December 2017 relates to an income taxable in Switzerland, which is expected to be of a recurring nature, whereas the item in the comparative year relates to an adjustment made in Ukraine in respect of sales of pellets to subsidiaries of the Group abroad in order to address the changes in the local transfer pricing law, which is expected to be non-recurring. 6 Non-recognition of deferred taxes on current year losses due to the uncertainty in respect of the timing of the subsidiaries becoming profitable for local tax purposes, which, depending on the level of taxable results of the Group’s subsidiaries in the different jurisdictions, might be of a recurring nature. Effects are related to final tax assessments received in Switzerland in the current and in the United Kingdom in the comparative year. Both effects are expected to be of a non-recurring nature. 7 Ferrexpo plc 2017 Annual Report & AccountsFINANCIAL STATEMENTSSTRATEGIC REPORTCORPORATE GOVERNANCE 112 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS CONTINUED Note 12: Taxation continued The net balance of income tax receivable/(payable) changed as follows during the financial year 2017: US$000 Opening balance Income statement charge Booked through other comprehensive income Tax paid/(refunded) Translation differences Closing balance Year ended 31.12.17 Year ended 31.12.16 4,607 49,150 (41,269) (41,982) 4,557 26,966 13,721 (24,438) 138 (5,089) (18,247) 4,607 During the financial years 2013, 2014 and 2015, VAT receivable balances in Ukraine were mainly recovered in exchange for prepayments of corporate profit tax. US$26,926 thousand of these prepaid taxes were refunded in cash during the financial year 2016 for prepayments made by FPM. The remaining balance of FPM’s prepayments of US$10,616 thousand as at 31 December 2016 was fully used to offset with a portion of FPM’s taxable profits during the financial year 2017. An income tax receivable balance of US$5,454 thousand (2006: US$5,630 thousand) relates to prepayments made by two other Ukrainian subsidiaries and is classified as non-current due to the uncertainty in respect of the timing of the recovery. The net income tax payable as at 31 December 2017 consisted of the following: US$000 Income tax receivable balance – current Income tax receivable balance – non-current Income tax payable balance Net income tax (payable)/receivable As at 31.12.17 As at 31.12.16 14 10,757 5,454 5,630 (23,715) (11,780) (18,247) 4,607 Temporary differences at the reporting date between the tax bases of assets and liabilities and their carrying amounts for financial reporting purposes and the capitalisation of available tax loss carry forwards results in the following deferred income tax assets and liabilities at 31 December 2017: US$000 Allowance for restricted cash and deposits Property, plant and equipment Inventory Tax losses recognised Accrued expenses Defined benefit pension liability Other Total deferred tax assets/change Thereof netted against deferred tax liabilities Total deferred tax assets as per the statement of financial position Property, plant and equipment Trade and other receivables Other Total deferred tax liabilities/change Thereof netted against deferred tax assets Total deferred tax liabilities as per the statement of financial position Notes 30 Consolidated statement of financial position Consolidated income statement As at 31.12.17 As at 31.12.16 Year ended 31.12.17 Year ended 31.12.16 3,720 25,938 (21,836) (1,265) 18,032 13,080 6,213 2,245 1,409 14,210 – 252 388 13,134 – 10,780 (10,654) 3,316 690 2,287 1,380 1,070 83 41,377 53,853 (11,738) (969) (1,035) 40,408 52,818 (600) (379) (371) (525) (555) (541) (62) (187) (2,105) (1,350) (1,621) (2,354) 969 (381) 1,035 (586) – (108) (359) 6 (169) 350 (62) (187) (317) (566) Net deferred tax assets/net change 40,027 52,232 (14,092) (216) Ferrexpo plc 2017 Annual Report & AccountsFINANCIAL STATEMENTS Note 12: Taxation continued The movement in the deferred income tax balance is as follows: US$000 Opening balance Income statement credit Booked through other comprehensive income Translation differences Closing balance 113 Year ended 31.12.17 Year ended 31.12.16 52,232 70,714 (14,092) (216) 1,556 (10,359) 331 (7,907) 40,027 52,232 As at 31 December 2017, the Group had available tax loss carry forwards in the amount of US$97,873 thousand (2016: US$241,070 thousand) for which no deferred tax assets were recognised. US$70,198 thousand (2016: US$217,560 thousand) are related to losses incurred in Ukraine and Austria and those losses do not expire. The remaining balance totalling US$27,675 thousand (2016: US$23,510 thousand) relates to losses incurred in Hungary of which US$22,957 thousand (2016: US$20,564 thousand) expire after more than eight years. Temporary differences associated with investments in subsidiaries for which deferred tax liabilities have not been recognised amount to US$453,097 thousand (2016: US$491,963 thousand). Other temporary differences of US$26,627 thousand have not been recognised as of 31 December 2017 (2016: US$52,492 thousand), of which the vast majority relates to temporary differences on property, plant and equipment in Ukraine. Note 13: Earnings per share and dividends paid and proposed Accounting policy Basic number of Ordinary Shares outstanding The basic number of Ordinary Shares is calculated by reducing the total number of Ordinary Shares in issue by the weighted average of shares held in treasury and employee benefit trust reserve. The basic earnings per share (“EPS”) are 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. Dilutive potential Ordinary Shares The dilutive potential Ordinary Shares outstanding are 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 that are potentially dilutive are considered in the calculation of diluted earnings per share. Distributable reserves Ferrexpo plc (the “Company”) is the Group’s holding company, with no direct operating business, so its ability to make distributions to its shareholders is dependent on its ability to access profits held in the subsidiaries. The Group’s consolidated retained earnings shown in the consolidated statement of changes in equity do not reflect the profits available for distribution in the Group as of 31 December 2017. Before special items Special items Year ended 31.12.17 Before special items Special items Year ended 31.12.16 Earnings/(loss) for the year attributable to equity shareholders per share Basic (US cents) Diluted (US cents) 66.53 66.30 0.56 0.55 67.09 66.85 33.60 33.51 (1.60) (1.60) 32.00 31.91 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 31.12.17 Year ended 31.12.16 585,674 585,503 2,074 1,713 587,748 587,216 Dividends proposed and paid Taking into account relevant thin capitalisation rules and dividend-related covenants for the Group’s major bank debt facilities, the total available distributable reserves of Ferrexpo plc is US$197,236 thousand as of 31 December 2017. Ferrexpo plc 2017 Annual Report & AccountsFINANCIAL STATEMENTSSTRATEGIC REPORTCORPORATE GOVERNANCE 114 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS CONTINUED Note 13: Earnings per share and dividends paid and proposed continued US$000 Dividends proposed Final dividend for 2017: 3.3 US cents per Ordinary Share Special dividend for 2017: 6.6 US cents per Ordinary Share Special dividend for 2017: 3.3 US cents per Ordinary Share Total dividends proposed The special dividend for 2017 of 3.3 US cents per Ordinary Share was declared in December 2017 and paid in January 2018. US$000 Dividends paid during the year Interim dividend for 2017: 3.3 US cents per Ordinary Share Final dividend for 2016: 3.3 US cents per Ordinary Share Special dividend for 2016: 3.3 US cents per Ordinary Share Total dividends paid during the year US$000 Dividends proposed Final dividend for 2016: 3.3 US cents per Ordinary Share Special dividend for 2016: 3.3 US cents per Ordinary Share Total dividends proposed No dividends were paid during the financial year 2016. Year ended 31.12.17 19,328 38,656 19,328 77,312 Year ended 31.12.17 19,266 19,679 19,371 58,316 Year ended 31.12.16 19,325 19,325 38,650 Note 14: Property, plant and equipment Accounting policy Property, plant and equipment Property, plant and equipment is stated at cost, net of accumulated depreciation and/or accumulated impairment losses. Such cost includes the cost of replacing part of the property, plant and equipment and borrowing costs for qualifying assets (see below) 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 servicing 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 charged to the income statement in the period the costs are incurred unless it can be demonstrated that the expenditure results in future economic benefits, when 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. Assets included in property, plant and equipment are depreciated over their estimated useful life taking into account their own physical life limitations and the present assessment of economically recoverable reserves of the mine property at which the assets are located. The remaining useful lives for major assets are reassessed on a regular basis. Changes in estimates, which affect the 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 period the item is derecognised. Assets in the course of construction are initially recognised in assets under construction. Assets under construction are not depreciated. On completion of the asset and when available for use, the cost of construction is transferred to the appropriate asset category in property, plant and equipment and depreciation commences. Ferrexpo plc 2017 Annual Report & AccountsFINANCIAL STATEMENTS 115 Note 14: Property, plant and equipment continued Freehold land is not depreciated. Deferred stripping costs Rock, soil and other waste materials are typically to be removed to access an ore body, which is known as stripping activity. Stripping work comprises overburden removal at pre-production, mine extension and production stages. Pre-production stripping costs incurred in the development of a component of a mine before commercial production commences are capitalised as part of assets under construction. After the commencement of commercial production, the respective capitalised pre-production stripping costs are transferred to mining assets and depreciated over the life of the respective component of the ore body on a unit of production (“UOP”) basis. Production stripping costs are generally charged to the income statement as variable production costs unless these costs are related to gaining improved access to an identified component of the ore body to be mined in future periods. Such production stripping costs are capitalised within mining assets provided all the following conditions are met: – it is probable that the future economic benefit associated with the stripping activity will be realised; – the component of the ore body for which access has been improved can be identified; and – the costs relating to the stripping activity associated with the improved access can be reliably measured. Once the commercial production of the specific component of the ore body commences, the capitalised production stripping costs are depreciated on a UOP basis over the life of the respective identified component. No production stripping costs were capitalised as at 31 December 2017 (2016: nil). Mining assets Any capitalised stripping activities, either of a pre-production or production nature, are reclassified to mining assets at the point of time when the extraction of the ore body of the specific component starts. Mining assets are depreciated using the UOP method based on the estimated economically recoverable reserves to which they relate. 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 assets 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 are measured at cost and are 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 either transferred to assets under construction or other intangible assets, if those costs were associated with the acquisition of licences. 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 (qualifying asset) are capitalised as part of the cost of the respective asset. All other borrowing costs are expensed in the period they occur. Borrowing costs consist of interest and other costs incurred in connection with the borrowing of the funds. In the case of general borrowings used to fund the acquisition or construction of a qualifying asset, 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. Impairment testing Property, plant and equipment is considered to be part of a single cash-generating unit (“CGU”). The recoverable amount of the CGU is determined to be the fair value less cost of disposal. The Group assesses at each reporting date whether there are indications that assets may be impaired or previously recognised impairment losses may no longer exist or may have decreased. If such indication exists, or when annual impairment testing for an asset, such as goodwill, is required, the Group estimates the assets’ recoverable amounts. If the carrying amount of an asset exceeds its recoverable amount, the asset is considered to be impaired and is written down to its recoverable amount. Impairment losses are recognised in the income statement. The Group assesses at each reporting date whether a financial asset or group of financial assets is impaired. Individual balances of receivables and prepayments are assessed at each reporting date and written off when management deems that there is no possibility of recovery. Further information on the result of the annual impairment testing of goodwill is provided in Note 15. Ferrexpo plc 2017 Annual Report & AccountsFINANCIAL STATEMENTSSTRATEGIC REPORTCORPORATE GOVERNANCE 116 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS CONTINUED Note 14: Property, plant and equipment continued 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. In this case, the carrying amount of the asset is increased to its recoverable amount, but not exceeding 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 and the basis for future depreciation is adjusted accordingly. Impairment losses in respect of goodwill are not reversed. Critical estimates Capitalised stripping costs Stripping costs are deferred and capitalised if related to gaining improved access to an identified component of an ore body to be mined in future periods. The capitalised amount is determined based on the volume of waste extracted, compared with expected ore volume in the identified component of the ore body. The identification of the components of a mine’s ore body is a critical estimate and is made by reference to the respective life of mine plan, which depends on a range of factors, including the price of iron ore, the cost of extraction and the mine’s specific operational features. Changes to the life of mine plan, including the life and design of a mine, may result in changes to the expected stripping ratios (waste to ore extracted) and may result in the capitalisation of production stripping costs or adjustments of the carrying value of stripping costs capitalised in previous periods. As at 31 December 2017, deferred pre-production stripping costs totalling US$110,124 thousand relate to components in operation and are included in mining assets. Deferred pre-production stripping costs in relation to components expected to be put into operation in a future period totalled US$22,734 thousand and are included in assets under construction. No production stripping costs are capitalised as of this point of time. As at 31 December 2017, property, plant and equipment comprised: US$000 Cost: Exploration and evaluation Land Mining assets Buildings Vessels Plant and equipment Vehicles Fixtures and fittings Assets under construction Total At 1 January 2016 1,699 3,089 123,653 150,664 103,392 195,085 144,366 5,618 163,671 891,237 Additions Transfers Disposals 20 – – 116 6,380 (2,120) 1,370 9,924 277 353 – 117 56,066 64,699 2,966 21,783 5,260 281 (38,096) – – (965) – (9,406) (941) (78) (2,537) (13,927) Translation differences (200) (369) (19,683) (18,110) (3,252) (23,594) (17,214) (485) (19,103) (102,010) At 31 December 2016 1,519 2,838 108,230 142,883 103,383 184,221 131,471 5,453 160,001 839,999 Additions Transfers Disposals 157 769 489 175 1,355 (192) (354) 237 121,007 123,643 – – 19 92,058 13,281 3,747 25,863 11,125 780 (146,873) – – – (936) (257) (9,096) (2,529) (175) (479) (13,472) Translation differences (58) (123) (9,811) (5,088) 9,916 (6,437) (4,579) (97) (2,174) (18,451) At 31 December 2017 1,618 3,503 190,966 150,315 118,144 194,359 135,134 6,198 131,482 931,719 Depreciation: At 1 January 2016 Depreciation charge Disposals Impairment Translation differences At 31 December 2016 Depreciation charge Disposals Impairment Translation differences At 31 December 2017 Net book value at: – – – – – – – – – – – 37,300 33,993 27,942 77,006 56,001 3,608 995 236,845 12,661 7,994 7,172 17,547 13,022 – – (434) 114 10 – (2,944) (565) – 1 – 1,707 1,822 515 (74) – – 58,913 (4,007) (5,150) (4,404) (1,139) (9,984) (7,343) (277) (116) (28,413) 44,811 37,263 33,985 81,625 61,116 3,772 2,586 265,160 8,433 7,747 9,093 17,388 12,228 – – (633) 44 – – (4,595) (1,637) 1 2 (1,842) (1,467) 3,627 (3,133) (2,451) 628 (160) – (41) – – (8) 55,520 (7,025) 39 (27) (5,334) 5 51,402 42,954 46,705 91,286 69,258 4,199 2,551 308,360 2 – – 2 – – – 2 3 – – – 31 December 2016 1,519 2,836 63,419 105,620 69,398 102,596 70,355 1,681 157,415 574,839 31 December 2017 1,618 3,498 139,564 107,361 71,439 103,073 65,876 1,999 128,931 623,359 Ferrexpo plc 2017 Annual Report & AccountsFINANCIAL STATEMENTS 117 Note 14: Property, plant and equipment continued Assets under construction consist of ongoing capital projects amounting to US$106,197 thousand (2016: US$86,752 thousand) and capitalised pre-production stripping costs of US$22,734 thousand (2016: US$70,663 thousand). Once production commences, stripping costs are transferred to mining assets. Property, plant and equipment includes capitalised borrowing costs on qualifying assets of US$17,810 thousand (2016: US$15,454 thousand). The capitalised borrowing costs on general borrowings were determined based on the capitalisation rate of 9.0% (2016: 7.8%), 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 2017 was US$2,214 thousand (2016: US$2,746 thousand). Leased assets and assets under hire purchase contracts are pledged as security for the related finance leases and hire purchase liabilities. US$47,921 thousand of property, plant and equipment have been pledged as security for liabilities (2016: US$47,236 thousand). The gross value of fully depreciated property, plant and equipment that is still in use is US$24,728 thousand (2016: US$20,553 thousand). Note 15: Goodwill and other intangible assets Accounting policy Goodwill If the cost of acquisition in a business combination exceeds the identifiable net assets attributable to the Group, the difference is considered as purchased goodwill, which is not amortised. After initial recognition, goodwill is measured at cost less any accumulated impairment losses. Goodwill is reviewed for indication of impairment annually and, in case those are identified, an impairment assessment is conducted. An impairment loss recognised for goodwill is never reversed in a subsequent period. 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. Exploration and evaluation assets See policy disclosed in Note 14. Other intangible assets Other intangible assets acquired separately are measured on initial recognition at cost and the useful lives are assessed as either finite or indefinite. Following the initial recognition, the intangible assets are carried at cost less accumulated amortisation and accumulated impairment losses. If amortised, the intangible assets 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. The cost of other intangible assets acquired in a business combination is its fair value as at the date of acquisition. Ferrexpo plc 2017 Annual Report & AccountsFINANCIAL STATEMENTSSTRATEGIC REPORTCORPORATE GOVERNANCE 118 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS CONTINUED Note 15: Goodwill and other intangible assets continued As at 31 December 2017, goodwill and other intangible assets comprised: US$000 Cost: At 1 January 2016 Additions Disposals Translation differences At 31 December 2016 Additions Disposals Translation differences At 31 December 2017 Accumulated amortisation and impairment: At 1 January 2016 Amortisation charge Disposals Translation differences At 31 December 2016 Amortisation charge Disposals Translation differences At 31 December 2017 Net book value at: 31 December 2016 31 December 2017 Goodwill Exploration and evaluation Other intangible assets Total 32,938 3,064 6,750 42,752 – – – – 378 (87) 378 (87) (3,905) (359) (726) (4,990) 29,033 2,705 6,315 38,053 – – – – 3,408 3,408 (28) (28) (933) (84) (107) (1,124) 28,100 2,621 9,588 40,309 – – – – – – – – – – – – – – – – – – 2,728 2,728 438 (74) (259) 438 (74) (259) 2,833 2,833 472 (28) 174 472 (28) 174 3,451 3,451 29,033 2,705 3,482 35,220 28,100 2,621 6,137 36,858 The goodwill acquired through business combinations in previous periods has been allocated for impairment purposes to a single cash- generating unit, as the Group only has one operating segment, being the production and sale of iron ore products. This represents the lowest level within the Group at which goodwill is monitored for internal management purposes. The major component of other intangible assets comprises mining licences and purchased software. Impairment testing Impairment testing was performed at 31 December 2017 based on a fair value less cost of disposal calculation using cash flow projections over the remaining estimated lives of the GPL and the Yerystivske deposits, which are expected to expire in 2038 and 2048, respectively, according to the current approved mine plans. The estimated production volumes are based on these mine plans and do not take into account the effects of expected future mine life extension programmes. The cash flow projection is based on a financial long-term model approved by the senior management covering the expected life of the mines. The production capacity remains at a fixed level once full capacity is reached and therefore no perpetual growth rate is applied for the cash flow projections beyond this point of time. Ferrexpo plc 2017 Annual Report & AccountsFINANCIAL STATEMENTS 119 Note 15: Goodwill and other intangible assets continued The key assumptions used for the impairment testing are: Estimates/assumptions Future production: Commodity prices: Basis Proved and probable reserves Contract prices and longer-term price estimates Cost of raw materials and other production/distribution costs: Expected future costs Exchange rates: Discount rates: Current market exchange rates Cost of capital risk adjusted for the resource concerned Cash flows are projected based on management’s expectations regarding the development of the iron ore and steel market and the cost of producing and distributing the pellets. The Group takes into account two key assumptions: selling price and total production costs considering relevant macro and local factors. In determining the future long-term selling price, the Group 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 Group considers local supply and 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$60 per tonne to US$63 per tonne of 62% Fe fines CFR North China (2016: US$55 per tonne to US$62 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, 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 a pre-tax discount rate of 14.0% (2016: 14.0%) per annum. These rates reflect the time value of money and risk associated with the asset, and are in line with the rates used by competitors with a similar background. Sensitivity to changes in assumptions Management believes that due to the available headroom resulting from the Group’s impairment testing of its operating assets, no reasonable change in the above key assumptions would cause the carrying value of these operating assets to materially exceed its recoverable amount. Note 16: Other non-current assets As at 31 December 2017, other non-current assets comprised: US$000 Prepayments for property, plant and equipment Prepaid bank arrangement fees Other non-current assets Total other non-current assets As at 31.12.17 10,283 – 218 As at 31.12.16 2,450 278 256 10,501 2,984 Ferrexpo plc 2017 Annual Report & AccountsFINANCIAL STATEMENTSSTRATEGIC REPORTCORPORATE GOVERNANCE 120 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS CONTINUED Note 17: Inventories Accounting policy Inventories are stated at the lower of cost and net realisable value. Costs incurred in bringing each product to its present location and condition are accounted for as follows: – Raw materials – 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. – Lean and weathered ore – at cost, if lower than net realisable value. The net realisable value is the estimated selling price in the ordinary course of business, less estimated costs of completion (conversion into pellets or concentrate) and the estimated costs necessary to sell the product or goods. Major spare parts and servicing equipment that meet the definition of property, plant and equipment are, in accordance with IAS 16, included in property, plant and equipment and not in inventory. Critical estimates Lean and weathered ore Iron ore of various grades is being extracted at the Group’s two operating mines GPL and Yerystivske. In order to maximise the operational efficiency and output of the processing facility at FPM, management determines the optimal mix and grade of ore to be delivered to the processing facility from each mine. During the last financial years, including the financial year 2017, ore of a lower iron content was stockpiled due to limited processing capacities. It is the Group’s intention to process the stockpiled ore once additional processing capacities are available. This additional capacity is currently being constructed and expected to be completed during the financial year 2020 and as a consequence the entire balance is classified as non-current. As at 31 December 2017, the ore valued at cost totalled US$175,831 thousand. Critical estimates in determining the net realisable value of the lean and weathered ore includes i) the expected timing of the completion of the capacity upgrade programme at FPM, ii) forecast iron ore pellet prices, and iii) the estimated cost to process the ore into iron ore pellets. Separate stress tests have been performed, which assumed the lowest forecast iron ore price from a set of brokers, a one-year delay in the completion of the additional capacity and 10% increase in processing costs and under each scenario the cost value remained recoverable. At 31 December 2017, inventories comprised: US$000 Raw materials and consumables Spare parts Finished ore pellets Work in progress Other Total inventories – current Lean and weathered ore Total inventories – non-current Total inventories As at 31.12.17 As at 31.12.16 34,295 26,847 42,053 35,603 15,482 12,408 2,475 2,340 2,522 1,555 96,645 78,935 175,831 130,357 175,831 130,357 272,476 209,292 Inventories classified as non-current mainly comprise lean and weathered ore that are, based on the Group’s current processing plans, not planned to be processed within the next year. It is the Group’s intention to process this ore at a later point of time and it is expected that it will take more than one year to process this stockpile, depending on the Group’s future mining activities, processing capabilities and anticipated market conditions. Ferrexpo plc 2017 Annual Report & AccountsFINANCIAL STATEMENTS 121 Note 18: Trade and other receivables Accounting policy Trade and other receivables are stated at original invoice amount less an allowance for any doubtful debts. An allowance for doubtful debts is recorded when collection of the full amount is no longer probable. Individual balances are written off when management deems that there is no possibility of recovery. Trade receivables include provisionally priced sales, which are open at the end of the reporting period. Certain contracts have embedded provisional pricing mechanisms, which have the character of commodity derivatives that are carried at fair value through profit and loss. Revenues on these contracts are initially recognised at the estimated fair value of consideration receivable, based on the contractual price, and adjusted at the end of each subsequent reporting period on the basis of changes in iron ore prices and the specific underlying contract terms. Final prices based on the relevant index are normally known within 60 days after the reporting period. Further information on the fair value of the embedded provisional pricing mechanism at 31 December 2017 is disclosed in Note 27. At 31 December 2017, trade and other receivables comprised: US$000 Trade receivables Other receivables Allowance for doubtful receivables Total trade and other receivables As at 31.12.17 As at 31.12.16 85,645 85,430 3,364 6,064 (682) (926) 88,327 90,568 In the current year, management have reviewed the presentation of the provisional pricing components and have re-classified those from accrued income (Note 19) to trade receivables in order to reflect the nature of these embedded derivatives in the presentation. US$8,823 thousand has been re-presented for the comparative information to be on a consistent basis. There has been no restatement of the underlying financial information. Trade receivables at 31 December 2017 includes US$1,237 thousand (2016: US$4,881 thousand) owed by related parties. The detailed related party disclosures are made in Note 34. The movement in the allowance for doubtful debts during the period under review was: US$000 Opening balance Increase Release Translation differences Closing balance Year ended 31.12.17 Year ended 31.12.16 926 177 (445) 24 682 1,455 92 (447) (174) 926 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 31.12.17 US$000 Trade receivables Other receivables As at 31.12.16 US$000 Trade receivables Other receivables Gross amount Receivables past due and impaired Receivables neither past due nor impaired Receivables past due but not impaired Less than 45 days 45 to 90 days Over 90 days 85,645 3,364 431 251 84,154 2,923 282 101 154 5 624 84 Gross amount 85,430 6,064 Receivables past due and impaired 721 206 Receivables neither past due nor impaired 80,781 5,473 Receivables past due but not impaired Less than 45 days 3,295 169 45 to 90 days Over 90 days 107 12 526 204 The Group’s exposures to credit, currency and commodity risks are disclosed in Note 27. Ferrexpo plc 2017 Annual Report & AccountsFINANCIAL STATEMENTSSTRATEGIC REPORTCORPORATE GOVERNANCE 122 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS CONTINUED Note 19: Prepayments and other current assets As at 31 December 2017, prepayments and other current assets comprised: US$000 Prepayments to suppliers: Electricity and gas Materials and spare parts Services Other prepayments Prepaid bank arrangement fees Accrued income Assets classified as held for sale Total prepayments and other current assets As at 31.12.17 As at 31.12.16 2,729 3,068 2,650 615 4,384 4,069 – 832 3,030 2,393 362 1,357 4,587 3 17,514 12,564 In the current year, management have reviewed the presentation of the provisional pricing components and have re-classified those from accrued income to trade receivables (Note 18) in order to reflect the nature of these embedded derivatives in the presentation. US$8,823 thousand has been represented for the comparative information to be on a consistent basis. There has been no restatement of the underlying financial information. Prepayments at 31 December 2017 include US$1,259 thousand (2016: US$483 thousand) made to related parties. The detailed related party disclosures are made in Note 34. Note 20: Other taxes recoverable and payable Accounting policy 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. VAT receivable balances are not discounted unless the overdue balances are expected to be received after more than 12 months following the period end. As at 31 December 2017, other taxes recoverable comprised: US$000 VAT receivable Other taxes prepaid Total other taxes recoverable and prepaid The table below provides a reconciliation of the VAT receivable balance in Ukraine: US$000 Opening balance, gross Net VAT incurred VAT refunds received in cash Translation differences Closing balance, gross Allowance Closing balance, net As at 31.12.17 As at 31.12.16 23,081 21,303 111 86 23,192 21,389 Notes Year ended 31.12.17 Year ended 31.12.16 20,565 49,339 99,536 84,555 (96,824) (109,756) 2 (833) (3,573) 22,444 20,565 (1,190) (891) 21,254 19,674 US$678 thousand of the total VAT receivable balance in Ukraine was overdue as at 31 December 2017 (2016: US$427 thousand). The allowance of US$1,190 thousand (2016: US$891 thousand) is related to uncertainties in terms of the recovery of VAT receivable balances of one of the Ukrainian subsidiaries with its mine still being developed. Ferrexpo plc 2017 Annual Report & AccountsFINANCIAL STATEMENTS Note 20: Other taxes recoverable and payable continued As at 31 December 2017, other taxes payable comprised: US$000 Environmental tax Royalties VAT payable Withholding tax Other taxes Total other taxes payable See Note 30 for information in respect of a withholding tax claim in Ukraine. Note 21: Trade and other payables Accounting policy Trade and other payables are not interest-bearing and are stated at their original invoice amount. As at 31 December 2017, trade and other payables comprised: US$000 Materials and services Payables for equipment Dividends payable Other Total current trade and other payables 123 As at 31.12.17 1,010 3,494 159 3,357 2,932 10,952 As at 31.12.16 571 2,309 173 – 2,617 5,670 As at 31.12.17 As at 31.12.16 30,040 27,268 2,084 1,221 16,008 296 25 293 48,428 28,807 Trade and other payables at 31 December 2017 includes US$1,770 thousand (2016: US$2,054 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 27. Note 22: Pension and post-employment obligations Accounting policy The defined benefit costs relating to the plans operated by the Group in the different countries are determined and accrued in the consolidated financial statements using the projected unit credit method for those employees entitled to such payments. The underlying assumptions are defined by management and the defined benefit pension liability is calculated by independent actuaries at the end of each annual reporting period. Remeasurements, comprising actuarial gains and losses, are immediately reflected in the statement of financial position. The corresponding charge or credit is recognised in the other comprehensive income of the period in which it occurred and immediately reflected in retained earnings as not reclassified to the income statement in subsequent periods. The costs of managing plan assets are deducted from the return on plan assets reflected in other comprehensive income. All other scheme administration costs are charged to the income statement. The net interest is calculated by applying the discount rate to the net defined benefit pension liability or plan assets. Any past service costs are recognised in the income statement at the earlier of when the plan amendment occurs or when related restructuring costs are recognised. The service costs (including current and past) are included in cost of sales, selling and distribution expenses and general and administrative expenses in the consolidated income statement whereas the net finance expenses are included in finance expenses. The effects from remeasurements are recognised in other comprehensive income. The defined benefit pension liability is the aggregate of the defined benefit obligation less plan assets of funded schemes. The Group operates funded and unfunded schemes. The Group’s expenses in relation to defined contribution plans are charged directly to the income statement. The Group mainly operates defined benefit plans for qualifying employees of its subsidiaries in Ukraine and Switzerland. All local defined benefit pension liabilities are calculated by independent actuaries applying accepted actuarial techniques. In addition to the aforementioned schemes, the Group operates a defined benefit scheme in Austria and contribution plans for qualifying employees in the United Kingdom and in Singapore. Ferrexpo plc 2017 Annual Report & AccountsFINANCIAL STATEMENTSSTRATEGIC REPORTCORPORATE GOVERNANCE 124 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS CONTINUED Note 22: Pension and post-employment obligations continued Details of the major defined benefit schemes in Ukraine and Switzerland are provided below: Ukraine The Group makes defined contributions to the Ukrainian State Pension scheme at statutory rates based on gross salary payments for the employees of PJSC Ferrexpo Poltava Mining (“FPM”) and LLC Ferrexpo Yeristovo Mining (“FYM”). The Group also has a legal obligation to compensate the Ukrainian State Pension Fund for additional pensions paid to certain categories of the current and former employees of the Group. Additionally, the Group had 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 which was also included in the pension liability before the end of the financial year 2017. All pension schemes in Ukraine are unfunded. In October 2017, the Ukrainian pension legislation was changed by adjusting the average state salary for the years 2014 to 2018, stepwise increasing insurance length of services and decreasing the coefficient for one year of service. Following the change to the pension legislation, the pensions for the current pensioners have been recalculated and resulted in a past service cost gain of US$4,038 thousand as of 31 December 2017 for both Ukrainian schemes. As of 1 December 2017, the collective agreement for FPM was changed in order to remove FPM’s obligation of additional payments to its employees reaching the retirement age in order to improve their welfare. This change affected 6,992 employees and resulted in a curtailment gain of US$655 thousand. At 31 December 2017, the pension schemes in Ukraine covered 4,302 current employees (2016: 8,735 people) following the above-mentioned change of the collective agreement for FPM. There are 956 former employees currently in receipt of pensions (2016: 1,026 people). Switzerland The employees of the Group’s Swiss operation are covered under a collective pension plan (multi-employer plan), which is governed in accordance with the requirements of Swiss law. The funding, of which two-thirds is contributed by the employer and one-third by the employees, is based on the regulations of the pension scheme and Swiss law. The pension scheme in Switzerland is funded and the assets of the pension scheme are held separately from those of the Group and are invested with an insurance company. The accumulated capital of the employees is subject to interests determined by the local legislation and defined in the regulations 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 2017, the Swiss pension scheme covered 20 people (2016: 20 people). 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) US$000 Present value of funded defined benefit obligation Fair value of plan assets Funded status Present value of unfunded defined benefit obligation Defined benefit pension liability Thereof for Ukrainian schemes Thereof for Swiss scheme Thereof for schemes in other jurisdictions Year ended 31.12.17 Year ended 31.12.16 Ukrainian schemes Swiss scheme Ukrainian schemes Swiss scheme 13.00% 0.80% 16.00% 0.70% 7.44% 1.00% 9.22% 1.25% 8.48% 0.00% 81.5 77.2 89.4 87.4 6.92% 7.54% 6.92% 76.1 66.5 As at 31.12.17 5,094 1.0% 1.25% 0.00% 86.0 82.9 As at 31.12.16 4,714 (3,183) (2,835) 1,911 1,879 18,603 13,610 20,514 15,489 18,504 13,531 1,911 1,879 99 79 Ferrexpo plc 2017 Annual Report & AccountsFINANCIAL STATEMENTS Note 22: Pension and post-employment obligations continued Amounts recognised in the income statement or other comprehensive income are as follows: US$000 Defined benefit cost charged in the income statement: Current service cost Past service cost Curtailment gains Interest cost on defined benefit obligation Interest income on plan assets Administration cost 125 Year ended 31.12.17 Year ended 31.12.16 943 (4,038) (655) 2,116 (20) 22 1,119 (158) – 2,230 (27) 21 Total defined benefit (gains)/cost charged in the income statement (1,632) 3,185 Remeasurement cost/(gains) in other comprehensive income: Remeasurement from demographic assumptions Remeasurement from financial assumptions Experience adjustment Return on plan assets Total remeasurement cost/(gains) in other comprehensive income Total defined benefit cost Thereof for Ukrainian schemes Thereof for Swiss scheme Thereof for schemes in other jurisdictions (799) 7,682 2,468 (179) 9,172 7,540 7,232 301 7 (64) (429) (597) 15 (1,075) 2,110 1,458 643 9 The effect from remeasurement of financial assumptions relates to the decrease of the discount rate for the Ukrainian schemes as of 31 December 2017 whereas the effect from remeasurement from financial assumptions is related to the higher than assumed salary increases in Ukraine during the financial year 2017. Changes in the present value of the defined benefit obligation are as follows: US$000 Opening defined benefit obligation Current service cost Interest cost on defined benefit obligation Remeasurement losses/(gains) Translation differences Contributions paid by employer Contributions paid by employees Benefits paid through pension assets Curtailment gains Plan amendments Closing defined benefit obligation Thereof for Ukrainian schemes Thereof for Swiss scheme Thereof for schemes in other jurisdictions Thereof for active employees Thereof for vested terminations Thereof for pensioners Year ended 31.12.17 Year ended 31.12.16 18,324 19,801 943 2,116 9,352 (480) (1,539) 112 (424) (669) 1,119 2,230 (1,088) (1,969) (1,466) 112 (257) – (4,038) (158) 23,697 18,504 5,094 99 18,324 13,531 4,714 79 14,256 11,651 4,414 5,027 2,494 4,179 Ferrexpo plc 2017 Annual Report & AccountsFINANCIAL STATEMENTSSTRATEGIC REPORTCORPORATE GOVERNANCE 126 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS CONTINUED Note 22: Pension and post-employment obligations continued The durations of the defined benefit obligation for the different schemes as at 31 December 2017 are 10.0 years (Ukraine) and 21.2 years (Switzerland). Contributions to the defined benefit plans, including benefits paid by employer and employee contributions, are expected to be US$1,685 thousand for the schemes in Ukraine and US$659 thousand in Switzerland in the next financial year. The expenses in relation to the defined contribution plan in the United Kingdom and Singapore totalled US$50 thousand (2016: US$67 thousand). Changes in the fair values of the plan assets are as follows: US$000 Opening fair value of plan assets Interest income Contributions paid by employer Contributions paid by employees Benefits paid through pension assets Return on plan assets Administration cost Translation differences Closing fair value of plan assets Thereof for Swiss scheme 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 Year ended 31.12.17 Year ended 31.12.16 2,835 2,767 20 354 112 27 320 112 (424) (257) 179 (21) 128 3,183 3,183 (15) (20) (99) 2,835 2,835 As at 31.12.17 As at 31.12.17 As at 31.12.16 As at 31.12.16 26.6 35.6 10.5 27.3 847 1,133 334 869 25.8 35.4 10.9 27.9 731 1,003 309 792 100.0 3,183 100.0 2,835 The pension assets are included in a multi-employer plan and no information in respect of the split of the investments into quoted and non- quoted assets is available. Taking into account the requirements of Swiss law, it is assumed that equities and bonds reflect investments into quoted assets whereas a portion of the other assets in the portfolio could be investments into non-quoted assets. Changes to interest rates and future salary increases in Ukraine are considered to be the main pension-related risks for the Group, as such changes are likely to affect the balance of the Group’s defined benefit obligation. The percentage used to calculate the sensitivities was set under consideration of the volatility for these assumptions for the Ukrainian schemes and has also been applied for the Group’s less material schemes in other jurisdictions. Ferrexpo plc 2017 Annual Report & AccountsFINANCIAL STATEMENTS 127 Note 22: Pension and post-employment obligations continued Changes to the significant assumptions would have the following effects on the defined benefit obligation in the different jurisdictions: US$000 Change Discount rate (%) Future salary increases (%) Local inflation (%) Indexation of pension (%) Life expectancy (years) Ukrainian schemes Swiss scheme Other jurisdictions Ukrainian schemes Swiss scheme Other jurisdictions Year ended 31.12.17 1.0% or 1 year (1,587) 1,324 249 n/a 286 Increase by 1.0% or 1 year (868) 181 6 556 102 1.0% or 1 year (9) 8 n/a n/a n/a 1.0% or 1 year 1,845 Decrease by 1.0% or 1 year 1,221 (1,178) (162) (247) n/a (335) (6) n/a (102) 1.0% or 1 year 10 (9) n/a n/a n/a Following new rules in the Ukrainian pension legislation, the pension indexation is defined by the future salary increases and the local inflation rate. As a result of this change, no sensitivity for the indexation of pension is calculated anymore for the Ukrainian schemes, but the sensitivity for local inflation is used instead. US$000 Change Discount rate (%) Future salary increases (%) Indexation of pension (%) Life expectancy (years) Ukrainian schemes Swiss scheme Other jurisdictions Ukrainian schemes Swiss scheme Other jurisdictions Year ended 31.12.16 1.0% or 1 year (945) 588 379 174 Increase by Decrease by 1.0% or 1 year (811) 162 526 99 1.0% or 1 year (8) 7 n/a n/a 1.0% or 1 year 1,073 (532) (366) (204) 1.0% or 1 year 1,138 (145) n/a (99) 1.0% or 1 year 8 (7) n/a n/a For the presentation of the effects of the changes of the significant assumptions shown in the table on the previous page, the present value of the defined benefit obligation has been calculated based on the projected unit credit method at the end of the reporting period, which is the same as the one applied for the calculation of the defined benefit obligation recognised in the statement of financial position as at 31 December 2017. The methods and assumptions used for the sensitivity analysis for the prior year are unchanged. Note 23: Provisions Accounting policy General Provisions are recognised when the Group has a present obligation (legal or constructive) as a result of a past event and 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. Site restoration 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. The provision for site restoration changed as follows during the financial year 2017: US$000 Opening balance Unwind of the discount Charge to the income statement Translation differences Closing balance Year ended 31.12.17 Year ended 31.12.16 1,071 150 904 (55) 2,070 975 141 76 (121) 1,071 Ferrexpo plc 2017 Annual Report & AccountsFINANCIAL STATEMENTSSTRATEGIC REPORTCORPORATE GOVERNANCE 128 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS CONTINUED Note 23: Provisions continued 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 2038, 2041 and 2061 depending on the different areas within the mine. The first restoration work of the Yerystivske mine is expected to start after 2032. 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 in Ukrainian Hryvnia using a nominal pre-tax discount rate of 13.0% (2016: 16.0%) 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. Note 24: Accrued liabilities and deferred income As at 31 December 2017, 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 31.12.17 3,721 12,235 As at 31.12.16 3,228 9,317 780 29,027 1,460 1,012 18,196 42,584 Note 25: Cash and cash equivalents Accounting policy Cash and cash equivalents include cash at bank and on hand and short-term deposits with original maturity of 90 days or less. Cash at bank and on hand and short-term deposits are recorded at their nominal amount as these present an insignificant risk of changes in value. As at 31 December 2017, cash and cash equivalents comprised: US$000 Cash at bank and on hand Total cash and cash equivalents As at 31.12.17 As at 31.12.16 97,742 144,751 97,742 144,751 The debt repayments during the financial year ended 31 December 2017 totalled US$238,602 thousand (2016: US$195,918 thousand) affecting the balance of cash and cash equivalents. Further information on the Group's gross debt is provided in Note 26. The balance of cash and cash equivalents held in Ukraine amounts to US$10,281 thousand as at 31 December 2017 (2016: US$40,787 thousand). The Group’s exposure to liquidity, counterparty and interest rate risk as well as a sensitivity analysis for financial assets and liabilities are disclosed in Note 27. Note 10 and Note 30 provide details on the Group’s balance of restricted cash and deposits which has been fully provided for as currently not available to the Group. Ferrexpo plc 2017 Annual Report & AccountsFINANCIAL STATEMENTS 129 Note 26: Interest-bearing loans and borrowings Accounting policy The Group’s interest-bearing loans and borrowings are measured at amortised cost. All loans are in US Dollars. See also Note 27 for more details in respect of the accounting policies applied. This note provides information about the contractual terms of the Group’s major finance facilities. US$000 Current Eurobond issued Syndicated bank loans – secured Other bank loans – secured Other bank loans – unsecured Obligations under finance leases Trade finance facilities Interest accrued Total current interest-bearing loans and borrowings Non-current Eurobond issued Syndicated bank loans – secured Other bank loans – secured Other bank loans – unsecured Obligations under finance leases Total non-current interest-bearing loans and borrowings Total interest-bearing loans and borrowings At 31 December 2017, the Group’s major external debt facilities comprised: Notes As at 31.12.17 As at 31.12.16 171,202 – 112,500 175,000 16,218 18,309 1,523 3,969 1,495 3,684 – 19,025 9,358 10,548 314,770 228,061 171,202 337,685 – 131,250 9,267 3,752 2,073 25,434 5,246 6,026 30 30 186,294 505,641 27 501,064 733,702 – a syndicated revolving US$350,000 thousand pre-export finance facility, of which US$131,250 thousand was available (2016: US$306,250 thousand) and US$112,500 thousand are drawn. The amortisation of this facility commenced in November 2016 with eight quarterly amortisations and commitment reductions of US$43,750 thousand to the final maturity date of 8 August 2018; and – an undrawn syndicated revolving US$195,000 thousand pre-export finance facility signed on 16 November 2017. Following a grace period, the facility will be amortised in eight quarterly instalments. The first instalment is due on 31 March 2019 and the final maturity date is 31 December 2020. The aforementioned major bank debt facilities were guaranteed and secured as follows: – Ferrexpo AG and Ferrexpo Middle East FZE assigned the rights to revenue from certain sales contracts; – PJSC Ferrexpo Poltava Mining assigned all of its rights of certain export contracts for the sale of pellets to Ferrexpo AG and Ferrexpo Middle East FZE; and – the Group pledged bank accounts of Ferrexpo AG and Ferrexpo Middle East FZE into which sales proceeds from assigned sales contracts are exclusively received. In addition to the major bank debt facilities listed above, the Group has outstanding unsecured Notes at par value totalling US$346,385 thousand as at 31 December 2017 which fall due in two equal instalments of US$173,193 thousand on 7 April 2018 and 2019, respectively. The Notes have a 10.375% interest coupon payable semi-annually. As at 31 December 2017, the Group had no open trade finance facilities (2016: US$19,025 thousand). Trade finance facilities are secured against receivables related to these specific trades. All facilities are shown net of associated arrangement fees, except for the revolving syndicated pre-export finance facilities, for which the fees are presented in prepayments and current assets and other non-current assets based on the maturity of the underlying facility and are amortised over the term of the facility. Ferrexpo plc 2017 Annual Report & AccountsFINANCIAL STATEMENTSSTRATEGIC REPORTCORPORATE GOVERNANCE 130 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS CONTINUED Note 26: Interest-bearing loans and borrowings continued The table below shows the movements in the interest-bearing loans and borrowings: US$000 Eurobond issued Syndicated bank loans – secured Other bank loans – secured Other bank loans – unsecured Obligations under finance leases Trade finance facilities Interest accrued Movements during the year ended 31.12.17 Cash movements Change of arrangement fees Interest expense As at 31.12.16 337,685 – 4,720 306,250 (193,750) – 43,743 (20,512) 2,254 6,741 9,710 (1,534) (3,690) 19,025 (19,025) 10,548 (47,661) 39 – – – – – – – – – 46,547 Other As at 31.12.17 – 342,405 – 112,500 – 25,485 28 22 – (76) 5,274 6,042 – 9,358 Total interest-bearing loans and borrowings/movements 733,702 (286,172) 7,013 46,547 (26) 501,064 Further information on the Group’s exposure to interest rate, foreign currency and liquidity risk is provided in Note 27. Note 27: Financial instruments Accounting policy Financial assets and liabilities are recognised when the Group becomes a party to the contractual provisions of the financial instrument. Non-derivative financial instruments Non-derivative financial instruments comprise investments in equity and debt securities (e.g. promissory notes), trade and other receivables, cash and cash equivalents, loans and borrowings and trade and other payables. Derivative financial instruments Except for the provisionally priced receivables disclosed in Note 18, the Group does not hold any derivative financial instruments. Initial measurement Non-derivative financial instruments Financial assets and financial liabilities are initially measured at fair value. Any transaction costs that are directly attributable to the acquisition or issue of financial assets or financial liabilities are added or deducted from its fair value except for financial assets and financial liabilities at fair value through the income statement. For those financial assets and financial liabilities, the transaction costs are recognised immediately in the income statement. 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 subsequent measurement is based on the classification of the financial instruments. Subsequent measurement Financial assets Loans and receivables Except for the provisionally priced receivables disclosed in Note 18, 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 the income statement when the loans and receivables are derecognised or impaired along with the amortisation process. Other Other non-derivative financial assets 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 subsequently measured at amortised cost using the effective interest method. Interest-bearing loans and borrowings 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. Ferrexpo plc 2017 Annual Report & AccountsFINANCIAL STATEMENTS 131 Note 27: Financial instruments continued 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). 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. If, in a subsequent period, the amount of the impairment loss decreases and it is objectively related to an event occurring after the impairment was recognised, the previously recognised impairment loss is to be 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. 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 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 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 As at 31.12.17 Financial liabilities measured at amortised cost Total Notes Loans and receivables 25 18 21 24 26 97,742 88,327 620 186,689 – – – – 97,742 88,327 620 186,689 – – – – 48,428 48,428 15,956 15,956 501,064 501,064 565,448 565,448 As at 31.12.16 Financial liabilities measured at amortised cost Total Notes Loans and receivables 25 18 21 24 26 144,751 90,568 877 236,196 – – – – 144,751 90,568 877 236,196 – – – – 28,807 28,807 12,540 12,540 733,702 733,702 775,049 775,049 Ferrexpo plc 2017 Annual Report & AccountsFINANCIAL STATEMENTSSTRATEGIC REPORTCORPORATE GOVERNANCE 132 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS CONTINUED Note 27: Financial instruments continued Fair values and impairment testing Financial assets and other financial liabilities 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. Interest-bearing loans and borrowings The fair values of interest-bearing loans and borrowings are based on the discounted cash flows using market interest rates except for the fair value of the Eurobond issued, which is based on the market price quotation at the reporting date. The fair values of interest-bearing loans and borrowings totalled US$526,599 thousand (2016: US$743,888 thousand). Fair value measurements recognised in the statement of financial position Except for the provisionally priced trade receivables (Level 2) disclosed in Note 18, the Group does not have any financial instruments that are measured subsequent to initial recognition at fair value, grouped into Level 1 to Level 3 based on the degree to which the fair value is observable. There were no transfers between Level 1 and Level 2 in these periods. Financial risk management Overview The Group has exposure to the following risks from its use of financial instruments: – credit risk; – liquidity risk; – market risk – including currency and commodity risk. This note presents information about the Group’s exposure to each of the above risks, the Group’s objectives, policies and processes for measuring and managing risk, and the Group’s management of capital. Further quantitative disclosures are included throughout these consolidated financial statements. The Board has overall responsibility for the establishment and oversight of the Group’s risk management framework. The Group’s risk management policies are established to identify and analyse the risks faced by the Group, to set appropriate risk limits and controls, and to monitor risks and adherence to limits. Risk management policies and systems are reviewed regularly to reflect changes in market conditions and the Group’s activities. The Group, through its training and management standards and procedures, aims to develop a disciplined and constructive control environment in which all employees understand their roles and obligations. The Audit Committee oversees how management monitors compliance with the Group’s risk management policies and procedures and reviews the adequacy of the risk management framework in relation to the risks faced by the Group. The Audit Committee is assisted in its oversight role by Internal Audit. Internal Audit undertakes both regular and ad hoc reviews of risk management controls and procedures, the results of which are reported to the Audit Committee 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 creditworthiness would achieve, and compared with other financing available to the Group. Ferrexpo plc 2017 Annual Report & AccountsFINANCIAL STATEMENTS 133 Note 27: Financial instruments continued 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 Outside Ukraine 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 Ukrainian transactional banking counterparties where the sector is small and constrained by the sovereign credit rating. 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 financial institution. Subsequent to the declaration of insolvency of the Group’s former transactional bank in Ukraine (see Note 30), the Group changed its transactional banking arrangements and is currently working with four banks in Ukraine, all of them being subsidiaries of Western banks, and is still exposed to Ukraine country and banking sector risk in this respect. 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 2017, Ferrexpo AG, Ferrexpo Finance plc and Ferrexpo Middle East FZE were jointly and severally liable under a US$350 million revolving pre-export finance facility, of which US$112,500 thousand was drawn as of 31 December 2017 (2016: US$350,000 thousand) and US$131,250 thousand was available (2016: nil), and an undrawn US$195 million pre-export finance facility. Ferrexpo plc, Ferrexpo AG and Ferrexpo Middle East FZE are guarantors to the Eurobond (“Notes”) issued by Ferrexpo Finance plc totalling US$346,385 thousand, which is due for repayment on 7 April 2018 and 2019, respectively. Additionally, the Notes benefit from a surety agreement provided by FPM. Certain Group companies act as guarantors for several finance facilities provided to Ukrainian subsidiaries: Ferrexpo AG amounting to US$38,902 thousand (2016: US$63,465 thousand), Ferrexpo Middle East FZE amounting to US$15,852 thousand (2016: US$25,108 thousand) and Ferrexpo plc amounting to US$7,984 thousand (2016: US$13,307 thousand). The total remaining contractual maturities of the guarantees provided under the facilities listed above is US$497,800 thousand (2016: US$736,265 thousand). Exposure to credit risk The carrying amount of financial assets at 31 December 2017 was US$186,689 thousand (2016: US$236,196 thousand) and represents the maximum credit exposure. See page 131 for further information. Of the total maximum exposure to credit risk, US$13,170 thousand (2016: US$47,025 thousand) related to Ukraine. The total receivables balance relating to the Group’s top three customers was US$49,918 thousand (2016: US$21,766 thousand) making up 63.4% of the total amounts receivable (2016: 30.8%). The top three customers are considered to be crisis resistant top-class steel mills and sales are made under long-term contracts. Impairment profile The Group’s exposure to credit risk relating to trade and other receivables is disclosed in Note 18. 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 committed credit facilities. Ferrexpo plc 2017 Annual Report & AccountsFINANCIAL STATEMENTSSTRATEGIC REPORTCORPORATE GOVERNANCE 134 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS CONTINUED Note 27: Financial instruments continued 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 intends to ensure that it has sufficient cash on demand and/or lines of credit to meet expected operational expenses, including the servicing of financial obligations. For further information see the Group’s Viability Statement on page 40. The following are the contractual maturities of financial liabilities: US$000 Interest-bearing Fixed rate loans and borrowings Floating rate loans and borrowings Interest accrued Future interest payable Total interest-bearing Non-interest-bearing Trade and other payables Accrued liabilities Total non-interest-bearing Total financial liabilities As at 31.12.17 Less than 1 year Between 1 to 2 years Between 2 to 5 years More than 5 years Total 189,004 181,180 – 119,847 5,468 2,301 9,358 – 30,251 9,218 – 70 348,460 195,866 2,371 48,428 15,956 64,384 – – – – – – 412,844 195,866 2,371 – – – – – – – – – 370,184 127,616 9,358 39,539 546,697 48,428 15,956 64,384 611,081 In the current year, the presentation of the interesting-bearing loans and borrowings balances in the liquidity risk table above was changed from amortised costs disclosed in the past to contractual amounts due to reflect the contractual maturities at the respective period ends. The comparative information of the table below has been re-presented to be on a consistent basis. The difference of the total of fixed and floating interest-bearing loans and borrowings compared to the balances disclosed in Note 26 mainly relates to arrangement fees paid for specific facilities. US$000 Interest-bearing Fixed rate loans and borrowings Floating rate loans and borrowings Interest accrued Future interest payable Total interest-bearing Non-interest-bearing Trade and other payables Accrued liabilities Total non-interest-bearing Total financial liabilities As at 31.12.16 Less than 1 year Between 1 to 2 years Between 2 to 5 years More than 5 years Total 15,538 188,991 181,177 – 385,706 204,271 138,518 7,770 – 350,559 10,548 – – 47,381 30,489 9,307 – – 10,548 87,177 277,738 357,998 198,254 – 833,990 28,807 12,540 41,347 – – – – – – 319,085 357,998 198,254 – – – – 28,807 12,540 41,347 875,337 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 UK Pounds 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 published by the NBU. The devaluation of the Ukrainian Hryvnia reduced the operating costs of the production unit in US Dollar 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. Ferrexpo plc 2017 Annual Report & AccountsFINANCIAL STATEMENTS 135 Note 27: Financial instruments continued With the devaluation of the local currency, US Dollar-denominated loans held by the Ukrainian subsidiary resulted 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 the devaluation in the currency resulted in reduced net asset values with the effect recorded in the translation reserve. The NBU manages and determines the official exchange rates. An interbank 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. The Group’s exposure to foreign currency risk was as follows based on notional amounts: US$000 Financial assets Financial liabilities Trade and other payables Accrued liabilities Interest-bearing loans and borrowings Total financial liabilities Net financial assets/(liabilities) US$000 Financial assets Financial liabilities Trade and other payables Accrued liabilities Interest-bearing loans and borrowings Total financial liabilities Net financial assets/(liabilities) Ukrainian Hryvnia – – – – – – Ukrainian Hryvnia – – – – – – As at 31.12.17 US Dollars 6,906 Euro 145 Swiss Franc 673 Other currencies Total 1,446 9,170 (1,818) (1,719) (201) (5,656) (9,394) (5) (20,238) – (12) (15) (913) (933) – – (20,250) (22,061) (1,731) (216) (6,569) (30,577) (15,155) (1,586) 457 (5,123) (21,407) As at 31.12.16 US Dollars 1,172 Euro 207 Swiss Franc 768 Other currencies 2,226 Total 4,373 (1,488) (1,332) (2) (32,296) – (37) (33,786) (1,369) (32,614) (1,162) (238) (20) – (258) 510 (569) (982) (3,627) (1,004) – (32,333) (1,551) (36,964) 675 (32,591) 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. Commodity risk Revenues related to provisionally priced sales are initially recognised at the estimated fair value of the consideration receivable based on the forward price at each reporting date for the relevant period outlined in the different contracts. As a consequence, the receivable balance may change in a future period when final invoices can be issued based on final iron ore prices to be applied according to the specific underlying contract terms. The provisionally priced iron ore exposure at 31 December 2017 was 176,000 tonnes (2016: 173,000 tonnes) which gave rise to a fair value gain relating to the embedded provisional pricing mechanism of US$846 thousand as at 31 December 2017 (2016: fair value loss of US$777 thousand). Final iron ore prices based on the relevant index are normally known within 60 days after the reporting period. The difference between the provisionally priced receivable balance recognised as at 31 December 2017 and the receivable balance taking into account the known final prices is US$863 thousand (2016: US$1,433 thousand) and would have increased the consolidated result and the shareholders’ equity by this amount. Where pricing terms deviate from the index-based pricing model, derivative commodity contracts may be used to swap the pricing terms to the iron ore index price. Finished goods are held at cost without revaluation to a spot price for iron ore pellets at the end of the reporting period, as long as the recoverable amount exceeds the cost basis. Ferrexpo plc 2017 Annual Report & AccountsFINANCIAL STATEMENTSSTRATEGIC REPORTCORPORATE GOVERNANCE 136 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS CONTINUED Note 27: 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. The percentage applied to the sensitivity analysis of the Group’s foreign currency exposure is based on the average change of the Ukrainian Hryvnia, the Group’s most relevant foreign currency, compared to the US Dollar in past years, which might repeat again in the near future. This percentage was also applied for the Group’s less relevant foreign currencies and does not have a significant effect on the total effect of this sensitivity analysis. This assumes that all other variables, in particular interest rates, remain constant. US$000 Ukrainian Hryvnia Euro Swiss Franc Total Year ended 31.12.17 Income statement/ equity Year ended 31.12.16 Income statement/ equity (2,526) (5,436) (264) 76 (194) 85 (2,714) (5,545) 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 the income statement. Cash flow sensitivity for variable rate instruments An increase of 100 basis points (“bps”) in interest rates would have decreased equity and the consolidated result by the amounts shown below. The possible change applied to the cash flow sensitivity represents a plausible scenario taking into account the movement of variable interest rates in the last year and possible changes in the near future. This analysis assumes that all other variables, in particular foreign currency rates, remain constant. US$000 Net finance charge Year ended 31.12.17 Year ended 31.12.16 299 1,868 A decrease of 100bps would increase equity and profit by US$1,288 thousand for the year ended 31 December 2017 (2016: increase of US$1,014 thousand). This is on the basis that all the other variables remain constant. 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. A key measure in respect of the Group’s capital management is the level of net debt and the net debt to EBITDA ratio. Both key figures improved significantly during the financial year 2017 as a result of the strong financial performance. The net debt has decreased from US$588,951 thousand at the beginning of the year to US$399,217 thousand as at 31 December 2017. The capital base of the Group can be adversely affected by falls in the price of iron ore reducing reported revenues and profitability. The price that the industry earns for iron ore products is cyclical in nature and the Board of Directors continues to review its capital base in line with industry trends. In prior years the Board approved investments in growth projects as part of its policy to support a strong capital base. During the financial years 2015 and 2016, in recognition of the industry trend and to further support the Group’s capital base, the Board slowed down investments in major growth projects. Under consideration of increased iron ore prices and more positive industry trends, suspended investments in major growth projects accelerated again in 2017 and are expected to continue in 2018. 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. The Board maintains a dividend policy consistent with the Group’s profile, reflecting the investment activities the Group has made supporting current and future production growth and the cash generated by existing operations, while maintaining a prudent level of dividend cover supported by an appropriate level of liquidity. 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. Ferrexpo plc 2017 Annual Report & AccountsFINANCIAL STATEMENTS 137 Note 27: Financial instruments continued Ferrexpo plc (the “Company”) is the Group’s holding company, with no direct operating business, so its ability to make distributions to its shareholders is dependent on its ability to access profits held in the subsidiaries. The Group’s consolidated retained earnings shown in the consolidated statement of changes in equity do not reflect the profits available for distribution in the Group as of 31 December 2017. See Note 13 for further information. For more information about the Group’s interest-bearing loans and borrowings see Note 26. Note 28: Share-based payments Accounting policy Equity-settled transactions The cost of equity-settled transactions with employees is measured by reference to the fair value of the award at the grant date using modelling techniques consistent with the mathematics underlying the Black-Scholes option pricing model extended to allow for the performance conditions. The fair value is determined by reference to the quoted closing share price on the grant date. The cost 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. In valuing equity-settled transactions, no account is taken of any vesting conditions, except for market conditions, such as the relative Total Shareholder Return (“TSR”). Where the vesting of awards 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. At each reporting date, the cumulative expense of outstanding awards 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 employee benefit trust reserve in equity. Long-term incentive plan (“LTIP”) The LTIP is a share-based scheme whereby certain senior management and executives receive rewards based on the relative TSR. The LTIP is subject to a performance condition based on the TSR compared to a comparator group, which operate in a similar environment, measured over the vesting period. Further description is provided in the Remuneration Report. 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. The following number of share awards were granted under the LTIP in the previous financial years. The LTIP vesting period is three years. Thousand Year ended 31.12.17 Year ended 31.12.16 Year ended 31.12.15 2017 LTIP 2016 LTIP 2015 LTIP 803 – – – 765 – – – 617 The following expenses have been recognised in 2017 and 2016 in respect of the LTIP: Total 803 765 617 Total 586 389 2017 LTIP 2016 LTIP 2015 LTIP 2014 LTIP 433 – 54 59 112 126 (13) 204 Year ended 31.12.17 WAFV (US$) Year ended 31.12.16 WAFV (US$) Year ended 31.12.17 No. (’000) Year ended 31.12.16 No. (’000) 0.63 1.64 1.17 1.27 0.86 1.03 0.23 – 1.40 0.63 1,862 1,497 803 (112) (431) 765 – (400) 2,122 1,862 US$000 Year ended 31.12.17 Year ended 31.12.16 LTIP Beginning of the year Awards granted during the year Awards vested during the year Awards lapsed during the year Outstanding at 31 December The main inputs to the valuation of the 2017 LTIP awards were the share price at date of grant of US$2.01 (2016 LTIP awards: US$0.53), the volatility of the share price of 74% (2016 LTIP awards: 68%) and a risk-free interest rate of 1.5% p.a. (2016 LTIP awards: 0.8% p.a.). Ferrexpo plc 2017 Annual Report & AccountsFINANCIAL STATEMENTSSTRATEGIC REPORTCORPORATE GOVERNANCE 138 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS CONTINUED Note 29: Employees Employee benefits expenses for the year ended 31 December 2017 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 Production Marketing and distribution Administration Other Total average number of employees Notes Year ended 31.12.17 Year ended 31.12.16 22 28 50,223 40,957 9,383 943 7,474 1,119 3,336 3,033 586 389 64,470 52,972 Year ended 31.12.17 Year ended 31.12.16 7,154 180 1,002 727 9,063 7,194 183 1,003 724 9,104 The balances included in the table below show compensation for Non-executive Directors, Executive Directors and other key management personnel: US$000 Wages and salaries Social security costs Post-employment benefits Other employee costs Share-based payments Total compensation for key management Share-based payments amounting to US$586 thousand (2016: US$389 thousand) are included in wages and salaries. The details of compensation relating to Non-executive and Executive Directors are disclosed in the table below: US$000 Wages and salaries Social security costs Post-employment benefits Other employee costs Share-based payments Total compensation to Non-executive and Executive Directors Year ended 31.12.17 Year ended 31.12.16 6,356 6,106 276 199 226 278 236 116 258 38 7,335 6,754 Year ended 31.12.17 Year ended 31.12.16 3,079 3,342 124 81 170 81 122 60 170 12 3,535 3,706 Note 30: Commitments, contingencies and legal disputes Accounting policy Contingencies Contingent liabilities are not recognised in the consolidated financial statements. They are disclosed unless the possibility of an outflow of resources embodying economic benefits is remote. A contingent asset is not recognised in the consolidated financial statements but disclosed when an inflow of economic benefits is probable. 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 if that right is not specified in an arrangement. Ferrexpo plc 2017 Annual Report & AccountsFINANCIAL STATEMENTS 139 Note 30: Commitments, contingencies and legal disputes continued 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 asset or, if lower, at the present value of the minimum lease payments. Lease payments are apportioned between the finance costs and the amortisation of the lease liability in order to achieve a constant interest rate on the remaining outstanding lease liability. Finance costs are recognised in the income statement. Leased assets are generally depreciated over the useful life of the asset. 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. Operating lease commitments – Group as lessee Future minimum rentals payable under non-cancellable operating leases as at 31 December 2017 are as follows: US$000 Less than one year Between one and five years More than five years Total minimum rentals payable As at 31.12.17 2,569 8,694 As at 31.12.16 2,441 7,202 31,206 37,136 42,470 46,779 During the year ended 31 December 2017, US$2,291 thousand was recognised as an expense in the income statement in respect of operating leases (2016: US$2,152 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 five to ten years on buildings. 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 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 Total minimum lease payments Less: amounts representing finance charges Present value of minimum lease payments Other US$000 Capital commitments on purchase of property, plant and equipment As at 31.12.17 Minimum payments 4,296 2,131 6,427 (386) Present value of payments 3,969 2,072 6,041 – 6,041 6,041 As at 31.12.16 Minimum payments Present value of payments 4,289 3,684 6,562 6,026 10,851 9,710 (1,141) 9,710 – 9,710 As at 31.12.17 As at 31.12.16 29,681 24,665 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. Ferrexpo plc 2017 Annual Report & AccountsFINANCIAL STATEMENTSSTRATEGIC REPORTCORPORATE GOVERNANCE 140 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS CONTINUED Note 30: Commitments, contingencies and legal disputes continued Deposit Guarantee Fund and liquidator of Bank F&C The Group’s former transactional bank in Ukraine, Bank F&C (“BFC”), is still going through the liquidation process after having been declared insolvent by the National Bank of Ukraine and put under temporary administration on 18 September 2015. The Group has recorded in previous periods a full allowance for its cash and deposit balances (denominated in Ukrainian Hryvnia) held with BFC on the date of introduction of temporary administration, totalling UAH4,262 million (US$151,850 thousand) as at 31 December 2017 (2016: US$156,866 thousand). The Group, through its major subsidiaries in Ukraine, is engaged in various court proceedings with the aim to maximise its recovery in the liquidation process of BFC as disclosed below. The Group’s principal Ukrainian subsidiary, PJSC Ferrexpo Poltava Mining (“FPM”), is claiming the release of UAH217 million (US$7,731 thousand as of 31 December 2017), which was blocked after the introduction of the temporary administration of BFC on 18 September 2015. FPM has filed a cassation appeal in respect of an earlier adverse judgment received from the court. With judgment of 17 October 2017, the relevant court instance dismissed FPM’s appeal in full. Based on legal advice obtained, there are no legal grounds for an appeal against this judgement to the Supreme Court of Ukraine. Following the commencement of the liquidation process of BFC and in accordance with the applicable local legislation, FPM, LLC Ferrexpo Yeristovo Mining (“FYM”) and LLC Ferrexpo Belanovo Mining (“FBM”), collectively referred to as “Ukrainian subsidiaries”, submitted on 21 January 2016 their claims for cash and deposit balances held with BFC on the date of introduction of temporary administration totalling UAH4,262 million (US$151,850 thousand as of 31 December 2017). On 22 April 2016, the liquidator of BFC issued certificates recognising UAH540 million (US$19,240 thousand as of 31 December 2017) of these claims and recognised these claims in the ninth rank. The aforementioned Ukrainian subsidiaries are currently involved in legal proceedings in respect of the under-recognition of the claims amounting to UAH3,722 million (US$132,610 thousand as of 31 December 2017) and the ranking of the claims in the liquidation process. The court proceedings commenced in October 2016 and following various hearings during the financial year 2017, the relevant court instance dismissed on 25 October 2017 FPM’s claim in full. FPM filed an appeal on 13 November 2017 and a hearing took place on 21 February 2018. In this hearing, the liquidator of BFC failed to provide certain original documents requested by the court. As a result, the court did not rule on the parties’ motions yet, but instead decided to adjourn the hearing. The next hearing is scheduled for 29 March 2018. The claims of FYM and FBM on the same matter are still pending with the relevant courts, but no hearings took place or are scheduled yet. Note 31: Share capital and reserves Accounting policy Ordinary Shares Ordinary Shares are classified as equity. Incremental costs directly attributable to the issue of Ordinary Shares and share options are recognised as a deduction from equity, net of any tax effects. Employee benefit trust reserve Ferrexpo plc shares held by the Group are recognised at cost and classified in reserves. Consideration received for the sale of such shares is also recognised in equity, with any difference between the proceeds from the sale and the original cost to be recorded in reserves. No gain or loss is recognised in the income statement on the purchase, issue or cancellation of equity shares. Treasury shares Own equity instruments, which are re-acquired (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 reserves. Translation reserve The translation reserve represents exchange differences arising on the translation of non-US Dollar functional currency operations, mainly those in Ukrainian Hryvnia, within the Group into US Dollars. Critical judgements Net investments in foreign operations There are various intercompany balances between subsidiaries used to finance capital expenditure projects as well as working capital requirements. The vast majority of these loans are denominated in US Dollars and are translated into the respective local functional currencies in the subsidiaries’ local accounts. Loans for which cash settlement is neither planned nor likely to occur in the foreseeable future are, in substance, a part of the Group’s net investment in that foreign operation. In assessing whether cash settlement is planned or likely to occur in the foreseeable future, critical judgement is required in forecasting whether the Group will generate sufficient cash outside of Ukraine to satisfy its liquidity requirements. Translation differences on these loans are recognised in other comprehensive income (translation reserve) and only reclassified from the translation reserve to profit or loss on disposal of the respective net investment. Translation losses related to these loans of US$22,046 thousand, net of associated tax effect of US$4,557 thousand, are recognised in other comprehensive income for the financial year 2017 (2016: US$121,261 thousand). It is the Group management’s view that the total balance of the loans granted by the Group to its Ukrainian subsidiaries qualifies as net investment in its foreign operations. Ferrexpo plc 2017 Annual Report & AccountsFINANCIAL STATEMENTS 141 Note 31: Share capital and reserves continued Information on the Group’s share capital and reserves is provided below: Share capital 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 2017 was 613,967,956 Ordinary Shares (2016: 613,967,956) at a par value of £0.10 paid for in cash, resulting in share capital of US$121,628 thousand (2016: US$121,628 thousand) per the statement of financial position. As at 31 December 2017, other reserves attributable to equity shareholders of Ferrexpo plc comprised: US$000 At 1 January 2016 Foreign currency translation differences Tax effect Total comprehensive loss for the period Share-based payments At 31 December 2016 Foreign currency translation differences Tax effect Total comprehensive loss for the period Share-based payments At 31 December 2017 Uniting of interest reserve Treasury share reserve Employee benefit trust reserve Translation reserve Total other reserves 31,780 (77,260) (5,497) (1,825,647) (1,876,624) – – – – – – – – – – – (125,130) (125,130) 16,607 16,607 (108,523) (108,523) 389 – 389 31,780 (77,260) (5,108) (1,934,170) (1,984,758) – – – – – – – – – – – (41,249) (41,249) 4,557 4,557 (36,692) (36,692) 586 – 586 31,780 (77,260) (4,522) (1,970,862) (2,020,864) Uniting of interest reserve The uniting of interest reserve represents the difference between the initial investment by Ferrexpo AG in FPM 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 In September 2008, Ferrexpo plc completed a buy-back 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. Information on the Group’s share-based payments is provided in Note 28. As at 31 December 2017, the employee benefit trust reserve includes 2,916,419 shares (2016: 3,024,899 shares). Translation reserve During the financial year 2017, the Ukrainian Hryvnia depreciated from 27.191 as at the beginning of the year to 28.067 as at 31 December 2017 and the exchange differences arising on translation of the Group’s foreign operations is initially recognised in the statement of other comprehensive income. See also on page 97. Note 32: Consolidated subsidiaries Accounting policy Entities are included in the consolidated financial statements from the date of obtaining control and the inclusion in the consolidated financial statements is consequently ceased when the control over an entity is lost. Control is obtained when the Group is exposed, or has the rights, to variable returns from its involvement with an entity and has the ability to affect those returns through its power over the entity that gives the current ability to direct the relevant activities. Control can be obtained through voting rights, but also through agreements, statutes, contracts, trust deeds or other schemes. Non-controlling interests in the net assets of consolidated subsidiaries are shown separately in the Group’s consolidated statement of financial position and consolidated statement of changes in equity. The share of the profit attributable to non-controlling interests is shown in the consolidated income statement and the consolidated statement of comprehensive income. Ferrexpo plc 2017 Annual Report & AccountsFINANCIAL STATEMENTSSTRATEGIC REPORTCORPORATE GOVERNANCE 142 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS CONTINUED Note 32: Consolidated subsidiaries continued The Group comprises Ferrexpo plc and its consolidated subsidiaries. The Group’s interests in the entities are held indirectly by the Company, with the exception of Ferrexpo AG which is directly held. The Group’s equity interests are 100% for all its major consolidated subsidiaries, except for FPM. The interest that non-controlling interests have in the Group’s operations are not material and predominantly related to FPM. No significant judgements and assumptions were required to determine that the Group has control over these entities. The Group’s consolidated subsidiaries are listed on page 149. The Group does not have any other interests of 20% or more in undertakings that are not disclosed on page 149, except for the investment in the associate mentioned in Note 33. Note 33: Investments in associates Accounting policy 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 any 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 from an associate is shown on the face of the income statement. This is the profit attributable to the Group and is therefore the profit after tax and non-controlling interests in the subsidiaries of the associate. The reporting dates of the associates and the Group are identical and the associates’ accounting policies are generally in conformity with those applied by the Group. The Group also holds an interest of 49.5% (2016: 49.4%) in TIS Ruda LLC, operating a port on the Black Sea which the Group uses as part of its distribution channel. US$000 Opening balance Share of profit1 Dividends declared Translation adjustments Closing balance Year ended 31.12.17 Year ended 31.12.16 2,165 5,527 5,801 3,726 (1,489) (6,870) (256) 5,947 (492) 2,165 For the year ended 31 December 2017 the summarised financial information for the associate was as follows: US$000 TIS Ruda LLC1 1 Based on preliminary and unaudited financial information. Revenue Net profit Year ended 31.12.17 Year ended 31.12.16 Year ended 31.12.17 Year ended 31.12.16 22,002 22,911 11,076 7,467 The figures in the table above represent 100% of the associate’s revenue and net profit and not the Group’s share based on its ownership. As at 31 December 2017, the associate’s total assets were US$13,481 thousand (2016: US$9,858 thousand) and the total liabilities were US$1,563 thousand (2016: US$5,519 thousand) based on preliminary and unaudited statutory accounts. Any deviations from of the Group’s share in the associate’s equity based on the audited financial statements is adjusted subsequent to the year-end once the audited financial statements are available. 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, control, properly disclose and obtain independent confirmation, when relevant, for transactions with the related parties. Entities under common control are those under the control of Kostyantin Zhevago. Associated companies refer to TIS Ruda LLC, in which the Group holds an interest of 49.5% (2016: 49.4%). This is the only associated company of the Group. Other related parties are principally those entities controlled partially by Anatoly Trefilov who resigned as a member of the supervisory board of PJSC Ferrexpo Poltava Mining as of 19 April 2017. In accordance with the Listing Rules, all transactions with the entities controlled by Anatoly Trefilov within one year of his resignation from the supervisory board will still be considered as related party transactions and disclosed as such. The payments made to the Non-executive Directors and Executive Directors are disclosed in the Remuneration Report on pages 74 and 75. Ferrexpo plc 2017 Annual Report & AccountsFINANCIAL STATEMENTS 143 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 expense Year ended 31.12.17 Year ended 31.12.16 US$000 Sales of pellets a Other sales b Total related party transactions within revenue Materials c Spare parts and consumables d Gas e Total related party transactions within cost of sales Selling and distribution expenses f General and administration expenses g Allowance for restricted cash and deposits h Associated companies Other related parties Entities under common control – 362 362 7,504 1,382 – 8,886 – – – – – – – 10,867 18,366 594 – – – Entities under common control 1,975 234 2,209 6,954 1,251 4,297 12,502 Associated companies – – – – – – – Other related parties – 143 143 8 – – 8 10,766 19,803 1,507 673 8,524 – – 92 – – 94 94 8 – – 8 827 425 – Total related party transactions within expenses 20,347 18,366 1,260 32,465 19,803 1,607 Finance expense Total related party finance expense 34 34 – – – – 38 38 – – – – A description of the most material transactions which are in aggregate over US$200 thousand in the current or comparative period is given below. Entities under common control The Group entered into various related party transactions with entities under common control. All transactions were carried out on an arm’s length basis in the normal course of business. a Spot sales of pellets in the amount of US$1,975 thousand as of the end of the comparative period ended 31 December 2016 to VA Intertrading AG. No such sales as of 31 December 2017. b Sales of power, steam and water and other materials for US$88 thousand (2016: US$37 thousand) and income from premises leased to Kislorod PCC of US$135 thousand (2016: US$135 thousand). c c c Purchases of compressed air and oxygen and metal scrap from Kislorod PCC for US$3,911 thousand (2016: US$3,587 thousand); Purchases of cast iron balls from AutoKraZ Holding Co. for US$851 thousand (2016: US$1,269 thousand); and Purchases of cast iron balls from OJSC Uzhgorodsky Turbogas for US$2,673 thousand (2016: US$2,063 thousand). d Purchases of spare parts from CJSC Kyiv Shipbuilding and Ship Repair Plant (“KSRSSZ”) in the amount of US$96 thousand (2016: US$410 thousand); d Purchases of spare parts from OJSC Uzhgorodsky Turbogas in the amount of US$294 thousand (2016: US$150 thousand); d Purchases of spare parts from Valsa GTV of US$756 thousand (2016: US$486 thousand); and d Purchases of spare parts from OJSC Berdichev Machine-Building Plant Progress of US$211 thousand (2016: US$61 thousand). e Procurement of gas for US$4,297 thousand from OJSC Ukrzakordongeologia as of the end of the comparative period ended 31 December 2016. No such transaction as of 31 December 2017. f g h Purchases of advertisement, marketing and general public relations services from FC Vorskla of US$10,867 thousand (2016: US$10,766 thousand). Insurance premiums of US$403 thousand (2016: US$385 thousand) paid to ASK Omega for workmen’s insurance and other insurances. The Group recorded during the financial year 2016 an additional allowance for its cash and deposits held at Bank F&C resulting in a charge of US$8,525 thousand as a result of the latest developments of the ongoing court case. See Note 30 for further information. 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 33). f Purchases of logistics services in the amount of US$18,366 thousand (2016: US$19,803 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. All transactions were carried out on an arm’s length basis in the normal course of business. f g Purchases of logistics management services from Slavutich Ruda Ltd. relating to customs clearance services and the coordination of rail transit totalling US$827 thousand (2016: US$1,502 thousand). Legal services in the amount of US$221 thousand (2016: nil) provided by Kuoni Attorneys at Law Ltd., which is controlled by a former member of the Board of Directors of Ferrexpo plc who resigned in November 2016, but still acts as a member of the Board of Directors of one of the subsidiaries of the Group; and g Consulting services totalling US$205 thousand (2016: US$92 thousand) provided by Nage Capital Management AG, which is controlled by a former member of the Board of Directors of Ferrexpo plc who resigned in August 2014, but still acts as a member of the Board of Directors of one of the subsidiaries of the Group. Ferrexpo plc 2017 Annual Report & AccountsFINANCIAL STATEMENTSSTRATEGIC REPORTCORPORATE GOVERNANCE 144 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS CONTINUED Note 34: Related party disclosure continued Purchases of property, plant and equipment The table below details the transactions of a capital nature which were undertaken between Group companies and entities under common control, associated companies and other related parties during the periods presented. US$000 Purchases in the ordinary course of business Total purchases of property, plant and equipment There were no individual transactions which exceeded US$200 thousand in the current or comparative period. Year ended 31.12.17 Year ended 31.12.16 Entities under common control 68 68 Associated companies – – Other related parties – – Entities under common control 37 37 Associated companies – – 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 Prepayments for property, plant and equipmenti Total non-current assets Trade and other receivables j Prepayments and other current assets k Total current assets Trade and other payables l Accrued liabilities and deferred income Total current liabilities As at 31.12.17 As at 31.12.16 Associated companies Other related parties Entities under common control Associated companies Entities under common control 2,981 2,981 – – 118 1,082 1,088 1,206 339 – 339 – 1,082 1,367 – 1,367 – – 37 171 208 64 51 115 – – 257 282 539 456 – 456 – – 4,576 – 4,576 1,331 – 1,331 Other related parties 1 1 Other related parties – – 48 201 249 267 – 267 A description of the balances over US$200 thousand in the current or comparative period is given below. Entities under common control i As of 31 December 2017, prepayments for property, plant and equipment totalling US$2,722 thousand (2016: nil) were made to OJSC Berdichev Machine-Building Plant Progress and US$256 thousand (2016: nil) to AutoKraZ Holding Co. k Prepayments and other current assets totalling US$858 thousand as of 31 December 2017 related to prepayments made to FC Vorskla for advertisement, marketing and general public relations services (2016: nil). Associated companies j As at 31 December 2017, trade and other receivables included US$1,082 thousand (2016: US$4,576 thousand) related to dividends declared by TIS Ruda LLC. l As at 31 December 2017, trade and other payables included US$1,367 thousand (2016: US$1,331 thousand) related to purchases of logistics services from TIS Ruda LLC. Other related parties k Prepayments and other current assets totalling US$171 thousand (2016: US$201 thousand) related to prepayments made to Slavutich Ruda Ltd. for distribution services. l Trade and other payables of US$59 thousand (2016: US$267 thousand) were in respect of distribution services provided by Slavutich Ruda Ltd. Note 35: 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 13. Ferrexpo plc 2017 Annual Report & AccountsFINANCIAL STATEMENTS PARENT COMPANY STATEMENT OF FINANCIAL POSITION 145 Ferrexpo plc (the “Company”) is required to present its separate Parent Company statement of financial position and certain notes to the statement of financial position on a standalone basis as at 31 December 2017 and 2016, which has been prepared in accordance with Financial Reporting Standard 101 Reduced Disclosure Framework (“FRS 101”). Information on the principle accounting policies is outlined in Note 3. Ferrexpo plc is exempt from presenting a standalone Parent Company profit and loss account and statement of comprehensive income in accordance with section 408 of the UK Companies Act 2006. US$000 Fixed assets Investment in subsidiary undertakings Total fixed assets Current assets Debtors Cash at bank and in hand Total current assets Creditors: amounts falling due within one year Net current assets Total assets less current liabilities Creditors: amounts falling due after more than one year Net assets Capital and reserves Called up share capital Share premium account Treasury share reserve Employee benefit trust reserve Profit and loss account Total capital and reserves Notes As at 31.12.17 As at 31.12.16 4 147,496 147,496 147,496 147,496 5 835,453 874,534 1,576 47 837,029 874,581 23,433 7,280 813,596 867,301 961,092 1,014,797 494 2,015 960,598 1,012,782 121,628 121,628 185,112 185,112 (77,260) (77,260) (4,522) (5,108) 735,640 788,410 960,598 1,012,782 6 6 7 7 7 7 7 The profit after taxation for the Company, registration number 05432915, was US$24,562 thousand for the financial year ended 31 December 2017 (2016: US$19,403 thousand). The financial statements were approved by the Board of Directors on 20 March 2018. KOST YANTIN ZHEVAGO CHIEF EXECUTIVE OFFICER CHRISTOPHER MAWE CHIEF FINANCIAL OFFICER Ferrexpo plc 2017 Annual Report & AccountsFINANCIAL STATEMENTSSTRATEGIC REPORTCORPORATE GOVERNANCE 146 NOTES TO THE PARENT COMPANY FINANCIAL STATEMENTS Note 1: Corporate information The Company is incorporated and registered in England, which is considered to be the country of domicile, with its registered office at 55 St James’s Street, London SW1A 1LA, UK. The Company’s Ordinary Shares are traded on the London Stock Exchange. The majority shareholder of the Company is Fevamotinico S.a.r.l. (“Fevamotinico”), a company incorporated in Luxembourg and ultimately owned by The Minco Trust, of which Kostyantin Zhevago, the Group’s Chief Executive Officer, is a beneficiary. At the time this report was published, Fevamotinico held 50.3% (2016: 50.3%) of the Company’s issued share capital. Note 2: Basis of preparation The financial statements are prepared under the historical cost convention and in accordance with Financial Reporting Standard 101 Reduced Disclosure Framework (“FRS 101”). The Company has transitioned from previously applied International Financial Reporting Standards as adopted by the European Union to FRS 101 for all periods presented in these financial statements with the date of transition being 1 January 2017. There were no measurement or recognition adjustments for the Company on the adoption of FRS 101. The financial statements are presented in US Dollars (US$), the Company’s functional currency, and all values are rounded to the nearest thousand, except where otherwise indicated. The functional currency is determined as the currency of the primary economic environment in which the Company operates. The majority of the Company’s operating activities are conducted in US Dollars. The Company has taken advantage of the following disclosure exemptions under FRS 101 as the Company is included in publicly available consolidated financial statements, which include disclosures that comply with the standards listed below: – the requirements of paragraphs 45(b) and 46-52 of IFRS 2 Share-based payments; – the requirements of IFRS 7 Financial instruments: Disclosures; – the requirements of paragraphs 91-99 of IFRS 13 Fair value measurements; – the following paragraphs of IAS 1 Presentation of financial statements: – 10 (d) (statement of cash flows); – 16 (statement of compliance with all IFRS); – 38A (requirement for minimum of two primary statements, including cash flow statements); – 38B-D (additional comparative information); – 111 (cash flow statement information); and – 134-136 (capital management disclosures). – the requirements of IAS 7 Statement of cash flows; – the requirements of paragraphs 30 and 31 of IAS 8 Accounting policies, changes in accounting estimates and errors; – the requirements of paragraph 17 of IAS 24 Related party transaction and the requirements to disclose related party transactions entered into between two or more members of a group, provided that any subsidiary which is a party to the transaction is wholly owned by such a member of the same standard. The Company does not have any employees other than the Directors. The requirement to give employee numbers and costs information under Section 411 of the Companies Act is addressed in the Directors’ Remuneration Report of the Group on page 75. Note 3: Significant accounting policies Foreign currencies The accounting policy is consistent with the Group’s policy set out in Note 2 “Basis of preparation” of the Group’s financial statements. Investments in subsidiary undertakings Equity investments in subsidiaries are carried at cost less any provision for impairments. Investments are reviewed for impairment at each reporting date. If indication exists that investments may be impaired, the investments’ recoverable amounts are estimated. If the carrying amount of an investment exceeds its recoverable amount, the investment is considered impaired and is written down to its recoverable amount, which is the higher of its fair value less costs of disposal and its value in use. Impairment losses are recognised in the income statement. Financial guarantees Financial guarantee liabilities issued by the Company are those contracts that require a payment to be made to reimburse the holder for a loss, which incurs because the specified debtor fails to make a payment when due in accordance with the terms of a debt instrument. Financial guarantees provided are initially recognised at fair value and subsequently measured at the higher of the best estimate to settle the present obligation at the reporting date and the amount initially recognised less, when appropriate, the cumulative amortisation recognised as guarantee fee. Treasury share reserve Own equity instruments which are re-acquired (treasury shares) are recognised at cost and deducted from equity shown in the treasury share reserve. 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 reserves. Ferrexpo plc 2017 Annual Report & AccountsFINANCIAL STATEMENTS 147 Note 3: Significant accounting policies continued Share-based payments The accounting policy is consistent with the Group’s policy set out in Note 28 “Share-based payments” of the Group’s financial statements. 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. Taxation The accounting policy is consistent with the Group’s policy set out in Note 12 “Taxation” of the Group’s financial statements. Note 4: Investment in subsidiary undertakings Investment in subsidiary undertakings at 31 December 2017 relates to the Company’s investment in Ferrexpo AG, which is domiciled in Switzerland and wholly owned by the Company. The subsidiary’s registered office is at Bahnhofstrasse 13, 6340 Baar, Switzerland. US$000 Investment in subsidiary undertakings Total investment in subsidiary undertakings See Note 32 to the consolidated financial statements for further information on subsidiaries indirectly held by the Company. Note 5: Debtors Debtors as at 31 December 2017 related to the following: US$000 Amounts falling due within one year Amounts owed by subsidiary undertakings Accrued interest owed by subsidiary undertakings Prepaid expenses Total amounts falling due within one year Amounts falling due after more than one year Amounts owed by subsidiary undertakings Total amounts falling due after more than one year Total debtors At 31.12.17 At 31.12.16 147,496 147,496 147,496 147,496 At 31.12.17 At 31.12.16 19,273 16,977 2,793 2,360 369 292 22,435 19,629 813,018 854,905 813,018 854,905 835,453 874,534 The Company’s loans are contractually payable on demand but having assessed the expected repayment profile, this balance has been presented as non-current with the comparative presentation aligned to be on a consistent basis. Other receivables due from subsidiaries are related to the financial guarantees provided by the Company and reflect the future guarantee fee receivable recorded when the financial guarantees were recognised as a liability. Note 6: Creditors Creditors as at 31 December 2017 related to the following: US$000 Creditors: amounts falling due within one year Financial guarantees Other payables and accrued liabilities Total creditors: amounts falling due within one year Creditors: amounts falling due after more than one year Financial guarantees Total creditors: amounts falling due after more than one year At 31.12.17 At 31.12.16 1,211 22,222 23,433 494 494 3,959 3,321 7,280 2,015 2,015 The Company’s policy is to provide financial guarantees under limited circumstances only for the benefit of wholly owned or substantially owned subsidiaries. Ferrexpo plc 2017 Annual Report & AccountsFINANCIAL STATEMENTSSTRATEGIC REPORTCORPORATE GOVERNANCE 148 NOTES TO THE PARENT COMPANY FINANCIAL STATEMENTS CONTINUED Note 6: Creditors continued As at 31 December 2017, the Company was a guarantor to the following major external debt facilities of the Group: − Notes totalling US$346,386 thousand of a 10.375% Eurobond repayable in two equal instalments of US$173,193 thousand falling due on 7 April 2018 and 2019. The interest coupon is payable semi-annually; − a syndicated revolving US$350,000 thousand pre-export finance facility, of which US$131,250 thousand is available (2016: $306,250 thousand) and US$112,500 thousand is drawn (2016: US$306,250 thousand). The amortisation of this facility commenced in November 2016 with eight quarterly amortisations and commitment reductions of US$43,750 thousand to the final maturity date of 8 August 2018; and − an undrawn syndicated revolving US$195,000 thousand pre-export finance facility, which was secured on 16 November 2017. Following a grace period, the facility will be amortised in eight quarterly instalments. The first instalment is due on 31 March 2019 and the final maturity date is 31 December 2020. The Company earns guarantee fees from its subsidiaries for the financial guarantees provided in respect of the Group’s finance facilities aforementioned. Note 7: Share capital and reserves As at 31 December 2017, share capital and reserves comprised: US$000 At 1 January 2016 Profit for the period Total comprehensive income for the period Share-based payments At 31 December 2016 Profit for the period Total comprehensive income for the period Equity dividends paid to shareholders Share-based payments At 31 December 2017 Issued capital Share premium Treasury share reserve Employee benefit trust reserve Retained earnings Total capital and reserves 121,628 185,112 (77,260) (5,497) 769,007 992,990 − − − − − − − − − − − 389 19,403 19,403 19,403 19,403 − 389 121,628 185,112 (77,260) (5,108) 788,410 1,012,782 − − − − − − − − − − − − − − − 24,562 24,562 24,562 24,562 (77,332) (77,332) 586 − 586 121,628 185,112 (77,260) (4,522) 735,640 960,598 Share capital 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 the Company at 31 December 2017 was 613,967,956 Ordinary Shares (2016: 613,967,956) at a par value of £0.10 paid for in cash, resulting in share capital of US$121,628 thousand (2016: US$121,628 thousand) per the statement of financial position. Treasury share reserve In September 2008, the Company completed a buy-back of 25,343,814 shares for a total cost of US$77,260 thousand (2016: 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 used to satisfy future grants for senior management incentive schemes. As at 31 December 2017, the employee benefit trust reserve includes 2,916,419 shares (2016: 3,024,899 shares). Distributable reserves The Company is the Group’s holding company, with no direct operating business, so its ability to make distributions to its shareholders is dependent on its ability to access profits held in the subsidiaries. The Company’s retained earnings shown in the statement of changes in equity as of 31 December 2017 do not reflect the profits that are available for distribution by the Company as of this date. Taking into account relevant thin capitalisation rules and dividend-related covenants for the Group’s major bank debt facilities, the total available distributable reserves of Ferrexpo plc is US$197,236 thousand as of 31 December 2017. Note 8: Events after the reporting period No material adjusting or non-adjusting events have occurred subsequent to the year end other than the proposed dividends disclosed in Note 13 “Earnings per share and dividends paid and proposed” to the consolidated financial statements. Ferrexpo plc 2017 Annual Report & AccountsFINANCIAL STATEMENTS ADDITIONAL DISCLOSURES 149 See Note 32 for further information on the Group. Unless otherwise stated, the equity interest disclosed includes ordinary or common shares which are owned by subsidiaries of the Group. Name Address of consolidated subsidiary’s registered office Principal activity Equity interest owned 31.12.17 % 31.12.16 % Consolidated subsidiaries Ferrexpo AG Bahnhofstrasse 13, 6340 Baar, Switzerland Holding company and sale of iron ore pellets 100.0 100.0 PJSC Ferrexpo Poltava Mining 1 Budivelnykiv Street 16, 39802 Horishni Plavni, Poltava Region, Ukraine LLC Ferrexpo Yeristovo Mining Budivelnykiv Street 15, 39802 Horishni Plavni, Poltava Region, Ukraine LLC Ferrexpo Belanovo Mining Budivelnykiv Street 15, 39802 Horishni Plavni, Poltava Region, Ukraine Iron ore mining Iron ore mining Iron ore mining Ferrexpo Middle East FZE P.O. Box 18341, The Galleries – 04 1203, Jebel Ali Down Town, Dubai, U.A.E. Sale of iron ore pellets Ferrexpo Finance plc 55 St James’s Street, London SW1A 1LA, United Kingdom Ferrexpo Services Limited Patris Lumumba Street 4/6, 01042 Kyiv, Ukraine Universal Services Group Ltd. Patris Lumumba Street 4/6, 01042 Kyiv, Ukraine DP Ferrotrans Portova Street 65, 39802 Horishni Plavni, Poltava Region, Ukraine United Energy Company LLC Bydivelnykiv Street 16, 39802 Horishni Plavni, Poltava Region, Ukraine Nova Logistics Limited Budivelnykiv Street 16, 39802 Horishni Plavni, Poltava Region, Ukraine Finance Management services and procurement Asset holding company Trade, transportation services Holding company Service company 99.0 100.0 100.0 100.0 100.0 100.0 100.0 99.0 99.0 51.0 Ferrexpo Singapore PTE Ltd. Marina Boulevard #05-02, Marina Bay Financial Centre, 018981 Singapore, Singapore Marketing services 100.0 Ferrexpo Hong Kong Limited 2 Wing on Centre 16/F, 111 Connaught Road Central, Hong Kong, HK Ferrexpo Shipping International Ltd. Ajeltake Road, MH-96960 Ajeltake Island – Majuro, Marshall Islands Iron Destiny Ltd. Arlington Ltd. 3 Ajeltake Road, MH-96960 Ajeltake Island – Majuro, Marshall Islands PO Box 296, Sarnia House, Le Truchot, GY1 4NA St Peter Port, Guernsey First-DDSG Logistics Holding GmbH Handelskai 348, 1020 Wien, Austria EDDSG GmbH Handelskai 348, 1020 Wien, Austria DDSG Tankschiffahrt GmbH Handelskai 348, 1020 Wien, Austria DDSG Services GmbH Handelskai 348, 1020 Wien, Austria DDSG Mahart Kft. Sukorói út 1., 8097 Nadap, Hungary Pancar Kft. Sukorói út 1., 8097 Nadap, Hungary Ferrexpo Port Services GmbH Handelskai 348, 1020 Wien, Austria Transcanal SRL Ecluzei Street 1, Agigea, Constanta, Romania Helogistics Asset Leasing Kft. Sukorói út 1., 8097 Nadap, Hungary LLC DDSG Ukraine Holding Patris Lumumba Street 4/6, 01042 Kyiv, Ukraine LLC DDSG Invest Patris Lumumba Street 4/6, 01042 Kyiv, Ukraine LLC DDSG Ukraine Shipping Management Patris Lumumba Street 4/6, 01042 Kyiv, Ukraine Marketing services Holding company Shipping company Holding company Holding company Barging company Barging company Service company Barging company Barging company Port services Port services Asset holding company Holding company Asset holding company Barging company LLC DDSG Ukraine Shipping Radhospna Street 18, 39763 Kamiani Potoky, Kremenchuk District, Poltava Region, Ukraine Asset holding company Ferrexpo Poltava Mining Charity Fund4 Heroiv Dnipra Street 23-a , 39802 Horishni Plavni, Poltava Region, Ukraine Charity fund – 100.0 100.0 – 100.0 100.0 100.0 100.0 100.0 100.0 100.0 77.6 100.0 100.0 100.0 100.0 100.0 100.0 99.0 100.0 100.0 100.0 100.0 100.0 100.0 99.0 99.0 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 77.6 100.0 100.0 100.0 100.0 100.0 100.0 Associate TIS Ruda LLC Available-for-sale investments 5 PJSC Stakhanov Railcar Company Vostok Ruda LLC LLC Atol CJSC AMA CJSC Amtek Chapaieva Street 50, 67543 Vizirka Village, Odesa Region, Ukraine Port development 49.4 49.4 Rail car producer Iron ore mining Gas Gas Gas 1.1 1.1 9.9 9.0 9.0 1.1 1.1 9.9 9.0 9.0 In November 2017, the Group increased its shareholding by 0.019%. The entity was liquidated in September 2017. 1 2 3 The entity was dissolved in February 2017. 4 Charity fund controlled by the Group through its CSR committees. 5 All investments relate to companies incorporated in Ukraine and are fully impaired. Ferrexpo plc 2017 Annual Report & AccountsFINANCIAL STATEMENTSSTRATEGIC REPORTCORPORATE GOVERNANCE 150 ALTERNATIVE PERFORMANCE MEASURES When assessing and discussing the Group’s reported financial performance, financial position and cash flows, management may make reference to Alternative Performance Measures (“APMs”) that are not defined or specified under International Financial Reporting Standards (“IFRS”). APMs are not uniformly defined by all companies, including those in the Group’s industry. Accordingly, the APMs used by the Group may not be comparable with similarly titled measures and disclosures made by other companies. APMs should be considered in addition to, and not as a substitute for or as superior to, measures of financial performance, financial position or cash flows reported in accordance with IFRS. Ferrexpo makes reference to the following APMs in the 2017 Annual Report. C1 cash cost of production Definition: Non-financial measure, which represents the cash costs of production of iron pellets from own ore divided by production volume of own production ore. Non-C1 cost components include non-cash costs such as depreciation, inventory movements and costs of purchased ore and concentrate. The Group presents the C1 cash cost of production because it believes it is a useful operational measure of its cost competitiveness compared to its peer group. US$000 C1 cash costs Non-C1 cost components Cost of sales – pellet production Own ore produced (tonnes) C1 cash cost per tonne (US$) Year ended 31.12.17 335,451 31,745 367,196 Year ended 31.12.16 (audited) 306,611 53,884 360,495 10,394,440 11,071,404 32.27 27.7 Underlying EBITDA Definition: The Group calculates the underlying EBITDA as profit before tax and finance plus depreciation and amortisation and net gains and losses from disposal of investments and property, plant and equipment and share-based payments and operating and non-operating special items, including write-offs and impairment losses and other exceptional items. The underlying EBITDA is presented because it is a useful measure for evaluating the Group’s ability to generate cash and its operating performance. See Note 5 for further details. Closest equivalent IFRS measure: Profit before tax and finance. Rationale for adjustment: The Group presents the underlying EBITDA as it is a useful measure for evaluating its ability to generate cash and its operating performance. It excludes the impact of special items that can mask underlying changes in performance. Also it aids comparability across peer groups as it is a measurement that is often used. Reconciliation to closest IFRS equivalent: US$000 Underlying EBITDA Losses on disposal of property, plant and equipment Share-based payments Operating special items Non-operating special items Depreciation and amortisation Profit before tax and finance Notes Year ended 31.12.17 Year ended 31.12.16 550,705 375,243 (7,754) (4,446) 28 10 10 (586) (407) – (389) (2,501) (8,525) (46,392) (50,671) 495,566 308,711 Ferrexpo plc 2017 Annual Report & AccountsFINANCIAL STATEMENTS 151 Underlying diluted earnings per share before special items Definition: Earnings per share excluding special items and calculated using the diluted number of Ordinary Shares outstanding. Closest equivalent IFRS measure: Diluted earnings per share. Rationale for adjustment: Excludes the impact of special items that can mask underlying changes in performance. Reconciliation to closest IFRS equivalent: Earnings/(loss) for the year attributable to equity shareholders per share Basic (US cents) Diluted (US cents) Before special items Special items Year ended 31.12.17 Before special items Special items Year ended 31.12.16 66.53 66.30 0.56 0.55 67.09 66.85 33.60 33.51 (1.60) (1.60) 32.00 31.91 Net debt to underlying EBITDA Definition: Net debt divided by the underlying EBITDA (for the last 12 months): US$000 Net debt (US$000) Underlying EBITDA (US$000) Net debt to underlying EBITDA As at 31.12.17 As at 31.12.16 (403,322) (588,951) 550,705 375,243 0.73x 1.57x Rationale for adjustment: The ratio is a measurement of the underlying EBITDA Group’s leverage, calculated as a company’s interest- bearing liabilities minus cash or cash equivalents, divided by its underlying EBITDA. Reconciliation to net debt: US$000 Cash and cash equivalents Interest-bearing loans and borrowings – current Interest-bearing loans and borrowings – non-current Net debt Notes As at 31.12.17 As at 31.12.16 25 26 26 97,742 144,751 (314,770) (228,061) (186,294) (505,641) (403,322) (588,951) For a reconciliation of underlying EBITDA to profit before tax and finance see page 150. Capital investment Definition: Capital expenditure for the purchase of property, plant and equipment and intangible assets. Closest equivalent IFRS measure: Purchase of property, plant and equipment and intangible assets (net cash flows used in investing activities). Rationale for adjustment: The Group presents the capital investment as it is a useful measure for evaluating the degree of capital invested in its business operations. Reconciliation to closest IFRS equivalent: US$000 Purchase of property, plant and equipment and intangible assets (net cash flows used in investing activities) Notes As at 31.12.17 As at 31.12.16 14/15 102,953 48,176 Ferrexpo plc 2017 Annual Report & AccountsFINANCIAL STATEMENTSSTRATEGIC REPORTCORPORATE GOVERNANCE 152 ALTERNATIVE PERFORMANCE MEASURES CONTINUED Total liquidity Definition: Sum of cash and cash equivalents and available facilities. Closest equivalent IFRS measure: Cash and cash equivalents. Rationale for adjustment: The Group presents total liquidity as it is a useful measure for evaluating its ability to meet short-term business requirements. Reconciliation to closest IFRS equivalent: US$000 Cash and cash equivalents Available facilities Total liquidity As at 31.12.17 As at 31.12.16 97,742 144,751 213,750 – 311,492 144,751 Ferrexpo plc 2017 Annual Report & AccountsFINANCIAL STATEMENTS GLOSSARY 153 Act AGM The Companies Act 2006 The Annual General Meeting of the Company Articles The Articles of Association of the Company Audit Committee The Audit Committee of the Company’s Board Bank F&C Bank Finance & Credit Belanovo or Bilanivske 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 BIP Business Improvement Programme, a programme of projects to increase production output and efficiency at FPM blast furnace pellets Used in Basic Oxygen Furnace “BOF” steelmaking and constitute about 70% of the traded pellet market Board BT C1 costs capesize The Board of Directors of the Company Billion tonnes Represents 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 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 the Suez Canal capital employed The aggregate of equity attributable to shareholders, non-controlling interests and borrowings Central Europe This segmentation for the Group’s sales includes Austria, the Czech Republic, Hungary, Serbia and Slovakia CFR Delivery including cost and freight China & South East Asia This segmentation for the Group’s sales includes China and Vietnam CIF CIS Code CODM Delivery including cost, insurance and freight The Commonwealth of Independent States The UK Corporate Governance Code The Executive Committee is considered to be the Group’s Chief Operating Decision-Maker 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 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 Ferrexpo plc 2017 Annual Report & AccountsFINANCIAL STATEMENTSSTRATEGIC REPORTCORPORATE GOVERNANCE 154 GLOSSARY CONTINUED Directors The Directors of the Company Direct reduction “DR” pellets Used in Direct Reduction Iron “DRI” production. In regions where natural gas is cheap and plentiful, such as the Middle East, DR pellets are mixed with natural gas to produce DRI, an alternative source of metallic to scrap in Electric Arc Furnace “EAF” steelmaking. DR pellets are niche, higher quality product with Fe content greater than 67% and a combined level of silica and alumina of <2% EBT EPS 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 The Company and its subsidiaries Ferrexpo AG Group Ferrexpo AG and its subsidiaries, including FPM Fevamotinico 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 river corridor FOB FPM FRMC FTSE 250 FYM GPL Group HSE IAS IASB IFRS IPO 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 Finance & 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 Gorishne-Plavninske-Lavrykivske, the iron ore deposit being mined by FPM The Company and its subsidiaries 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 pellets Balled and fired agglomerate of iron ore concentrate, whose physical properties are well suited for transportation to and reduction within a blast furnace iron ore sinter fines Fine iron ore screened to -6.3mm JORC K22 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) Ferrexpo plc 2017 Annual Report & AccountsFINANCIAL STATEMENTS 155 KPI KT LIBOR LLC LTIFR LTIP m3 Key Performance Indicator Thousand tonnes The London Inter Bank Offered Rate Limited Liability Company (in Ukraine) 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 NBU Millimetre Million tonnes Million tonnes per annum National Bank of Ukraine 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 North East Asia This segmentation for the Group’s sales includes Japan and Korea 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 and 90,000 tonnes of cargo and can transit both the 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 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 sinter 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 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 Ferrexpo plc 2017 Annual Report & AccountsFINANCIAL STATEMENTSSTRATEGIC REPORTCORPORATE GOVERNANCE 156 spot price sterling/£ STIP tailings tolling ton GLOSSARY CONTINUED The current price of a product for immediate delivery Pounds 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 with 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 TSR UAH Tailings storage facility 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 Ukrainian Hryvnia, the currency of Ukraine Ukr SEPRO The quality certification system in Ukraine, regulated by law to ensure conformity with safety and environmental standards underlying EBITDA The Group calculates the underlying EBITDA as profit before tax and finance plus depreciation and amortisation and net gains and losses from disposal of investments and property, plant and equipment and share-based payments and operating and non-operating special items, including write-offs and impairment losses and other exceptional items underlying EBITDA margin Underlying EBITDA (see definition above) as a percentage of revenue US$/t US dollars per tonne value-in-use VAT WAFV 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 Value added tax Weighted average fair value Western Europe This segmentation for the Group’s sales includes Germany and Italy WMS Wet magnetic separation Yeristovo or Yerystivske The deposit being developed by FYM Ferrexpo plc 2017 Annual Report & AccountsFINANCIAL STATEMENTS SHAREHOLDER INFORMATION Registered Office 55 St James’s Street London SW1A 1LA www.ferrexpo.com Advisers Share Registrars Equiniti Aspect House Spencer Road Lancing West Sussex BN99 6DA Financial J.P. Morgan Cazenove Ltd 25 Bank Street London E14 5JP Corporate Brokers J.P. Morgan Cazenove Ltd 25 Bank Street London E14 5JP Deutsche Bank AG Winchester House 1 Great Winchester Street London EC2N 2DB Legal Herbert Smith Freehills Exchange House Primrose Street London EC2A 2EG Auditors Deloitte LLP 2 New Street Square London EC4A 3BZ United Kingdom WWW.FERREXPO.COM F E R R E X P O P L C 2 0 1 7 A N N U A L R E P O R T & A C C O U N T S FERREXPO PLC 55 ST JAMES’S STREET, LONDON SW1A 1L A T +44 (0)20 7389 8300