ANNUAL REPORT
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A
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S
for over 40 years
SINCE 1977, FERREXPO HAS SUPPLIED
HIGH QUALITY IRON ORE PELLETS TO
THE WORLD’S STEEL INDUSTRY. WE
HAVE BEEN LISTED ON THE LONDON
STOCK EXCHANGE FOR OVER 10 YEARS.
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.
For more information
See pages 20-23
BUT IT’S THE FUTURE THAT INSPIRES US.
OUR VISION IS TO KEEP ON GROWING BY
DEVELOPING OUR PLENTIFUL RESOURCES
AND ENABLING OUR PEOPLE TO PERFORM
TO THEIR BEST.
01
Ferrexpo plc
Annual Report & Accounts 2018
GROUP PERFORMANCE 2018
LOST TIME INJURY FREQUENCY R ATE
TOTA L PRODUCTION
1.18x
Group LTIFR in line with 2017 (2017: 1.17x)
1 fatality during the year (2017: 1)
10.6MT
94% of production of 65% Fe pellets (2017:
total production 10.4Mt, 95% of production
of 65% Fe pellets)
RE V ENUE
US$1.3BN
(2017: US$1.2BN)
UNDERLYING EBITDA A
PROFIT FOR THE Y E A R
US$503M
(2017: US$551M)
US$335M
(2017: US$394M)
DILUTED EPS
56.7¢
(2017: 66.9 US CENTS)
NE T CASH FLOW FROM
OPER ATING ACTIVITIE S
US$292M
(2017: US$353M)
NE T DEBT TO EBITDA A
0.67x
(2017: 0.72x)
DIVIDEND PER SH A RE
23.1¢
(2017: 16.5 US CENTS PER SHARE)
A LT E R N AT I V E
P E R F O R M A N C E M E A S U R E S
Words with the symbol A
are defined in the Alternative
Performance Measures
section of the Annual Report
on pages 169-171.
S T R AT E G I C R E P O R T
Welcome to Ferrexpo
Group Performance 2018
Ferrexpo at a Glance
High Value Sector
Long-Life Resource Base
Low Cost and Well Invested Production
Process
High Quality Product
Established Logistics
World Class Customer Base
Sustainable Future
Business Model
Production Process
Chairman’s Statement
Market Review
Performance Review
Strategic Framework
Key Performance Indicators
Risk Management
Principal Risks
Viability Statement
Responsible Business
C O R P O R AT E G O V E R N A N C E
Board of Directors
Executive Committee
Corporate Governance Report
Independent Review Committee Report
Audit Committee Report
Nominations Committee Report
Relations with Shareholders
Remuneration Report
Directors’ Report
Statement of Directors’
Responsibilities
F I N A N C I A L S TAT E M E N T S
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
03
04
05
06
07
08
09
10
12
16
20
24
32
34
36
38
48
49
60
62
63
69
71
76
77
78
94
98
100
110
111
112
113
114
115
162
164
168
169
172
176
STRATEGIC REPORTCORPORATE GOVERNANCEFINANCIAL STATEMENTS 02
Ferrexpo plc
Annual Report & Accounts 2018
FERREXPO AT A GLANCE
Ferrexpo’s strong
business profile
enables the Company
to create long-term
sustainable value
for all stakeholders.
01 HIGH VALUE
SECTOR
Ferrexpo’s products are used to create
high value steels that are used for
sophisticated end-user products.
For more information
See page 3
02 LONG-LIFE
RESOURCE BASE
Ferrexpo has a significant resource base
with 6.5 billion tonnes of JORC classified
resources and 13 billion tonnes of FSU
classified resources.
For more information
See page 4
03 LOW COST AND
WELL INVESTED
PRODUCTION
PROCESS
Ferrexpo is one of the lowest cost pellet
producers in the world. Since its IPO in
2007, it has invested over US$2.3 billion
into modernising and expanding
its operations.
For more information
See pages 5, 12-15
04 HIGH QUALITY
PREMIUM PRICED
PELLETS
05 ESTABLISHED
LOGISTICS
INFRASTRUCTURE
Ferrexpo receives a price premium for its
product compared to the benchmark
62% Fe iron ore fines price, CFR China.
The Group exports all of its production
and transports its pellets by rail, barge or
sea to customers around the world.
For more information
See pages 6, 20-23, 25
For more information
See page 7
06 WORLD CLASS
CUSTOMER BASE
Ferrexpo has a high quality customer list
consisting of the most ‘crisis-resistant’
steel mills in the world.
For more information
See pages 8, 29
07 SUSTAINABLE
FUTURE
Ferrexpo has been profitable through
every trough in the commodities cycle
due to its well invested asset base,
long-term customer relationships, skilled
workforce and high quality product. This
ensures the Group can continue to make
a positive contribution to the societies in
which it operates.
For more information
See pages 9, 49-59
03
Ferrexpo plc
Annual Report & Accounts 2018
HIGH VALUE SECTOR
Supply of pellets peaked in 2010 at c.150MT
MT
Exports of pellet feed
Exports of pellets
Exports of lump
Exports of fines
Total exports
2010
exports
30
151
160
759
1,100
2018
exports
91
132
285
1,133
1,641
% change
vs 2010
203%
(13)%
78%
49%
49%
Source: management estimates and CRU (Market Outlook January 2019)
Iron ore pellets are the highest value
form of iron ore. It is a niche market
with high barriers to entry, including
the requirement to beneficiate and
upgrade the iron ore and high capital
costs to establish a full mine-to-port
pelletising operation. Pellets are the
most productive source of iron ore a
steel mill can use.
8%PELLETS MAKE UP 8%
OF GLOBAL IRON ORE EXPORTS
IRON ORE FINES/
LUMP/PELLET FEED
Fines (150μm – 6.8mm)
– From hematite ore, c.70% of global
iron ore exports
– Global benchmark for iron ore pricing
–
Agglomerated into ‘sinter’ at the sinter
plant of a steel mill before use in a
furnace. The resultant operating cost
causes fines to have a lower
relative value
Lump (6.8mm – 15mm)
– From hematite. c.17% of global exports
Can be charged directly into furnace,
–
enabling steel producer to avoid
sintering, thus sold at premium to fines
Pellet feed (60μm – 150μm)
–
From magnetite – also known as
concentrate, c.6% of global exports
– Lowest value form of iron ore, since the
required pelletising is more costly than
the sintering required for fines
IRON ORE
PELLETS
Pellets (10mm)
– From magnetite, c.8% of global exports
– Uniform in size and composition
(c.62-65% iron content)
– Highest value form of iron ore since
pellets are the most efficient source
of iron for a steel furnace
– Pellets reduce energy requirements, slag
volumes and air emissions in the
steelmaking process while improving the
quality of the final product…
– … and thus command a premium
on the market relative to fines, lump
and concentrate
– Manufactured by agglomeration
of concentrate (“pellet feed”) in a
pelletising plant
STRATEGIC REPORTCORPORATE GOVERNANCEFINANCIAL STATEMENTS 04
Ferrexpo plc
Annual Report & Accounts 2018
FERREXPO AT A GLANCE CONTINUED
02
LONG-LIFE
RESOURCE BASE
Ferrexpo’s significant magnetite resource
base is situated along a single ore body,
which allows for efficient expansion
through brownfield developments
Magnetite ore allows for isolation of iron
units so as to produce a uniform and high
iron content product. Magnetite ore is
exothermic which reduces energy
requirements and lowers costs.
4.0BT
BROVARKIVSKE
3.4BT
MANUILIVSKE
1.4BT
VASYLIVSKE
1.7BT
BILANIVSKE
3.4BT
GORISHNE-PLAVNINSKE-
LAVRYKIVSKE (“GPL”)
0.3BT
GALESCHYNSKE
JORC CLASSIFIED RESOURCES
FORMER SOVIET UNION (NON-JORC)
CLASSIFIED RESOURCES
2.8BT
KHARCHENKIVSKE
1.5BT
ZARUDENSKE
1.1BT
YERYSTIVSKE
RATES, THE GROUP HAS
ENOUGH RESERVES FOR
OVER 40 YEARS OF
PRODUCTION
+40 AT CURRENT PRODUCTION
JORC Reserve Statements as at 1 January 20191
13BT
FORMER SOVIET
UNION CLASSIFIED
RESOURCE
6.5BT
JORC CLASSIFIED RESOURCES
Deposit
Gorishne-Plavninske-Lavrykivske (“GPL”)
Yerystivske
JORC Reserves
JORC Resource Statements as at 1 January 2019²
Proved
Mt
169
195
364
Fe total
%
Fe magnetic
%
Probable
Mt
Fe total
%
Fe magnetic
%
27
34
31
17
27
22
516
417
933
30
32
31
22
25
23
Deposit
Gorishne-Plavninske-Lavrykivske (“GPL”)
Yerystivske
Bilanivske
Galeschynske
JORC Resources
Measured
Mt
Fe total
%
Fe
magnetic
%
Indicated
Mt
Fe total
%
Fe
magnetic
%
Inferred
Mt
Fe total
%
Fe
magnetic
%
312
200
336
–
848
30
34
31
–
31
20
27
24
–
23
1,645
556
1,149
268
3618
31
33
31
55
33
23
26
23
–
22
1,442
364
217
58
2081
31
30
30
55
31
23
23
21
–
22
1. The ore reserves estimates for the GPL deposits were calculated based on a review conducted by Turgis DHV Mining Consultants in May 2009 less the volume of ore mined from GPL
deposits between May 2009 and 31 December 2018.
2. The ore reserve estimates are based on a report by Royal Haskoning DHV dated September 2013. The ore reserves estimates for Yerystivske deposit has been depleted in line with the
volume of ore mined between September 2013 and 31 December 2018.
05
Ferrexpo plc
Annual Report & Accounts 2018
03
LOW COST AND
WELL INVESTED
PRODUCTION
PROCESS
CAPITAL INVESTMENTA (US$M)
– Since 2007, the Group has
increased output of 65% Fe pellets
by 168%
– Since 2007, the Group has
increased total annual production
volumes by 17%
– By 2021, the Group plans to
increase production volumes
by 15% to 12Mt
– Thereafter, the Group aims to
increase production volumes
to 20Mt
07
08
09
10
11
12
13
14
15
16
17
18
105
Acquired 49.5% of berth at Port Yuzhny
enabling seaborne shipments
276
Start of development of FYM
(new open pit mine)
86
167
Acquired barging operation on
Danube River to transport pellets
378
Commenced modernisation
& quality upgrade programme
at FPM
430
First ore
at FYM
278
First shipment of capesize vessels to
customers in Asia
232
Completion of FPM’s quality upgrade programme
& ramp up of premium 65% Fe pellets; refurbishment
of first pellet line
65
Increased ownership of rail cars to
transport 80% of production volumes
48
103
Commencement of Concentrator Expansion
Programme (“CEP1”); refurbishment of second pellet
line
US$2.3BN
INVESTED SINCE IPO
135
Completion of Medium Fine Crushing 1 (“MFC1”), increased
maintenance vs. 2015 and 2016; refurbishment of third pellet line
19–2021
Refurbishment of final pellet line;
New concentrate storage area; completion of engineering studies for pellet expansion to 20Mt+
Completion of CEP1 – increase in pellet feed output by c.1-1.5MtPA; completion of MFC2
Increase in pellet output to 12Mt
20 MTPA
Future projects not yet Board approved, engineering studies in progress,
continue to increased pellet quality, commencement of CEP2 pellet and plant upgrade
STRATEGIC REPORTCORPORATE GOVERNANCEFINANCIAL STATEMENTS 06
Ferrexpo plc
Annual Report & Accounts 2018
FERREXPO AT A GLANCE CONTINUED
04
HIGH QUALITY
PREMIUM PRICED
PELLETS
In 2015, the Group completed its Quality Upgrade
Programme to increase average iron content of its
pellets to 65% Fe. As such, production of 65% Fe
pellets has increased from 53% total output in 2014
to 94% in 2018. Ferrexpo receives a price premium
for its product, which is supported by high cost
pellet producers with large market share (as can be
seen from the cost curve below).
Improvement in Ferrexpo’s Pellet Price
Following its Quality Upgrade Investment
Programme
94%
95%
94%
89%
43%
46%
53%
PREMIUM 65% FE
PELLET PRODUCTION
94%
CRU Breakeven Pellet Cost Curve to China
y-axis: Business costs for pellet exports, 2018, US$/dmt CFR China
x-axis: Cumulative pellet exports, 2018, Mt (dry)
2012
2013
2014
2015
2016
2017
2018
62% Fe fines price Platts CFR China
Ferrexpo realised price
Ferrexpo’s % production of 65% Fe pellet
FERREXPO IS ONE OF THE
LOWEST COST PELLET
PRODUCERS IN THE WORLD
* Delivery to China assumes all
shipments from all producers
go to the Chinese market,
which has a higher pellet
premium than other pellet
markets.
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.
07
Ferrexpo plc
Annual Report & Accounts 2018
ESTABLISHED LOGISTICS
INFRASTRUCTURE The Group’s logistics
infrastructure enables it to
transport its pellets by rail to the
western border of Ukraine to
connect with the European rail
network, by barge on the Danube
River into Europe and by capesize
vessel from its TIS Ruda Terminal
in the southern port of Yuzhny.
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
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
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
D N I E P E R R IV E R
S E A O F A Z OV
P OR T I Z M A IL
C R I M EA
P OR T C O N ST A N T A
SAILING TIME TO ASIA
UKRAINE/30 DAYS
BRAZIL/40 DAYS
NORWAY/50 DAYS
CANADA/55 DAYS
AVERAGE NUMBER CAPESIZE VESSELS
LOADED PER YEAR
20
156 OWN
2,252OWN RAIL CARS
BARGES
STRATEGIC REPORTCORPORATE GOVERNANCEFINANCIAL STATEMENTS 08
Ferrexpo plc
Annual Report & Accounts 2018
FERREXPO AT A GLANCE CONTINUED
WORLD CLASS
CUSTOMER BASE
CENTRAL EUROPE
47%
WESTERN EUROPE
TURKEY, MIDDLE
EAST & INDIA
*
16%
6%
* A trial shipment to the US
accounted for just under 1%
of sales volume in 2018.
CHINA & SOUTH
EAST ASIA
13%
NORTH
EAST ASIA
17%
Ferrexpo’s world class
customer base produces high
quality steels for value added
finished products. These
customers look to operate
efficiently and to reduce
their CO2 footprint.
3RD
LARGEST EXPORTER OF
PELLETS IN THE WORLD
High Quality Sales Portfolio
The Group has continued to implement its
strategy of selling the vast majority of its
production under long-term contracts with
crisis-resistant customers. During 2018, in
both Asia and Europe, several long-term
contracts were renewed or extended whilst
new markets continued to be developed
toward long-term business in the future.
In this regard, during the year, the Group
made its first trial shipment of DR pellets to
North America representing just under 1%
of sales volumes in 2018.
GLOBAL PELLET EXPORTERS IN 2018
Company
Vale (Brazil + Oman)
LKAB
Ferrexpo
IOC
India
QCM
Severstal
Bahrain Steel
US Steel
Cliffs
Metalloinvest
CMP
Grange
Evraz
Subtotal
Others
Total
Market
Share
2018
Pellet Exports
in 2018
(Mt)
BF Pellets
in 2018
DR Pellets
in 2018
33.4%
14.3%
7.7%
6.3%
5.8%
4.2%
4.2%
4.2%
4.0%
3.8%
3.2%
2.2%
1.6%
0.5%
44.1
18.8
10.2
8.3
7.6
5.6
5.5
5.5
5.3
5.0
4.2
3.0
2.1
0.6
95.4%
125.9
4.6%
6.0
100.0%
131.9
19.9
11.9
10.2
7.0
7.5
5.0
4.0
0.0
2.9
0.6
4.2
2.9
2.1
–
78.3
4.2
82.5
24.1
6.9
0.0
1.3
0.1
0.5
1.5
5.5
2.4
4.4
0.0
0.1
0.0
0.6
47.6
1.8
49.4
Note - ‘Other’ category includes CRU estimate of exports from the following countries: Iran, Venezuela and CIS outside of
Ukraine/Russia, in addition to Metinvest.
09
Ferrexpo plc
Annual Report & Accounts 2018
SUSTAINABLE
FUTURE
LARGEST EMPLOYER IN POLTAVA REGION
IN 2018
9,035 STAFF EMPLOYED
1,620 CONTRACTORS
EMPLOYED IN 2018
Ferrexpo has a sustainable
long-term profile due to
investment in its operations
and its strong customer base.
This ensures the future viability
of the business and continued
support for the community
and Ukraine.
Ferrexpo is a major user and
payer of state infrastructure
(railways, electricity, gas, port)
through the commodities cycle.
IN THE FORMER SOVIET UNION#1
EXPORTER OF IRON ORE PELLETS
LARGEST EXPORTER OF IRON ORE
PELLETS IN THE FORMER SOVIET UNION
2.0%
OVER
US$700M
FERREXPO
ACCOUNTED
FOR 2.0% OF
UKRAINE’S
TOTAL GOODS
EXPORTED
IN 2018.
TOTAL TAXES
PAID IN
UKRAINE
SINCE 2007.
DRIVERS OF
PELLET DEMAND
Environmental
– Government regulations in China require mills to
use higher quality iron ore to lower emissions
– Increasing CO2 costs in Europe
Productivity
– Chinese government looking to move steel
production up the value chain – this generally
requires lower impurity ores
– Steel capacity closures in China and Europe
should support steel prices in the medium term
driving demand for higher productivity raw
materials
– Pellets are a growth enabler for steel mills in case
of sinter or blast furnace bottlenecks
Natural Decline of High Grade Ore Reserves
and Rising Coking Coal Costs
– Decline of high quality lump
– Increasing supply of ultrafine ores
– Depletion of low alumina and low phosphate
ores in Australia
– Pellet use reduces coke requirements
Rise of DRI Production in MENA, CIS and USA
– DR pellets account for a third of the global pellet
market, +25% since 2010
STRATEGIC REPORTCORPORATE GOVERNANCEFINANCIAL STATEMENTS 10
Ferrexpo plc
Annual Report & Accounts 2018
BUSINESS MODEL
We create value for our stakeholders through the careful
development of our long-life iron ore deposit in Ukraine into a high
quality iron ore product. Vital to our ongoing success are the people
who we employ, investment into our operations, our diversified
global customer base and the support of our communities.
OUR KEY RESOURCES
WHAT WE DO
SUSTAINABLE STAKEHOLDER RELATIONSHIPS
– LONG-LIFE IRON ORE DEPOSIT
IN UKRAINE
– WELL INVESTED PRODUCTION
PROCESS
– SKILLED WORKFORCE
– INFRASTRUCTURE NETWORK
(WITH ACCESS TO WATER/ELECTRICITY/GAS)
– GLOBAL LOGISTICS CAPABILITY
– CUSTOMER RELATIONSHIPS
(WITH HIGH QUALITY ‘CRISIS-RESISTANT’ STEEL MILLS)
– FINANCIAL STABILITY
ORE EXTRACTION
DRILLING
BLASTING
EXCAVATION
HAULAGE
ORE TO CRUSHER
PELLETISING
THICKENING
FILTRATION
BALLING
INDURATION
OUR MARKETING POSITION
We operate in a niche market with high barriers to entry. Our
significant capital and operational investments enable the business
to be cash generative throughout the commodities cycle.
UNDERPINNED BY OUR VALUES
Our key value is to ensure the safety of all our employees from those
working at our mines and processing facility in Ukraine, to those in
our logistics and marketing operations located around the world.
11
Ferrexpo plc
Annual Report & Accounts 2018
OUR KEY RESOURCES
WHAT WE DO
SUSTAINABLE STAKEHOLDER RELATIONSHIPS
– CUSTOMERS
Revenue generated
– EMPLOYEES
Wages and salaries paid
– COMMUNITIES
Charitable donations made
– GOVERNMENT
Taxes and royalties paid
– INVESTORS
Dividends declared for the
financial year
– SUPPLIERS
Money spent on suppliers
CRUSHING
COARSE CRUSHING
MEDIUM CRUSHING
SCREENING
FINE CRUSHING
DRY MAGNETIC SEPARATION
BENEFICIATION
GRINDING
CLASSIFICATION
HYDRO SEPARATION
MAGNETIC SEPARATION
FLOTATION UPGRADE
TAILINGS
(2017: US$28M)
(2017: US$64M)
(2017: US$1.2BN)
US$1.3BN
US$86M
US$15M
US$73M
23.1¢ per share
US$844M
(2017: 16.5 US CENTS PER SHARE)
(2017: US$33M)
(2017: US$717M)
OUR MARKETING POSITION
We operate in a niche market with high barriers to entry. Our
significant capital and operational investments enable the business
to be cash generative throughout the commodities cycle.
UNDERPINNED BY OUR VALUES
Our key value is to ensure the safety of all our employees from those
working at our mines and processing facility in Ukraine, to those in
our logistics and marketing operations located around the world.
STRATEGIC REPORTCORPORATE GOVERNANCEFINANCIAL STATEMENTS 12
Ferrexpo plc
Annual Report & Accounts 2018
PRODUCTION PROCESS
AN EFFICIENT AND
WELL INVESTED
PRODUCTION PROCESS
ORE EXTRACTION
Open cut, hard rock iron ore mining,
using truck and shovel. Average Fe
content of 31%.
BENEFICIATION
The ore is ground to produce
concentrate which is then upgraded to
67% Fe content. Waste material is
removed to the tailings storage area.
THE FINE ORE PARTICLES ARE COLLECTED
TO PRODUCE 67% FE CONCENTRATE
13
Ferrexpo plc
Annual Report & Accounts 2018
96% OF OUTPUT PARTICLES
WITH 35% FE CONTENT
35%
CRUSHING
The ore is crushed and screened
before entering one of two
crushing plants.
PELLETISING
Four kiln grate units heat and form
the pellet feed into pellets of
around 16mm.
To view our animated video
visit: www.ferrexpo.com/media/video-library
STRATEGIC REPORTCORPORATE GOVERNANCEFINANCIAL STATEMENTS 14
Ferrexpo plc
Annual Report & Accounts 2018
PRODUCTION PROCESS CONTINUED
DRILLING AND BLASTING
EXCAVATION
HAULING TO RELOADING POINT
MEDIUM CRUSHERS
SCREENING
FINE CRUSHING
BENEFICIATION
GRINDING IN MAIN MILLS
CLASSIFICATION IN SPIRAL CLASSIFICATORS
FLOTATION UPGRADE AREA
GRINDING IN VERTICAL MILLS
WET MAGNETIC SEPARATION
BLENDING ORE WITH BENTONITE AND LIMESTONE
BALLING
DRYING GREEN PELLETS IN TRAVELLING GRATE
15
Ferrexpo plc
Annual Report & Accounts 2018
LOADING TO DUMPCARS
TRANSPORTING TO CRUSHING FACILITY
PRIMARY CRUSHERS
SCREENING
DRY MAGNETIC SEPARATION
FINE CRUSHING
CLASSIFICATION IN HYDROCYCLONES
WET MAGNETIC SEPARATION
MAGNETIC-HYDRAULIC SEPARATION
FLOTATION
THICKENING
DEWATERING BY VACUUM FILTERS
INDURATION IN ROTARY KILN
TRANSPORTING BY RAIL
TRANSPORTING BY SEA VESSELS
STRATEGIC REPORTCORPORATE GOVERNANCEFINANCIAL STATEMENTS 16
Ferrexpo plc
Annual Report & Accounts 2018
CHAIRMAN’S STATEMENT
Steve Lucas, Chairman
Health and Safety
We deeply regret the fatality (2017: one) in
October 2018 of Maxim Blinkov, a
contractor at Ferrexpo Poltava Mining
(“FPM”), who was fatally injured after falling
from a height in the processing plant. 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 colleague.
For more information
See pages 29, 33, 42, 52
Year in Summary
I am pleased to report another strong year
for iron ore pellet demand with premiums
rising 30% over 2017 levels. In general,
the iron ore market in 2018 was notable
for its unusually low levels of volatility.
Average iron ore prices for 58% Fe fines
and the benchmark 62% Fe fines declined
marginally compared to 2017, while the
average price for 65% Fe fines increased
by 3%. Pellets, however, were an exception
as steel mills looked to boost productivity.
The steel industry experienced strong
profitability for most of 2018 due to high
global demand. As such, mills looked to
increase their utilisation rates to maximise
output, while in China mills also sought
to decrease their emissions by reducing
sintering and increasing use of higher
grade direct charge material, such as
pellet. Meanwhile, additional supply
of pellet was limited, resulting in pellet
premiums trading at ten-year highs.
In the 4Q of 2018, steel margins
contracted reflecting increased global
trade tensions and slower economic
activity, especially in China, while steel
output remained at relatively high levels.
As a result steel demand and profit
margins fell. To date in 1Q 2019, the steel
industry in China has seen a gradual
recovery in margins, while margins in
Europe have been slower to improve.
In 2018, commodity producers experienced
significantly higher oil prices with an
average 31% increase in the price of Brent
compared to 2017. This drove an increase
in Ferrexpo’s cost of pellet production
along with other external factors, such as
local PPI inflation of 18% while the Hryvnia
RECORD PROPOSED
DIVIDEND PAY-OUT
RATIO 41%
(2017: 25%)
17
Ferrexpo plc
Annual Report & Accounts 2018
RECORD DIVIDEND PROPOSED,
INCREASED CAPITAL INVESTMENTA
AND REDUCTION IN NET DEBT
RECORD PELLET
PREMIUM
RECEIVED IN 2018
TOTA L RECOMMENDED DIVIDEND
PER SH A RE
23.1¢
+40% (2017: 16.5 US CENTS)
REDUCTION IN NE T DEBT
60%SINCE 1 JANUARY 2016 TO US$339M
For further information
See pages 24-28
appreciated marginally against the US
Dollar adding further to cost pressures.
Ferrexpo remains a low cost producer
relative to the majority of its peers.
Underlying EBITDA for 2018 was US$503
million (2017: US$551 million). Profit for
the period was US$335 million (2017:
US$394 million) while net cash flows
from operating activities were US$292
million (2017: US$353 million).
Ferrexpo further strengthened its
balance sheet during 2018 and net debt
reduced for the third consecutive year
to US$339 million as of 31 December
2018 (31 December 2017: US$394
million). The Group has strong credit
metrics with net debt to underlying
EBITDA comfortably below 1 times.
Finally, I am pleased to report, subject to
shareholder approval, a record dividend
for the 2018 financial year of 23.1 US cents
per share, a 40% increase compared
to 2017 (16.5 US cents per share).
Industry
It is with immense sadness that we
saw reports of the catastrophic breach
of a tailings dam in Brazil in January
2019. As would be expected, there are
likely to be far-reaching consequences,
including increased scrutiny of the
global mining industry. Ferrexpo
supports the establishment of an
independent organisation to monitor the
safety of all tailings dams on a global
basis to ensure compliance with the
highest level of safety standards.
Ferrexpo operates one tailings dam
covering an area of 1,500 hectares. The
dam is constructed on flat topography
and the method of construction is the
Modified Centreline methodology. The
dam is inspected twice a year by the
Ukrainian mining regulator. Following
the breach in Brazil in January,
Ferrexpo appointed Knight Piesold, an
international independent consultant,
to further review and verify the dam’s
design, construction and monitoring.
For further information on the market
environment see Operational Review
See page 29
Iron Ore Pellet Market
Iron ore pellets are a niche market segment,
representing 8% of the total iron ore export
market, principally due to high barriers
to entry, including the requirement to
beneficiate and upgrade the iron ore and
the high capital intensity to establish a full
mine-to-port pelletising operation which
is typically in excess of US$300 per tonne
of output for a greenfield operation.
Pellets are one of the most efficient sources
of iron in the steelmaking process. This
has underpinned demand and profitability
for established pellet producers for many
years. As in the past, Ferrexpo continue to
believe long-term demand for pellet will be
supported by requirements for iron ore of
a higher grade and in a form that reduces
energy inputs, slag volumes and air
emissions in the steelmaking process while
improving the quality of the final product.
This is likely to be further supported by the
general decline of naturally occurring high
quality iron ore fines and lump as well as
ongoing consolidation in the steel industry
in China and Europe, which underpins
a general increase in utilisation rates.
For these reasons Ferrexpo expects
pellets to continue to receive a healthy
price premium relative to other types of
iron ore which will underpin the Group’s
profitability. The size of the premium,
however, is likely to vary in line with steel
mill profitability reflecting the cyclical nature
of the industry. Given the limited availability
of seaborne pellets, however, supply
disruptions can also influence pricing
until the market is able to adjust. The
Group expects reduced supply of global
pellet exports in 2019 and 2020 following
the major supply disruptions in Brazil.
With the best steel mills in the world
amongst Ferrexpo’s customers,
the Company is well positioned to
benefit from increasing demand.
For further information on the market
environment see Market Review
See pages 20-23
STRATEGIC REPORTCORPORATE GOVERNANCEFINANCIAL STATEMENTS
18
Ferrexpo plc
Annual Report & Accounts 2018
CHAIRMAN’S STATEMENT CONTINUED
Capital Allocation
The Group’s capital allocation strategy
is to maintain an appropriate balance
between investment grade credit metrics,
attractive 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.
Balance Sheet
During the year, Ferrexpo’s credit rating
was upgraded by Moody’s, Fitch and
S&P. Ferrexpo’s credit rating is restricted
by Ukraine’ country ceiling and the
Group’s rating should improve in line
with positive developments in Ukraine.
Ferrexpo aims to maintain prudent leverage
metrics with net debt to underlying EBITDA
as of 31 December 2018 at 0.67 times. The
Group’s priority since 2015 has been to
reduce debt and it has repaid over US$500
million of gross debt since 1 January 2016.
As such, the Board feels it is appropriate
to readjust the use of available free cash
flows from primarily deleveraging to include
a more balanced focus on dividends and
investment projects whilst ensuring the
Group’s credit metrics remain strong.
Dividends
The Board is pleased to announce a special
dividend of 6.6 US cents per share (2017
final special dividend: 6.6 US cents per
share) and propose a final ordinary dividend
per share of 6.6 US cents per share (2017
final ordinary dividend: 3.3 US cents
per share). If the final ordinary dividend
is approved by shareholders, the total
dividend declared for the 2018 financial
year will be a record 23.1 US cents per
share, equivalent to US$138 million (2017
total dividend declared: 16.5 US cents per
share or US$97 million). This reflects the
long-term structural factors underpinning
pellet demand and the continued
solid cash generation of the Group.
Capital InvestmentA
Capital investmentA increased by 31% in
2018 to US$135 million (2017: US$103
million). This included the Group’s
Concentrate Expansion Programme 1
(“CEP1”) which will enable the Group
to increase pellet output by 13% or
approximately 1.5 million tonnes to 12
million tonnes per annum in 2021.
Ferrexpo has a number of priority
projects and will continue to invest in
these project in 2019. Subject to available
cash generation through the year and
to debt repayments and dividend
declarations, the Group will increase
its annual capex expenditure to include
initial investment into growth projects
aimed at increasing pellet production
beyond 12 million tonnes per annum.
1 UkrStat (http://ukrstat.gov.ua/express/expr2019/02/17.pdf)
This portfolio of projects has the potential
to increase pellet production volumes
up to 20 million tonnes per annum.
In total, capexA for 2019 is expected
to be in a range of US$220 million
to US$300 million, subject
to realised pricing.
Ferrexpo’s investment strategy remains
to identify opportunities which are
value accretive to the Group and
that can reduce operating risk.
Social Responsibility
For the year ended 2018, it is expected
that Ferrexpo’s pellet exports will be
approximately 2%1 of Ukraine’s total export
revenue. The Board believes it is essential
to the Group’s long-term viability to ensure
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.
In order to maintain its social licence
to operate, Ferrexpo provides financial
support to a broad array of social
programmes and, in 2018, it invested
approximately 1% of total Group
revenue in these programmes.
Independent Review of Charitable
Donations to Blooming Land
As part of the Group’s Corporate Social
Responsibility (“CSR”) programme in
Ukraine, since 2013 the Group has
donated to a charity called Blooming Land
which operates through three sub-funds
(the “Charity”). The Charity’s activities
include diabetes prevention, eyesight care
and support for the elderly. In the year
ended 31 December 2018, the Group
made contributions to the Charity of
US$9.5 million (2017: US$24.0 million).
The Board suspended donations to the
Charity in May 2018 following continued
delays in receiving additional information,
which the Charity regarded as beyond
the normal requirements expected of a
Ukrainian charity, and while it awaited the
outcome of a review into the Charity’s
2017 audited financial statements.
Following the publication of the Group’s
Interim Results in August 2018, a
number of irregularities were reported to
the Board including inconsistencies in
copy bank statements provided by the
Charity to Deloitte, the Group’s auditor.
Explanations were received from
the Charity which were considered
incomplete and unsatisfactory and
could not be independently verified. As
a result in February 2019, the Board
established the Independent Review
Committee (“IRC”) to look into this and
other matters which included seeking
to determine that Ferrexpo’s donations
were used for their stated purpose.
The terms of reference and the work of
the IRC is set out on pages 69-70.
As at the date of this report, the work of the
IRC and its advisers in the UK and Ukraine
remains ongoing. The IRC has made
some progress in receiving explanations
regarding the inconsistencies contained
on the copy bank statements and has
received some third party evidence and
explanations that could explain bank
statement inconsistencies as well as
some of the possible discrepancies in
the application of funds by the Charity.
The IRC is undertaking further work to
corroborate and verify the evidence and
explanations. Its interim conclusion is
that the Charity is not a related party of
the Group, its Chief Executive Officer
(the majority shareholder of Ferrexpo) or
its executive management, as defined
under applicable accounting standards
or Chapter 11 of the Listing Rules. At this
stage, the IRC cannot yet conclude as to
the ultimate use of the funds by the Charity,
however, there are indications that some
could have been misappropriated. Further
work is required before any final conclusion
can be drawn. For further information
see the IRC report on pages 69-70.
US$135M CAPITAL INVESTMENT
(2017: US$103M)
19
Ferrexpo plc
Annual Report & Accounts 2018
The Board notes that the auditors have
been unable to conclude as to whether
the Chief Executive Officer (“CEO”) does
or does not have significant influence or
control over Blooming Land. The Board
has formed a unanimous view, based on
a lack of clear evidence to the contrary
and unambiguous representations given
to the Board by the CEO over many years,
that the CEO does not have significant
influence or control over Blooming Land.
Ukraine
In December 2018, Moody’s upgraded
Ukraine’s sovereign credit rating
to Caa1 with a stable outlook. The
upgrade was based on improved
economic fundamentals which have
reduced vulnerability to external
shocks, expectations that recent
reforms will improve transparency and
strengthen institutions, and higher
resilience to regional geographic risk.
The Board together with the IRC are
committed to understanding the full
extent of any issues arising from the
review and will continue to update
shareholders as appropriate.
Given the extensive disclosures on
the Blooming Land Charity in this
annual report, for ease of reading
and to avoid repetition, the following
cross references are listed:
Chairman’s Statement (page 18),
Principal Risks (page 45), Responsible
Business (page 59), Corporate
Governance Report (page 63),
Independent Review Committee Report
(pages 69), Audit Committee Report
(page 71), and Note 7 (page 121), Note 29
(page 155), Note 33 (page 161) and Note
34 (page 161) to the financial statements.
Moody’s expects Ukrainian real GDP
growth of approximately 3.5% in 2018.
Against this background of GDP growth
and gradual ongoing improvements to the
country’s fiscal and regulatory environment,
the Board of Ferrexpo believes Ukraine
is progressively moving in the right
direction although challenges remain.
Board Composition
Simon Lockett resigned from the
Board in January 2019. The Board
would like to thank Simon for his
contribution to the Group and wish
him every success in the future.
In February 2019, Lucio Genovese was
reappointed to the Board as a Non-
executive Director. Lucio previously
served on the Board from 2007 to 2014.
The Board believes that Lucio’s deep
knowledge across commodities, including
iron ore, as well as his extensive experience
of operating in emerging markets,
specifically in Russia and the former USSR,
is of significant value to the Group.
People
The Board would like to sincerely express
its appreciation for the management and
staff, many of whom we have had the
pleasure of meeting on our Board site
visits, for their continued hard work which
directly contributes to the Company’s
achievements. I am very pleased with the
manner in which Ferrexpo has withstood
market and country volatility since the
IPO in 2007. The Group is emerging
as a strong competitor operating to
ever higher world class standards.
Steve Lucas
Chairman
STRATEGIC REPORTCORPORATE GOVERNANCEFINANCIAL STATEMENTS 20
Ferrexpo plc
Annual Report & Accounts 2018
MARKET REVIEW
EXTERNAL TRENDS
1
2
3
4
5
STRONG GLOBAL
STEEL MARGINS
RATIONALISATION
OF CHINESE STEEL
INDUSTRY
IMPLEMENTATION
OF STRICT
ENVIRONMENTAL
CONTROLS IN CHINA
STRONG DEMAND
FOR HIGHER GRADE
IRON ORES
CONTINUED
SHORTAGE OF
PELLETS ON THE
WORLD MARKET
6
RECORD PELLET
PREMIUMS
TONNES
TOTAL EXPORTED IRON ORE
PELLETS WORLDWIDE IN 2018
In 2018, the average Atlantic pellet premium
increased 30% to US$59 per tonne
compared to US$45 per tonne in 2017.
The first nine months of the year saw strong
global demand for steel resulting in
increased production levels and margins
for steel mills. This increased demand for
higher quality iron ore, including pellet,
as mills looked to drive productivity
improvements to maximise profit levels. In
addition, ongoing environmental reforms in
China encouraged the use of direct charge
materials, such as pellet, to reduce the
harmful impact of sintering on air quality.
The 4Q of 2018 was impacted by rising
trade tensions and slower economic
activity, especially in China. Steel output,
however, remained at relatively high levels
as government imposed winter production
cuts in China were not as severe as
expected. As a result, steel demand and
profit margins fell. On average in 2018,
however, margins for the global steel
industry saw significant increases as can
be seen from Graph 1.
CRU expects global steel demand to be
stable in 2019 and that steel margins will
recover from the lows seen in 4Q 2018;
however, it does not expect margins
to recover to the highs seen in 2018.
21
Ferrexpo plc
Annual Report & Accounts 2018
Graph 1: Steel Producers Enjoyed High EBITDA Margins Till 4Q 2018
30%
25%
20%
15%
10%
5%
0%
-5%
-10%
-15%
02.01.2017
02.04.2017
02.07.2017
02.10.2017
02.01.2018
02.04.2018
02.07.2018
02.10.2018
02.01.2019
German domestic HRC EBITDA margin
Chinese domestic HRC EBITDA margin
Source: CRU February 2019
Graph 2: Historic Price Chart of 62% Fe Iron Ore Fines Price CFR China
(US$ per tonne)
200
160
120
80
40
0
31.12.2018
30.06.2018
31.12.2017
30.06.2017
31.12.2016
30.06.2016
31.12.2015
30.06.2015
31.12.2014
30.06.2014
31.12.2013
30.06.2013
31.12.2012
30.06.2012
31.12.2011
30.06.2011
31.12.2010
30.06.2010
31.12.2009
30.06.2009
31.12.2008
30.06.2008
Source: S&P Global Platts
Graph 3: High Grade Premia Reached a Record in 2Q 2018 with the
Average for the Year at US$21 Per Tonne
Iron ore price differentials, % January 2018 to January 2019
50%
40%
30%
20%
10%
0%
-10%
-20%
-30%
-40%
65% Fe premium
58% Fe discount
Jan
Fe b
M ar
A pr
M ay
Ju n
Jul
S e p
O ct
N ov
D ec
Jan
Source: CRU January 2019
Steel and Iron Ore Market Statistics
in 2018
According to CRU, crude steel production
increased 2.5% in 2018 to 1,730 million
tonnes compared to 1,687 million tonnes
in 2017. The increase of 44 million
tonnes was driven by China, the rest
of Asia and America while production
declined marginally in Europe.
The benchmark 62% Fe iron ore fines
price in 2018 was characterised by low
volatility compared to previous years
with average yearly prices not materially
different to 2017. Graph 2 shows that the
benchmark 62% Fe iron ore fines price CFR
China traded in a historically tight range
of US$60 to US$80 per tonne in 2018.
In contrast to the benchmark 62%
Fe fines price, premiums for 65% Fe
high grade ore reached record levels
during the year before normalising in
4Q 2018, as can be seen from Graph
3. This largely reflected global steel mill
profitability peaking in September.
Overall, 2018 was a record year for
high grade premiums. On average,
the 65% Fe iron ore fines price was
31% above the average 62% Fe iron
ore fines price compared to 23% and
10% in 2017 and 2016 respectively.
STRATEGIC REPORTCORPORATE GOVERNANCEFINANCIAL STATEMENTS 22
Ferrexpo plc
Annual Report & Accounts 2018
MARKET REVIEW CONTINUED
Pellet utilisation rates in steel production
vary regionally across the world. Graph 4
below, from Steel Consult International,
shows the consumption of pellet, lump
and fines per tonne of hot metal in
Europe, Japan, the Middle East and
China. Europe remains the largest import
market for pellets whilst the proportion
of sintering in China is high at close to
80% and North East Asia utilises a higher
proportion of lump given its proximity
to lump supply in Australia. The Middle
East has a high proportion of pellet
as its steel production is derived from
electric arc furnaces (which use pellet
as the principal source of iron ore).
A 1% increase in the proportion of pellets
consumed would increase pellet demand
by approximately 15 million tonnes
per annum.
Table 1: Average Price Differentials Between Benchmark 62% Fe Iron Fines and
65% Fe Iron Ore Fines
US$ per tonne
2016
2017
2018
Source: S&P Global Platts
Avg 62% Fe
iron ore fines
price CFR
China
Avg 65% Fe
iron ore fines
price CFR
China
Avg 65% Fe
– Avg 62% Fe
%
difference
58
71
69
63
87
90
5
16
21
10%
23%
31%
Pellet Supply in 2018
The supply of pellet exports in 2018 was in line with 2017, with total exports at
approximately 132 million tonnes (vs. 133 million tonnes in 2017). The biggest increase in
pellet supply was from Brazil, as the largest producer bought back previously idled
capacity. The Middle East also added extra capacity. The increases in supply were offset
by lower production from Canada and a decline in exports from the CIS.
Graph 5 shows a breakdown of global pellet exports by supplier; Ferrexpo is the third
largest supplier with 8% market share.
Graph 4: Average Ore Burden Mix to
Produce Hot Metal (%)
Graph 5: Market Share in 2018
100
6%
2%
80
36%
23%
12%
14%
10%
Evraz 0.5%
Grange 1.6%
CMP 2.2%
Other 4.6%
Metalloinvest 3.2%
Cliffs 3.8%
89%
US Steel 4.0%
65%
76%
Bahrain Steel 4.2%
58%
60
40
20
0
EU
Japan
9%
Middle East
North Africa
China
Sinter Pellet Lump
Source: Steel Consult International, November 2018
Demand for pellets is growing greatest in
China which is gradually moving towards
a more developed iron ore market
that favours increased use of pellets
to improve blast furnace productivity,
reduce its environmental emissions
and produce more sophisticated steel
products (requiring higher quality inputs).
Traditional blast furnace pellet markets are
Europe (principally Germany) and North
East Asia (Japan, South Korea and Taiwan),
reflecting their developed market status,
including an increasing focus on CO2
costs in Europe. The Middle East (Qatar
and Saudi Arabia) consumes a third of
global pellet supply, up from 25% in 2010.
CRU expects growing steel production
from South East Asia (especially Vietnam
and Indonesia) over the medium to long
term which will almost entirely rely on
seaborne iron ore inputs. This region will
also aim to operate larger, more efficient
blast furnaces which require at least 10%
pellet in the blast furnace burden mix.
Severstal 4.2%
QCM 4.2%
India 5.8%
Vale 33.4%
IOC
6.3%
Ferrexpo
7.7%
LKAB 14.3%
Source: management estimates and CRU (Market Outlook January 2019)
Pellet Supply in 2019
Supply of pellets in 2019 and 2020 is expected to be impacted by closures of mines
and pellet plants in Brazil due to heightened concerns about the safety of upstream
tailings dams.
Given these concerns, the largest supplier in Brazil, and the world, has idled two pellet
plants that together produced 11 million tonnes of pellets per annum. Additional ore supply
which fed other local pellet plants has also been offline since 1 February 2019, however, it
has been reported that this supply will return in 2Q 2019.
It is likely that the expected return to the market of further pellet supply from Brazil (which
has been offline since 2016 and amounts to approximately 10 million to 20 million tonnes)
will be delayed, and there may be additional impacts on other projects (including pellet
feed operations) in the country which have upstream tailings dams.
In the rest of the world, CRU expects a recovery in pellet output in 2019 from incumbents
in Sweden, Canada and Bahrain (although as Bahrain is a merchant pellet plant, recovery
is dependent on the global availability of pellet feed) as well as increases in supply from
India and Iran. Together these producers are expected to increase production by
approximately 7 million to 9 million tonnes following various production difficulties in 2018.
In addition, a producer in Chile is expected to reduce production due to ship loader
difficulties at its port.
Ferrexpo believes, as a result of the above, that there could be a reduction of around 5
million to 10 million tonnes of pellet supply in the export market in 2019.
23
Ferrexpo plc
Annual Report & Accounts 2018
High Barriers to Entry into the
Pellet Market
The pellet market has been a niche sub-
sector of the iron ore market for many
years due to its high barriers to entry.
Greenfield pellet supply is constrained
by high capital costs (especially when
compared to capital costs to establish sinter
fines operations), ore type and processing
technology. Table 2 shows the historic cost
of capital required for pelletising operations.
Establishing a greenfield pelletising
operation from mine-to-port is estimated to
require at least US$3 billion of investment
for approximately 10 million tonnes, a
capital intensity of US$300 per tonne.
Breakeven Cost Curve for Pellet
Exporters
Graph 6 shows the breakeven pellet cost
curve for delivery to China. Market
concentration is high, with the two largest
pellet suppliers in 2018 (coloured in green
and red) holding a market share of
approximately 46%. Ferrexpo is the third
largest exporter and positioned in the
bottom half of the cost curve.
The white crosses on the cost curve show
the pelletising operations which have been
closed since 20 February 2019 and remain
closed as of 22 April 2019. Their absence
will shift the cost curve to the left. As such,
subject to stable demand, pellet premiums
should increase to reflect the use of higher
cost supply.
Conclusion to Market Review
While pellet premiums are largely influenced
by steel mill margins, increasing global
focus on reducing air emissions as well as
expected constraints to the supply of
pellets from incumbent producers is likely
to provide support for pellet premiums.
Prohibitively high barriers to entry means
that significant new pellet supply entering
the market in the short to medium term
is unlikely.
Ferrexpo stands to benefit from operating
in a niche market with high barriers to entry
given it is a high quality exporter, with
established operations, a low cost position
relative to the majority of its peers and is
well positioned geographically to supply
major import markets.
Table 2:
New pellet capacity
Duration
Tonnes
Samarco
2011–2014
R$6.459bn
8.3Mt
(US$3.251bn
equivalent)
Cost/tonne of
pellet capacity
US$391/
tonne
Vale Tubarão VIII 2011–2015
US$1.3bn
7.5Mt
Metalloinvest
2012–2015
RUB16bn
5Mt
(US$460m
equivalent)
NMLK
2011–2016
RUB41bn
6Mt
(US$1.4bn
equivalent)
US$176/
tonne
US$92/
tonne
US$233/
tonne
Description
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$113/
tonne expanded mining
and beneficiation capacity
Source: Company announcements
Graph 6: CRU Breakeven Cost Curve for Pellet Producers to China 2018
Ferrexpo
* Delivery to China assumes
all shipments from all producers
go to the Chinese market, which
has a higher pellet premium than
other pellet markets.
100
90
80
70
60
50
40
30
20
10
0
0
10
20
30
40
50
60
70
80
90
100
110
120
y-axis: Business costs for pellet exports, 2018, US$/dmt CFR China
x-axis: Cumulative pellet exports, 2018, Mt (dry)
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 REPORTCORPORATE GOVERNANCEFINANCIAL STATEMENTS
24
Ferrexpo plc
Annual Report & Accounts 2018
PERFORMANCE REVIEW
SUPPLYING HIGH
QUALITY IRON ORE
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.
Kostyantin Zhevago, Chief Executive Officer
Chris Mawe, Chief Financial Officer
FINANCIAL REVIEW
Summary
Strong demand for iron ore pellets in 2018
enabled Ferrexpo to achieve a record
pellet premium. While pellet premiums
increased 30% over 2017 levels, the C1
cost per tonne of production increased
34% in line with higher commodity input
prices and local inflation, while the Hryvnia
appreciated marginally during the period,
adding further upward cost pressure.
The Group increased pellet production
by 2% to 10.6 million tonnes (2017: 10.4
million tonnes) and maintained the grade
of its output with 94% of its production in
the form of 65% Fe pellets. Sales volumes
were 10.2 million tonnes (2017: 10.5
million tonnes) reflecting low water levels
on the Danube River in the 2H 2018 and
slower than expected railings in December
which delayed some sales into 2019.
Overall, underlying EBITDAA for 2018 was
US$503 million (2017: US$551 million).
Profit for the period was US$335 million
(2017: US$394 million) principally reflecting
higher sales prices offset by increased
production costs, lower sales volumes
and an operating foreign exchange loss
compared with a gain in 2017.
Capital investmentA increased 31% to
US$135 million (2017: US$103 million)
primarily reflecting sustaining capex and
the Group’s Concentrate Expansion
Programme (“CEP1”). Net debt reduced by
14% to US$339 million as of 31 December
2018 (31 December 2017: US$394 million).
INCREASE IN REVENUE
US$1.3 BILLION
25
Ferrexpo plc
Annual Report & Accounts 2018
The Group has strong credit metrics with
net debt to underlying EBITDAA at 0.67
times, a seven-year low. The Group
successfully increased its primary debt
facility during the year which has smoothed
and extended its debt maturity profile. This
is in line with our strategy to have a principal
revolving, low cost, long-term debt facility
that amortises on a quarterly basis.
Finally, subject to shareholder approval, the
Group is pleased to announce an increase
in dividends for the 2018 financial year to
a record 23.1 US cents per share, a 40%
increase compared to 2017 (16.5 US cents).
Outlook
To date in 2019, realised prices for
Ferrexpo’s pellets have continued at
high levels.
In 2019, the Group will continue its repairs
and maintenance programme which will
include a 75-day pellet line shutdown in 2H
2019. Overall, 2019 production volumes
are expected to be in line with 2018 at
approximately 10.6 million tonnes.
The cost of production in 2019 is expected
to increase as a result of higher commodity
input prices and local inflation in Ukraine.
Year to date the Hryvnia has been broadly
stable against the US Dollar, appreciating
by approximately 2%.
Capital expenditure in 2019 will be focused
towards growth projects and is expected
to be in the range of US$220 million
to US$300 million, subject to realised
pricing and market conditions. Of this,
sustaining capital expenditure is expected
to be in line with 2018. Investment of
approximately US$35 million is planned for
the Concentrator Expansion Programme 1
(“CEP1”), which is anticipated to increase
pellet production to approximately 12 million
tonnes per annum by 2021. In addition,
subject to market conditions and available
cash flows, Ferrexpo will commence
construction on a new press filtration plant
and other capacity upgrade projects as
well as purchase of additional rail cars.
Revenue
Group revenue increased 6.4% to US$1,274
million compared to US$1,197 million
in 2017.
In 2018, the Group’s pellet sales contracts
were all priced based on a spot 62%
Fe iron ore fines price, a negotiated
pellet premium adjusting for the cost
of international freight, typically the C3
index from Brazil to China. Subject to
customer preference, pellet premiums were
negotiated annually, half-yearly or quarterly.
Ferrexpo’s achieved price in 2018, after
taking into account the above price
movements, increased by US$9 per
tonne compared to 2017.
Due to strong market demand for
the Group’s 65% Fe pellets, Ferrexpo
achieved a record average pellet
premium. The Group’s net pellet
premium increased by 32%.
The average 62% Fe iron ore fines price
fell marginally in 2018 to US$70 per tonne
(2017: US$71 per tonne) while international
freight increased by 20% principally due
to higher oil prices. The average C3 freight
rate increased by US$3 per tonne to
US$18 per tonne (2017: US$15 per tonne).
During the year, the Group also marginally
increased shipments to Asia and Western
Europe. As such, turnover from seaborne
freight services increased to US$90 million
compared to US$73 million in 2017.
Sales volumes for the year were 10.2 million
tonnes compared to 10.5 million tonnes
in 2017. Sales volumes were impacted
by reduced barge shipments towards
the end of the year given the low water
levels on the Danube River in 2H 2018.
Slower than expected rail shipments in
December and a delay of an ocean-going
shipment into 1H 2019 also lowered sales
volumes and increased year end working
capital. The Group expects these sales
volumes to be caught up in 1H 2019.
Pellet stocks as of 31 December 2018
were approximately 794,000 tonnes
compared to a more normal level of
390,000 tonnes as at the end of 2017.
Costs
Cost of Goods Sold
Ferrexpo’s total cost of goods sold was
US$508 million in 2018 compared to
US$411 million in 2017. The 24% increase
primarily reflected higher commodity input
prices, local inflation and an increase in
maintenance activities and mining costs.
C1 Cash Cost of ProductionA
The Group’s average C1 cash cost of
productionA was US$43.3 per tonne in
2018 compared to US$32.3 per tonne
in 2017.
The increase in costs was primarily due
to commodity and local cost inflation.
Commodity linked costs increased by
US$3.3 per tonne which included a 13%
increase in electricity tariffs due to a higher
average Amsterdam-Rotterdam-Antwerp
coal price, while higher fuel costs reflected
a US$19 per barrel, or 31%, increase in the
average European Brent spot price in 2018
compared to 2017. Higher gas prices also
partly mirrored the higher oil price, while
increased grinding media costs reflected
higher steel prices.
STRATEGIC REPORTCORPORATE GOVERNANCEFINANCIAL STATEMENTS 26
Ferrexpo plc
Annual Report & Accounts 2018
PERFORMANCE REVIEW CONTINUED
season in Ukraine, and help offset rail tariff
increases as the Group receives a discount
for using its own rail cars.
Currency
Ferrexpo prepares its accounts in US
Dollars, whereas the functional currency of
the Ukrainian operations is the Hryvnia.
In 2018, the Hryvnia appreciated from
UAH28.07 per US Dollar on 1 January to
UAH27.69 per US Dollar as of 31 December
2018. This resulted in a non-cash operating
forex loss of US$5.3 million compared to a
gain of US$6.7 million in 2017 (following the
depreciation of the Hryvnia from 27.19 to
28.07 per US Dollar in 2017).
Local inflation, including the impact of
higher wages, increased costs by
approximately US$2.8 per tonne. Local
producer price inflation was 18% in 2018
compared to 2017. The local currency was
broadly stable against the US Dollar and
appreciated 1% from 1 January 2018 to
31 December 2018. Approximately half of
the Group’s operating costs, including rail
costs, are in local currency and are
impacted by the Hryvnia exchange rate and
domestic inflation.
For further information
See Currency below
Together, commodity and local cost
inflation increased the C1 cash cost of
productionA by approximately US$6.1
per tonne.
Repair and maintenance costs increased
by US$2.1 per tonne due to higher levels of
maintenance activities in 2018. The Group
has increased its repair and maintenance
activities to further improve equipment
reliability and performance.
Higher stripping at FPM increased the C1
cost of productionA by US$1.9 per tonne.
Royalties and other costs increased by
0.9 per tonne. Royalties, which are based
on the cost of concentrate production,
increased by US$0.7 per tonne compared
to 2017, while higher gas consumption
increased costs by US$0.2 per tonne.
Table 3 breaks down the Group’s C1
cash cost of productionA by category;
approximately 60% of costs are
commodity related.
Table 3: C1 Cash Cost of ProductionA
Breakdown
Table 4: Ukrainian Hryvnia vs. US
Dollar
US$ per tonne
Electricity
Gas
Fuel
Materials
Spare parts
Personnel
Maintenance and
repairs
Grinding media
Royalties
Explosives
2018
% of C1 cost
2017
% of C1 cost
23%
10%
9%
16%
9%
9%
8%
8%
5%
3%
28%
10%
9%
14%
7%
8%
8%
9%
5%
2%
The Group’s C1 cost represents the cash
costs of productionA 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, also the costs of
purchased ore, concentrate and gravel.
For further information
See Capital InvestmentA on page 27
The C1 Cash Cost of Production (US$ per
tonne)A is regarded as an Alternative
Performance Measure (“APM”). For further
information see page 169.
Selling and Distribution Costs
Selling and distribution costs were US$260
million compared to US$220 million in 2017.
The increase primarily reflected higher
seaborne freight rates (see Revenue) and a
marginal increase in shipment volumes to
Asia and Western Europe; as such,
seaborne freight increased to US$90 million
compared to US$73 million in 2017.
Rail costs to transport pellets to border
points for export increased during the year,
reflecting a full year impact of a 15% rail tariff
increase in October 2017. As of
31 December 2018, the Group owned 2,252
rail cars. Since then, a further 153 rail cars
have been delivered to FPM, increasing the
Group’s ownership to 2,405 rail cars as of
28 February 2019. This should improve
availability, especially during the grain
1 January 2018
31 December 2018
Average 2018
Average 2017
Source: National Bank of Ukraine.
UAH per US$
28.07
27.69
27.20
26.60
Local balances at 31 December 2018 are
converted into the Group’s reporting
currency at the prevailing exchange rate.
The appreciation of the Hryvnia during the
financial year 2018 resulted in a US$12.1
million increase in net assets (2017:
decrease of US$41.2 million), as reflected in
the translation reserve.
Operating Foreign Exchange
Gains/Losses
Given that the functional currency of the
Ukrainian subsidiaries is the Hryvnia, an
appreciation of the Hryvnia against the
US Dollar results in foreign exchange
losses on the subsidiaries’ US Dollar
denominated receivable balances (from
the sale of pellets), compared to a gain
in 2017 due to the depreciation of the
Hryvnia. The operating foreign exchange
loss in 2018 was US$5 million compared
to a gain of US$7 million in 2017.
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 principally from
the conversion of Euro denominated
loans (relating to loans to the Group’s
logistics operations in Austria). During
2018, the Euro slightly depreciated
from 0.838 per US Dollar to 0.874 per
US Dollar, resulting in a non-operating
foreign exchange loss of US$1.6 million.
In 2017, the Euro appreciated from
0.956 per US Dollar to 0.838 per US
Dollar which resulted in a non-operating
foreign exchange gain of US$9 million.
27
Ferrexpo plc
Annual Report & Accounts 2018
Profit Before Tax and Finance
Profit before tax and finance was US$433
million compared to US$496 million in 2017.
This primarily reflected higher sales prices
offset by lower sales volumes and cost
inflation as well as a net change of US$12
million of operating foreign exchange
differences (losses of US$5 million in 2018
compared to gains of US$7 million in 2017).
Debt and Interest Paid
Gross debt as of 31 December 2018
declined 18% to US$402 million compared
to the prior year end (31 December 2017:
US$492 million).
This reflected total debt repayments of
US$309 million. This included the US$113
million final amortisation of the Group’s
2013 Pre-Export Finance (“PXF”) facility, a
US$173 million Eurobond redemption (first
out of two, with the second redemption due
in April 2019) and repayment of the
remaining US$23 million due under Export
Credit Agency (“ECA”) loans.
In August 2018, Ferrexpo announced that it
had increased its 2017 PXF credit facility
from US$195 million to US$400 million and
extended the tenor from three to four years.
This is a revolving committed facility with a
one-year grace period. Quarterly
amortisation commences in 2020. The
interest rate is 450 basis points + three-
month US$ LIBOR.
Due to the lower gross debt, finance
expense declined 29% to US$39 million
during the period (2017: US$55 million). The
average cost of debt for the period ended
31 December 2018 was 8.2% (average
2017: 8.0%). The increased average rate
reflected amortisation of the Group’s 2013
PXF facility which had a lower cost than the
Group’s outstanding US$173 million
Eurobond.
Following final redemption of the Group’s
Eurobond in April 2019 for US$173 million
(coupon 10.375%), 98% of its outstanding
debt will be at floating interest rates.
For further details
See Total LiquidityA and Debt Maturity
Profile on page 28
Tax
In 2018, the Group’s tax charge was US$57
million, resulting in an effective tax rate of
14.5%. This compares to an effective tax
rate of 12.3% in 2017 and a tax charge of
US$55 million.
As a result of a higher achieved selling price
in 2018, the effective tax rate reflected a
higher proportion of taxable profits at the
Group’s Ukrainian subsidiaries. This
increased the weighted average statutory
tax rate from 13.5% in 2017 to 15.5%
in 2018.
For further information
See Note 11 of the financial statements
Profit for the Year from Continuing
Operations
Profit for the year was US$335 million
(2017: US$394 million). This reflected lower
operating profit and non-operating foreign
exchange losses offset by a US$16 million
reduction in finance expense while income
tax expense was in line with 2017.
Capital InvestmentA
Capital expenditure in 2018 was US$135
million compared to US$103 million in 2017.
Of this, US$66 million was sustaining and
modernisation capex (2017: US$43 million)
at FPM. Sustaining capex also included a
substantial refurbishment of one of the
Group’s four pellet lines during the period.
Cash Flows
Net cash flows from operating
activities
Net cash flows from operating activities
were US$292 million in 2018 compared to
US$353 million in 2017. This reflected a
working capital outflow of US$116 million
during the year compared to an outflow of
US$110 million in 2017.
Working capital included an increase of
US$40 million (2017: US$53 million) in
stocks of lower grade iron ore which are to
be processed following the addition of
beneficiation capacity.
Trade receivables were higher, reflecting
higher pricing in 2H 2018 and an increase in
inventories of US$48 million (2017: US$26
million). This, reflected higher pellet stocks
at the yearend as well as higher spare parts
and raw materials due to an increase in
maintenance activities.
VAT was received promptly during most of
2018. A delayed VAT receipt in December
2018 of US$12 million, however, further
increased working capital. The VAT was
subsequently received in January 2019.
FYM investment of US$32 million (2017:
US$32 million) included capitalised
stripping, completion of mine infrastructure,
commencement of drill automation and
development of a spare parts warehouse
for the Group as part of the integration of
certain key functions between the
Group’s operations.
Investment in FPM’s CEP1 was US$24
million (2017: US$18 million) which, once
complete, will increase pellet production
by approximately 1.5 million tonnes
per annum. In 2018, activities included
commissioning of a new medium fine
crushing unit (“MFC1”) which has increased
the capacity of FPM’s crushers by up to 6
million tonnes per annum. This additional
crushing capacity will be fully utilised once
the remaining sections to increase the
concentrator capacity are completed in
2020. The construction of a concentrator
stockyard is under way and expected to
be completed by the end of 2019. The
stockyard will facilitate continuous operation
of the processing plant while parts of the
plant undergo routine maintenance.
STRATEGIC REPORTCORPORATE GOVERNANCEFINANCIAL STATEMENTS 28
Ferrexpo plc
Annual Report & Accounts 2018
PERFORMANCE REVIEW CONTINUED
Ferrexpo invested US$4 million (in line with
2017) in the development and exploration of
the Belanovo, Galeschyno and the
Northern Deposits.
The Group acquired 50 rail cars in
December 2018 for approximately US$5
million. While it invested approximately
US$5 million of sustaining capex at its
logistics company in Austria in 2018 (2017:
US$4 million).
Ferrexpo continues engineering studies to
expand its pelletising capacity above its
current nameplate capacity of 12 million
tonnes per annum towards 20 million
tonnes per annum.
Dividends
A final special dividend for the year of 6.6
US cents (2017: 6.6 US cents) has been
announced today and will be paid on
14 May 2019 to shareholders on the
register at the close of business on 3 May
2019. A final ordinary dividend of 6.6 US
cents per share is being proposed (2017:
3.3 US cents). If the final ordinary dividend
is approved by shareholders, the total
dividend related to 2018 will be 23.1 US
cents per share (2017: 16.5 US cents per
share).¹
Subject to approval at the Group’s AGM,
payment of the final ordinary dividend will
be made on 1 July 2019 to shareholders on
the register at the close of business on
14 June 2019.
The dividend will be paid in UK Pounds
Sterling with an election to receive
US Dollars.
Total LiquidityA and Debt Maturity
Profile
As of 31 December 2018, Ferrexpo’s total
available liquidityA was US$268 million
(2017: US$312 million) consisting of US$63
million of cash and US$205 million of the
Group’s US$400 million committed PXF
facility. In March 2019, the Group drew
down US$185 million of the available
US$205 million PXF facility.
In 2019, the Group has US$187 million of
debt repayments consisting of a US$173
million Eurobond redemption (which was
repaid on 4 April 2019) and US$14 million of
Export Credit Agency repayments across
the year.
The Group has US$70 million of
uncommitted trade finance facilities
available of which US$19 million was drawn
as of 31 December 2018.
Net debt declined for the third year to
US$339 million as of 31 December 2018
(31 December 2017: US$394 million). Net
debt to underlying EBITDA for the last 12
months was 0.67 times compared to 0.72
times as of 31 December 2017. Total debt
outstanding, as of 31 December 2018, was
US$402 million (31 December 2017:
US$492 million).
For further information
See Debt and Interest Paid on page 27
In 1Q 2020, the Group’s US$400 million
PXF facility commences quarterly
amortisations of approximately US$33
million over three years.
During the year, Ferrexpo’s long-term
corporate and debt rating was upgraded by
credit rating agencies to B+ at Fitch (an
upgrade of two notches) and to B3 and B
respectively at Moody’s and S&P (an
upgrade of one notch). With all credit rating
agencies, Ferrexpo has a stable outlook
and its rating is capped at the maximum
level above Ukraine’s Sovereign rating.
Following the successful extension of its
PXF facility in 2018, Ferrexpo may look to
further extend its debt maturity profile in
2019 using the PXF market or other debt
capital markets.
1
In August 2018, the Group declared an ordinary interim
dividend of 3.3 US cents (1H 2017: 3.3 US cents per
share) while in December 2018 the Group declared a
special interim dividend of 6.6 US cents (special interim
dividend 2017: 3.3 US cents per share).
29
Ferrexpo plc
Annual Report & Accounts 2018
Graph 7 shows the increases in production
and productivity compared to 2017. The
Group is pleased with the reduction in
unplanned downtimes, which should improve
further as it continues with its repair and
maintenance programme. Once CEP1 is
completed, which includes de-bottlenecking
the concentrator and building a concentrate
stockyard, FPM expects to produce enough
pellet feed to ensure its pelletiser can operate
at full capacity of 12 million tonnes per
annum. CEP1 is expected to be completed
in 2020.
Graph 7: Pellet Production 2017 vs.
2018
(000t)
133
52
10,607
238
10,444
156
10,700
10,600
10,500
10,400
10,300
10,200
10,100
2017
production
Planned
downtimes
Decrease in
unplanned
downtimes
Productivity
improvements
2018
production
Other
downtimes
(lack of
concentrate)
The Group continues to maintain a high
proportion of 65% Fe pellets within its
production mix at 94% of total production
compared with 95% in 2017. Table 7
summarises production in 2018 compared
with 2017.
OPERATIONAL REVIEW
PRODUCTION
Marketing
Total sales volumes in 2018 were 10.2
million tonnes (2017: 10.5 million tonnes)
with the Group’s premium 65% Fe pellet
representing 94% of total pellet output
during the year (2017: 95%). Sales volumes
were impacted in 2H 2019 by low water
levels on the Danube River and one
seaborne shipment falling into 2019.
Table 5 shows that the customer mix
remained stable compared to 2017. The top
three sales destinations remain Austria,
Germany and Japan.
Table 5: Sales Volume by Market
Region
Health and Safety
Ferrexpo deeply regrets to report the fatality
of Maxim Blinkov, a contractor at FPM
during the year. Mr Blinkov was fatally
injured after falling from a height in the
processing plant (2017: one fatality).
There were a total of 25 lost time injuries
(“LTIs”) across the Group in 2018
(2017: 23), equating to an LTI frequency
rate (“LTIFR”) of 1.18, in line with 2017
(1.17). Table 6 details the LTIFR as per
million man hours worked across the
Company’s mining and processing
operations in Ukraine and its logistics
subsidiary in Austria for 2018 and 2017.
2018
2017
Table 6: Lost Time Injury Frequency
Rate
Central Europe
North East Asia
Western Europe
China and South East
47%
17%
16.5%
13%
49%
16%
15%
12%
Asia
Turkey, Middle East,
6%
8%
India
North America
Total sales volume
(million tonnes)
0.5%
–
10,227 10,467
The Group has continued to implement
its strategy of selling the vast majority of
its production under long-term contracts
with crisis resistant customers. During
2018, in both Asia and Europe, several
long-term contracts were renewed or
extended whilst new markets continued
to be developed towards long-term
business in the future. In this regard, during
the year, the Group made its first trial
shipment of DR pellets to North America.
Sales contracts are typically of three years’
duration although the Group has sales
contracts of varying tenors up to 14 years. A
small proportion of uncommitted volume is
maintained for (1) new customer
development; (2) adjusting for production
variations; and (3) opportunistic spot sales.
The Group’s pricing formula for its long-term
contracts is based on a spot index iron ore
fines price; in 2018 and in prior years this was
the Platts 62% Fe iron ore fines price, plus a
pellet premium (which is typically negotiated)
and an adjustment for the cost of international
freight, typically the C3 index.
For further information on sales
See Revenue in the Financial Review
LTIFR
2018
2017
– FPM
– FYM
– FBM
Mining entities
Barging
Group
1.25
0.66
0.00
1.15
1.83
1.18
1.03
0.74
0.00
0.98
4.32
1.17
Most of the accidents reported have
been traced back to non-compliance
with internal safety procedures. Actions
taken during 2018 have been focused
on contractors and employees. Activities
include a focus on significant risk
management; significant incident and
near miss reporting; increased training
throughout the year for safety advisers;
a focus on improvement in the quality of
accident investigations; a focus on FPM’s
maintenance areas to improve workplace
conditions and housekeeping; an increase
in external safety audits; increased
minimum safety standards for light vehicles
and equipment; the employment of a safety
consultant with significant international
experience; and implementation of a
Supervisor Safety Leadership Training
Programme. Lastly, there has been an
increase in speed checks, alcohol testing
and operator and maintainer competencies.
Pellet Production
Pellet production increased by 2% in 2018 to
10.6 million tonnes, compared to 10.4 million
tonnes in 2017.
Overall, production levels were impacted by
constraints in the processing and pelletising
plants. FPM completed a planned 65-day
pellet line refurbishment in 2Q and it has now
refurbished three out of its four pellet lines.
The final pellet line refurbishment is expected
to take place in 2H 2019.
STRATEGIC REPORTCORPORATE GOVERNANCEFINANCIAL STATEMENTS 30
Ferrexpo plc
Annual Report & Accounts 2018
PERFORMANCE REVIEW CONTINUED
Table 7: Production Statistics
(000’t unless otherwise stated)
Iron ore processed
Average Fe content
Concentrate produced (“WMS”)
Average Fe content
Pellets produced from own ore
62% Fe pellets
Average Fe content
65% Fe pellets
Average Fe content
Pellets produced from purchased concentrate
Total pellet production
Total Group stripping volume (million m³)
2018
2017
Change
27,083
27,230
(0.5)%
33.80% 33.69%
0.11ppt
12,750
12,807
(0.4)%
63.36% 63.12% 0.23ppt
10,506
10,394
1.1%
683
559
22.2%
62.53% 62.58% (0.05)ppt
9,824
9,835
(0.1)%
64.89% 64.85% 0.04ppt
101
10,607
30,097
50
10,444
33,826
102%
1.6%
(11)%
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 2018, there was no concentrate for sale.
Graphs 8 to 11: Production Efficiencies Achieved in Mining Operations
Mining Dig Rates (TPEH)
5,000
4,500
4,000
3,500
3,000
2,500
2,000
1,500
Caterpillar 6060
Hitachi 5600
2015
2016
2017
Hitachi 3600
2018
Caterpillar 6050
Haul Truck Productives (Tkm/hr)
2,200
2,000
1,800
1,600
1,400
1,200
1,000
800
Caterpillar 793
Caterpillar 789
2015
2016
Caterpillar 785
2018
2017
Hitachi 3500
Pit Viper Drilling Rates (m/hr)
Dragline Dig Rates (TPEH)
20
19
18
17
16
15
14
1,600
1,400
1,200
1,000
800
2015
2016
2017
2018
600
2015
2016
2017
2018
Mining and Production Efficiencies
The Group has several projects under way
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
costs in the crushing plant.
Other efficiency projects include the use
of automatic pit drills, drones for surveys
of the pit area and the commencement
of the creation of a centralised mining
control hub for all mining operations. 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 to
ensure they are best in class and deliver
improved process plant reliability.
Ferrexpo will continue to implement
small-scale projects aimed at improving
productivity and efficiency to reduce
operating costs. The results of the above
actions taken in mining can be seen in
Graphs 8 to 11 left, showing a significantly
positive trend across most areas.
CO2 Emissions
Ferrexpo’s carbon intensity ratio fell in
2018 by 3% to 235 kg of CO2 per tonne of
pellets produced, primarily as a result of a
2% increase in pellet production and a 1%
decrease in electricity consumption, the
latter of which accounts for the majority of
the Group’s Scope 1 and 2 CO2 emissions.
The electricity emissions factor (estimated
by the European Bank for Reconstruction
and Development) relates to the volume of
CO2 emitted per MWh of electricity from
the Ukrainian national grid. This decreased
by 2% in 2018, as the country continues
to reduce its reliance on older coal-fired
power stations, which further helped
reduce the Company’s Scope 2 emissions.
Ferrexpo continues to partially substitute
natural gas with sunflower husks in its
pelletising kilns. In 2018, the Company
consumed 124,000 tonnes of husks
(2017: 116,000 tonnes), which maintained
the use of sunflower husks at 19% of the
total energy in the Company’s pelletiser.
Diesel consumption, which relates to
the level of mining activity, fell by 3%
in 2018, despite a 4% increase in the
total rock mined during the year. This
improvement is due to productivity
gains from the Group’s mining fleet and
increased usage of electric excavators.
31
Ferrexpo plc
Annual Report & Accounts 2018
Table 8: CO2 Emissions
Emissions in tonnes (unless otherwise stated)
2018
2017
Total CO2 emissions (Scope 1, 2 & 3)
2,583,178
2,614,449
Scope 1 (direct emissions generated by
Ferrexpo from natural gas, diesel, coal, oil,
explosives, etc)
566,877
554,763
Change
(1.2)%
2.2%
Scope 2 (indirect emissions purchased by
1,925,670
1,974,997
(2.5)%
Ferrexpo from electricity and steam)
Pellets produced
Intensity ratio (kilogramme per tonne of
pellet produced) (Scope 1 & 2 only)
10,607
10,444
235
242
1.6%
(3.0)%
Scope 3 (emissions derived from living matter
90,631
84,689
7.0%
such as biofuels)
TAILINGS DAM
Ferrexpo operates one tailings dam
covering an area of 1,500 hectares.
The dam is constructed on flat
topography and the method of
construction is the Modified
Centreline methodology.
The dam is split into three sections
with each section subdivided into
smaller sections of 400 meters by
400 meters. The walls of the dam and
of the sections within the dam are
constructed using engineered fill,
including siliceous rock.
Due to this structure, if a breach
occurs the leakage is unlikely to occur
from all sections at the same time.
This means that the amount of
possible damage should be limited.
The dam has been designed by
external consultants Ukrgiproruda,
with biannual inspections by the
Ukrainian mining regulator. Following
the tailings dam breach in Brazil in
January 2019, Ferrexpo appointed
Knight Piesold, an international
independent consultant, to further
review and verify the dam’s design,
construction and monitoring.
STRATEGIC REPORTCORPORATE GOVERNANCEFINANCIAL STATEMENTS 32
Ferrexpo plc
Annual Report & Accounts 2018
STRATEGIC FRAMEWORK
Ferrexpo’s strategy is
to produce and export
high quality pellets to
premium steel mills
around the world that
produce sophisticated
steel products. It aims to
be a low cost, efficient
producer with a reliable
logistics infrastructure.
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 STRATEGIC PRIORITIES
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
WHAT WE SAID WE WOULD DO IN 2018
WHAT WE DID
WHAT WE AIM TO DO IN 2019
– Maintain consistent quality in line with
– Production of 65% Fe pellet represented
– Maintain consistent quality in line
customer expectations
94% of total pellet output in 2018
with customer expectations
– Complete refurbishment of pellet line
– Completed refurbishment of pellet line 1
– Complete refurbishment of final pellet
number 1
– Total production increased by 2%
line (number 2)
compared to 2017
– Increase production levels to improve
– Total production increased by 2%
efficiencies and reduce C1 cash cost
– Continue to implement small-scale
projects to improve productivity and
reduce operating costs
compared to 2017
– Exceeded benchmark effective dig
rates on shovels and draglines
– Increase production levels to improve
efficiencies and reduce C1 cash cost
– Continue to implement small-scale
projects to improve productivity and
– Transitioned to 100% emulsion blasting,
reduce operating costs
improving rock fragmentation, reducing
– Automation of drill rigs
equipment wear and tear, and yielding
power savings and lower maintenance
– Continue to improve fixed plant
maintenance processes and procedures
costs
– Consolidated FPM’s and FYM’s mobile
maintenance centre
– Continued to improve fixed plant
maintenance processes and procedures
India
times
2018
– Continue to focus on servicing the
Group’s long-term customer base
– Maintain a geographically diversified
portfolio of crisis-resistant customers
– The Group focused on servicing its
– Continue to focus on servicing the
existing long-term customer portfolio split
Group’s long-term customer base
between Central Europe, Western Europe,
– Renew long-term contracts with key
North East Asia, China and South East
Asia, and Turkey, the Middle East and
customers as they expire
– Maintain a geographically diversified
portfolio of crisis-resistant customers
– Eliminate fatal accidents and target zero
– Most regrettably, there was one
fatality in 2018 (2017: one)
– Support the community through various
– The LTIFR was in line with 2017 at 1.18
management
– Eliminate fatal and serious accidents by
focusing on material operational risk
– Support the community through
lost time injuries
initiatives
– Reduce consumption of key inputs such
– Continued to provide financial support
various initiatives
as electricity and gas, and reduce
to community initiatives
– Reduce consumption of key inputs
emissions per tonne
– Ferrexpo’s carbon intensity ratio fell 3% in
such as electricity and gas, and
reduce emissions per tonne
– If market conditions are appropriate look
– Extended the tenor of the pre-export
– If market conditions are appropriate,
to extend the Group’s debt maturity profile
facility by 1 year and increased its size by
look to extend the Group’s debt maturity
– Subject to cash flows, continue to pay
US$205 million to US$400 million
– Subject to cash flows, further resume
development capex to expand the
Group’s concentrate and pelletising
dividends
capacity
– Reduced net debt to US$339 million
(31 December 2017: US$394 million)
profile and increase available facilities
– Subject to cash flows, continue to
pay dividends
– Last 12 months net debt to EBITDA 0.67
– Subject to cash flows, increase
times as at 31 December 2018
(2017: 0.72 times)
development capex to expand the
Group’s concentrate and pelletising
– Increased dividends to 23.1 US cents
capacity
For more on our
Key Performance Indicators
See pages 34-35
per share (2017: 16.5 US cents)
– Increased capital investment to
US$135 million (2017: US$103 million)
For more on being a Responsible
Business
See pages 49-59
For more on our Principal Risks
See pages 38-47
33
Ferrexpo plc
Annual Report & Accounts 2018
WHAT WE SAID WE WOULD DO IN 2018
WHAT WE DID
WHAT WE AIM TO DO IN 2019
– Maintain consistent quality in line with
– Production of 65% Fe pellet represented
– Maintain consistent quality in line
customer expectations
– Complete refurbishment of pellet line
number 1
94% of total pellet output in 2018
– Completed refurbishment of pellet line 1
–
Total production increased by 2%
compared to 2017
with customer expectations
– Complete refurbishment of final pellet
line (number 2)
–
Increase production levels to improve
efficiencies and reduce C1 cash cost
– Continue to implement small-scale
projects to improve productivity and
reduce operating costs
–
Total production increased by 2%
compared to 2017
– 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’s and FYM’s mobile
–
maintenance centre
Continued to improve fixed plant
maintenance processes and procedures
–
Increase production levels to improve
efficiencies and reduce C1 cash cost
– Continue to implement small-scale
projects to improve productivity and
reduce operating costs
– Automation of drill rigs
– Continue to improve fixed plant
maintenance processes and procedures
– Continue to focus on servicing the
Group’s long-term customer base
– Maintain a geographically diversified
portfolio of crisis-resistant customers
– 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, the Middle East and
India
– Continue to focus on servicing the
Group’s long-term customer base
– Renew long-term contracts with key
customers as they expire
– Maintain a geographically diversified
portfolio of crisis-resistant customers
– Eliminate fatal accidents and target zero
– Most regrettably, there was one
lost time injuries
fatality in 2018 (2017: one)
– Support the community through various
– The LTIFR was in line with 2017 at 1.18
initiatives
times
–
Eliminate fatal and serious accidents by
focusing on material operational risk
management
– Support the community through
– Reduce consumption of key inputs such
– Continued to provide financial support
various initiatives
as electricity and gas, and reduce
emissions per tonne
to community initiatives
– Ferrexpo’s carbon intensity ratio fell 3% in
2018
– Reduce consumption of key inputs
such as electricity and gas, and
reduce emissions per tonne
5. MAINTAIN APPROPRIATE CAPITAL
ALLOCATION BETWEEN A STRONG
BALANCE SHEET, RETURNS TO
SHAREHOLDERS AND INVESTMENT
FOR GROWTH
–
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 34-35
– Extended the tenor of the pre-export
–
–
facility by 1 year and increased its size by
US$205 million to US$400 million
– Reduced net debt to US$339 million
(31 December 2017: US$394 million)
Last 12 months net debt to EBITDA 0.67
times as at 31 December 2018
(2017: 0.72 times)
Increased dividends to 23.1 US cents
per share (2017: 16.5 US cents)
Increased capital investment to
US$135 million (2017: US$103 million)
–
–
For more on our Principal Risks
See pages 38-47
If market conditions are appropriate,
look to extend the Group’s debt maturity
profile and increase available facilities
– Subject to cash flows, continue to
pay dividends
– Subject to cash flows, increase
development capex to expand the
Group’s concentrate and pelletising
capacity
For more on being a Responsible
Business
See pages 49-59
TOP FIVE STRATEGIC PRIORITIES
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
Ferrexpo’s strategy is
to produce and export
high quality pellets to
premium steel mills
around the world that
produce sophisticated
steel products. It aims to
be a low cost, efficient
producer with a reliable
logistics infrastructure.
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.
STRATEGIC REPORTCORPORATE GOVERNANCEFINANCIAL STATEMENTS
34
Ferrexpo plc
Annual Report & Accounts 2018
KEY PERFORMANCE INDICATORS
The Group’s reporting of KPIs focuses on those
most relevant to the Annual Report.
FINANCIAL KPIs
Underlying EBITDAA
Profit for the Year
Lost Time Injury Frequency Rate and Fatalities
Production Volumes
NON-FINANCIAL KPIs
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 providing
a useful measure of operating performance excluding certain
non-cash items.
In 2018, EBITDA was US$503 million, reflecting higher average
received prices offset by higher costs and lower sales volumes.
In addition to Alternative Performance Measures, Ferrexpo
considers the IFRS results of the Group to be an important
measurement of profitability.
In 2018, profit for the year was US$337 million, reflecting lower
operating profit and non-operating foreign exchange losses offset
by a reduction in finance expense while income tax expense was in
line with 2017.
US$ M ILLION
2018
2017
2016
LINK TO STRATEGY
1 2 3 4 5
503
551
375
US$ M ILLION
2018
2017
2016
LINK TO STRATEGY
1 2 3 4 5
337
394
189
Net Debt to Underlying EBITDAA
Net Cash Flow From Operating Activities
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.
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 2018, net debt to underlying EBITDA reduced to 0.67 times.
In 2018, net cash flow from operating activities was US$292 million
reflecting lower EBITDA and working capital build mainly due to a
temporary increase in stocks.
0.67
0.72
NET DEBT TO EBITDA
2018
2017
2016
LINK TO STRATEGY
1 2 3 4 5
1.57
US$ M ILLION
2018
2017
2016
LINK TO STRATEGY
1 2 3 4 5
292
353
332
2018
2017
2016
2 5
LINK TO STRATEGY
43.3
32.3
27.7
It is the Group’s highest priority to ensure its employees operate
Production volumes measure the Group’s ability to meet customer
in a safe environment. The LTIFR is an industry standard
measurement and an important indicator of how safe the
demand as well as providing an indication of the Group’s
operational performance.
work environment is.
The LTIFR in 2018 was 1.18 times, slightly higher than in 2017.
In 2018, production increased 2% despite a 75 day shutdown for
planned maintenance on one of the Group’s pelletising lines.
LTIFRx
2018
2017
2016
LINK TO STRATEGY
1 2 3 4 5
C1 Cash CostsA
1.18
1.17
1.17
10.6
10.4
11.2
LINK TO STRATEGY
1 2 3 5
Sales Volume by Region
specific regions.
This is the cash costs of production of iron pellets from own ore,
divided by production volume from own ore. This is an industry
Ferrexpo believes it is important to have a diversified customer
base so as to be able to withstand periods of volatility in
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 2018, Ferrexpo’s C1 cash cost of production increased to
In 2018, Ferrexpo focused on servicing its existing long-term
customer portfolio. During 2018, in both Asia and Europe, several
long-term contracts were renewed or extended whilst new markets
continued to be developed towards long-term business in the
US$43.3 per tonne. This reflected higher commodity input prices,
future. In this regard, during the year, the Group made its first trial
local inflation and increased mining and maintenance activity.
shipment of DR pellets to North America.
US$ PER TONNE
TURKEY, ME & INDIA
CHINA & SOUTH EAST ASIA
MT
2018
2017
2016
2018
2017
2016
2018
2017
2016
2018
2017
2016
NORTH EAST ASIA
WESTERN EUROPE
CENTRAL EUROPE
NORTH AMERICA
2018
2017
2016
2018
2017
2016
2018
6%
6%
6%
17%
16%
16%
47%
49%
48%
13%
12%
13%
16.5%
15%
17%
0.51%
LINK TO STRATEGY
3 5
35
Ferrexpo plc
Annual Report & Accounts 2018
Profit for the Year
Lost Time Injury Frequency Rate and Fatalities
Production Volumes
NON-FINANCIAL KPIs
Our key performance indicators link to our strategic priorities.
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
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 2018 was 1.18 times, slightly higher than in 2017.
Production volumes measure the Group’s ability to meet customer
demand as well as providing an indication of the Group’s
operational performance.
In 2018, production increased 2% despite a 75 day shutdown for
planned maintenance on one of the Group’s pelletising lines.
LTIFRx
2018
2017
2016
LINK TO STRATEGY
1 2 3 4 5
C1 Cash CostsA
1.18
1.17
1.17
MT
2018
2017
2016
10.6
10.4
11.2
LINK TO STRATEGY
1 2 3 5
Sales Volume by Region
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 2018, Ferrexpo’s C1 cash cost of production increased to
US$43.3 per tonne. This reflected higher commodity input prices,
local inflation and increased mining and maintenance activity.
Ferrexpo believes it is important to have a diversified customer
base so as to be able to withstand periods of volatility in
specific regions.
In 2018, Ferrexpo focused on servicing its existing long-term
customer portfolio. During 2018, in both Asia and Europe, several
long-term contracts were renewed or extended whilst new markets
continued to be developed towards long-term business in the
future. In this regard, during the year, the Group made its first trial
shipment of DR pellets to North America.
US$ PER TONNE
TURKEY, ME & INDIA
CHINA & SOUTH EAST ASIA
2018
2017
2016
LINK TO STRATEGY
2 5
43.3
32.3
27.7
2018
2017
2016
NORTH EAST ASIA
2018
2017
2016
CENTRAL EUROPE
2018
2017
2016
LINK TO STRATEGY
3 5
2018
2017
2016
WESTERN EUROPE
2018
2017
2016
13%
12%
13%
16.5%
15%
17%
NORTH AMERICA
2018
0.51%
6%
6%
6%
17%
16%
16%
47%
49%
48%
FINANCIAL KPIs
Underlying EBITDAA
non-cash items.
US$ M ILLION
2018
2017
2016
LINK TO STRATEGY
1 2 3 4 5
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 providing
In addition to Alternative Performance Measures, Ferrexpo
considers the IFRS results of the Group to be an important
measurement of profitability.
a useful measure of operating performance excluding certain
In 2018, profit for the year was US$337 million, reflecting lower
operating profit and non-operating foreign exchange losses offset
by a reduction in finance expense while income tax expense was in
In 2018, EBITDA was US$503 million, reflecting higher average
received prices offset by higher costs and lower sales volumes.
line with 2017.
503
551
375
337
394
189
US$ M ILLION
2018
2017
2016
LINK TO STRATEGY
1 2 3 4 5
Net Debt to Underlying EBITDAA
Net Cash Flow From Operating Activities
Ferrexpo uses net debt to underlying EBITDA to monitor its debt
Net cash flow from operating activities represents the cash flow
levels relative to profitability. It is an industry standard measurement
generation ability of the Company and indicates available cash flow
used to determine relative levels of indebtedness.
for investments, returns to shareholders and debt reduction.
In 2018, net debt to underlying EBITDA reduced to 0.67 times.
In 2018, net cash flow from operating activities was US$292 million
reflecting lower EBITDA and working capital build mainly due to a
temporary increase in stocks.
0.67
0.72
NET DEBT TO EBITDA
2018
2017
2016
LINK TO STRATEGY
1 2 3 4 5
1.57
US$ M ILLION
2018
2017
2016
LINK TO STRATEGY
1 2 3 4 5
292
353
332
STRATEGIC REPORTCORPORATE GOVERNANCEFINANCIAL STATEMENTS 36
Ferrexpo plc
Annual Report & Accounts 2018
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.
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 71.
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.
2018 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 38 to 47.
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 48.
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.
37
Ferrexpo plc
Annual Report & Accounts 2018
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
– Supports the Board in monitoring risk
exposure and risk appetites
– Reviews effectiveness of risk
management and control systems
EXECUTIVE COMMITTEE
– Assesses and mitigates
Company-wide risk
– Monitors internal controls
CSR COMMITTEE
– Overseas CSR matters
and performance
FINANCE AND RISK
MANAGEMENT COMMITTEE
– Monitors centralised financial risk
management structures
EXECUTIVE COMPLIANCE COMMITTEE
– Monitors Group compliance
– Monitors Group and local
compliance officers
INTERNAL AUDIT FUNCTION
– Supports the Audit Committee in reviewing the effectiveness of risk management
– Maintains and develops 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 blue) 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
2.3
3.2
5.1
2.1
1.1
3.1
2.2
1.2
1.3
4.1
Likelihood
ALMOST CERTAIN
STRATEGIC REPORTCORPORATE GOVERNANCEFINANCIAL STATEMENTS
38
Ferrexpo plc
Annual Report & Accounts 2018
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.
All risks and their mitigations are actively
considered monthly at the Group’s Finance
and Risk Management Committee
meetings based on detailed analysis.
Ferrexpo operates in the mining industry
where there is an inherent level of risk
present due to the nature of its operations.
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. In general, in 2018, the
overall level of risk present was similar to
prior years and movements in individual
risks have not varied significantly compared
to 2017. Risks relating to 2019 are
discussed below.
The Board of Ferrexpo has ultimate
responsibility for the identification of risks
and associated mitigation strategies. The
Chief Executive Officer, Chief Financial
Officer, Chief Operating Officer and Chief
Marketing Officer manage specific risks on
a day-to-day basis related to their functions.
We have indicated how our principal risks would impact our ability to deliver against our strategy.
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
Increase in expected risk in 2019
Decrease in expected risk in 2019
Risk balance for 2019
For more information on Our Strategy
See pages 32-33
1. REALISED PRICE
The Group’s realised price is principally impacted by demand for iron ore which is highly correlated to global demand for steel and steel
mill profitability. In 2018, global steel mill profitability increased compared to 2017 levels, especially in the first nine months of the year.
Profitability in the 4Q of the year, however, was impacted by rising trade tensions and slower economic activity, especially in China. This
resulted in a fall in global steel mill margins. As of 31 January 2019, steel margins had improved in China; however, no improvement was
seen in Europe as yet.
Despite the above, most market analysts have recently upgraded their iron ore price expectations for 2019. This follows the January 2019
tailings dam breach in Brazil and the subsequent reduction in mining volumes announced by the largest producer in Brazil (and the world)
of an expected 60 million to 70 million tonnes annualised of current capacity closures as of 18 April 2019. Most of this tonnage was used
to produce high grade iron ore.
In 2018, in line with previous years, the pricing formula used for long-term contracts in the pellet industry was, 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).
In 2019, it appears the industry is transitioning to a pricing formula based on 65% Fe index iron ore fines price rather than the 62% Fe iron
ore fines price. This represents a change in precedent for the industry and allows producers of 65% Fe pellets, such as Ferrexpo, to
directly capture the price premium for higher grade ore.
Ferrexpo’s achieved price can vary significantly from period to period as it is dependent on the global price for 65% Fe iron ore fines, pellet
premiums and freight (all of which Ferrexpo has little or no control over as a price taker).
39
Ferrexpo plc
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1.1. LOWER IRON ORE PRICES (EXTERNAL RISK)
ROOT CAUSE AND IMPACT
A decline in the 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 investmentA. Lower
levels of maintenance investment could result in lower
production volumes, higher production costs, reduced
cash generation and a weakened balance sheet.
The 62% Fe iron ore fines price averaged US$69 per tonne in
2018 compared to US$71 per tonne in 2017. Most market
analysts have recently upgraded their expectations for iron
ore prices in 2019 based on supply disruptions expected
from Brazil. Furthermore, it is expected that required
upstream tailings dam remediation across the industry will
likely last around three years, continuing to constrain supply.
Currently, a consensus of analyst forecasts for the average
benchmark 62% Fe iron ore fines price in 2019 is US$71
per tonne1 and US$64 per tonne in 2020.
Steel demand and steel mill profitability have weakened
which, together with increased scrap usage, could impact
overall demand for iron ore and hence iron ore pricing. A
weak demand environment would support demand for low
grade iron ore as steel mills look to reduce their input costs
and, therefore, reduce the premium paid for high quality
ores and pellets.
For further information on iron ore prices and the market
environment
See pages 20-23
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
LINK TO STRATEGY
3 5
CHANGE
MITIGATION
Ferrexpo is a low cost producer
relative to the majority of its peers,
positioned on the lower half of
the pellet cost curve. Ferrexpo’s
operating costs are partly correlated
with commodity prices. When the
commodities cycle is in a downward
phase, and Ferrexpo typically receives
a lower selling price, its cost base in
general also reduces. Furthermore,
the Hryvnia is a commodity-related
currency and historically over the long
term it has depreciated during periods
of low commodity prices, although
movements of the Hryvnia against
the US Dollar can also be influenced
by short-term political factors.
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 and cash generation
throughout the iron ore price cycle.
1 Analyst consensus is based on price forecasts from Citi, Macquarie, Barclays, JPM, Credit Suisse, Deutsche Bank, Goldman Sachs, CRU, HSBC, Investec and UBS as of 2 April 2019.
1.2. PELLET PREMIUMS AND PELLET SUPPLY (EXTERNAL RISK)
CHANGE
ROOT CAUSE AND IMPACT
RESPONSIBILITY
MITIGATION
Chief Marketing Officer
and Chief Executive Officer
RISK APPETITE
Medium
LINK TO STRATEGY
1 3 5
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 20 to 23
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 2018 was US$38 per tonne.
Average pellet premiums in 2018 were 30% higher than in
2017 and traded at a ten year high. In 2019 it is expected
that pellet premiums will likely be in line with 2018; however,
industry pricing will be based on the 65% Fe iron ore fines
price rather than the 62% Fe iron ore fines price.
As the industry appears to be transitioning the pellet pricing
formula to be based on the 65% Fe iron ore fines price, it is
notable that in 2018, 2017 and 2016 the 65% Fe iron ore fines
price traded at US$21 per a tonne, US$16 per tonne and
US$5 per tonne respective price premium above the 62%
Fe iron ore fines price.
Pellet premiums are primarily influenced by steel mill
profitability. CRU expects global steel demand to remain
stable in 2019. Pellet premiums may also be influenced by
increasing requirements to reduce air emissions in the steel
production process as well as supply shortages following
the tailings dam accident in Brazil in January 2019. This is
likely to provide support to pellet premiums in the short to
medium term.
Meanwhile, prohibitively high barriers to entry are unlikely to
see significant new pellet supply entering the market in the
short to medium term.
For further information
See Industry in Chairman’s statement and Market Review on
pages 17 and 20-23 respectively
STRATEGIC REPORTCORPORATE GOVERNANCEFINANCIAL STATEMENTS
40
Ferrexpo plc
Annual Report & Accounts 2018
CHANGE
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.
PRINCIPAL RISKS CONTINUED
1.3. SEABORNE FREIGHT RATES (EXTERNAL RISK)
RESPONSIBILITY
Chief Marketing Officer
and Group Freight
Manager
RISK APPETITE
Medium
LINK TO STRATEGY
2 3 5
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.
Seaborne freight rates, such as C3, are published by the
Baltic Exchange. C3 freight represents the cost for ocean
transportation for iron ore from the Brazilian port of Tubarão
(where the largest seaborne pellet supplier is based) to
Qingdao, China (the largest steel producer in the world).
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
and demand for capesize vessels from competing bulk
producers. In 2018, the average C3 freight rate increased
to US$18 per tonne from US$15 per tonne in 2017. In
2019, subject to oil prices, freight rates may be impacted
by lower demand due to reduced iron ore shipments
from Brazil given recent curtailments to production.
As of 1 January 2020, the International Maritime
Organization will enforce a new 0.5% global sulphur cap on
fuel content in the shipping industry from the present 3.5%
limit. Subject to supply and demand dynamics, including
steel mill profitability, the introduction of IMO 2020 could
increase freight costs for iron ore suppliers across the
industry and reduce net prices and thus impact profitability.
41
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Annual Report & Accounts 2018
2. OPERATING RISKS
2.1. OPERATING RISKS AND HAZARDS INCL. MINING,
PROCESSING AND LOGISTICS (COMPANY SPECIFIC RISK)
RESPONSIBILITY
Chief Operating Officer,
Chief Marketing Officer
RISK APPETITE
Low
LINK TO STRATEGY
1 2 3 4 5
ROOT CAUSE AND IMPACT
Ferrexpo operates large-scale mining operations and
industrial process facilities, which pose significant
operating challenges and environmental risks. The
Group is exposed to geotechnical incidents, including
high wall failures and tailings dam breaches, as well as
catastrophic processing equipment failure. This could
lead to large scale fatalities, production-related shortfalls
or shutdowns as well as logistics bottlenecks.
The Group’s operations require significant sustaining capital
expenditure and repair and maintenance programmes
to ensure safe operation and availability of equipment. A
reduction in sustaining capital or repairs and maintenance
expenditure can result in lower mining volumes,
processing plant breakdowns and pelletiser line failures.
Production stoppages will increase costs and lower
output. It can also reduce the quality of the product and
may lead to late delivery to customers. Lower volumes,
higher costs and financial penalties due to poor quality
and late delivery can impact the Group’s cash generation
ability, reducing liquidity levels and impacting capital
investment levels as well as balance sheet strength. Poor
pellet quality or late delivery of product can also affect
the Group’s ability to perform according to customer
contracts and its ability to renew contracts in the future.
CHANGE
MITIGATION
Since 2014, the Group has refurbished
three out of its four pellet lines. In 2019,
the Group will continue to invest in its
repairs and maintenance programme,
which will include the final pellet line
shutdown for 75 days in 2H 2019.
In 2018, Ferrexpo spent US$66 million
on sustaining capex (2017: US$79
million) and US$80 million on repairs
and maintenance (2017: US$78 million).
Ferrexpo operates one tailings dam
covering an area of 1,500 hectares.
The dam is constructed on flat
topography and the method of
construction is the Modified Centreline
methodology. The dam is split into
three sections with each section
subdivided into smaller sections of 400
meters by 400 meters. The walls of the
dam and of the sections within the
dam are constructed using engineered
fill, including siliceous rock. Due to this
structure, if a breach occurs the
leakage is unlikely to occur from all
sections at the same time. This means
that the amount of possible damage
should be limited. The dam has been
designed by external consultants
Ukrgiproruda, with biannual
inspections by the Ukrainian mining
regulator. Following the tailings dam
breach in Brazil in January 2019,
Ferrexpo has appointed an
international consultant, to further
review and verify the dam’s design,
construction and monitoring.
Ferrexpo has also appointed an
international consultant to review the
possibility of high wall pit failures.
Where possible, Ferrexpo owns its
own logistics infrastructure. As of
31 December 2018, this included
2,252 rail cars, which reduces reliance
on state rail cars for transportation of
pellets to border points, 156 barges to
transport 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 REPORTCORPORATE GOVERNANCEFINANCIAL STATEMENTS
42
Ferrexpo plc
Annual Report & Accounts 2018
PRINCIPAL RISKS CONTINUED
2.2. HEALTH AND SAFETY RISKS (COMPANY SPECIFIC RISK)
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
work 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 impacting employee morale.
During 2018, there was one fatality (2017: one). A total of 25
lost time injuries occurred across the Group during the year
compared to 23 in 2017. The lost time injury frequency rate
per million man hours worked was 1.18 (2017: 1.17).
RESPONSIBILITY
Chief Operating Officer
RISK APPETITE
Low
LINK TO STRATEGY
2 4
CHANGE
MITIGATION
Most of the accidents reported have
been traced back to non-compliance
with internal safety procedures.
Actions taken during 2018 have been
largely focused around contractors
and FPM employees. Activities include:
– A focus on significant risk
management;
– Significant incident and near miss
–
reporting;
Increased training throughout the
year for safety advisers;
– Focus on improvement in the
quality of accident investigations;
– Focus on FPM’s maintenance areas
to improve workplace conditions
and housekeeping;
Increase in external safety audits;
Increased minimum safety
standards for light vehicles and
equipment;
–
–
– Employment of a safety consultant
with significant international
experience and implementation of a
Supervisor Safety Leadership
Training Programme;
– An important focus of safety
training is to instil a culture of
accountability. The goal of these
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; and
– An increase in speed checks,
alcohol testing and operator and
maintainer competencies.
Employee remuneration is partly linked
to safety performance.
43
Ferrexpo plc
Annual Report & Accounts 2018
2.3. OPERATING COST INCREASES (EXTERNAL AND COMPANY RISK)
CHANGE
ROOT CAUSE AND IMPACT
RESPONSIBILITY
MITIGATION
Chief Operating Officer
RISK APPETITE
Low
LINK TO STRATEGY
2 5
Ferrexpo sits in the bottom half 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.
Ferrexpo has established several
sources of suppliers for key products
as well as several supply routes.
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, pellet producers typically 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 (US$ per tonne)A 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
typically reduced. In addition, over half of the Group’s
operating costs, including in-land logistics costs, are
incurred in Ukrainian Hryvnia. The Hryvnia is a commodity-
related currency and historically over the long term it has
depreciated during periods of low commodity prices,
although movements of the Ukrainian Hryvnia against the
US Dollar can also be influenced by short-term
political factors.
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 the higher pellet premium environment the Group has
taken the opportunity to increase its repair and maintenance
activities to further improve equipment reliability and
performance; this has continued into 2019 and likely to
continue into 2020. The Group is also increasing its mining
activity at FPM to access higher grade ore.
In 2018, the Group’s C1 cash cost of production increased
from US$32.3 per tonne to US$43.3 per tonne. See pages
25 and 26 for a description of the factors impacting
operating costs.
STRATEGIC REPORTCORPORATE GOVERNANCEFINANCIAL STATEMENTS 44
Ferrexpo plc
Annual Report & Accounts 2018
PRINCIPAL RISKS CONTINUED
3. COUNTRY
3.1 UKRAINE COUNTRY RISK (EXTERNAL RISK)
ROOT CAUSE AND IMPACT
Ukraine has been an independent country since 1991.
During this time, the country has witnessed four changes
in government and 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 with
over 12,000 deaths of Ukrainian nationals. The general
political instability has negative social and economic
consequences and is capable of damaging Ferrexpo’s
ability to operate without disruption in Ukraine. As of
21 April 2019, a new president of Ukraine was elected and
parliamentary elections will be held in October 2019.
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.
The Group holds mining licences and 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.
Macro and political events in Ukraine can constrain
Ferrexpo’s ability to raise finance. It can also reduce
availability of high skilled labour as emigration levels rise.
In December 2018, Moody’s upgraded Ukraine’s sovereign
credit rating to Caa1 with a stable outlook. Moody’s stated
Ukraine’s credit profile balanced the country’s meaningful
progress on reforms, a gradually improving external liquidity
position, increasing resilience to geopolitical shocks and
a moderating debt burden against a still weak rule of law,
pervasive corruption, sporadic access to capital markets,
and a short-term risk of a disorderly political transition.
Transparency International ranks Ukraine as 120th out of
180 countries in terms of the level of perceived corruption
(with 180th being regarded as the most corrupt). This
is the third year of improvement in Ukraine’s ranking.
There is a risk, however, 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 judgement.
RESPONSIBILITY
Chief Executive Officer,
Ferrexpo Board of
Directors
RISK APPETITE
Medium
LINK TO STRATEGY
1 2 3 4 5
CHANGE
MITIGATION
Ferrexpo operates in accordance with
relevant laws and utilises internal and
external legal advisers as required to
monitor and adapt to legislative
changes.
In August 2018, Ferrexpo increased its
2017 Pre-Export Finance (“PXF”) credit
facility from US$195 million to US$400
million and extended the tenor from
three to four years.
Ferrexpo prioritises sufficient
total liquidityA levels and strong
credit metrics to ensure smooth
operations should geopolitical or
economic weakness disrupt the
financial system of the country.
Ferrexpo prioritises a strong internal
control framework including high
standards of compliance and ethics. It
operates a centralised compliance
structure supported and resourced
locally at the Group’s operations.
Ferrexpo has implemented policies
and procedures throughout the Group
including training.
Ferrexpo looks to maintain a talented
workforce through skills training and by
offering competitive wages, taking into
account depreciation of the Hryvnia
against the US Dollar and local
inflation levels.
Ferrexpo is an important economic
contributor to Ukraine and it is
integrated into the local and national
economy.
45
Ferrexpo plc
Annual Report & Accounts 2018
CHANGE
MITIGATION
The Board has closely monitored
the relationship between the Charity
and the Group, and overseen the
involvement of the Chief Executive
Officer who, in his role, was the
main communication between
the Board and the Charity.
Enquiries were made over several
years by the Group as part of its
relationship with the Charity. The
Group implemented a number of key
controls to manage its relationship
and expenditures which have been
improved and developed in particular
throughout 2016, 2017 and 2018.
For further information on
controls in place in relation to
Blooming Land see the Audit
Committee Report on page 71.
Throughout the relationship with the
Charity, various other steps have been
taken, including a review by the Audit
Committee covering the operation of
the sub-funds in 2015 and site visits.
As part of the Group’s procedures
and outside the internal control
framework, an additional external
review was carried out in May 2018
as to the relevance and reliability of
the independent audited accounts
of the Charity received by the
Board for the year end 2017.
An Independent Review has been
established by the Board to look
into, amongst other things, whether
Blooming Land’s use of Ferrexpo’s
contributions was for the stated
purpose. The review is ongoing.
For further information
See Chairman’s Statement (page
18), Responsible Business (page 59),
Corporate Governance Report (page
63), Independent Review Committee
Report (page 69), Audit Committee
Report (page 71) and Note 7 (page
121), Note 29 (page 154), Note 33
(page 161) and Note 34 (page 161) to
the financial statements.
RESPONSIBILITY
Ferrexpo Board of
Directors
RISK APPETITE
Low
LINK TO STRATEGY
4
3.2. COUNTER PARTY RISK (EXTERNAL RISK)
ROOT CAUSE AND IMPACT
Independent Review of Charitable Donations to
Blooming Land
Ukraine is a frontier emerging market that has undergone
significant upheaval since the Euromaidan revolution in
November 2013. This was followed by the annexation of
Crimea by Russia in 2014 and the start of armed conflict
in Eastern Ukraine, where over 12,000 Ukrainian nationals
have died to date. During this period, the country went
through a severe economic recession, with real GDP
declining 6.6% and 9.8% in 2014 and 2015 respectively.
This was followed by a major banking crisis, with over 85
banks declared insolvent by the National Bank of Ukraine
while the local currency devalued 67% against the US
Dollar from 1 January 2014 to 31 December 2015.
Ferrexpo’s Corporate Social Responsibility (“CSR”)
programme in Ukraine was formally established in 2009
and focused on the areas surrounding the mines.
In 2013, given the severe upheaval in the country and to
support its general social licence to operate, the Group
established a CSR programme on a national basis. A
charity called Blooming Land which operates through three
sub-funds (the “Charity”) was used for this programme.
The Charity’s activities included diabetes prevention,
eyesight care and support for the elderly, including by
hosting events subcontracted out to event managers.
The interim conclusion is that the Charity operated
independently of Ferrexpo and it is not a related
party of the Chief Executive Officer or of the
Group’s executive management.
For the year ended 31 December 2018, the Group made
charitable contributions of US$9.5 million to Blooming Land
(2017: US$24.0 million). Donations to the Charity ceased in
May 2018. From 2013 until May 2018, when donations were
ceased, the Group made total contributions to the Charity
of approximately US$110 million.
As with any CSR programme there is a risk that
funds donated could be misapplied, including through
misappropriation. Depending on the nature of any such
misappropriation or misapplication, there is a risk that
the Group’s financial statements might not fairly reflect
the nature of the expenditures made to the Charity
and may fail to make provision for fines, penalties or
other liabilities. There is also a risk that related party
transactions within the Charity are not disclosed
to the Group. Due to uncertainty surrounding the
status of the donations, further considerations are
presented in Note 29 Contingencies on page 155.
The Board developed controls to cover donations to
the Charity as set out in the 2017 full year accounts and
continued to develop these controls prior to the Group
ceasing donations in May 2018. During 2019, (see Note
34 Events after reporting period on page 161) the IRC
was formed and the circumstances leading up to its
establishment are described in the IRC Report on page 69.
For further information
See Chairman’s Statement (page 18), Independent Review
Committee Report (page 69), Responsible Business
(page 59), Corporate Governance Report (page 63), Audit
Committee Report (page 71), and Note 7 (page 121), Note 29
(page 155), Note 33 (page 161) and Note 34 (page 161) to the
financial statements.
STRATEGIC REPORTCORPORATE GOVERNANCEFINANCIAL STATEMENTS
46
Ferrexpo plc
Annual Report & Accounts 2018
PRINCIPAL RISKS CONTINUED
4. TAX
4.1 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 total liquidityA levels.
RESPONSIBILITY
Chief Financial Officer
RISK APPETITE
Medium
LINK TO STRATEGY
5
CHANGE
MITIGATION
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.
For further information
See Note 11 of the financial
statements
47
Ferrexpo plc
Annual Report & Accounts 2018
5. CAPITAL ALLOCATION
Ferrexpo aims to maintain prudent leverage metrics with net debt to underlying EBITDA as of 31 December 2018 at 0.67 times. The
Group’s priority since 2015 has been to deleverage and it has repaid over US$500 million of gross debt since 1 January 2016. As such,
the Board feels it is appropriate to readjust the use of available free cash flows from primarily deleveraging to include a more balanced
focus on dividends and investment opportunities whilst ensuring its credit metrics remain strong.
5.1 INVESTMENT OPPORTUNITIES (COMPANY RISK)
ROOT CAUSE AND IMPACT
Ferrexpo evaluates and, if appropriate, enters into high
net present value opportunities which it believes are
potentially value accretive to the Group and can reduce
future operating risk. There is a risk that Ferrexpo
may make acquisitions or investments, which may
not be accretive to earnings or otherwise meet its
operational or strategic expectations. In addition, such
an investment or acquisition may divert management’s
attention away from ongoing business activities.
RESPONSIBILITY
Chief Executive Officer,
Chief Financial Officer
RISK APPETITE
Medium
LINK TO STRATEGY
1 3 5
CHANGE
MITIGATION
Management has procedures in place
to ensure any potential investment
opportunity undergoes thorough due
diligence and meets strict financial
criteria. There is a Group Investment
Committee which analyses hurdle
return rates to ensure risk is
appropriately mitigated both on project
execution and in terms of the internal
rates of return. All investment decisions
are approved by the Board.
STRATEGIC REPORTCORPORATE GOVERNANCEFINANCIAL STATEMENTS 48
Ferrexpo plc
Annual Report & Accounts 2018
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 38 to 47.
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 65% Fe
iron ore fines CFR China price and the
pellet premium) and cost inflation. Based
on 2019 expected production volumes
of approximately 10.6 million tonnes,
a US$5 per tonne fall in the Group’s
received price would, if not mitigated,
reduce the Group’s underlying EBITDA
by US$5 per tonne. While a general
production cost increase of 10% would
decrease Group underlying EBITDA by
US$4.8 per tonne and a 5% decrease
in production volumes would decrease
underlying EBITDA by US$2.6 per tonne.
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, repairs
and maintenance, 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
historical 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 over US$500 million and it currently
has a strong financial profile.
Viability Statement
Based on the results of this analysis, the
Directors have a reasonable expectation
that the Group will be able to continue to
operate and meet its liabilities as they fall
due over the five-year period of
this assessment.
Prospects
The Directors, having assessed the
principal risks related to the Group’s
business model, believe the long-term
prospects of the Group remain sound.
Principally this is due to Ferrexpo’s
competitive cost position on the iron ore
cost curve, its high quality product that
commands a price premium in a niche
market with high barriers to entry, a first
class customer portfolio, a well invested
asset base and favourable industry
dynamics supporting pellet consumption.
49
Ferrexpo plc
Annual Report & Accounts 2018
RESPONSIBLE BUSINESS
ENSURING A LONG-TERM
SUSTAINABLE FUTURE
Ferrexpo’s policy
towards Responsible
Business covers its
efforts in Environmental,
Social and Governance
(“ESG”) matters. High
ESG standards underpin
a sustainable business
that benefits all
stakeholders of
the Group.
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 2018, and assists the
Board in its oversight of responsible
business-related activities.
In 2018, the UK Corporate Governance
Code was revised. One of the new
provisions of the Code is to enable greater
board engagement with the workforce to
understand their views. As such, Ferrexpo’s
Board has agreed to develop an Employee
Listening Programme which will be
overseen by the CSR Committee
going forward.
The following diagrams highlight the CSR
governance structure at Ferrexpo and a
framework of how responsible business
considerations (in green) are fully
embedded within the corporate strategy.
Through community engagement,
environmental monitoring, compliance
training and health and safety
improvements, Ferrexpo aims to sustain a
long-term future that not only develops its
natural resources for its own benefit, but
also for the shared benefit of those around
us – employees and their families, local
communities and businesses, the natural
environment around the Company’s mines,
and tax revenues to national governments.
Ferrexpo has once again been recognised
in the Ukrainian government’s published list
of ‘Top Taxpayers’* and through its 40
years of continuous operation the Group
has been able to maintain a constant
presence in Central Ukraine, providing
employment as the largest company in the
Poltava Region.
During the year, the Group maintained a
focus on product quality and increasing its
output as well as enhancing its operating
processes. It also focused on softer
processes such as health and safety
initiatives and compliance training, through
which the Company continues to sustain its
social licence to operate.
I would like to thank all of the Company’s
employees, contractors and other
stakeholders for their collective efforts to
ensure our progress in ESG reporting.
Yuriy Khimich
Chairman, Corporate Social
Responsibility Committee
* http://officevp.sfs.gov.ua/media-ark/news-ark/365564.html
For more information
See our Responsible Business Reports
– www.ferrexpo.com
STRATEGIC REPORTCORPORATE GOVERNANCEFINANCIAL STATEMENTS 50
Ferrexpo plc
Annual Report & Accounts 2018
RESPONSIBLE BUSINESS CONTINUED
Governance Structure
THE BOARD
THE BOARD
Oversight of responsible business matters and performance
Oversight of responsible business matters and performance
CSR COMMITTEE1
Chairman – Yuriy Khimich
Members – Steve Lucas, Kostyantin Zhevago, Bert Nacken, Greg Nortje, Viktor Lotous
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 Yuriy Khimich – FBM General Director; Steve Lucas – Ferrexpo plc Non-executive Chairman; Bert Nacken – independent Non-executive Director; Greg Nortje – Chief Human Resources
Officer; Kostyantin Zhevago – CEO; Viktor Lotous – FPM Chief Operating Officer and Head of Managing Board; 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.
Non-Financial Information Statement
Ferrexpo aims to comply with the new Non-Financial Reporting requirements contained in sections 414CA and 414CB of the Companies
Act 2006. The below table, and information it refers to, is intended to help stakeholders understand the Company’s position on key
non-financial matters. This builds on existing reporting that the Company already does under the following frameworks: CDP, Global
Reporting Initiative, Guidance on the Strategic Report (UK Financial Reporting Council), UN Global Compact, UN Sustainable
Development Goals and UN Guiding Principles.
REPORTING REQUIREMENTS
POLICIES AND STANDARDS
ADDITIONAL INFORMATION
ENVIRONMENTAL
– Environmental statement
Environment pages 54-55
www.ferrexpo.com/responsibility/environment
EMPLOYEES
– Ethics and Responsible Business Policy
– Code of Responsibility
– Health and Safety Policy
www.ferrexpo.com/responsibility/people
Equality, inclusion & diversity pages 52-53
Health, safety & wellbeing pages 52-53
Learning & development pages 52-53
Responsible conduct & culture pages 58-59
Diversity, skills & composition pages 52-53
HUMAN RIGHTS
– Human Rights Policy statement
– Data Privacy Policy
– Anti-Slavery and Trafficking Statement
– Information and Cyber Security Policy
Equality, inclusion & diversity pages 52-53
Health, safety & wellbeing pages 52-53
Learning & development pages 52-53
Responsible conduct & culture pages 58-59
Diversity, skills & composition pages 52-53
Environmental risk
management
pages 36-45
Board Diversity Policy
page 76
People risk
pages 36-45
Governance risk
pages 36-45
SOCIAL MATTERS
– Donations Policy
– Helping communities
www.ferrexpo.com/responsibility/community
Independent Review Committee
pages 69-70 and page 155
Community risk
pages 44-45
(see 3.1 and 3.2)
ANTI-CORRUPTION
AND ANTI-BRIBERY
– Anti-bribery Policy
– Anti-money Laundering
and Counter Terrorist Financing Policy
– Fraud Risk Management Policy
Customer privacy & data security pages 56-57
Responsible conduct & culture pages 56-57
Operational risk pages 36-45
www.ferrexpo.com/responsibility/governance
PRINCIPAL RISKS
AND IMPACT ON
BUSINESS
ACTIVITIES
NON-FINANCIAL KPI – Key Performance Indicators
Customer Business Model pages 10-11
Risk Management pages 36-45
51
Ferrexpo plc
Annual Report & Accounts 2018
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:
Key to materiality matrix
– People
– Economic indicators
– Community
– Environment
S
R
E
D
L
O
H
E
K
A
T
S
O
T
N
R
E
C
N
O
C
G
N
S
A
E
R
C
N
I
I
– Occupational health
– Employment and turnover
– Contracts and collective
– Health and safety
performance
bargaining
– 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
OPERATIONAL LEVEL
OUR RESPONSIBLE APPROACH
LOGISTICS
WORKFORCE
MARKETING
PROCESSING
RESOURCE BASE
MINING
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
OUR STAKEHOLDERS
GOVERNMENT
INVESTORS
SUPPLIERS
WORKFORCE
COMMUNITIES
CUSTOMERS
CAPITAL PROVIDERS
STRATEGIC REPORTCORPORATE GOVERNANCEFINANCIAL STATEMENTS
52
Ferrexpo plc
Annual Report & Accounts 2018
RESPONSIBLE BUSINESS CONTINUED
PEOPLE
Ferrexpo is a major employer in the Poltava Region
and the Company’s workforce represents a large
proportion of the population of the local town of
Horishni Plavni. Ferrexpo’s success is therefore
closely linked to the relationship it has with its
workforce and it is important that the Company
develops its workforce to achieve this goal.
The Ferrexpo team comprises 9,170 people
globally, with the majority of this workforce
located at the Company’s iron ore mines in
Ukraine. As a business Ferrexpo aims to
recruit and retain a talented workforce, to
create a stable and consistent environment
across the Company’s operations, as
evidenced through the length of service for
employees at the Company’s operating
assets in Ukraine – 58% of the workforce at
FPM and 40% at FYM have worked with
Ferrexpo for at least five years, representing
increases on last year from 55% and 32%
respectively. Ferrexpo aims to provide its
employees with a fair and inclusive
environment to work in, and to promote
diversity where possible.
Safety and Wellbeing
It is with regret that the Company reports
that a fatality occurred at its Ukrainian
operations in October 2018, whereby a
contractor engaged in maintenance work
on the Company’s pelletiser plant was
involved in a fall from height incident.
A thorough investigation into this incident
has resulted in stricter guidelines for the
maintenance of raised walkways, in addition
to greater oversight of contractor safety by
Ferrexpo’s onsite management team.
An important focus for the Company was
on safety throughout 2018, in an effort to
improve safety statistics from the prior year.
Two notable achievements were recognised
in Ferrexpo’s safety record in 2018 – FYM
MONTHS LTI-FREE AT FERREXPO
YERISTOVO IN 2018,
REPRESENTING OVER 2.5
MILLION HOURS
managed to operate without a lost time
injury (“LTI”) for 10 months of the year, and
the Company’s barging subsidiary on the
Danube River, DDSG, registered a 50%
reduction in the number of LTIs compared
to previous years.
The Company’s main operating entity, FPM
however, noted a year-on-year deterioration
in its lost time injury frequency rate (“LTIFR”)
from 1.03 to 1.28, due to an increase in
employees involved in LTIs from 11 to 17.
An analysis of these incidents has identified
that road traffic accidents and interactions
with heavy-lifting equipment as key areas
for improvement, with a number of process
improvements identified, such as an
increase in the frequency of inspections
of the condition of all slings and other
heavy-lifting equipment. Furthermore, from
January 2019, all vehicles at Ferrexpo’s
operations will be required to have safety
belts fitted, which was not previously
required under Ukrainian legislation.
Safety-related activities in 2018 focused on
improved reporting procedures, such as
ensuring that initial incident reports are
available within 24 hours in order to identify
risks quickly, and Serious Incident Reports
(“SIRs”) also now include potential serious
incidents in order to capture as many risk
areas as possible in the Company’s risk
registers. This improved reporting and risk
53
Ferrexpo plc
Annual Report & Accounts 2018
identification can be seen in the increase
in SIRs to 25 in 2018 (from ten), with
deliverable action points from each report.
For a comparison of safety performance
– Safe Work Australia, an Australian
government agency, states that the
industry standard for mining of metal ores
in Australia is a LTIFR of 4.0. Ferrexpo
therefore continues to maintain an
injury rate below this benchmark¹.
Through improved risk identification
processes and reporting, the Company
also registered a 30% decrease in the
severity rate of incidents in 2018, an
important lead indicator for progress
in safety.
Drug and Alcohol Testing
Ferrexpo operates in a region where
drug and alcohol addiction is a serious
social concern, and the Company
maintains a strict zero-tolerance policy
on the use of alcohol and recreational
drugs in the workplace, with regular
testing for employees, mandatory checks
for new applicants and on-the-spot
testing for anyone suspected of being
under the influence during work hours.
During 2018, a total of 3,889 checks
were undertaken (2017: 3,731), with a
failure rate of 4% in 2018 – down one
third on the prior year. For employees
considered eligible, the Company
operates a rehabilitation programme to
help those affected by alcohol and drug
addiction, which follows internationally
recognised frameworks for recovery,
such as Alcoholics Anonymous and the
12 Steps Programme. As at the end of
2018, a total of 66 individuals classified
as being ‘at-risk’ were being treated
under this initiative (2017: 64 individuals).
Training
Over 11,500 training courses were
completed by employees in 2018, the
equivalent of 1.28 courses per employee,
up 20% from 2017. The number of safety
training courses undertaken rose by 17% to
4,433, as well as a significant increase in
functional training (+146% to 4,943). The
number of training hours per employee also
rose by 26% to 27 hours in 2018.
The above increase in functional training is
the result of several new training initiatives
implemented, including environmental
management (132 employees), and
cross-functional training for employees
to operate multiple pieces of mobile
equipment such as excavators and light
vehicles (385 people).
In line with the Company’s focus on
safety in 2018, new training courses were
provided in first aid for 940 employees in
the processing plant, risk identification
and risk management (129 employees),
as well as emergency medical assistance
(71 employees).
Ferrexpo also provides training for
contractors working at its operations, with
775 contractors trained in safety and other
skills (2017: 1,143).
Diversity
Ferrexpo monitors diversity in its workforce,
to help develop a balanced and positive
working environment. Women represent
29% of the Company’s workforce
(2017: 29%), with the percentage of
female managers declining slightly in
2018 following a grading project by
the Company’s HR function to grade
all positions across the Group and
reclassify management roles according
to a specific grade. Female managers
represented 18% of total managers in
2018 (2017: 20%). The Company has a
number of ongoing initiatives to further the
careers of women at Ferrexpo, details of
which will be available in the Company’s
Responsible Business Report, which will
be published later this year. In another
area of diversity, 4% of the Company’s
workforce are registered disabled, in line
with a government requirement in Ukraine.
+20%
11,500 TRAINING COURSES
COMPLETED BY EMPLOYEES IN 2018,
A 20% INCREASE ON COURSES PER
EMPLOYEE
11,157
WORKFORCE OF 11,157, COMPRISING
OVER 9,000 EMPLOYEES AND NEARLY
2,000 CONTRACTORS
KPIs
GOAL
To operate
fatality free
Maintain injury
frequency rate
below peers
PERFORMANCE
One fatality in 2018
(2017: 1)
LTIFR maintained at
same level as 2017
(1.18), compared to
industry standard of
4.0.
1 For more information on LTIFR statistics see:
https://www.safeworkaustralia.gov.au/statistics-and-
research/lost-time-injury-frequency-rates-ltifr
CASE STUDY
LOCK-OUT TAG-OUT
SYSTEMS
In an initiative to modernise and
improve conditions for plant maintainers
in its processing facilities, Ferrexpo is
implementing the Lock-Out Tag-Out
(“LOTO”) system whereby maintainers
can physically lock equipment in the
off position whilst it is being repaired.
Control panels are also being moved to
be located adjacent to equipment they
control, in an effort to improve lines of
sight for operators to see if equipment
is being worked on. A major focus in
2019 will be to improve workers’
visibility by replacing darker coloured
Personal Protective Equipment (“PPE”)
with lighter, brighter versions of the
same clothing.
For more information on Ferrexpo’s approach to its
workforce, please see the Company’s Responsible Business
Reports on the Company’s website (www.ferrexpo.com).
STRATEGIC REPORTCORPORATE GOVERNANCEFINANCIAL STATEMENTS 54
Ferrexpo plc
Annual Report & Accounts 2018
RESPONSIBLE BUSINESS CONTINUED
ENVIRONMENT
Ferrexpo operations have a bearing on a wide
range of environmental factors – air quality, water
quality, land use and rehabilitation, and biodiversity,
with the Company committed to monitoring each
area and managing its footprint.
Carbon Dioxide Emissions
Carbon dioxide (CO2) emissions from
Ferrexpo’s operations in Ukraine principally
revolve around the consumption of three
key consumables – the diesel that powers
the Group’s mining fleet in its mines,
the electricity that drives the Group’s
processing plant, and the natural gas that
heats the Company’s pellets in its pelletiser.
These three consumables accounted
for 92% of Group CO2 emissions in
2018 (2017: 92%). Additional sources of
CO2 from the Company’s activities are
consumed in the Company’s barging
subsidiary DDSG, which transports pellets
to customers along the Danube River, as
well as steam that is used for heating and
is purchased from the local supplier.
Consumption of natural gas increased in
2018 as the Company increased the kiln
temperatures in its pelletiser as part of
a planned programme to increase pellet
quality. Diesel consumption throughout
the Group decreased by 3%, despite rock
mining tonnes increasing by 4% during
the year. This decrease in diesel usage
relates to improved mining productivity
and utilising a greater number of electric
shovels at FPM, which represents over
80% of the Group’s rock mining activities.
WATER REUSE
92% OF WATER EXTRACTED AT
FPM WAS REUSED IN 2018
Electricity is provided by the Ukrainian
national grid, which continues to be
modernised, with reduced reliance on older
coal-fired power stations, meaning that
the estimated carbon factor for electricity
generated fell by 2% in 2018. Furthermore,
total electricity consumption fell by 1%
in 2018, meaning that electricity was the
single largest contributor towards total
Group CO2 production falling in 2018.
Other Emissions
Ferrexpo closely monitors emissions at its
operations in Ukraine, divided into two
categories: stationary sources (processing
and pelletising plants, tailings facilities, and
waste dumps) and mobile sources (mining
equipment and other sources).
(All figures tonnes unless otherwise stated)
2018
2017
% change
Group CO2 emissions
Scope 1 (direct)
Scope 2 (indirect)
Scope 3 (biofuels)
Pellets produced (million tonnes)
2,583,178
566,877
1,925,670
90,631
10.607
2,614,449
554,763
1,974,997
84,689
10.444
Intensity ratio (Scope 1 and 2 only)
235
242
-1%
+2%
-2%
+7%
+2%
-3%
55
Ferrexpo plc
Annual Report & Accounts 2018
-3%
235KG CO2 PER TONNE PELLETS
PRODUCED, REPRESENTING A 3%
DECREASE ON 2017
19%
BIOFUEL CONSUMPTION MAINTAINED
AT 19% OF THE TOTAL ENERGY MIX IN
THE COMPANY’S PELLETISER
KPIs
GOAL
Reduce carbon
footprint
Increase
percentage of
renewable energy
usage in fuel mix
PERFORMANCE
Direct CO2
emissions rose 2%
but total Scope 1
and 2 emissions per
tonne of pellets
decreased by 3%
Sunflower husks
continue to
represent 19% of
energy mix in
pelletiser, in line
with 2017
Emissions from stationary sources in 2018
were as follows:
– NO2 emissions rose by 21% to 3,493
tonnes as the Company increased kiln
temperatures in 2018 to improve pellet
quality, resulting in increased natural gas
and sunflower husk consumption.
– SO2 emissions rose by 41% to 1,894
tonnes after a trial to add lime to the ore
as it is processed was halted, when it
was discovered that the lime was
causing excessive wear to the
processing plant.
– Solid emissions fell by 8% in 2018 to
3,619 tonnes after the successful
rehabilitation of waste dumps at FYM
resulted in a reduction of dust
emissions.
Emissions from mobile sources fell by 2%
for the majority of gases, the result of a 2%
to 4% decrease at FPM and a 1% to 2%
increase at FYM.
Waste and Tailings Production
Ferrexpo operates its own tailings facility
at its mining operations in Ukraine that
has been in operation since 1974, and
covers an area of over 1,500 hectares. The
Company produced 9.7 million tonnes of
tailings representing an 8% decrease on
2017. The tailings storage facility is a single
dam facility, split into three sections, with
each section comprising multiple smaller
cells measuring 400m by 400m. The walls
of the tailings facility are constructed using
engineered fill, including siliceous waste
from the mine, which has the required
strength characteristics for use in such
facilities. The dam has been designed
by external consultant Ukrgiproruda,
with biannual inspections by external
consultants. Ferrexpo’s tailings facility differs
in its design from the valley fill type of facility
often utilised by iron ore mines in Brazil.
Overburden removal increased by 4%
to 88 million tonnes as the Company
increased its focus on the Poltava mine to
further improve pellet quality. Overburden is
transported by haul truck to waste dumps
that are designed by the Company’s
mine planning department, with designs
approved by Ukrgiproruda.
Energy Consumption
Ferrexpo’s mining and barging operations
consumed 18.084 PJ of energy in 2018, a
1% increase on 2017, which corresponds
to the equivalent of 604 MJ per tonne of
pellets created (+4% vs. 2017).
Overall energy consumption increased
as the Company increased the kiln
temperature in its pelletiser in order to
improve pellet quality. Sunflower husks
continue to represent 19% of the pelletiser’s
energy mix.
Water Consumption and Treatment
The majority of Ferrexpo’s water extraction
relates to groundwater inflows and rainfall
into its open pit mining operations in
Ukraine, which directly relates to the level
of precipitation incurred each year. Total
water extraction rose by 5% in 2018 to
33.8 million cubic metres, with this increase
related to the 50% increase in rainfall noted
at the mine in 2018 (619mm). The majority
(59%) of water extracted is immediately
discharged as part of the Company’s
dewatering operations. FPM continues
to reuse the majority of water it extracts
(92%), which represents 38% of Group
water extraction.
Ferrexpo closely monitors water quality at
both its mining operations across a suite of
13 chemical indicators, and can confirm
that it remained within the strict quality
control limits set by the Ukrainian authorities
throughout the year.
For more information on Ferrexpo’s environmental initiatives,
please see the Company’s Responsible Business Reports
on the Company’s website (www.ferrexpo.com).
STRATEGIC REPORTCORPORATE GOVERNANCEFINANCIAL STATEMENTS 56
Ferrexpo plc
Annual Report & Accounts 2018
RESPONSIBLE BUSINESS CONTINUED
ECONOMIC
INDICATORS AND
ETHICAL BUSINESS
FERREXPO’S PELLET EXPORTS
ARE EXPECTED TO BE
APPROXIMATELY 2.0% OF
UKRAINE’S TOTAL EXPORT
REVENUE.1
Ferrexpo operates in a business environment
that increasingly requires higher standards from
leadership teams, and this is achieved through
continuous improvements in compliance
regulations and compliance training. Through
good corporate governance, the Company can
foster a strong bond with its stakeholders.
Direct Economic Value Generated
The Company generated revenues of
US$1,300 million in 2018, and from
which generated value for the national
governments through taxes and royalties
paid of US$73 million, in addition to support
at the local level through US$86 million in
wages and salaries, and doing business
with local suppliers that operate in the
communities located close to the mine.
Ferrexpo aims to do business with local
companies in Ukraine where possible, to
help support communities and develop the
local economy through indirect jobs and
the local multiplier effect. Examples of
Ukrainian businesses that Ferrexpo has
long-standing relationships with include
local drilling contractors, the railway car
manufacturing plant in Kremenchuk and
the local clothing garment manufacturers in
the town of Horishni Plavni.
Tax Compliance
Ferrexpo complies with the tax laws in each
jurisdiction that it operates, in contributing
to a number of economies globally. Every
year the Company publishes a report on
taxes paid to governments, with each
report published in the first half of the year,
the most recent being the report for 2017
that was published on 27 June 2018. The
report for 2018 will be published in Q2
2019, in line with previous years.
Ethical Business
Ferrexpo’s success depends on building
trust and strong relationships with internal
and external stakeholders by conducting
business in a fair, transparent, legally
compliant and ethical manner. High ethical
standards apply to everyone across the
Group without exceptions. It is important
that Ferrexpo’s business partners and
stakeholders can rely on the Company’s
integrity and have confidence in their
relationship with Ferrexpo.
1 Source is:
UkrStat (http://ukrstat.gov.ua/express/expr2019/02/17.pdf)
1.9%
57
Ferrexpo plc
Annual Report & Accounts 2018
84%
COURSE COMPLETION RATE FOR
COMPLIANCE TRAINING IN 2018
US$150M
OVER US$150 MILLION DIRECT VALUE
GENERATED THROUGH TAXES,
ROYALTIES, WAGES AND SALARIES
KPIs
GOAL
Supporting
economies where
we operate
Educate
workforce in Code
of Conduct and
best practice
principles
PERFORMANCE
Over US$150 million
paid in taxes,
royalties and
salaries
Further two
additional
compliance courses
initiated in 2018,
with completion
rates on both new
compliance courses
reaching 84%
Ferrexpo’s compliance programme has
been designed to promote ethical
standards and compliance. It is aligned
with Ferrexpo’s strategy and business
objectives and clearly articulates and
assigns responsibility for compliance
outcomes. Ferrexpo directs its compliance
efforts and resources in accordance with
the risks that the Company faces, which
are reviewed and prioritised through a
biannual risk assessment process. The
presence and effectiveness of existing
controls are verified by an independent
internal audit function, which reports to
the Board of Directors.
The Board of Directors oversees the
Group’s Compliance Programme directly
and through its Committees, receives
regular compliance reports. The elements
of the compliance programme, including
Ferrexpo’s Code of Conduct and training,
apply equally to the Board as well as
to all Ferrexpo employees. In 2014,
the Executive Compliance Committee
was founded and meets regularly to
oversee the compliance of the Group
with applicable laws, regulations and
ethical standards in relation to Ferrexpo’s
employees, neighbours, the environment
and other stakeholders. In 2018, a Local
Compliance Committee was established
to foster the culture of compliance at
the Company’s operations in Ukraine.
Ferrexpo has an independent compliance
function led by the Group Compliance
Officer including four local compliance
officers in Ukraine and one at the
Group’s logistics subsidiary. Compliance
teams regularly attend national and
international compliance conferences
to keep up to date with best practice in
this field. The Group Compliance Officer
establishes, reviews and monitors the
Group’s compliance programme.
The Company has instituted a Code of
Conduct available publicly at Ferrexpo’s
website, which sets out the Company’s
requirements in relation to a number of
areas such as Anti-bribery & Anti-
corruption, Conflicts of Interest, Health &
Safety and Human Rights. Ferrexpo’s
policies and procedures, developed and
implemented across the Group, are based
on the foundation of the Code of Conduct.
Ferrexpo believes that training is
fundamental for an effective compliance
programme. Ferrexpo’s employees,
directors and officers, as well as certain
categories of contractors, receive training
on various aspects of the Code of
Conduct. Since the Company published its
revised and updated Code on Corporate
Responsibility and Business Ethics in 2015,
a total of five newly created training courses
in compliance have been introduced across
the business, leading to the completion of
over 2,500 modules by employees in 2018
alone. Two additional courses were initiated
by Ferrexpo’s Compliance Department
in 2018, relating to anti-bribery and data
privacy. Completion rates for the courses
introduced in 2018 reached 84% as of
December 2018, with the completion of
the remaining employees targeted for
2019. For those who do not have access to
e-learning, Ferrexpo’s compliance teams
convey compliance-related messages
through posters, internal newspapers,
the intranet, and other available
communication channels.
Ferrexpo acknowledges that any improper
conduct by its business partners
could damage Ferrexpo’s reputation
and potentially expose the Company
and individual employees to liability
and penalties. Ferrexpo therefore has
procedures in place to ensure that its
potential business partners are carefully
selected and are following anti-corruption
laws, observe human rights, and that
relationships with them do not breach any
applicable sanction laws and regulations.
In 2018, the Group has developed a
Business Partners’ Code of Conduct,
which will be rolled out in 2019.
The Group has a system of reporting
compliance and ethics-related concerns,
available to all employees and third parties.
Ferrexpo encourages its employees to
raise any questions or concerns with their
managers, another manager or with the
Compliance Team. It is also possible to
submit a query to compliance@ferrexpo.ch
or through Ferrexpo Integrity Line available
at http://ferrexpo.com/IntegrityLine and by
telephone (with numbers for each country
available via this link). Ferrexpo does not
allow retaliation for raising concerns and will
take disciplinary action up to and including
dismissal for intimidation or harassment
of individuals who report business
conduct concerns.
External Transparency Initiatives
Ukraine continues to make progress with
implementing the Extractive Industries
Transparency Initiative (“EITI”) since it
joined in 2013, with EITI determining
that the country has made ‘meaningful’
progress in its review published in June
2018. In September 2018, the Ukrainian
parliament also passed the law “On
ensuring transparency in extractive
industries”, which sets out legal principles
for the collection, disclosure and
dissemination of data on Ukraine’s
extractive industries.
CASE STUDY
COMPLIANCE WEEK
Ferrexpo’s compliance work in 2018
included face-to-face training sessions
at the Company’s operations in
Ukraine. This has the clear advantage
over online-based training as it enables
compliance officers to adapt
compliance teaching materials to their
audience. In November 2018, the
Company held its first site-wide
‘Compliance Week’, with Compliance
training sessions at each of Ferrexpo’s
operating entities (FPM, FYM and
FBM), together with the senior leaders
of the Group, and holding daily
briefings, which collectively resulted in
face-to-face meetings with over 250
employees. Other activities included
anti-corruption lessons at local schools
and an anti-corruption art exhibition.
One of the highlights of the Compliance
Week was a Compliance Forum entitled
‘Integrity in What We Do’, which was
hosted by Ferrexpo in tandem with the
Ukrainian Network of Integrity and
Compliance and Business
Ombudsman Council. The forum
featured presentations by Ferrexpo’s
employees and guest speakers about
ethical leadership, case studies on the
cost of non-compliance, and best
practice in compliance programmes.
For more information on Ferrexpo’s approach to ethical
business and other economic indicators, please see the
Company’s Responsible Business Reports on the
Company’s website (www.ferrexpo.com).
STRATEGIC REPORTCORPORATE GOVERNANCEFINANCIAL STATEMENTS 58
Ferrexpo plc
Annual Report & Accounts 2018
RESPONSIBLE BUSINESS CONTINUED
COMMUNITY
Ferrexpo’s footprint in Ukraine is much more
than mining and processing iron ore. The towns
and villages located close to the mine rely on the
Company for employment, as well as support for
both local businesses and communities.
Ferrexpo’s Corporate Social Responsibility
(“CSR”) programme in Ukraine was formally
established in 2009 and focused on the
areas surrounding the mines. The Group
supports the local community and the
country which is recovering from a deep
recession caused by geopolitical tensions.
Living standards have reduced
considerably over recent years.
Ferrexpo’s local community work and
charitable donations can be divided into
three key areas: (1) work done directly with
local community projects, (2) direct
transfers to vulnerable individuals in the
local community requiring support (such as
veterans and individuals requiring medical
treatment), and (3) donations to Blooming
Land, an independent third party
responsible for the coordination of the
Group’s national CSR programme.
Total donations to these three areas
amounted to US$15.1 million in 2018,
compared to US$ 28.4 million in 2017.
Ferrexpo’s engagement with the
communities local to its mines does not
focus on one area of society, instead the
Company prefers to support a diverse and
broad range of activities, from funding
sports activities at local sports facilities,
to supporting medical institutions, schools
and kindergartens, to supplementing the
local council’s budget.
Specific local projects in 2018 include:
– The financial support of students at
universities in Kremenchug, Dnipro and
Krivyi Rih, as well as students at higher
educational colleges in Horishni Plavni,
which are institutions from which the
Company continues to recruit its
future leaders.
COMMUNITY SUPPORT:
INDIVIDUALS AND FAMILIES
SUPPORTED THROUGH DIRECT
AID SUPPORT
–
In terms of sports and recreation,
Ferrexpo provides financial support to
the local football club in Horishni Plavni,
FC Gornyak, which currently has 200
children and teenagers involved in its
youth teams. In addition, Ferrexpo has
helped build and maintain indoor tennis
facilities that are used extensively
throughout the harsh winters in Ukraine.
In total, Ferrexpo-supported sports
facilities in Horishni Plavni registered
1,364 participants in sports competitions
in 2018, with 34 professional trainers
involved in a variety of sports.
–
– Financial support of the Organisation for
the Protection of the Rights of Children
with Disabilities (‘Tenderness’), which
cares for 95 children in local communities.
Individual aid to those in need of medical
treatments, assistance for utility bills and
families with multiple children. The
Company received applications from,
and provided assistance to, 574
individuals and families under this
programme in 2018, in line with its
efforts in 2017.
– Ferrexpo’s support for local sportsmen
and sportswomen helped local
individuals to succeed in 2018 – including
gold and bronze models at the European
Rowing Championships, gold medals
at the shooting World Cup in Germany,
and a number of first prizes at the All
Ukrainian judo tournament held in Kiev.
59
Ferrexpo plc
Annual Report & Accounts 2018
US$15M
US$15.1 MILLION SPENT ON DIRECT
CONTRIBUTIONS TO LOCAL
COMMUNITY PROJECTS
KPIs
GOAL
Contribute to
development,
education and
skills of local
population
Provide targeted
assistance
PERFORMANCE
Direct assistance
through Ferrexpo
Charitable Fund of
US$15.1 million
(2017: US$28.4
million)
574 families and
individuals provided
with direct aid in
2018, in line with
2017 (575)
Blooming Land Charity
In 2013, given the severe upheaval in the
country and to support its general social
license to operate, the Group established
a CSR programme on a national basis.
Blooming Land (the “Charity”) was used for
this programme and its activities included
diabetes prevention, eyesight care and
support for the elderly. For further
information see the Chairman’s Statement
on page 18 and the Independent Review
Committee Report on page 69.
As discussed in the Independent Review
Committee Report, Ferrexpo is currently
conducting an independent review in
relation to the Group’s relationship with
the Charity. This includes reviewing certain
irregularities which have been identified
in copy banks statements and other
documentation provided by the Charity, and
also the application of funds by the Charity.
The Group will continue its current
programme of charitable donations at
a local level supporting individuals and
communities surrounding the mines.
These programmes are managed by FPM
and supervised by the CSR Committee.
For further information
See Chairman’s Statement (page 18),
Principal Risks (page 45), Corporate
Governance Report (page 63),
Independent Review Committee Report
(page 69), Audit Committee Report (page
71) and Note 7 (page 121), Note 29 (page
155), Note 33 (page 161) and Note 34
(page 161) to the financial statements.
CASE STUDY
COMMUNITY
SUPPORT THROUGH
MODERNISING
EQUIPMENT
At the request of the local council in the
village of Kozelshchyna, Ferrexpo’s
charity fund and Ferrexpo Belanovo
Mining jointly purchased a modern
wheeled tractor (MTZ-82.1) for use by
the council for improving farmland
around the village, clearing snow from
public roads in the village and for waste
removal, which was previously left to
individual villagers for disposal. The
purchase of modern equipment such
as this is an important part of the
Company’s community engagement
policy, addressing specific concerns
and needs raised through dialogue with
each community.
For more information on Ferrexpo’s community support
initiatives, please see the Company’s Responsible Business
Reports on the Company’s website (www.ferrexpo.com).
STRATEGIC REPORTCORPORATE GOVERNANCEFINANCIAL STATEMENTS 60
Ferrexpo plc
Annual Report & Accounts 2018
BOARD OF DIRECTORS AS OF 31 DECEMBER 2018
Steve Lucas
Non-executive Chairman
Date of Appointment
19 May 2016
Vitalii Lisovenko
Independent
Non-executive Director
Date of Appointment
28 November 2016
Other Appointments
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 Appointments
Non-executive director, Tullow
Oil plc since 2012 and Acacia
Mining plc since 2013.
Background and Experience
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.
Simon Lockett
Senior Independent
Non-executive Director
Date of Appointment
15 June 2017
Date of Departure
28 January 2019
Chris Mawe FCA
Chief Financial Officer
Date of Appointment
7 January 2008
Other Appointments
Non-executive director and
chairman of Nominations
Committee, Pico Petroleum
Limited (Egypt) since 2015.
Other Appointments
None.
Background and Experience
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.
Background and Experience
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.
– Non-executive director and
chairman of Remuneration
Committee, Triyards Holdings
Limited (Singapore) 2015–2018
– Non-executive director, Genel
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.
Background and Experience
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.
– Finance director, UK
Coal plc, 2004–2007
– Finance director, Carclo
plc, 1999–2004
– Finance director of various
large subsidiaries of IMI
plc, 1992–1999.
Bert Nacken
Independent
Mary Reilly
Independent
Non-executive Director
Non-executive Director
Date of Appointment
1 August 2014
Date of Appointment
27 May 2015
Kostyantin Zhevago
Chief Executive Officer
Date of Appointment
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 Appointments
Other Appointments
Other Appointments
Independent mining consultant. As
Non-executive director of Essentra
None.
of December 2018, Non-executive
plc and Mitie Group plc; Non-
director of Norge Mining plc.
executive director and the chair of
Audit Committee of Travelzoo Inc.
Background and Experience
Background and Experience
Background and Experience
Mary Reilly is a Chartered
Accountant and a former audit
Kostyantin Zhevago has
substantial management
partner of Deloitte LLP, where she
and investment experience
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
gained over a 25-year
business career in Ukraine.
– Non-executive director,
New World Resources
plc, 2008–2014
Committees of the UK Department
– Member of Parliament,
of Transport until March 2018
and of Crown Agents Ltd until
the end of September 2017.
– Non-executive director,
Ukraine, since 1998
– Chairman of the management
board and deputy chairman
of the supervisory board,
Bank Finance & Credit,
Ukraine, 1996–2000.
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
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.
– President and COO, American
Cape plc, 2016–2017.
Chartered Accountant.
PhD in Economics, Kiev
National Economic University.
MBA, Manchester
Business School.
Committee Membership
He is the Chairman of the
Nominations Committee
and a member of the CSR
Committee and the Committee
of Independent Directors.
Committee Membership
He is a member of the Audit
and Remuneration Committees
and the Committee of
Independent Directors.
Committee Membership
He was the Chairman of the
Committee of Independent
Directors and was a member
of the Nominations, Audit and
Remuneration Committees.
Chartered Accountant, Coopers &
Lybrand, 1991, First-class honours
degree in Engineering, 1987.
Committee Membership
None.
PhD in Chemistry, University
of Aachen, Germany 1976.
Chartered Accountant.
Committee Membership
He is the Chairman of the
Remuneration Committee and
a member of the Audit and CSR
Committees and the Committee
of Independent Directors.
Committee Membership
She is the Chairman of the
Audit Committee and a
member of the Remuneration
Committee and the Committee
of Independent Directors.
Degree in international economics
from the Kiev National Economic
University, Kiev, 1996.
Committee Membership
He is a member of the
CSR Committee.
61
Ferrexpo plc
Annual Report & Accounts 2018
Steve Lucas
Non-executive Chairman
Date of Appointment
19 May 2016
Vitalii Lisovenko
Independent
Non-executive Director
Date of Appointment
28 November 2016
Other Appointments
Non-executive director, Tullow
Oil plc since 2012 and Acacia
Mining plc since 2013.
Other Appointments
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.
Simon Lockett
Senior Independent
Non-executive Director
Date of Appointment
15 June 2017
Date of Departure
28 January 2019
Chris Mawe FCA
Chief Financial Officer
Date of Appointment
7 January 2008
Other Appointments
Non-executive director and
chairman of Nominations
Committee, Pico Petroleum
Limited (Egypt) since 2015.
Other Appointments
None.
Background and Experience
Steve Lucas is a Chartered
Accountant with long and wide-
ranging financial experience
as an executive and non-
Background and Experience
Vitalii Lisovenko has spent most
of the past 20 years involved in
government finance, developing
particular expertise in debt
executive director in the energy
negotiation. He has also worked
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
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
Background and Experience
Background and Experience
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.
– Non-executive director and
chairman of Remuneration
Committee, Triyards Holdings
Limited (Singapore) 2015–2018
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.
– Finance director, UK
Coal plc, 2004–2007
– Finance director, Carclo
plc, 1999–2004
– Finance director of various
– Shell International Petroleum
from 2010 until 2017.
– Non-executive director, Genel
large subsidiaries of IMI
– Executive director, Ukreximbank
Energy plc, 2016–2017
plc, 1992–1999.
Co, 1983–1994, in various
senior financial roles.
(Ukraine), 2006–2010
– Executive director, Alfa
Bank Ukraine, 2010–2014
– Non-executive director,
Amsterdam Trade
Bank, 2013–2014.
– Chairman, Loyz Energy Ltd
(Singapore), 2014–2016
– Non-executive adviser on
behalf of the UK government
for the UK-ASEAN Business
Council, 2010–2014.
Bert Nacken
Independent
Non-executive Director
Date of Appointment
1 August 2014
Mary Reilly
Independent
Non-executive Director
Date of Appointment
27 May 2015
Other Appointments
Independent mining consultant. As
of December 2018, Non-executive
director of Norge Mining plc.
Other Appointments
Non-executive director of Essentra
plc and Mitie Group plc; Non-
executive director and the chair of
Audit Committee of Travelzoo Inc.
Kostyantin Zhevago
Chief Executive Officer
Date of Appointment
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 Appointments
None.
Background and Experience
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 and Experience
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.
Background and Experience
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.
Chartered Accountant.
PhD in Economics, Kiev
National Economic University.
MBA, Manchester
Business School.
Committee Membership
He is the Chairman of the
Nominations Committee
and a member of the CSR
Committee and the Committee
of Independent Directors.
Committee Membership
He is a member of the Audit
and Remuneration Committees
and the Committee of
Independent Directors.
Committee Membership
He was the Chairman of the
Committee of Independent
Directors and was a member
of the Nominations, Audit and
Remuneration Committees.
Chartered Accountant, Coopers &
Lybrand, 1991, First-class honours
degree in Engineering, 1987.
Committee Membership
None.
PhD in Chemistry, University
of Aachen, Germany 1976.
Chartered Accountant.
Committee Membership
He is the Chairman of the
Remuneration Committee and
a member of the Audit and CSR
Committees and the Committee
of Independent Directors.
Committee Membership
She is the Chairman of the
Audit Committee and a
member of the Remuneration
Committee and the Committee
of Independent Directors.
Degree in international economics
from the Kiev National Economic
University, Kiev, 1996.
Committee Membership
He is a member of the
CSR Committee.
STRATEGIC REPORTCORPORATE GOVERNANCEFINANCIAL STATEMENTS 62
Ferrexpo plc
Annual Report & Accounts 2018
EXECUTIVE COMMITTEE
Nikolay Goroshko
General Director, FYM
Jason Keys
Chief Marketing Officer
Nikolay Kladiev
Chief Financial Officer, FPM
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.
Chartered Accountant (UK);
Masters in International Economic
Relations from the Kiev National
Economic University.
Viktor Lotous
Chief Operating Officer and
Head of Managing Board, FPM
Viktor became Chief Engineer in
1997 and General Director and
Chief Operating Officer in April
2007. A graduate of Kryvyi Rih
Mining and Ore Institute, and
of the Kiev National Economic
University, specialising in Finance.
Chris Mawe FCA
Chief Financial Officer
Jim North
Chief Operating Officer
Greg Nortje
Chief Human Resources Officer
Kostyantin Zhevago
Chief Executive Officer
For more information
See page 60 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 postgraduate
Diploma in Education from the
University of the Witwatersrand.
For more information
See page 61 for details
63
Ferrexpo plc
Annual Report & Accounts 2018
CORPORATE GOVERNANCE REPORT
Chairman’s Introduction
Post year end, Mr Lockett resigned from the Board in January
2019. In February 2019, Mr Genovese was re-appointed to
the Board as a Non-executive Director. Mr Genovese previously
served on the Board from 2007 to 2014. The Board believes that
Mr Genovese’s deep knowledge across commodities, including
iron ore, as well as his extensive experience of operating in
emerging markets, specifically in Russia and the former USSR,
is of significant value to the Group.
Steve Lucas
Chairman
Statement of Compliance
(In Accordance with Listing Rule 9.8.6R)
During the year to 31 December 2018, 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).
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 76.
Steve Lucas, Chairman
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 and is
reviewing its existing arrangements in light of the revision of the UK
Corporate Governance Code in 2018. 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 of Ferrexpo has constantly managed the risk facing
the business. This includes taking into account the country of
operation and all associated counterparty risks.
This year saw a particular focus on charitable donations. The
Board has taken a number of steps to improve the control and
oversight in this area, particularly since 2016 (as detailed in
Principal Risks on page 45 and the Audit Committee Report
on page 73).
As noted in the Independent Review Committee Report, the
Board has established the Independent Review, which is being
conducted to look into matters relating to or arising from the
donations made to the Charity by the Group. The committee is
chaired by Mr Lisovenko and its other members are Mr Lucas,
Ms Reilly and Mr Nacken. It is assisted by independent legal
advisers in the UK and Ukraine and independent specialist
forensic accounting experts (BDO).
At the time of writing, the work of the Independent Review
Committee and its advisers in the UK and Ukraine remains ongoing.
Given the extensive disclosures on the Blooming Land
Charity in this annual report, for ease of reading and to avoid
repetition, the following cross references are listed:
See Chairman’s Statement (page 18), Principal Risks (page 45),
Responsible Business (page 59), Independent Review Committee
Report (page 69), Audit Committee Report (page 71), and Note 7
(page 121), Note 29 (page 155), Note 33 (page 161) and Note 34
(page 161) to the financial statements.
STRATEGIC REPORTCORPORATE GOVERNANCEFINANCIAL STATEMENTS 64
Ferrexpo plc
Annual Report & Accounts 2018
CORPORATE GOVERNANCE REPORT CONTINUED
LEADERSHIP
Governance Structure
SHAREHOLDERS
THE BOARD
Audit
Committee
Remuneration
Committee
Nominations
Committee
Committee of
Independent
Directors (“CID”)
Corporate Safety and
Social Responsibility
Committee
(“CSR Committee”)
Chief Executive
Officer and Executive
Committee1
Responsibilities
include:
– Monitoring
integrity of financial
statements.
– Reviewing internal
control and risk
management
systems.
– Relationship with
external auditor.
For more information
Audit Committee
Report page 71
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.
Responsibilities
include:
– Ensuring
compliance with
Chapter 11 of the
Listing Rules and
the Relationship
Agreement.
– Authorising (if
Responsible for
formulating and
monitoring the
implementation of
the Group’s policy on
CSR issues as they
affect operations.
For more information
Directors’
Remuneration Report
page 78
As of January 2019,
all nominations are
being handled by
the Board pending
appointment of further
Independent Non-
executive Directors
to the Committee.
appropriate) related
party transactions
on behalf of
the Board.
– Conflicts of
interest procedure
under the 2006
Companies Act.
For more information
CSR section
pages 49 to 59
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.
For more information
See page 62
For more information
See page 65
For more
information
Nominations
Committee Report
page 76
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-us/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 50, and the role of the Remuneration Committee in the Remuneration Report on page 79.
65
Ferrexpo plc
Annual Report & Accounts 2018
Role
Description
Chairman
CEO
Senior
Independent
Director
Non-executive
Directors
Company
Secretary
Executive
Committee
Committee of
Independent
Directors
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 60. 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.
Simon Lockett was the Senior Independent Director until January 2019. The Board is currently recruiting for the
vacancy. In conjunction with the other independent Non-executive Directors, the Senior Independent Director assists in
communications and meetings with shareholders concerning corporate governance matters. He also chaired 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 was available
to discuss with shareholders any issues that the Chairman had been unable to resolve to shareholders’ satisfaction.
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 the Remuneration Report on page 86); and monitor
executive succession planning (for Board succession planning, see the Nominations Committee Report on page 76).
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 on 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 of 31 December 2018, the Board (excluding the Chairman) comprised 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 of 31 December 2018 is presented in the table below:
Board member
Role
Audit
Remuneration
Nominations
S Lucas
K Zhevago
C Mawe
S Lockett
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
••
•
•
•
•
••
•
•
••
•
CSR1
•
•
•
CID
•
••
•
•
•
1 The CSR Committee also includes some members of senior management; see the Strategic Report on page 50.
• Committee member.
•• Committee Chairman.
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 60 and 61.
STRATEGIC REPORTCORPORATE GOVERNANCEFINANCIAL STATEMENTS 66
Ferrexpo plc
Annual Report & Accounts 2018
CORPORATE GOVERNANCE REPORT CONTINUED
LEADERSHIP
EFFECTIVENESS
Board Activity in 2018
Five scheduled Board meetings were held in 2018, all in
Switzerland (supplemented by other meetings, telephone
conferences and written resolutions as required from time to time).
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 (as well as matters relating to Blooming Land); 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. In
2018, this included a presentation by the Chief HR Officer to
members of the Remuneration Committee to consider the
implications of changes to the Corporate Governance Code.
The Board visited the Group’s operations in Horishni Plavni
(formerly known as Komsomolsk) between 3 and 5 October 2018.
During that time, the Board inspected various parts of the
operations, 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.
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 2015 and 2018, a proper balance in
terms of skills, experience, independence and knowledge of
the Company. As at the date of this report, there is 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, Mr Zhevago, 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.
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 2018.
– So far as Ferrexpo is aware, the Controlling Shareholder and its
associates have also complied with the independence
provisions during 2018.
– 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 2018.
67
Ferrexpo plc
Annual Report & Accounts 2018
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.
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. In
February 2018, the Chairman of the Remuneration Committee had
a training session with Deloitte. 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.
As Lucio Genovese re-joined the Board it was agreed that no
formal programme of induction was required on appointment but
Mr Genovese will be updated on relevant matters as required.
STRATEGIC REPORTCORPORATE GOVERNANCEFINANCIAL STATEMENTS 68
Ferrexpo plc
Annual Report & Accounts 2018
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 Directors, 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 2018 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 2018
Director
S Lucas
K Zhevago
C Mawe
V Lisovenko
S Lockett
B Nacken
M Reilly
Performance Evaluation
The annual performance evaluation of the Board and its
Committees was carried out internally in 2017–2018 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. There
was also an externally facilitated evaluation (the Company’s
second) that was conducted between August and November
2018, the report of which was reported to the Board in
November. The evaluation was conducted by External Board
Evaluation Ltd and it has no other connections to the Group.
The process consisted of a series of one-to-one interviews.
All the Directors were interviewed along with senior executives
of the organisation. This led to the production of a number of
observations and recommendations followed by “next step”
actions and dissemination to non-Board member participants.
Board
Scheduled
Audit
Rem
5/5
5/5
5/5
5/5
5/5
5/5
5/5
5/5
4/5
5/5
5/5
4/4
4/4
4/4
4/4
Nom
2/2
2/2
CID
5/5
5/5
5/5
5/5
5/5
CSR
1/4
4/4
4/4
The 2018 evaluation concluded that the Board and its Committees
continued to work effectively; that the Board was high quality and
well engaged and well equipped to deal with challenges faced by
the business; and that there is an open culture which responds well
to constructive challenge. Contentious issues are discussed and
debated and the CEO encourages full and frank discussion. The
process revealed areas that could be improved. These included
greater interaction between the Board, the Executive Committee
and the senior management team; more timely provision of
information in order to confront and tackle known issues; improved
prioritisation of matters for Board time; and greater Board
contribution to the development and testing of strategy.
The Senior Independent Director and the other Non-executive
Directors have evaluated, and will continue to monitor, the
performance of the Chairman.
69
Ferrexpo plc
Annual Report & Accounts 2018
CORPORATE GOVERNANCE REPORT CONTINUED
Independent Review Committee Report
Terms of Reference
The IRC operates under terms of reference prepared with input
from its legal advisers and has been approved by the Board. These
authorise the IRC to review and progress all matters relating to or
arising from the charitable donations made to the Charity by the
Group, including:
– reviewing the initial discrepancies in the copy bank statements
brought to the attention of the Board and determining the action
and further review needed as a result of the explanations
provided by the Charity;
– gaining assurance over the use of the Group’s funds donated to
the Charity including where possible the end recipients of the
donations and the purposes for which the donations have been
used. The Group has made donations to the Charity over the
last six years totalling US$110 million;
– reviewing the relationship and transactions between the Charity
and Khimreaktiv LLC (an entity connected with Rosava which in
turn is controlled by Kostyantin Zhevago, the Chief Executive
Officer and ultimate majority shareholder of the Group);
– determining whether any significant influence as defined under
IAS 24 may exist between Ferrexpo’s CEO and the Charity; and
– considering any potential legal or regulatory exposures of the
Group and assessing what claims (if any) the Group may have
against third parties or other persons relating to the matters
arising from the Group’s relationship with the Charity.
The IRC operates independently of the Group’s CEO. An Executive
Director will attend a meeting of the IRC only when formally
requested to do so by the IRC, and in cases where the IRC
considers that the Executive Director can provide additional
information which is relevant to the IRC’s decision making process.
Activity of the IRC
Since its formation, the IRC has met regularly. The activities of
the IRC have included defining the scope of the Independent
Review, appointing appropriately qualified independent forensic
accountants (BDO) and legal counsel in the UK (Herbert Smith
Freehills) and Ukraine (Arzinger and Asters) and reviewing interim
reports provided by the before mentioned advisers. Additionally,
the IRC through its advisors has conducted interviews with
key Group personnel, reviewed key documents and approvals
(including the copy bank statements provided by the Charity
to Deloitte), and secured electronic documents for review and
undertaken visits to some of the sites of the charitable events.
Vitalii Lisovenko, Chairman
On 4 February 2019, Ferrexpo announced an independent review
(the “Independent Review”) into matters relating to the Group’s
donations to a charity called Blooming Land which operates
through three sub-funds (the “Charity”).
Blooming Land coordinated the Group’s CSR programme on a
national basis in Ukraine, alongside Ferrexpo’s local CSR
programme which supports communities and individuals
surrounding the mines.
The Independent Review is being conducted by a sub-committee
of the Board (“IRC”) with assistance from external advisers. The
IRC is chaired by Vitalii Lisovenko and its other members are Steve
Lucas, Mary Reilly and Bert Nacken.
Further detail on the background to the Group’s relationship with
the Charity is set out in Principal Risks, 3.2 Counterparty Risks on
page 45.
Steps Resulting in the Establishment of the IRC
The Board suspended donations to the Charity in May 2018 as a
result of continued delays in receiving information surrounding the
Charity’s activities, which the Charity regarded as beyond the
normal requirements expected of a Ukrainian charity, and whilst it
awaited the outcome of a review into the 2017 audited financial
statements of the Charity.
As part of the half year review, transactions between the Charity’s
sub-funds and Khimreaktiv LLC, a related party of the Group’s
Chief Executive Officer, were identified. These were clarified and
the funding flows were disclosed in the half year accounts. For
further information see Note 33 of the Financial Statements.
As part of the full year audit process, later in August 2018, a
number of irregularities were reported to the Board including
inconsistencies in copy bank statements provided by the Charity to
the Group’s auditors.
These inconsistencies were reviewed by the Committee of
Independent Directors (“CID”) and the Board, however, the
explanations provided by the Charity were considered incomplete
and unsatisfactory and could not be independently verified.
Following an inability under local law, in the view of the Charity, to
provide the original bank statements, the Independent Review was
established in February 2019 led by the IRC.
STRATEGIC REPORTCORPORATE GOVERNANCEFINANCIAL STATEMENTS
70
Ferrexpo plc
Annual Report & Accounts 2018
CORPORATE GOVERNANCE REPORT CONTINUED
Independent Review Committee Report
The IRC has considered the relationship of the CEO and the
Group’s executive management with the Charity, including the
CEO’s business network, and concluded, based on the interim
findings of the Independent Review to date and representations
from the Chief Executive Officer, that neither the CEO nor the
Group’s executive management control or exercise significant
influence over the Charity as defined under applicable accounting
standards or under chapter 11 of the listing rules and as a result the
Charity is neither a related party of the CEO nor of the Group’s
executive management.
The IRC has made progress in receiving explanations regarding the
differences contained in the copy bank statements, together with
explanations for other inconsistencies identified by BDO, which
might provide credible explanations for some of the differences and
inconsistencies. However, the credibility of these explanations can
only be assessed by access to certified bank statements. As at the
date of this report, the Company has not yet been provided access
to these.
The IRC has also received third party evidence (including
governmental confirmations) to explain some but not all of the
possible discrepancies identified by BDO in the application of funds
by the Charity. The IRC is undertaking further work to corroborate
this evidence and to evaluate those discrepancies.
At this stage, the IRC cannot conclude as to the ultimate use of all
of the funds by the Charity, however, there are indications that
some could have been misappropriated. Further work is required
before any final conclusions can be drawn.
Vitalii Lisovenko
Chairman of the Independent Review Committee
For further information
See Chairman’s Statement (page 18), Principal Risks (page 45),
Responsible Business (page 59), Corporate Governance Report
(page 63), Audit Committee Report (page 71), and Note 7 (page 121),
Note 29 (page 155), Note 33 (page 161) and Note 34 (page 161) to
the financial statements.
71
Ferrexpo plc
Annual Report & Accounts 2018
CORPORATE GOVERNANCE REPORT
Audit Committee Report
In accounting for the Charity, a critical judgement relates to control
of the Charity. After detailed analysis, including work carried out by
the IRC, the Audit committee considered that the Charity operates
independently of Ferrexpo.
The internal control and risk management procedures at Ferrexpo are
set out later in this report and the main risks themselves are on pages
38 to 47 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 2018 Annual Report are set out on page 73. 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 118.
Mary Reilly
Chairman of the Audit Committee
22 April 2019
Mary Reilly, Chairman
I am pleased to present to you the Report of the Audit Committee
for 2018. 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 75), 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 2018.
– Key estimates and critical judgements exercised by the
Committee.
– Ferrexpo’s systems of internal controls and risk management.
– The assessment of the external auditor’s independence and
effectiveness.
– The “fair, balanced and understandable” assessment.
Our Viability Statement is set out in the Strategic Report on page 48.
During the year, the Audit Committee met five 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. An important matter covered
in these meetings was charitable donations made to Blooming
Land (the “Charity”). At every meeting, the Audit Committee
reviewed the progress of the implementation of improved controls
around the donations to Blooming Land and requested detailed
information from the Charity in order to understand how the
donations from the Group were utilised to further its CSR policies.
For details of the relationship with the Charity
See Chairman’s Statement (page 18), Principal Risks (page 45),
Responsible Business (page 59), Corporate Governance Report
(page 63), Independent Review Committee Report (page 69), and
Note 7 (page 121), Note 29 (page 155), Note 33 (page 161) and Note
34 (page 161) to the financial statements.
The Audit Committee and the Board have taken a number of steps
to improve the control and oversight of the Charity particularly since
2016. The Board suspended donations to the Charity in May 2018
as a result of delays in receiving information requested by the
Group, and while the Group awaited the outcome of a review into
the 2017 audited financial statements of the Charity.
STRATEGIC REPORTCORPORATE GOVERNANCEFINANCIAL STATEMENTS
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CORPORATE GOVERNANCE REPORT CONTINUED
Audit Committee Report
Membership and Meetings
During the year, the Audit Committee comprised four independent Non-executive Directors: Mary Reilly (Chairman of the Committee),
Simon Lockett (who resigned from the Board as of 28 January 2019), Vitalii Lisovenko and Bert Nacken. 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 five occasions during 2018. The attendance record of the Committee
members is shown in the table on page 68.
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 2018
Key activities of the Audit Committee during 2018 are set out below.
Date
February
March
May
July
November
Matters discussed
– Reviewed community support donation disclosures, controls and audit reports.
– Received an update on Blooming Land.
– Received an update of the 2017 audit.
– Reviewed a presentation on the going concern and long-term viability assessments.
– Reviewed risk register.
– Reviewed compliance report.
– Reviewed an update on Directors’ Interests and Related Parties.
– 2017 year-end review.
– Reviewed significant risks.
– Reviewed auditors’ responsibility statement.
– Reviewed auditors’ independence statement.
– Reviewed risk register.
– Considered the auditor’s opinion.
– Reviewed Annual Report.
– Reviewed Viability Statement.
– Reviewed Internal Controls.
– Reviewed Audit Committee report.
– Reviewed auditors’ draft reports.
– Reviewed compliance report.
– Reviewed an update of the Audit Committee terms of reference.
– Received an update on community support donations including Blooming Land.
– Received an update on community support donations including Blooming Land.
– Reviewed Internal Audit recommendations.
– Reviewed the Internal Audit Plan.
– Reviewed Internal Audit quality survey results.
– Updated Internal Audit charter.
– Reviewed risk register.
– Reviewed compliance report.
– Reviewed Directors’ Interests and Related Parties table.
– Reviewed preliminary audit plan 2018.
– Reviewed risk register.
– Reviewed external audit – half year results.
– Reviewed community support donations including Blooming Land and
outstanding matters previously requested by the Board.
– Reviewed related party transactions.
– Received an update on Blooming Land.
– Considered KPI assessment of external auditors.
– Reviewed external audit planning report.
– Received an update on Viability Statement.
– Reviewed Whistleblowing Report.
– Reviewed Preliminary Internal Audit Plan 2019.
– Reviewed risk register.
– Noted compliance report.
– Reviewed Directors’ Interests and Related Parties table.
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Key Estimates and Critical Judgements
The significant issues and judgements considered by the Committee in respect of the 2018 Annual Report are set out below:
Issues
Judgements/actions taken
Operating expenses: nature of the
Group’s community support
donations (Financial Note 7)
Related party disclosures -
completeness and arm’s length
nature (Financial Note 33)
Taxation: tax legislation in Ukraine
(Financial Note 11)
In the absence of conclusive evidence that funds have not been used as intended, the Group has
judged that it remains appropriate for it to present its community support donations to the Charity
as such in the consolidated financial statements within operating expenses on the basis that all
material donations made by the Group have been applied as previously reported by the Charity to
the Group.
The Board concluded that neither the Group nor the Chief Executive Officer controls or exercises
significant influence over Blooming Land or its sub-funds (the “Charity”) pursuant to relevant
accounting standards IFRS 10 Consolidated financial statements and IAS 28 Investments in joint
ventures and associates or under Chapter 11 of the UK Listing Rules. The appropriateness of the
Group’s related party transactions and the completeness and accuracy of the disclosures in Note
33 was reviewed by the Committee of Independent Directors (“CID”).
Having considered the background of a recent claim made in Ukraine in respect of a tax audit with
a focus on the Group’s cross-border transactions, the Committee shares management’s
confidence that Ferrexpo will successfully defend its methodology applied to determine the prices
between its subsidiaries in the courts in Ukraine.
Property, plant and equipment:
deferred stripping costs (Financial
Note 13)
The Committee endorses the estimates underlying management’s decision to capitalise US$11.8
million of pre-production stripping during the financial year 2018 in order to ensure availability of ore
in future periods.
Inventories: lean and weathered
ore (Financial Note 16)
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 once additional processing capacities
are available.
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 2018 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.
In relation to Blooming Land, controls included:
– Board approval of the use of the Charity.
– Board approval of the annual budgeted expenditure.
– Board or CID approval from late 2015 of individual payments to
the Charity and from September 2017 approval of individual
payments to the Charity by the Non-executive Directors or a
committee of Non-executive Directors.
– A requirement for all expenditure to be supported by third party
documentation.
– A requirement for any independent charities supported by
Ferrexpo to provide fully audited accounts.
– Confirmation by Blooming Land of receipt, application and end
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.
– Verification of individual charitable event expenditures on a
sample basis.
– Attendance at certain charitable events by Ferrexpo and third
parties.
The Audit Committee reviewed reporting from the external
auditors in relation to their procedures on CSR as part of their
audit of the Group.
Controls over Community Support Donations
In 2018, Ferrexpo continued to support communities on a local and
national basis (see “Responsible Business” section of the Strategic
Report on pages 49 to 59). Community support activities take
place exclusively in Ukraine, and donations were 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.
Donations to Blooming Land (the “Charity”) were approved to
the Board and were not considered part of the remit of the
CSR Committee.
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Annual Report & Accounts 2018
CORPORATE GOVERNANCE REPORT CONTINUED
Audit Committee Report
Developments in 2018
The Board had taken a number of steps to improve the control and
oversight of the Charity in 2017. The following additional controls
were introduced in 2018:
– A Governance Framework for 2018, setting out the respective
roles and responsibilities for the Board, the Board’s sub-
committees and management in relation to charitable
donations.
– A ‘decision-making checklist’ to assist with the assessment of
funding requests received from Blooming Land and whether to
subsequently approve such requests.
– A requirement for all expenditure to be supported by third party
documentation.
– A requirement for any independent charities supported by
Ferrexpo to provide fully audited accounts.
– A letter requested and received from Blooming Land providing
further details on its activities and explanations for the use of
event managers.
Donations to the Charity were suspended in May 2018 as a result
of delays by the Charity in providing requested information to the
Group, and while the Group awaited the outcome of a review into
the Charity’s 2017 audited financial statements. Blooming Land
had also failed to implement certain control improvements
requested by the Group.
On 4 February 2019, Ferrexpo announced an independent review
into matters relating to the Group’s donations to the Charity. At this
stage, the Independent Review Committee cannot conclude as to
the ultimate use of all of the funds by the Charity, however, there
are indications that some could have been misappropriated.
Further work is required before any final conclusions can be drawn.
For further information see Chairman’s Statement (page 18),
Principal Risks (page 45), Responsible Business (page 59),
Corporate Governance Report (page 63), Independent Review
Committee Report (page 69), and Note 7 (page 121), Note 29
(page 155), Note 33 (page 161) and Note 34 (page 161) to the
financial statements.
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 (eight times in 2018), 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 processes for the review and approval of related
party listings and transactions and appropriate review and
approval from the CID and its delegated management sub-
committee the ERPMC. Additional procedures are in place
locally to ensure the completeness and arm’s length nature of
related party transactions, such as background checks and
tender processes.
– 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
26 to the financial statements on pages 145 to 152) 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 29 to the
financial statements on page 156).
Full details of the Group’s policy on risk and uncertainties are
set out in Note 26 to the financial statements on pages 145 to 152.
See also the Principal Risks section of the Strategic Report on
pages 38 to 47.
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
administratively to 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 2018 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 2019 was
approved by the Audit Committee in November 2018.
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Annual Report & Accounts 2018
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 48 and a
statement setting out the Board’s assessment of the Company as
a going concern is contained in the Directors’ Report on page 97
and Note 2 to the Financial Statements on page 115.
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
An internal audit programme for 2018, approved by the Audit
Committee, focused on the operational risks relating to the sales
and marketing, fuel management, repair and maintenance, HR,
compliance, IT, high wall failure, and fraud risk assessment. 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 2018 review was relayed to the relevant partners of
Deloitte LLP. This review takes the form of an assessment (using
a questionnaire) of the auditor’s 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.
The Company has complied with the Statutory Audit Services
Order issued by the UK Competition and Markets Authority for the
financial year ended 31 December 2018.
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 2018 are shown in Note 7 to the
financial statements on page 122.
Financial Reporting
The Board has asked the Committee to advise whether it
considers the 2018 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.
STRATEGIC REPORTCORPORATE GOVERNANCEFINANCIAL STATEMENTS 76
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Annual Report & Accounts 2018
CORPORATE GOVERNANCE REPORT CONTINUED
Nominations Committee Report
Steve Lucas, Chairman
Dear shareholder
I am pleased to present the Nominations Committee Report for 2018.
The Committee met formally twice during the year. At these meetings the
Board composition and refreshment of the Board was discussed as well
as the Group’s Diversity and Inclusion programme. It was also agreed to
undertake an externally facilitated Board performance evaluation for the year
to 31 December 2018 (for further information see Performance Evaluation on
page 68).
During the year, members of the Committee were active in interviewing
candidates for various Board roles and in recommending the appointment of
Lucio Genovese who joined the Board in February 2019.
The Committee is currently searching for a Non-executive Director to succeed
Simon Lockett, who resigned from the Board on 29 January 2019, as the
Senior Independent Director. It is expected that an appointment will be made
during 2019. As a result of Mr Lockett’s resignation, as of the date of this
report, the Committee is currently composed of the Chairman of the Board.
The Nominations Committee remains composed of an Independent Non-
executive Director and the Chairman of the Board.
Steve Lucas
Chairman of the Nominations Committee
22 April 2019
Membership and Meetings
The Nominations Committee is chaired by Steve Lucas and its
other member was Simon Lockett. The Nominations Committee
meets at least once a year, as required by its terms of reference,
and met formally twice in 2018 besides holding periodic meetings
with search agents and interviews with candidates.
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.
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.
During the year, the Committee discussed and interviewed for
various positions on the Board. Executive search consultants were
used in the search. After consulting the Nominations Committee
about the skills and experience required, the consultants drew
up a long list of candidates from which a short list was chosen
to be invited for interview by the Nominations Committee. The
Nominations Committee then recommended Lucio Genovese as
the preferred candidate and he was interviewed by other members
of the Board before being formally appointed on 12 February 2019.
The executive search consultants used in relation to the
appointment of Lucio Genovese were Odgers Berndtson, which
has no other connection with the Company.
Re-election
Lucio Genovese, who was appointed to the Board on 12 February
2019, will stand for election by shareholders at the Company’s
AGM in May 2019. In accordance with the provisions of the
Governance Code, all other Directors will stand for re-election by
shareholders at the same meeting.
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, although it is always seeking to improve on existing
diversity where possible. The Committee seeks to apply this policy
by ensuring that all available suitable candidates are taken into
account when drawing up short lists of candidates for appointment
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 “Diversity” in the “People” section of the Strategic
Report on page 53, Ferrexpo’s policy is to employ a diverse
workforce.
Gender Diversity
Currently 29% of the workforce is female. 18% of management
positions are held by women, and our aim is to increase this figure
to 24% 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. During the year,
Ferrexpo Belanovo Mining was very proud to train the first women
in Ukraine to be heavy duty truck drivers. Five women completed
their training programmes and in December 2018 transferred to the
FPM, FYM and FBM mining departments to be employed as dump
truck drivers.
Additionally, in 2018 some of FPM’s community support
programmes were 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 2018.
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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 AGM 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 22 April 2019.
Steve Lucas
Chairman
STRATEGIC REPORTCORPORATE GOVERNANCEFINANCIAL STATEMENTS 78
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Annual Report & Accounts 2018
REMUNERATION REPORT
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 2018.
As in previous years, this report is split into two distinct sections. The first sets out Ferrexpo’s remuneration policy 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 2018 and will be
implemented in 2019. This section will be subject to an advisory vote at the forthcoming AGM. The elements subject to audit are
highlighted throughout.
In 2018, the iron ore market was notably less volatile and iron ore pellet demand remained strong with pellet premiums rising 30% above
2017 levels. The Group’s production volumes rose by 2% compared with 2017, and reflected planned pellet line refurbishment in 2Q and
higher levels of required fixed plant maintenance. Higher commodity input prices, local inflation and increased mining and maintenance
activities beyond management control impacted the Group’s C1 cash cost of production which increased by 34% to US$43.3 per tonne
(2017: US$32.3 per tonne). Sales volumes were also hampered by temporary logistics difficulties in respect of railage to the port and low
water levels on the Danube River. 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 executive remuneration to
performance, basing rewards on a balanced portfolio of performance measures, and assessing remuneration packages against the
relevant market to ensure that Ferrexpo can attract, motivate and retain talented executives. The CEO’s incentive is derived entirely from
his shareholding in the Company, and his remuneration is paid to him at a flat rate of US$240,000 per year. The Board considers that his
large shareholding in the business is sufficient to strongly align the CEO’s interests with those of other shareholders.
In determining bonus outcomes under the Short Term Incentive Plan (“STIP”) for 2018, the Committee took account that some factors
affecting the outcomes of the Business scorecard were beyond the direct control of executives but noted with deep regret that a fatality
was experienced at Ferrexpo Poltava Mining (“FPM”) in 2018. The overall outcome under the STIP ranged from 55.6% to 83.5% of
maximum, including 75.2% of maximum for the Chief Financial Officer (“the CFO”), Mr Mawe. This outcome includes the application
of a negative 5 per cent Modifier on the overall STIP outcome for all executives in consideration of the tragic fatality and the impact
on business outcomes arising from higher production costs and lower than planned sales.
No significant changes were made to the implementation of the remuneration policy during the year, but in light of recent changes to the
UK Corporate Governance Code, the Committee will be considering the introduction of a post-employment shareholding guideline as part
of its review of the Company’s remuneration policy during 2019. The Committee has already introduced a two-year holding period on
vested LTIP shares with clawback provisions, for awards granted from 2018 onwards. This 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.
From a disclosure perspective, we have included Schedule 8 revisions around enhancing the pay scenario chart disclosure (see page 82)
and quantifying the impact of share price appreciation on long-term incentive outcomes (see page 86).
The Committee strives to align the interests of the executives with shareholders, 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. During the year the
Remuneration Committee did not exercise any upwards or downwards discretion with respect to the vesting of any element of the
remuneration package.
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.
79
Ferrexpo plc
Annual Report & Accounts 2018
PART A: POLICY SECTION (NOT SUBJECT TO AUDIT)
COMMITTEE
The terms of reference for the Committee were updated during the year to comply with changes made to the UK Corporate Governance
Code. The revised terms of reference were approved by the Board, and its duties include the determination of the policy for the remuneration
of the Executive Directors, the members of the Executive Committee, and the Company Secretary 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;
–
– reward based on a balanced portfolio of performance measures (e.g. Total Shareholder Return (“TSR”) relative to sector peers,
link a high proportion of remuneration to performance;
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 82). The framework governing the LTIP was approved by shareholders at the 2018 AGM.
The Chief Executive’s remuneration package includes an honorarium of US$240,000 per year (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.
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.
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.
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.
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.
Business and, where
relevant for current
Executive Directors,
individual
performance
are considerations in
setting base salary.
Not performance
related.
STRATEGIC REPORTCORPORATE GOVERNANCEFINANCIAL STATEMENTS
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Ferrexpo plc
Annual Report & Accounts 2018
REMUNERATION REPORT CONTINUED
Purpose and link to strategy
Operation
Opportunity
Benefits
Competitive in the market
in which the individual
is employed.
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.
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.
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.
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, a failure of risk
management, a material calculation
error or gross misconduct.
The LTIP framework was approved by
shareholders at the 2018 AGM. To the
extent that an LTIP award vests, this
will include the applicable dividends on
the shares earned during the vesting
period. Subsequent dividends on
shares held by participants are paid
in shares.
For LTIP awards from 2018 onwards a
two-year holding period applies to
Executive Directors’ vested
LTIP shares.
Malus and clawback provisions will
apply in the event of a material
misstatement of results, a failure of risk
management, a material calculation
error or gross misconduct.
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.
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.
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.
The threshold opportunity is 20%
of maximum.
Performance metrics
Not performance
related.
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 2018 are set
out in Part B under
“2018 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 2018”.
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.
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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. As indicated earlier in the introductory
letter to this report, to align with the changes in the UK Corporate Governance Code, the Committee is considering the introduction of a
post-termination shareholding policy when the remuneration policy is renewed in 2020.
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.
Changes to Non-executive
Director fees are applied in line
with the outcome of the review
undertaken by the Chairman and
Executive Directors.
Not performance related.
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.
STRATEGIC REPORTCORPORATE GOVERNANCEFINANCIAL STATEMENTS 82
Ferrexpo plc
Annual Report & Accounts 2018
REMUNERATION REPORT CONTINUED
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 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
four different performance scenarios: “Below threshold”, “Target” and “Maximum” and “Maximum assuming 50% share price growth”.
In illustrating potential reward opportunities, the following assumptions have been made:
Scenario
STIP
LTIP
Fixed pay
Maximum assuming
50% share price growth
Maximum STIP (150% of salary)
Performance warrants full vesting
and share price increase of 50%
versus the share price at grant
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)
Base salary, pension
and benefits as at
1 January 2019
1 Excludes increase in value arising from share price growth.
CFO
CHF (’000s)
Minimum
100%
912
Target
56%
Maximum
42%
Maximum*
39%
0
500
40%
44%
42%
1,000
4%
1,623
14%
2,188
1,500
19%
2,000
2,338
2,500
Fixed
STIP
LTIP
*plus impact of 50% share price increase on LTIP value
Potential reward opportunities illustrated above are based on the policy and current practice, applied to the base salary in force at
1 January 2019. For the STIP, the amounts illustrated for the CFO are those potentially receivable in respect of performance for 2019. 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 the award made but which he declined in 2018. It
should also 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 2019.
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.
83
Ferrexpo plc
Annual Report & Accounts 2018
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 light of developments in best practice.
The Executive Directors’ service contracts are available to view at the Company’s registered office.
STRATEGIC REPORTCORPORATE GOVERNANCEFINANCIAL STATEMENTS 84
Ferrexpo plc
Annual Report & Accounts 2018
REMUNERATION REPORT CONTINUED
External Appointments
It is the Board’s policy to allow the Executive Directors to accept directorships of other quoted companies, provided that they have
obtained the consent of both the 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 a 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
S Lucas
B Nacken
V Lisovenko
M Reilly
L Genovese1
Position
Date of first appointment
Date of re-election
Chairman
Non-executive Director
19 May 2016
1 August 2014
Non-executive Director
28 November 2016
Non-executive Director
27 May 2015
Non-executive Director
12 February 2019
Annual re-election
Annual re-election
Annual re-election
Annual re-election
Election
1 Lucio Genovese was appointed to the Board on 12 February 2019 and will stand for election at the 2019 AGM.
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 changes 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.
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Ferrexpo plc
Annual Report & Accounts 2018
PART B: REMUNERATION IN 2018 (SUBJECT TO AUDIT)
The following section provides details of how the remuneration policy was implemented during the year. Throughout this report, the
remuneration of Mr Zhevago and Mr Mawe (the Executive Directors) is disclosed in local currencies to facilitate year-on-year comparisons,
uninfluenced by exchange rate fluctuations.
Committee Membership in 2018
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. The Committee met four times during the year. Attendance at meetings by
individual members is detailed in the Corporate Governance Report on page 68. A summary of the topics discussed at meetings in 2018
is detailed below:
– Review of remuneration of members of the Executive Committee, including salaries, STIP and LTIP policy.
– Review of incentive outcomes.
– Review of pension arrangements across the Group.
– Review of the policy governing recovery provisions relating to incentive awards.
– Review of feedback from the 2018 AGM voting season.
– Review of general market considerations surrounding executive remuneration packages and structure.
– Review of changes in the UK Corporate Governance Code and implications for the operation of the Committee.
– Performance evaluation of the Committee.
The CEO and the Chief Human Resources Officer (the “CHRO”) 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 currently 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 2018 totalled £18,925 based on time and materials. The Committee evaluates the support provided by its advisers
periodically and is satisfied that Mercer | Kepler provides independent and objective remuneration advice to the Committee and does not
have any connections with Ferrexpo which may impair its independence.
The CEO and the CHRO 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 2018 and the prior year.
All figures shown in currency of payment
2018
2017
2018
2017
K Zhevago (CEO)
C Mawe (CFO)
1 Salary
2 Benefits
3 STIP
4 LTIP
5 Pension
Total
US$240,000
US$240,000
CHF651,525
CHF651,525
nil
–
–
nil
–
–
CHF191,339
CHF167,790
CHF735,000
CHF728,644
£291,975
£395,685
CHF10,941
CHF14,662
CHF68,922
CHF65,326
US$240,000
plus CHF10,941
US$240,000
plus CHF14,662
CHF1,646,786
plus £291,975
CHF1,613,285
plus £395,685
6 Total (single currency)
US$251,195
US$254,891
CHF2,028,018
CHF2,115,062
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 and healthcare).
3 STIP: this is the total bonus earned on performance during the year. Further details are provided on pages 87-89.
4 LTIP: the market value of shares that vested on performance to 31 December of the relevant year (2018: 100% vested on performance; 2017: 100% vested on performance). The market
value is based on the share price on the date of vesting: 31 December 2018 of 194.65 pence. Further details are provided on page 90. The impact of share price appreciation on the value of
the LTIP is reflected in the CFO’s LTIP Value at Vesting chart on page 86.
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: 2018 – US$1 = CHF0.9773, CHF1 = £0.7659; 2017 – US$1 = CHF0.9846, CHF1 = £0.7890.
STRATEGIC REPORTCORPORATE GOVERNANCEFINANCIAL STATEMENTS 86
Ferrexpo plc
Annual Report & Accounts 2018
REMUNERATION REPORT CONTINUED
CFO LTIP Value at Vesting
Date of grant
21/04/2015
20/04/2016
Number of
shares
Vesting
percentage
Share price at
date of grant¹
Share price at
date of vesting
Value based
on grant price
Value based
on vesting
price
Impact of share price
appreciation
135,000
150,000
100%
100%
75p
293.1p £101,250 £395,685 £294,435 (74%)
29.8p
194.65p
£44,700 £291,975
£247,275 (85%)
1 The grant price used for the purpose of the table above is the three-month average share price during the prior financial year to the year of grant, in line with the face value methodology used
in the Remuneration Report.
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 2018 and the prior year.
Non-executive Directors1
S Lucas2
M Reilly3
B Nacken4
V Lisovenko
S Lockett5
Former Non-executive Directors
M Field6
O Baring7
All figures shown in currency of payment, US$000
2018
2017
Fees
Total
Fees
Total
440
170
170
135
190
0
0
440
170
170
135
190
0
0
440
170
170
135
92
73
158
440
170
170
135
92
73
158
1 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.
2 Steve Lucas 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 Simon Lockett resigned from the Board on 28 January 2019. In 2018, in addition to a Non-executive Director base fee, he received fees of US$55,000 p.a. since 1 September 2017, for his
role as Senior Independent Director.
6 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.
7 Oliver Baring retired from the Board on 23 November 2017. He received, in addition to a Non-executive Director base fee until his retirement, additional fees of US$60,000 p.a. for his role as
Senior Independent Director until 30 August 2017.
87
Ferrexpo plc
Annual Report & Accounts 2018
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 2018. Mr Zhevago’s remuneration
also remained unchanged at US$240,000.
Executive Director
K Zhevago
C Mawe
Base salary at:
Position
1 January 2019
1 January 2018
Increase
CEO
CFO
US$240,000
US$240,000
CHF651,525
CHF651,525
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%.
Executive Director
K Zhevago
C Mawe
No additional benefit is receivable on early retirement.
Normal
retirement date
07.01.2039
31.01.2027
Increase in
value for 2018
less Director’s
contribution
(CHF000)
Total
cash value
at end of 2018
(CHF000)
11
69
93
903
Mr Zhevago is entitled to, but in 2018 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 and CHF23,549 of health insurance 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 earlier in the report.
2018 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 2018 were set 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, and sales and product
marketing performance, as well as personal targets relating to operational and financial management objectives. Safety (behavioural
safety initiatives and improvements in risk management and lost time accident statistics) was included as a modifier, decreasing the total
result in the event of a fatality.
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 2018, as determined by the Committee for the CFO, is summarised below.
STRATEGIC REPORTCORPORATE GOVERNANCEFINANCIAL STATEMENTS 88
Ferrexpo plc
Annual Report & Accounts 2018
REMUNERATION REPORT CONTINUED
Business Scorecard (60% of STIP)
KPI
Measure/target
Financial
Underlying cash
EBITDA (US$)
NOPAT (US$)
Operational Production
volume (Mt)
Full cash costs (C1)
(US$/t)
FPM Total movement
cost (US$/t)
FYM Total movement
cost (US$/t)
Weighting
for CFO
%
15%
15%
5.0%
5.0%
5.0%
Threshold
50%
433
283
Target
100%
452
326
Stretch
150%
Scorecard
outcome
Assessment
Max
as a %
of salary
Bonus
awarded
as a %
of salary
533
368
459
Above target
22.5%
15.7%
337
Above target
22.5%
16.9%
10,395
10,595
10,995
10,506
Above
threshold
7.5%
3.9%
47.6
2.18
46.6
44.6
47.5
Threshold
7.5%
2.8%
2.04
1.91
1.99
Above target
7.5%
5.9%
5.0%
1.99
1.86
1.75
1.90
Threshold
7.5%
4.2%
Sales and
Marketing
Realised DAP/FOB
price (US$)
5.0%
-5.0
-3.0
Seaborne freight
per wmt compared
to C3 (US$/t)
5.0%
4.5
3.0
60.0%
Safety
Zero harm –
5% deduction
due to fatality
-1.5
1.5
0.70
0.82
Stretch
achieved
Stretch
achieved
7.5%
7.5%
7.5%
7.5%
90.0%
64.4%
-5.0%
59.4%
Discretionary
modifier
Scorecard
outcome
The Committee considered the CFO’s performance against Financial, Operational, Sales and Marketing targets during 2018. The
Committee noted that production volumes in 2018 were impacted by planned pellet line refurbishments and higher than expected
required maintenance. Temporary rail logistics problems and low water on the Danube River impeded sales which caused a drag on
financial targets despite these targets being adjusted upwards to take account of actual market and raw material input cost price
developments which were beyond the direct control of management. The Committee also noted with deep regret that a fatal incident was
experienced at FPM in the year when a contractor fell while working at height. This loss has had an immense impact on all involved and
the Board continues to work closely with executive management to build leadership capability and improve safety performance. As a
result of this incident the Committee applied a penalty of (-5%) to the overall scorecard outcome for the CFO.
Taking into consideration all these factors, the Committee determined an overall business scorecard result for the CFO of 59.4% of salary.
89
Ferrexpo plc
Annual Report & Accounts 2018
Personal Objectives (40% of STIP)
KPI
Objectives
Weighting
for CFO
%
Threshold
50%
Target
100%
Stretch
150%
Scorecard
outcome
Max
as a %
Assessment
of salary
Bonus
awarded
as a % of
salary
10.0% Adjustment
of plus 12%
tax due
Adjustment of
plus 7%
of tax due
Adjustment
of plus 2%
tax due
Stretch
achieved
Tax charge
less than plus
2%
15.0% 15.0%
Personal
objectives
Minimise
additional tax
arising from
tax audits
Refinance
2019 bond
10.0% Comparative
terms to
peers and
not more
than +5%
above LIBOR
Better than
market terms
given to peers
and not more
than +4.5%
above LIBOR
Cash
management
to mitigate
price risk
10.0%
No
mitigation
needed
Cash issues
(Opex and
Capex)
discussed
with Exco
and effective
solutions
developed
with part
implementation
to mitigate
financial impact
of production
volumes and/or
sales shortfall
15.0% 10.0%
Target
PXF facility
arranged and
2019 Bond
fully financed
at 4.5% above
LIBOR
15.0% 13.5%
Above
target
Working
capital
effectively
managed with
specific and
effective
actions taken
and Exco fully
involved in
managing
highlighted
Opex and
Capex issues
Significantly
better than
market
terms given
to peers
and not
more than
+4.0%
above
LIBOR
Cash issues
(Opex and
Capex)
discussed
with Exco
and
effective
solutions
developed
and 100%
of actions
taken to
mitigate
financial
impact of
production
volumes
and/or sales
shortfall
10.0% Lowered to
mitigate risk
On schedule
Ahead of
schedule
Stretch
achieved
Enable
budgeted
dividend
payments
approved by
the Board
15.0% 15.0%
Group cash
balance
effectively
managed to
enable the
payment of
normal and
special
dividend
ahead of
schedule to
shareholders
Total
40.0%
Total STIP (Composite result of business scorecard and personal objectives achievement)
60.0% 53.5%
150.0% 112.9%
The Committee considered the CFO’s personal performance against his personal targets during 2018 as shown above and confirmed a
result of 53.5%. The Committee confirmed that the CFO had achieved all his personal targets relating to managing the Group’s overall tax
position, refinancing the Group’s bond due in 2019, and management of the Group’s cash position which enabled the payment of normal
and special dividends to shareholders. The Committee also considered that the CFO had continued to take actions to deleverage the
Group’s balance sheet, reducing working capital and had achieved various compliance-related targets in the normal course of his duties.
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 and trade finance facilities to
be arranged.
Taking into account his overall scorecard results and achievement of specific personal targets, the Committee awarded a total cash bonus
of 112.9% of salary to the CFO.
STRATEGIC REPORTCORPORATE GOVERNANCEFINANCIAL STATEMENTS 90
Ferrexpo plc
Annual Report & Accounts 2018
REMUNERATION REPORT CONTINUED
STIP Framework for 2019
The STIP framework for 2019 is in line with the principles of the remuneration policy and the 2018 framework. Financial and operational
targets, including cost reduction measures and personal KPIs, continue to be set as in previous years. Mr Mawe’s 2019 STIP opportunity
is 150% of salary for maximum performance, and 100% for target performance. The measures and weightings for the STIP in 2019 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%
100.0%
2016 LTIP Award Vesting – Audited
The performance period for the 2016 LTIP awards ended on 31 December 2018. The 2016 LTIP rewarded TSR outperformance of a
tailored comparator group, as set out below. Under the 2016 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 2016 to 31 December 2018,
Ferrexpo’s TSR outperformance was 11.9% p.a. resulting in 100% of the 2016 LTIP awards vesting.
Executive Director
Chris Mawe
Interests
held
Vesting
Interests
vesting
Vesting
date
Vesting share
price
Value
150,000
100% 150,000 31/12/2018 194.65p £291,975
LTIP Granted in 2018 – Audited
The 2018 LTIP intended grant to Mr Mawe had a face value of 46% of salary. As outlined in the Chairman’s statement, the CFO declined
receiving an LTIP award for the year.
The constituents of the index for the last three cycles are summarised in the table below:
Focused iron ore miners
Assore
Atlas Iron2
Cliffs
Fortescue Metals
Kumba Iron Ore
Mount Gibson
Weighting
20161
60%
2017
60%
2018
60%
✓
✓
✓
✓
✓
✓
✓
✓
✓
✓
✓
✓
✓
✓
✓
✓
✓
Global diversified miners
Weighting
40%
40%
40%
Anglo American3
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 for 2018 due to acquisition by Hancock Prospecting in 2018.
3. Removed from the peer group for 2018 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.
91
Ferrexpo plc
Annual Report & Accounts 2018
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. Dividends that ensue post vesting are
paid to participants in shares.
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 2019 will
be set out in next year’s Annual Report on Remuneration. The awards will be subject to recovery provisions and a two-year holding period
following the three-year performance period.
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 and reduced in 2016 and 2017. For 2019, fees for incoming NEDs will be reduced to align with market
benchmarks. The fee rates applicable for existing NEDs and new appointments from 2019 is disclosed below:
Role
Existing fees:
Chairman fee
Non-executive Director base fee
Committee Chairman fee
Senior Independent Director fee
From 1 January 2019
Annual fee for incoming NEDs
From 1 January 2019
Annual fee for existing NEDs
From 1 September 2017
Annual fee
US$440,000
US$100,000
US$20,000
US$35,0001
US$440,000
US$135,000
US$35,000
US$55,0002
US$440,000
US$135,000
US$35,000
US$55,000
1. Fee includes US$20,000 for chairmanship of the Committee Independent Directors (“CID”) and US$15,000 for acting as the Senior Independent Director (“SID”).
2. The additional fee for the SID includes US$35,000 for chairmanship of the CID and a fee of US$20,000 for acting as the SID.
Directors’ Shareholdings – Audited
Total interests of the Directors in office (and connected persons) as at 31 December 2018:
K Zhevago1
C Mawe
S Lucas
V Lisovenko
S Lockett
B Nacken
M Reilly
At 31 December
2018
296,077,944
254,309
–
–
50,000
20,000
–
At 31 December
2017
296,077,944
115,437
–
–
–
20,000
–
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.
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 22 April 2019,
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)
296,077,944
–
254,309
300,000
–
99.2%
Guideline
met?
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 2018 and a share price of 194.65 pence.
STRATEGIC REPORTCORPORATE GOVERNANCEFINANCIAL STATEMENTS 92
Ferrexpo plc
Annual Report & Accounts 2018
REMUNERATION REPORT CONTINUED
Details of LTIP awards held by Mr Mawe (which are subject to performance) are provided below.
Granted
(2018 award)
Exercised
Lapsed
135,000
–
At 1 January
2018
135,0001
150,0002
150,000
C Mawe
Total
Total at
31 December
2018
–
150,000
150,000
300,000
Price on
date of award
(pence)
67
37
148.6
Date
from which
exercisable
01.01.18
01.01.19
01.01.20
Expiry
date
21.04.25
25.04.26
04.05.27
1 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.
2 This award has vested 100% under the TSR performance condition described above. At the date of vesting (31 December 2018) the market price of a share was 194.65 pence.
With the exception of the reinvestment of the January 2019 special dividend to purchase 3,117 shares for Mr Mawe, there have been no
changes in the interests of the Directors from the end of the period under review to 22 April 2019. Total outstanding (i.e. awarded but
not yet vested) awards granted under the LTIP as at the end of 2018 are equivalent to 0.05% of issued share capital.
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 retired from the Board on 1 August 2014 and has subsequently been reappointed on 12 February 2019. In 2018, for his
role as a Non-executive Director of Ferrexpo AG he received a fee of US$40,000 p.a. Wolfram Kuoni retired from the Board on
28 November 2016 and, in 2018, for his role as the Chairman of Ferrexpo AG, he received a fee of US$100,000 p.a. No other payments
were made to past Directors in the year.
Percentage Change in CEO Remuneration Compared to Other Employees
The table below sets out the percentage increase in salary, taxable benefits and annual bonus for the CEO between 2017 and 2018
compared to that for other employees.
Salary
Taxable benefits
Annual bonus
1 Refers to senior executives.
CEO
0%
0%
n/a
Other
employees1
1.9%
0%
33.7%
Relative Importance of Spending on Pay
The table below shows Ferrexpo’s dividend and total employee pay expenditure (this includes pension and variable pay, including STIP and
fair value of LTIP, but not social security) for the financial years ended 31 December 2017 and 31 December 2018, and the percentage change.
US$ million
All-employee remuneration
Distributions to shareholders1
1
Includes dividends and share buybacks.
2018
73
97
2017
55
58
Year-on-year
change
32.8%
65.6%
Comparison of Company Performance and Executive Director Pay
The graph on page 93 shows the value, at 31 December 2018, 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.
93
Ferrexpo plc
Annual Report & Accounts 2018
HISTORICAL TSR PERFORMANCE
Growth in the value of a hypothetical £100 holding over the ten years to 31 December 2018.
1,500
120
900
600
300
— Ferrexpo
— 2018 LTIP Index
— FTSE 250 Index
— FTSE All-Share Index
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
31 Dec
2018
Chief Executive Officer’s Pay
US$000
K Zhevago
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
Single figure total remuneration
322
341
348
291
243
243
243
243
255
251
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 at the 2017 AGM and the advisory vote on the 2017
Annual Report at the 2018 AGM.
Remuneration policy (at 2017 AGM)
2017 Annual Report on Remuneration (at 2018 AGM)
For
Against
Withheld
No.
%
434m
483m
97.4%
98.0%
No.
12m
10m
%
2.6%
2.0%
No.
1.4m
0m
Other transactions involving Directors are set out in Note 33 (related parties) to the financial statements. This report was approved by the
Board on 22 April 2019.
Signed on behalf of the Board
Bert Nacken
Chairman Of The Remuneration Committee
STRATEGIC REPORTCORPORATE GOVERNANCEFINANCIAL STATEMENTS 94
Ferrexpo plc
Annual Report & Accounts 2018
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 2018. There have been no significant events since the balance sheet date, other than the proposed dividend
disclosed in Note 12 to the financial statements. Information about the Group’s strategy, business model and likely future developments is
included in the Strategic Report on pages 2 to 15.
Information about the use of financial instruments by the Group is given in Note 26 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:
Capitalised interest and tax relief (LR 9.8.4 R(1))
See financial statements Note 13
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 33. Transactions with FC
Vorskla are considered to be contracts of significance under
the Listing Rules
The employee benefit trust contains 2.3 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)). Also see Note 33: Related party disclosures
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 26 to
the financial statements
Events since the balance sheet date
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)
See financial statements Note 34
Corporate Governance Report
Corporate Governance Report
Dividends
Results for the year are set out in the consolidated income statement on page 110.
Page
130
78-93
158
–
66
54
145
161
98
63
The Directors recommend a final dividend of 6.6 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 1 July 2019 to shareholders on the register at the
close of business on 14 June 2019. 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 2018, the Directors have also announced a special dividend of 6.6 US cents per
share for payment on 14 May 2019 to shareholders on the register at the close of business on 3 May 2019. 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 and up to the date of signing were:
– Vitalii Lisovenko
– Simon Lockett (retired 28 January 2019)
– Steve Lucas
– Chris Mawe
– Bert Nacken
– Mary Reilly
– Kostyantin Zhevago
– Lucio Genovese (appointed 12 February 2019)
All of the Directors will retire at the forthcoming AGM and, being eligible, will offer themselves for re-election.
Further details about the Directors and their roles within the Group are given in the Directors’ biographies on pages 60 and 61. 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 78 to 93.
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Ferrexpo plc
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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 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 52 to 53. Employee numbers are stated in
Note 28 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 30 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.
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 2018. This authority will expire at the conclusion of the Company’s 2019 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 2018.
STRATEGIC REPORTCORPORATE GOVERNANCEFINANCIAL STATEMENTS
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Annual Report & Accounts 2018
DIRECTORS’ REPORT CONTINUED
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 2018, the Company had been advised, in accordance with the Disclosure and Transparency Rules, of the following
notifiable interests in its voting rights.
Name of shareholder
Fevamotinico S.a.r.l.1
Ordinary Shares
Number of voting
rights
% of the Company’s
total voting rights at
date of notification
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 31 March 2019, 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.
Bank Loan Facilities
The Group has a facility agreement relating to a Dollar revolving pre-export finance (“PXF”) facility up to US$500 million (US$400 million
of commitments) with BNP Paribas, Deutsche Bank and other banks entered into in November 2017 and amended and restated in
November 2018, 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 2018, US$195
million of the facility were drawn.
As of 31 December 2018, total committed PXF facilities available were US$400 million, of which US$195 million had been drawn 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.
97
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Annual Report & Accounts 2018
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 66). 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 24 to 47. The Viability Statement is set out in the Strategic Report on page 48. The financial position of the Group, its cash flows,
liquidity position and borrowing facilities are described in the Performance Review on pages 24 to 31. In addition, Note 26 of the notes to
the consolidated financial statements on pages 145 to 152 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 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, 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.
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 7 June 2019 at The Great Hall, J.P. Morgan, 60 Victoria Embankment London
EC4Y 0JP. 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 59 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 22 April 2019.
For and on behalf of the Board
Steve Lucas
Chairman
STRATEGIC REPORTCORPORATE GOVERNANCEFINANCIAL STATEMENTS 98
Ferrexpo plc
Annual Report & Accounts 2018
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 applicable accounting standards, 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.
The Directors’ Report (including Corporate Governance Report) comprises the information on pages 60 to 98.
This responsibility statement was approved by the Board of Directors on 22 April 2019 and is signed on its behalf by:
Steve Lucas
Chairman
Chris Mawe
Chief Financial Officer
22 April 2019
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Annual Report & Accounts 2018
FINANCIAL CONTENTS
Notes Content
I N D E P E N D E N T A U D I T O R ’ S R E P O R T
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
N O T E S T O T H E C O N S O L I D AT E D F I N A N C I A L S TAT E M E N T S
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
Other income
Foreign exchange gains and losses
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 contract liabilities
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
Section 4: Financial Instruments and Financial Risk Management
24 Cash and cash equivalents
25
26
Interest-bearing loans and borrowings
Financial instruments
Section 5: Other
Share-based payments
Employees
27
28
29 Commitments, contingencies and legal disputes
Share capital and reserves
30
31 Consolidated subsidiaries
32
Investments in associates
33 Related party disclosures
34
Events after the reporting period
Parent Company Financial Statements
Additional Disclosures
Alternative Performance Measures
Glossary
Shareholder Information
Page
110
111
112
113
114
115
115
116
118
118
119
121
122
123
124
124
128
130
133
134
135
135
137
137
138
138
142
143
143
144
145
153
154
154
156
157
158
158
161
162
168
169
172
176
STRATEGIC REPORTCORPORATE GOVERNANCEFINANCIAL STATEMENTS
100
Ferrexpo plc
Annual Report & Accounts 2018
INDEPENDENT AUDITOR’S REPORT
TO THE MEMBERS OF FERREXPO PLC
REPORT ON THE AUDIT OF THE FIN A NCI A L STATEMENTS
Qualified opinion
In our opinion, except for the possible effects of the matters described in the basis for qualified opinion section of our report:
– 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 2018 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 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 related consolidated Notes 1 to 34; 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 qualified opinion
We have been unable to obtain satisfactory audit evidence or explanations in respect of the following matters:
1. Corporate Social Responsibility (“CSR”) donations advanced to Blooming Land Charitable Foundation (“Blooming Land”)
We have been unable to obtain satisfactory audit evidence or explanations to conclude whether the US$9.5 million of CSR donations
advanced to Blooming Land in the year ended 31 December 2018, and US$24.0 million in the year ended 31 December 2017, was
expended by Blooming Land on legitimate business payments for charitable purposes. The Directors suspended payments to Blooming
Land in May 2018. The cumulative CSR payments made to Blooming Land by the Group since 2013 total approximately US$110 million.
Depending on the nature of any misappropriation or misapplication that might or might not emerge and is concluded on, 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.
In August 2018, Deloitte received from Blooming Land additional copy bank statements and inconsistencies were identified between
those and copy bank statements received previously in July 2018, which raised concerns as to the credibility and reliability of all other
information and documentation previously provided by Blooming Land. To date, Blooming Land has not provided the original or certified
copy bank statements to Ferrexpo, citing confidentiality constraints. Blooming Land has provided explanations for these inconsistencies,
including the cyber-attacks against Ukrainian financial institutions in June 2017 which they stated caused these irregularities in the copy
bank statement data. Our knowledge of the effects of the cyber-attack on other companies and the systems by which bank statements
are generated raised concerns whether these explanations are credible.
In relation to the direct donations of materials reported by Blooming Land as having been made to institutions in Ukraine, we received cost
breakdowns and source documents supporting the stated expenditure for a sample selected by us but Blooming Land has not provided
the requested details of the recipient parties or any supporting documents evidencing receipt by them.
In the final quarter of 2018, we identified from public records in Ukraine that certain criminal legal proceedings have been launched in
Ukraine under which Blooming Land has been directed by the relevant court to provide documents.
We reported all of these concerns to the Board of Directors and our recommendation that an independent forensic investigation be
launched. In February 2019, the Group established an Independent Review Committee (“IRC”) with the mandate set out on page 69,
which includes reviewing the discrepancies in the copy bank statements; gaining assurance over the ultimate use of funds donated
to Blooming Land; reviewing the relationship between Blooming Land and Khimreaktiv (an entity controlled by the Group’s CEO);
whether significant influence or control over Blooming Land exists; and the extent of any potential legal or regulatory exposures. The IRC
commissioned an independent forensic investigation (referred to as an Independent Review by the Company) led by legal counsel in the
UK and Ukraine and independent forensic accountants.
The forensic investigation is ongoing, such that the inconsistencies in the copy bank statements provided by Blooming Land are not
yet resolved. Further, the independent forensic accountant has identified discrepancies with regard to the application of funds by the
Blooming Land and there are indications from their work to date that some element of the funds could have been misappropriated. As
noted on page 70, the IRC has noted that they cannot conclude as to the ultimate use of all of the funds and that there are indications
that some could have been misappropriated and accordingly we are also unable to conclude as to the ultimate use of all the funds by
Blooming Land and whether the Group’s payments to Blooming Land are appropriately presented and disclosed.
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Annual Report & Accounts 2018
2. Whether Blooming Land is a related party of the Group
The Directors have reached an interim conclusion that neither the Group, nor its CEO and majority shareholder, have significant influence
or control over Blooming Land. In reaching this conclusion, the Directors have considered the relationship of the CEO with Blooming
Land, including the CEO’s business network, and have placed reliance on the CEO’s representation, as set out on page 70 that he
believes that he does not. Were this to be otherwise, Blooming Land would be a related party of the Group.
The investigation into Blooming Land has identified a significant number of potential associations and linkages adjacent to the CEO. Whilst
not individually definitive, when taken together with other factors, including the multiple capacities in which the Group’s CEO could interact
with Blooming Land (including as CEO of Ferrexpo, but also as a principal for Khimreaktiv and the controlling shareholder in Ferrexpo),
we did not consider that we had obtained sufficient appropriate audit evidence to conclude whether the Group CEO did hold significant
influence, held significant influence or exercised control. Accordingly, we are unable to conclude whether the associated related party
transaction disclosures are complete and accurate for the current and prior periods.
Had we been able to obtain sufficient appropriate evidence in respect of the above matters, adjustments might have been necessary to
the financial information and disclosures for the years ended 31 December 2018 and 31 December 2017.
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 qualified opinion.
Summary of our audit approach
Key audit matters
The key audit matters that we identified in the current year were:
– CSR payments and whether Blooming Land is a related party of the Group (see basis for qualified opinion
section above)
– Related party disclosure (other than in relation to Blooming Land)
– Management override of controls
– Taxation – transfer pricing
Our assessment of the Group’s key audit matters is consistent with 2017, except for;
i) the inclusion of management override of controls due to the matters and uncertainties noted in the basis
for qualified opinion above; and
ii) the taxation key audit matter now only relates to transfer pricing due to a further reduction in the
probability of a previously unrecognised deferred tax asset being recorded.
Materiality
The materiality that we used for the Group financial statements was US$18.1 million which was determined
as 5% of the three-year average of profit before tax and special items.
Performance materiality was set at 50% of materiality.
Scoping
We utilised Deloitte global member firms (“Component Auditors”) to report on the operations of the assessed
components, comprising the three mining and processing entities in Ukraine and the Swiss and Middle East
marketing companies.
Our audit scope results in all major operations of the Group being subject to audit work, covering in excess
of 99% of the Group’s revenue, 94% of the Group’s profit before tax and 94% of the net assets.
Revisions to our
planned audit
approach
As a result of the matters and uncertainties noted in the basis for qualified opinion, as required by
International Standards on Auditing (UK), we performed a reassessment of our audit risks and approach,
including fraud risks. Following which:
i) we involved Deloitte forensic specialists in our audit to review the scope and independence of the
Independent Review, and to assist in our analysis of its findings and conclusions. These specialists also
supported us in performing due diligence procedures over certain counterparties identified during the
audit;
ii) additional specific procedures were performed, in particular in relation to the risk areas of related parties
and management override as outlined in the relevant Key Audit Matters section of this report;
iii) the extent of existing procedures were increased through reducing performance materiality of the group
and components;
iv) the group scoping was revised with previously out of scope entities being subject to additional specified
procedures in relation to their external revenue balance;
v) we performed a reassessment over our work on controls with particular emphasis on management
review controls over significant account balances;
vi) we changed our overall audit approach such that we no longer place any reliance on controls and
adopted a fully substantive audit; and
vii) we performed increased procedures on capitalisation of expenditure and certain expenses accounts
including evaluating the business need and pricing for the services obtained and obtained audit evidence
for the receipt of the underlying goods or service.
STRATEGIC REPORTCORPORATE GOVERNANCEFINANCIAL STATEMENTS
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INDEPENDENT AUDITOR’S REPORT
TO THE MEMBERS OF FERREXPO PLC CONTINUED
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 Company’s ability to continue to do so over
a period of at least twelve months from the date of approval of the financial statements.
We confirm that we
have nothing material
to report, add or draw
attention to in respect
of these matters.
We considered as part of our risk assessment the nature of the group, its business model and related
risks including where relevant the impact of Brexit, the requirements of the applicable financial reporting
framework and the system of internal control. We evaluated the Directors’ assessment of the group’s
ability to continue as a going concern, including challenging the underlying data and key assumptions
used to make the assessment, the Directors’ assessment of forecast covenant compliance and
evaluated the Directors’ plans for future actions in relation to their going concern assessment.
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.
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 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:
We confirm that we
have nothing material
to report, add or draw
attention to in respect
of these matters.
– the disclosures on pages 38-47 that describe the principal risks and explain how they are being
managed or mitigated;
– the Directors’ confirmation on page 48 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 48 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.
In addition to the matters described in the basis for qualified opinion section, we have determined the matters described below to be the
key audit matters to be communicated in our report.
103
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Related party disclosure (other than in relation to Blooming Land)
Key audit matter
description
The Group enters into a substantial number of related party transactions and has reported an expense of
US$48.1 million and other income of US$1.0 million, of which US$27.7 million and US$0.9 million respectively
relates to transactions with counterparties that are controlled by the Group’s majority shareholder and CEO.
Our risk assessment and audit approach reflected the matters and uncertainties set out in the basis for
qualified opinion, including the limitation of scope in relation to whether the Group’s CEO and majority
shareholder has significant influence or control over Blooming Land, and the previously unreported related
party transaction in the year ended 31 December 2017 which was identified and disclosed during the Interim
review for the six months ended 30 June 2018 as set out in Note 33.
There was therefore considered to be a key audit matter due to the heightened 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. This risk was considered greatest in the Ukrainian operations because of the developing
regulatory environment.
Refer to Key Estimates and Critical Judgements section in the Report of the Audit Committee on page 73.
The related party disclosures are set out in Note 33 to the Financial Statements and the Company’s controls
and processes are described in the Report of the Audit Committee on page 74.
How the scope of our
audit responded to the
key audit matter
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 the individual entities.
We challenged the adequacy of the Company’s processes and controls in this area and its response to the
previously unreported related party transaction.
We reviewed the minutes of meetings of the Board of Directors and relevant sub-committees to assess
whether there are any new related party transactions entered into in 2018 that are significant or outside the
normal course of business.
We used forensic tools to profile the counterparties for all transactions entered into by Ferrexpo in Ukraine
during 2018 in order to identify those of greatest audit interest. For these 128 and the 6 new counterparties in
the year we performed detailed background checks using forensic experts in the UK and Ukraine to assist in
the design and execution of our audit procedures.
We performed independent searches of the CEO and majority shareholder’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 reviewed an increased sample of underlying contracts to understand the nature and commerciality of
any new or significant related party transactions and assessed whether they are executed on arm’s length
basis.
In relation to the US$10.7 million paid for the sponsorship of FC Vorskla, which is wholly owned by the
Group’s CEO and majority shareholder, we have benchmarked the amounts paid versus the commercial
income of other football clubs in Ukraine. In relation to the US$9 million of this amount, which is paid to FC
Vorskla Cyprus, an entity owned by a trust in turn controlled by the Group’s CEO, we saw a confirmation
from a representative of the football club confirming the use of funds.
We reviewed disclosure of related party balances and transactions to determine whether they were in
compliance with IAS 24.
Key observations
With the exception of the matters discussed in the basis for qualified opinion section above, the results of our
testing were satisfactory and we concur that the related party transactions and balances are appropriately
disclosed in the financial statements.
STRATEGIC REPORTCORPORATE GOVERNANCEFINANCIAL STATEMENTS
104
Ferrexpo plc
Annual Report & Accounts 2018
INDEPENDENT AUDITOR’S REPORT
TO THE MEMBERS OF FERREXPO PLC CONTINUED
Management override of controls
Key audit matter
description
In accordance with ISA 240 (UK) management override is presumed to be a significant risk. The ability to
override controls puts management in a unique position to perpetrate or conceal the effects of fraud. This
may take a number of forms such as falsifying accounting entries in order to conceal misappropriation of
assets or other manipulation of accounting entries intended to result in the production of financial statements
which give a misleading view of the entity’s financial position or performance.
We assessed an increased potential management override risk, as a result of the matters and uncertainties
noted in the basis for qualified opinion, in relation to the purchase to pay controls, which we considered to
be the most pervasive risk area for misappropriation of assets and undisclosed or non-commercial related
party transactions, and overstatement of reported profit by manipulation of key estimates or journal entries.
Related party disclosure was also assessed as a separate key audit matter.
How the scope of our
audit responded to the
key audit matter
As a result of the increased potential management override risk, we have performed the following
procedures (in addition to other specific procedures performed which are outlined in the other Key Audit
Matters and basis of qualified opinion section of this report):
– We performed an account balance by account balance review for all operating and capital payments, to
determine balances where substantive analytical procedures are no longer appropriate and supplemented
those procedures with tests of detail. We also deliberately increased unpredictability in our audit
procedures. We increased our testing over the nature of legal, consultancy and agency spend given
the higher fraud risk that exists for these balances. We increased our reliance on directly obtained third
party evidence, such as direct revenue and debt confirmation and reduced our reliance on management
representations.
– We increased unpredictability in our audit procedures surrounding the testing of journal entries by
reassessing the selection criteria we applied in our data analytics tools as a result of our revised risk
assessment. This included additional risk characteristics reflecting the CSR payments such as the
updated related party list and searching for additional keywords of interest resulting in additional samples
being substantively tested.
– We held additional discussions with a broader range of senior management, being the Chief Operating
Officer and Chief Marketing officer, Group legal counsel and with lower level operational management
throughout the organisation and at different levels and in different functions, including the chief geologist,
mine planner, head of production, chief surveyor and accounts payable clerks to identify if they are aware
of any instances of override of controls.
– We evaluated the design and implementation of key controls including, in particular high level
management review controls and controls over purchase to pay procurement processes, as part of our
risk assessment.
– We reviewed internal audit reports to help identify significant control deficiencies and the whistle blower
reports for any actual or suspected non-compliance with controls.
– We changed our overall audit approach such that we no longer place any reliance on the operating
effectiveness of controls and adopted a fully substantive audit with no control reliance approach.
In line with the initial audit plan, prior to the reassessment of audit approach, we also performed the following
in order to address the risk of management override:
– We tested the appropriateness of journal entries and other adjustments recorded in the general ledger and
other adjustments in the preparation of the financial statements;
– We evaluated whether the judgments and decisions made in determining the accounting estimates
included in the financial statements, even if they are individually reasonable, indicate a possible bias on the
part of the entity’s management that may represent a risk of material misstatement due to fraud; and
– We evaluated the business rationale for significant transactions that are outside the normal course of the
business for the entity.
– We held discussions with the Audit Committee, senior management and internal audit regarding the risk of
fraud, effectiveness of key oversight controls and any fraud or suspected fraud identified during the year.
Key observations
We did not identify any instances of management override of controls.
105
Ferrexpo plc
Annual Report & Accounts 2018
Taxation – transfer pricing
Key audit matter
description
The Group prices its sales between its subsidiaries using international benchmark prices for comparable
products covering product quality and applicable freight. The Group judge 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 for the years 2013-2015.
The SFS issued its official tax audit report to the Group on 27 December 2018 with a claim representing a
total exposure of US$16.2 million.
The Group submitted its objection to the SFS findings on 25 January 2019. The SFS rejected management’s
responses on 11 March 2019 and management intend to initiate legal proceedings.
Ferrexpo assessed the risk of loss in relation to the claim as possible and has accordingly disclosed, rather
than provided for, the US$16.2 million. The Group evaluated the risk of further claims being received in
respect of other entities or additional years, concluding that such exposure was remote.
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 and therefore this has been identified as a key audit
matter.
This matter is described in Note 11 to the financial statements.
The taxation disclosure including accounting policies and description of key sources of estimation
uncertainty are set in Note 11 and considered by the Audit Committee on page 73 of the annual report.
We involved 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 2018 to be in line
with the transfer pricing policy.
We reviewed the arguments set out in the statement of claim and underlying calculations, other
correspondence with the SFS and the calculations 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
court proceedings.
We reviewed the disclosure of these taxation balances to determine whether they were in compliance with
IAS 12.
How the scope of our
audit responded to the
key audit matter
Key observations
The results of our testing were satisfactory and we concur that the tax provisions and disclosures are
appropriate.
STRATEGIC REPORTCORPORATE GOVERNANCEFINANCIAL STATEMENTS
106
Ferrexpo plc
Annual Report & Accounts 2018
INDEPENDENT AUDITOR’S REPORT
TO THE MEMBERS OF FERREXPO PLC CONTINUED
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$8.1 million (2017: US$16.5 million)
Group financial statements
Basis for determining
materiality
We have determined materiality by using 5% of a three-year average (2016
– 2018) of profit before tax and special items. There were no special items in
2018 or 2017. In 2016, they comprised 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 2017, we used 5% of a two-year average (2016 – 2017) of profit before tax
and special items in determining our materiality.
Parent Company
financial statements
US$15.8 million (2017:
US$14.4 million)
1.5% of Parent
Company’s net assets
(2017: 1.5%)
Rationale for the
benchmark applied
The profit before tax for the years 2016-2018 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 the chosen
benchmark to be
appropriate due to the
nature of Company’s
operations being a
holding company of the
Group.
We consider this approach of using a three-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 extended to a three-year
average in 2018 following benchmarking to peer companies.
We set our 2018 performance materiality of US$9 million (2017: US$11.5 million) at a level lower than materiality to reduce the probability
that, in aggregate, uncorrected and undetected misstatements exceed the materiality for the financial statements as a whole. In
determining performance materiality, we considered the increased risk arising from the CSR payments to Blooming Land and the
subsequent investigation. Group performance materiality therefore is set at 50% of group materiality for the 2018 audit (2017: 70%).
We agreed with the Audit Committee that we would report to them all audit differences in excess of US$900,000 (2017: US$825,000) 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.
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.
As a result of the matters and uncertainties noted in the basis for qualified opinion, we performed an extensive reassessment of our audit
and fraud risks following which:
i) we involved Deloitte forensic specialists in our audit to review the scope and independence of the Independent Review, and to perform
analysis of its findings and conclusions. These specialists also supported us in performing due diligence procedures over certain
counterparties identified during the audit;
ii) additional specific procedures were performed, in particular in relation to the risk areas of related parties and management override as
outlined in the relevant Key Audit Matters section of this report;
iii) the extent of existing procedures were increased through reducing performance materiality of the group and components;
iv) the group scoping was revised with previously out of scope entities such as the bunkering and logistics operations being subject to
additional specified procedures in relation to their external revenue balance;
v) we performed a reassessment over controls with particular emphasis on management review controls over significant account
balances.
vi) we changed our overall audit approach such that we no longer place any reliance on controls and adopted a fully substantive audit;
vii) we performed increased procedures on capitalisation and certain expenses accounts including evaluating the business need and
pricing for the services obtained and obtained audit evidence for the receipt of the underlying goods or service.
Considering operational and financial performance and risk factors, we focussed our assessment on the significant components and
performed full scope audits of the Ukrainian FPM and FYM components and Ferrexpo plc entity along with specified group level audit
procedures on the material external balances at the Swiss marketing entities FAG and FME (being revenue and receivables), the non-
operating Ukrainian FBM component, Ferrexpo Finance plc and for the first time the Bunkering and Logistics businesses. Our full scope
and specified audit procedures cover revenue ( in excess of 99% of Group total), profit before tax (94% of Group total) and net assets
(94% of Group total).
107
Ferrexpo plc
Annual Report & Accounts 2018
The remaining 21 components represent a 9% reduction of the Group’s profit before tax and individually do not represent more than a 3%
reduction of the Group’s profit before tax.
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$9.1 million to US$14.5 million (2017: US$6.6 million
to US$10.7 million).
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, a visit to the Ukrainian team and operations, provision of referral instructions
(including detailed supplemented procedures following the revised risk assessment), 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.
Details of the extent to which the audit was considered capable of detecting irregularities, including fraud are set out below.
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.
STRATEGIC REPORTCORPORATE GOVERNANCEFINANCIAL STATEMENTS 108
Ferrexpo plc
Annual Report & Accounts 2018
INDEPENDENT AUDITOR’S REPORT
TO THE MEMBERS OF FERREXPO PLC CONTINUED
Extent to which the audit was considered capable of detecting irregularities, including fraud
We identify and assess the risks of material misstatement of the financial statements, whether due to fraud or error, and then design and
perform audit procedures responsive to those risks, including obtaining audit evidence that is sufficient and appropriate to provide a basis
for our opinion.
Identifying and assessing potential risks related to irregularities
In identifying and assessing risks of material misstatement in respect of irregularities, including fraud and non-compliance with laws and
regulations, our procedures included the following:
– enquiring of group and local management, internal audit, the Group’s internal and external legal counsel and the Audit Committee,
including obtaining and reviewing supporting documentation, concerning the group’s policies and procedures relating to:
– identifying, evaluating and complying with laws and regulations and whether they were aware of any instances of non-compliance;
– detecting and responding to the risks of fraud and whether they have knowledge of any actual, suspected or alleged fraud;
– the internal controls established to mitigate risks related to fraud or non-compliance with laws and regulations;
– discussing among the engagement team including significant component audit teams and involving relevant internal specialists,
including tax, valuations, pensions, IT, forensic and industry specialists regarding how and where fraud might occur in the financial
statements and any potential indicators of fraud. As part of this discussion, we identified potential for fraud in the following areas: CSR
payments, related party disclosure, taxation-transfer pricing, revenue recognition, valuation of lean ore inventories, cost capitalisation
and management override of controls; and
– obtaining an understanding of the legal and regulatory frameworks that the group operates in, focusing on those laws and regulations
that had a direct effect on the financial statements. The key laws and regulations we considered in this context included UK Companies
Act, Listing Rules, and tax legislation. In addition, we considered compliance with the UK Bribery Act, employee legislation, terms of the
group’s mining licences and environmental regulations as fundamental to the group’s operations.
Audit response to risks identified
As a result of performing the above, we identified CSR payments, taxation – transfer pricing, related party disclosure and management
override of controls as key audit matters. The basis for qualified opinion and key audit matters sections of our report explains the matters
in more detail.
In addition to the above, our procedures to respond to risks identified included the following:
– reviewing the financial statement disclosures and testing to supporting documentation to assess compliance with relevant laws and
regulations described as having a direct effect discussed above;
– enquiring of management, the audit committee and external legal counsel concerning actual and potential litigation and claims;
– performing analytical procedures to identify any unusual or unexpected relationships that may indicate risks of material misstatement
due to fraud;
– reading minutes of meetings of those charged with governance, reviewing internal audit reports and reviewing correspondence with the
Ukrainian State Fiscal Service;
– with respect to revenue recognition, we obtained direct third party confirmations of all iron ore sales during the year with detailed
substantive procedures performed for any unreconciled differences and reviewed customer agreements, including identifying any
pricing outliers;
– with respect to valuations of lean ore inventories:
– We audited the significant assumptions within the lean ore valuation calculations with reference to external third party support;
– We assessed the Group’s ability to complete key capital projects, including the processing facility expansion programme (“Section
9”), and the economic feasibility of processing lean ore versus the opportunity cost of processing higher grade ores; and
– In relation to capital projects, the Group audit team visited the mine in 2018 and observed the progress of key capital projects. We also
enhanced our detailed testing on capitalised expenditure and prepayments by: increasing the sample size of transactions, challenging
the commercial rationale for the transactions selected, obtaining documentary support for the delivery of goods or services, checking
that the cash payments were made to the correct supplier bank accounts and challenging whether the costs incurred qualified to be
capitalised under IAS 16.
We also communicated relevant identified laws and regulations and potential fraud risks to all engagement team members including
internal specialists and significant component audit teams, and remained alert to any indications of fraud or non-compliance with laws
and regulations throughout the audit.
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.
109
Ferrexpo plc
Annual Report & Accounts 2018
Matters on which we are required to report by exception
Adequacy of explanations received and accounting records
Arising solely from the limitation on the scope of our work referred to above:
– we have not obtained all the information and explanations that we considered necessary for the purpose of our audit.
Under the Companies Act 2006, we are required to report to you if, in our opinion:
– adequate accounting records have not been kept by the Parent Company, or returns adequate for our
audit have not been received from branches not visited by us; or
– the Parent Company financial statements 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 two years, covering years from our appointment through to the year ending
31 December 2018.
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).
Statement pursuant to section 837(4) of the Companies Act 2006
Respective responsibilities of Directors and the auditor
In addition to their responsibilities described above, the Directors are also responsible for considering whether the Company, subsequent
to the balance sheet date, has sufficient distributable profits to make a distribution at the time the distribution is made.
Our responsibility is to report whether, in our opinion, the subject matter of our qualification of our auditor’s report on the Ferrexpo plc
financial statements for the year ended 31 December 2018 is material for determining, by reference to those financial statements, whether
the distribution proposed by the Company is permitted under section 830 and section 831 of the Companies Act 2006. We are not
required to form an opinion on whether the Company has sufficient distributable reserves to make the distribution proposed at the time
the distribution is made.
Opinion
In our opinion, the subject matter of the above qualification is not material for determining by reference to these financial statements
whether the final dividend for the year ended 31 December 2018 of US$116 million proposed by the Company is permitted under section
830 and section 831 of the Companies Act 2006.
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.
Christopher Thomas
(Senior statutory auditor)
For and on behalf of Deloitte LLP
Statutory Auditor
London, United Kingdom
22 April 2019
STRATEGIC REPORTCORPORATE GOVERNANCEFINANCIAL STATEMENTS 110
Ferrexpo plc
Annual Report & Accounts 2018
CONSOLIDATED INCOME STATEMENT
US$000
Revenue
Operating expenses
Other operating income
Operating foreign exchange (losses)/gains
Operating profit
Share of profit from associates
Profit before tax and finance
Net finance expense
Non-operating foreign exchange (losses)/gains
Profit before tax
Income tax expense
Profit for the year
Profit attributable to:
Equity shareholders of Ferrexpo plc
Non-controlling interests
Profit for the year
Earnings per share:
Basic (US cents)
Diluted (US cents)
Notes
Year ended
31.12.18
Year ended
31.12.17
6 1,274,030 1,197,494
5/7
(844,470)
(717,354)
8
9
32
10
9
3,314
(5,295)
3,238
6,661
427,579 490,039
5,360
5,527
432,939 495,566
(39,332)
(54,766)
(1,585)
9,033
392,022 449,833
11
(56,801)
(55,361)
335,221
394,472
333,616
392,929
1,605
1,543
335,221
394,472
12
12
56.9
56.7
67.1
66.9
111
Ferrexpo plc
Annual Report & Accounts 2018
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
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 income/(loss) that may be reclassified to profit or loss in
subsequent periods
Items that will not be reclassified subsequently to profit or loss:
Remeasurement gains/(losses) on defined benefit pension liability
Income tax effect
Net other comprehensive income/(loss) not being reclassified to profit or loss in
subsequent periods
Other comprehensive income/(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
31.12.18
Year ended
31.12.17
335,221
394,472
12,178
(41,415)
11
(2,007)
4,557
10,171
(36,858)
21
11
875
–
(9,172)
1,556
875
(7,616)
11,046
(44,474)
346,267
349,998
344,587
348,686
1,680
1,312
346,267 349,998
STRATEGIC REPORTCORPORATE GOVERNANCEFINANCIAL STATEMENTS 112
Ferrexpo plc
Annual Report & Accounts 2018
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 (restated - see Note 12)
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 (restated - see Note 12)
Accrued liabilities and contract liabilities
Income taxes payable
Other taxes payable (restated - see Note 12)
Total current liabilities
Total liabilities
Total equity and liabilities
The financial statements were approved by the Board of Directors on 22 April 2019.
Steve Lucas
Chairman
Christopher Mawe
Chief Financial Officer
Notes
As at
31.12.18
As at
31.12.17
13
14
32
16
15
11
11
16
17
18
11
19
24
30
30
5/25
21
22
11
5/25
20
23
11
19
701,376
623,359
39,609
7,037
217,688
32,104
–
27,946
36,858
5,947
175,831
10,501
5,454
40,408
1,025,760
898,358
144,919
85,695
27,344
61
44,837
62,996
96,645
88,327
17,514
14
23,192
97,742
365,852
323,434
1,391,612
1,221,792
121,628
185,112
121,628
185,112
(2,010,080)
(2,020,864)
2,568,187
2,329,591
864,847
615,467
2,050
866,897
197,258
21,444
1,940
352
220,994
204,600
34,292
32,693
20,571
11,565
303,721
524,715
370
615,837
186,294
20,514
2,070
381
209,259
305,412
32,420
27,554
23,715
7,595
396,696
605,955
1,391,612
1,221,792
113
Ferrexpo plc
Annual Report & Accounts 2018
CONSOLIDATED STATEMENT OF CASH FLOWS
US$000
Profit before tax
Adjustments for:
Depreciation of property, plant and equipment and amortisation of intangible assets
Interest expense
Interest income
Losses on disposal of property, plant and equipment
Cash elements included in losses on disposal of property, plant and equipment
Write-offs
Share of profit from associates
Movement in allowance for doubtful receivables
Movement in site restoration provision
Employee benefits
Share-based payments
Operating foreign exchange losses/(gains)
Non-operating foreign exchange losses/(gains)
Other adjustments
Operating cash flow before working capital changes
Changes in working capital:
Increase in trade and other receivables
Increase in inventories
Increase/(decrease) in trade and other accounts payable
Increase in other taxes recoverable and payable (incl. VAT)
Cash generated from operating activities
Interest paid
Income tax paid
Post-employment benefits paid
Net cash flows from operating activities
Cash flows from investing activities
Purchase of property, plant and equipment 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 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
31.12.18
392,022
Year ended
31.12.17
449,833
62,094
37,832
(891)
5,701
(372)
1,489
(5,360)
222
(162)
3,642
674
5,295
1,586
(7,657)
496,115
(12,785)
(87,999)
1,903
(17,530)
379,704
(42,768)
(43,509)
(1,702)
291,725
(135,113)
800
827
4,137
(129,349)
214,317
(308,817)
(5,817)
(96,559)
(196,876)
(34,500)
97,742
(246)
62,996
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
10
10
7
32
17
22
21
27
9
9
19
11
13/14
25
25
24
STRATEGIC REPORTCORPORATE GOVERNANCEFINANCIAL STATEMENTS 114
Ferrexpo plc
Annual Report & Accounts 2018
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
US$000
At 1 January 2017
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 27)
Equity dividends to shareholders of
Ferrexpo plc (Note 12)
Attributable to equity shareholders of Ferrexpo plc
Issued capital
(Note 30)
Share premium
(Note 30)
Other reserves
(Note 30)
Retained
earnings
(Note 12)
Total
capital and
reserves
Non-controlling
interests
(Note 31)
Total
equity
121,628
185,112
(1,984,758)
2,002,153
324,135
(847)
323,288
–
–
–
–
–
–
–
–
–
–
–
–
–
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
–
(57,967)
(57,967)
(96)
–
–
(70)
586
(57,967)
At 31 December 2017
121,628
185,112 (2,020,864) 2,329,591
615,467
370
615,837
Application of new IFRSs
(Note 3)
At 1 January 2018 – after
application of new IFRSs
Profit for the year
Other comprehensive income
Total comprehensive income for
the year
Share-based payments (Note 27)
Equity dividends to shareholders of
Ferrexpo plc (Note 12)
–
–
–
989
989
–
989
121,628
185,112 (2,020,864) 2,330,580
616,456
370
616,826
–
–
–
–
–
–
–
–
–
–
–
333,616
333,616
1,605
335,221
10,110
861
10,971
75
11,046
10,110
334,477
344,587
1,680
346,267
674
–
674
–
(96,870)
(96,870)
–
–
674
(96,870)
At 31 December 2018
121,628
185,112
(2,010,080)
2,568,187
864,847
2,050
866,897
115
Ferrexpo plc
Annual Report & Accounts 2018
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
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-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% (2017: 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 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, 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 97 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.
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.
STRATEGIC REPORTCORPORATE GOVERNANCEFINANCIAL STATEMENTS 116
Ferrexpo plc
Annual Report & Accounts 2018
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
CONTINUED
Note 2: Basis of preparation continued
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 2017 except for the
adoption of new amendments and improvements to IFRSs effective as of 1 January 2018.
New standards and interpretations adopted with an impact on the Group’s consolidated financial statements
IFRS 9 Financial instruments
The Group applied IFRS 9 Financial instruments, as revised in July 2014, for the first time as of 1 January 2018 and elected to apply the
modified retrospective method in accordance with the transition provisions set out in the standard. The new standard became effective
as of 1 January 2018 and replaces IAS 39 and includes a new expected credit loss impairment model, changes to the classification and
measurement requirements of financial assets and financial liabilities as well as to hedge accounting. Additionally, the Group adopted as
of 1 January 2018 the consequential amendments to IFRS 7 Financial instruments: Disclosures.
The impact from the application of IFRS 9 on the Group’s consolidated financial statements is predominantly related to the expected
credit loss impairment model as the new standard established a new approach for the assessment of loans and receivable balances,
including trade receivables, with a focus on the risk of default in the future rather than based on incurred losses in the past. Classification
and measurement of financial instruments is unchanged on application of the new standard and the Group does not intend to apply
hedge accounting under IFRS 9.
IFRS 15 Revenue from contracts with customers
The Group applied IFRS 15 Revenue from contracts with customers, as amended in April 2016, for the first time as of 1 January 2018. The
Group, in accordance with the transition provisions set out in IFRS 15, elected to apply the modified retrospective method, under which
comparative financial information is not restated. 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.
Under IFRS 15 the revenue recognition model changed 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 control, the timing and the amount of revenue recognised is not affected for the majority of the Group’s
sales. For the Incoterms Cost, Insurance and Freight (“CIF”), and Cost and Freight (“CFR”), the Group 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 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 tables below and on the following page provide the details of the cumulative effects from the application of the new standards
on the consolidated statement of financial position as of 1 January 2018 and the consolidated statement of financial position and the
consolidated income statement as at 31 December 2018.
US$000
Consolidated statement of financial position
Assets
Trade and other receivables
Prepayments and other current assets
Liabilities
Balance as at
01.01.18
Effect from
application of
IFRS 15
Effect from
application of
IFRS 9
Year ended
31.12.17
88,109
24,727
–
7,213
(218)
–
–
88,327
17,514
(27,554)
Accrued liabilities and contract liabilities
(33,560)
(6,006)
Equity
Retained earnings
(2,330,580)
(1,207)
218
(2,329,591)
As disclosed above, the portion of revenue earned under sales contracts with CIF and CFR Incoterms, representing the obligation to
perform freight services, is deferred and recognised over time as this obligation is fulfilled, along with the associated costs. The effect from
the expected credit loss impairment model to be applied under the new standard is primarily calculated based on publicly available ratings
default risks of the Group’s customers with outstanding receivable balances as at the end of a reporting period. There are no non-current
receivable balances to be considered in the computation of the Group’s expected credit loss as all of the Group’s receivable balances are
classified as current based on the agreed terms and conditions.
117
Ferrexpo plc
Annual Report & Accounts 2018
Note 3: New accounting policies continued
Consolidated income statement
Freight revenue related to sales of iron ore pellets and concentrate
Operating expenses
Consolidated statement of financial position
Assets
Trade and other receivables
Prepayments and other current assets
Liabilities
As reported
as at
31.12.18
Effect from
application of
IFRS 15
Effect from
application of
IFRS 9
Balance without
effect from new
IFRSs
Notes
6
7
74,929
(844,470)
1,369
(3,207)
–
73,560
(35)
(841,228)
85,695
27,344
(3,207)
–
(253)
85,948
30,551
(34,062)
–
–
Accrued liabilities and contract liabilities
(32,693)
1,369
The table above shows the impact on the operating result from the application of the new accounting standards only. The impact from
the separate presentation of the total freight revenue related to the sales of iron pellets and concentrate is shown in Note 6 Revenue. The
adoption of the new accounting standards has not had any material impact on basic and diluted earnings per share.
New standards and interpretations adopted without an impact on the Group’s consolidated financial statements
– IFRIC 22 Foreign currency transactions and advance considerations clarifies the accounting for transactions that include the receipt or
payment of advance consideration in a foreign currency.
– Amendment to IFRS 2 Share-based payments: Classification and measurement of share-based payments clarifies the classification of
share-based payment transactions with net settlement features, the measurement of cash-settled share-based payment transactions
that include a performance condition and of modifications of share-based payment transactions from cash-settled to equity-settled.
– Annual improvements to IFRS standards 2014-2016 cycle contains amendments to IFRS 1 First-time Adoption of IFRS and IAS 28
Investments in associates and joint ventures.
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 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 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 long-term rental contracts for several of its office premises, 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 and the Group does not intend to early adopt this standard. If the new standard were applied as of 31 December
2018, right-of-use assets and corresponding lease liabilities of US$7,645 thousand would have been recognised without an effect on the
operating result at this point of time. Depreciation of right-of-use assets and resulting finance expense under the new standard are not
expected to be materially different to the operating lease expense recognised in the past.
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 does not expect a material impact on its consolidated financial statements from this new
interpretation.
Annual Improvements to IFRS Standards 2015-2017 Cycle
The improvements are effective for the financial year beginning on 1 January 2020 and contain amendments to IAS 12 Income taxes
and IAS 23 Borrowing costs. The Group does not expect a material impact on its consolidated financial statements from these annual
improvements.
Amendments to IFRS 9 Financial instruments: Prepayment features with negative compensation
The amendments are effective for the financial year beginning on 1 January 2019 and clarify the classification of particular pre-payable
financial assets and the accounting for financial liabilities following a modification. The Group does not expect a material impact on its
consolidated financial statements from these amendments.
STRATEGIC REPORTCORPORATE GOVERNANCEFINANCIAL STATEMENTS 118
Ferrexpo plc
Annual Report & Accounts 2018
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
CONTINUED
Note 3: New accounting policies continued
Amendments to IAS 19 Employee benefits: Plan amendment, curtailment or settlement
The amendments are effective for the financial year beginning on 1 January 2020 and provide guidance, in the case of plan amendment,
curtailment or settlement, on the measurement of the current service cost and the net interest for the period after the remeasurement.
Furthermore, they clarify the effect of a plan amendment, curtailment or settlement on the requirements regarding the asset ceiling. The
Group does not expect a material impact on its consolidated financial statements from these amendments.
Amendments to References to the Conceptual Framework in IFRS standards
The revised Conceptual Framework was issued in March 2018 and is effective for the financial year beginning on 1 January 2020 subject
to EU endorsement. The amendments introduce a new chapter on measurement, guidance on reporting financial performance, improved
definitions of an asset and a liability and clarifications in areas such as the roles of stewardship, prudence and measurement uncertainty in
financial reporting. The Group is in the process of performing the impact assessment.
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 16 Inventories – lean and weathered ore
Critical judgements
– Note 7 Operating expenses – nature of the Group’s community support donations
– Note 11 Taxation – tax legislation in Ukraine
– Note 33 Related party disclosures – completeness
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 175.
US$000
Profit before tax and finance
Losses on disposal of property, plant and equipment
Share-based payments
Write-offs
Depreciation and amortisation
Underlying EBITDA
US$000
Revenue
Cost of sales
Gross profit
Notes
Year ended
31.12.18
Year ended
31.12.17
432,939
495,566
27
7
5,701
674
1,489
7,754
586
407
62,094
46,392
502,897
550,705
Notes
Year ended
31.12.18
Year ended
31.12.17
6 1,274,030 1,197,494
7
(507,939)
(411,490)
766,091
786,004
119
Ferrexpo plc
Annual Report & Accounts 2018
Note 5: Segment information continued
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
31.12.18
As at
31.12.17
24
25
25
62,996
97,742
(204,600)
(305,412)
(197,258)
(186,294)
(338,862)
(393,964)
The Group made debt repayments of US$308,817 thousand during the year ended 31 December 2018 (2017: US$238,602 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 169 to 171.
In the current period, management has reviewed the presentation of the accrued interest and has reclassified it from interest-bearing
loans and borrowings to accrued liabilities in order to better reflect the nature of this balance in the presentation. US$9,358 thousand have
been re-presented for the comparative year ended 31 December 2017 to be on a consistent basis and reducing the net debt by these
amounts.
Disclosure of revenue and non-current assets
The Group does not generate significant revenues from external customers attributable to the UK, 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 Revenue. 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 control of the goods has 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. 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.
The control of goods passes when title for the goods passes to the customer as determined by the terms of the sales agreement. The
sales are typically made under the following terms:
– CIF (“Cost Insurance and Freight”);
– CFR (“Cost and Freight”);
– DAP (“Delivery At Place”); or
– FOB (“Free on Board”).
Under DAP Incoterms, 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.
The freight services under CIF and CFR Incoterms 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 freight revenue related to the sales of iron ore pellets made under CIF and CFR
Incoterms is shown separate from the revenue from sales of iron ore pellets and concentrate.
The Group has no unsatisfied or partially unsatisfied performance obligations relating to contracts with customers with original expected
duration of more than one year. The Group has therefore taken advantage of the practical expedient provided in IFRS 15 in respect of the
transaction price allocated to the remaining performance obligations.
Logistic services
Revenue from logistic services rendered is recognised over time as 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 as contract
liabilities.
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.
STRATEGIC REPORTCORPORATE GOVERNANCEFINANCIAL STATEMENTS 120
Ferrexpo plc
Annual Report & Accounts 2018
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
CONTINUED
Note 6: Revenue continued
The details on the first-time adoption of IFRS 15 Revenue from contracts with customers are provided in Note 3 New accounting policies.
Revenue for the year ended 31 December 2018 consisted of the following:
US$000
Revenue from sales of iron ore pellets and concentrate
Freight revenue related to sales of iron ore pellets and concentrate
Total revenue from sales of iron ore pellets and concentrate
Revenue from logistics and bunker business
Revenue from other sales and services provided
Total revenue
Year ended
31.12.18
Year ended
31.12.17
1,146,734 1,062,871
74,929
63,447
1,221,663 1,126,318
48,778
68,449
3,589
2,727
1,274,030 1,197,494
The information of the comparative year in respect of the separate presentation of the freight revenue related to sales of iron ore pellets
and concentrate have been re-presented to be on a consistent basis with the current period. There has been no restatement of the
underlying financial information.
Revenue in the amount of US$6,006 thousand were included in the contract liability balance at the beginning of the period and
recognised in the consolidated income statement during the year ended 31 December 2018.
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
31.12.18
Year ended
31.12.17
565,820
536,836
290,825
328,377
274,995
208,459
193,540
170,295
172,108
155,508
21,432
14,787
221,985
198,165
127,336
120,053
94,649
78,112
176,135
142,812
125,315
123,531
50,820
19,281
64,183
78,210
64,183
78,210
1,221,663 1,126,318
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 172 to 175.
During the year ended 31 December 2018, sales made to three customers accounted for 40% of the revenues from export sales of ore
pellets and concentrate (2017: 45%).
Sales to one customer that individually represented more than 10% of total sales in either the current or prior year amounted to
US$290,825 thousand (2017: US$328,377 thousand).
121
Ferrexpo plc
Annual Report & Accounts 2018
Note 7: Operating expenses
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.
Critical judgements
Nature of the Group’s community support donations
The preparation of the consolidated financial statements for the year ended 31 December 2018 required management to determine the
nature of the Group’s community support donations. In light of the ongoing Independent Review, it is currently considered that some of
the funds donated to Blooming Land (the “Charity”) could have been misappropriated. For further information see Independent Review
Committee Report (“IRC”) on page 69.
In the absence of conclusive evidence that funds have not been used as intended, the Group has judged that it remains appropriate for it
to present its community support donations to the Charity as such in the consolidated financial statements within operating expenses on
the assumption that all material donations made by the Group have been applied as previously reported by the Charity to the Group.
If the IRC, based on new facts, reaches a different view to the above critical judgement this may require additional or alternative
disclosures and, under certain circumstances, this may expose the Group to regulatory and other actions resulting in potential legal claims
or penalties, fines or other liabilities. For further information see Note 29 Commitments, contingencies and legal disputes on page 154.
Operating expenses for the year ended 31 December 2018 consisted of the following:
US$000
Cost of sales
Selling and distribution expenses
General and administrative expenses
Other operating expenses
Total operating expenses
Operating expenses include:
US$000
Inventories recognised as an expense upon sale of goods
Employee costs (excl. logistics and bunker business)
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
Write-offs
Losses on disposal of property, plant and equipment
Year ended
31.12.18
Year ended
31.12.17
507,939
411,490
260,422
219,703
45,246
41,954
30,863
44,207
844,470
717,354
Notes
Year ended
31.12.18
Year ended
31.12.17
481,366
367,161
79,471
53,293
(34,801)
(1,846)
61,377
45,920
718
472
29,742
19,610
50,270
63,127
3,166
1,342
33
15,130
28,384
1,489
5,701
407
7,754
Further information in respect of the Group’s community support donations is provided in the Chairman’s Statement (page 18), Principal
Risks (page 45), Responsible Business (page 59), Corporate Governance Report (page 63), Independent Review Committee Report
(page 69), Audit Committee Report (page 71) and Note 29 Commitments, contingencies and legal disputes, Note 33 Related party
disclosures and Note 34 Events after the reporting period to the consolidated financial statements.
Write-offs for the year ended 31 December 2018 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
Total write-offs
As at
31.12.18
1,072
395
22
1,489
As at
31.12.17
368
39
–
407
STRATEGIC REPORTCORPORATE GOVERNANCEFINANCIAL STATEMENTS 122
Ferrexpo plc
Annual Report & Accounts 2018
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
CONTINUED
Note 7: Operating expenses continued
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
Other services
Total non-audit services
Total auditor remuneration
Year ended
31.12.18
Year ended
31.12.17
2,827
1,008
182
3,009
150
3,159
7
7
191
1,199
140
1,339
3
3
3,166
1,342
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. Recognised in the 2018 audit services figure is US$192 thousand subsequently agreed in
relation to 2017.
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 2018 consisted of the following:
US$000
Lease income
Other income
Total other income
Year ended
31.12.18
Year ended
31.12.17
397
2,917
3,314
386
2,852
3,238
123
Ferrexpo plc
Annual Report & Accounts 2018
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 2018 consisted of the following:
US$000
Operating foreign exchange (losses)/gains
Revaluation of trade receivables
Revaluation of trade payables
Other
Total operating foreign exchange (losses)/gains
Non-operating foreign exchange (losses)/gains
Revaluation of interest-bearing loans
Conversion of cash and cash equivalents
Other
Total non-operating foreign exchange (losses)/gains
Total foreign exchange (losses)/gains
Year ended
31.12.18
Year ended
31.12.17
(4,922)
(358)
(15)
7,113
(394)
(58)
(5,295)
6,661
95
10,136
(801)
(879)
(1,497)
394
(1,585)
9,033
(6,880)
15,694
The translation differences and foreign exchange gains and losses are predominantly dependent on the fluctuation of the exchange rate
of the Ukrainian Hryvnia against the US Dollar. The table below shows the closing and average rates of the most relevant currencies of the
Group compared to the US Dollar.
US$
UAH
EUR
Average exchange rates
Closing exchange rates
As at
31.12.18
As at
31.12.17
Year ended
31.12.18
Year ended
31.12.17
27.200
26.597
27.688
28.067
0.847
0.887
0.874
0.838
Exchange differences arising on translation of non-US Dollar functional currency operations (mainly in Ukrainian Hryvnia) are included in
the translation reserve. See Note 30 Share capital and reserves for further details.
STRATEGIC REPORTCORPORATE GOVERNANCEFINANCIAL STATEMENTS 124
Ferrexpo plc
Annual Report & Accounts 2018
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
CONTINUED
Note 10: 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 13 Property, plant and equipment for further details.
Finance income
Finance income comprises 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 2018 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
31.12.18
Year ended
31.12.17
(43,468)
(53,560)
8,125
3,637
(2,390)
(2,094)
(778)
(2,537)
(1,713)
(584)
(40,224)
(55,138)
843
49
892
364
8
372
(39,332)
(54,766)
The presentation of the interest expense on loans and borrowings has been changed in the current period to reflect an interest
expense measured at amortised cost using the effective interest rate method by presenting the effect from the amortisation of prepaid
arrangement fees in interest expense on loans and borrowings and not in bank charges as done in the previous periods. In order to
be consistent with the presentation in the current period, the amount of US$7,013 thousand has been reclassified from bank charges
to interest expense on loans and borrowings for the comparative year ended 31 December 2017. The total finance expense remained
unchanged.
Note 11: 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.
125
Ferrexpo plc
Annual Report & Accounts 2018
Note 11: 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.
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.
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 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 costs. 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 for the period from 1 September 2013 to 31 December 2015 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. In accordance with the current legislation, the SFS has completed this audit within 18 months from commencement and issued
its official tax audit report on 27 December 2018, claiming a tax adjustment totalling UAH448 million (US$16,180 thousand). The Group’s
major subsidiary in Ukraine submitted its objections to the findings of the SFS on 25 January 2019 and following further discussions
between the parties during February 2019, the SFS issued the formal claim on 12 March 2019 according to its earlier tax audit report.
The Group’s Ukrainian subsidiary is going to initiate legal proceedings and to file a claim to the first court instance in Poltava on 22 March
2019. As the Group considers that it has complied with applicable legislation for all cross-border transactions and periods, the Group
expects to successfully defend its methodology applied to determine the prices between its subsidiaries. Consequently, no provision has
been recorded as at 31 December 2018. The SFS may commence new audits on other cross-border transactions within the Group or on
other periods and the Group also expects to successfully defend its pricing methodology against any further claims should they arise.
STRATEGIC REPORTCORPORATE GOVERNANCEFINANCIAL STATEMENTS 126
Ferrexpo plc
Annual Report & Accounts 2018
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
CONTINUED
Note 11: Taxation continued
The income tax expense for the year ended 31 December 2018 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
31.12.18
Year ended
31.12.17
44,086
45,423
(569)
(4,154)
43,517
41,269
13,284
14,092
13,284
14,092
56,801
55,361
The amounts relating to the prior year shown in the table above for the comparative year ended 31 December 2017 are predominantly
related to effects from final tax assessments received in Switzerland during the year ended 31 December 2017. As a result of the final tax
assessments received, a recorded tax accrual in Switzerland could be released in financial year 2017.
Tax effects on items charged to the statement of other comprehensive income consisted of the following for the year ended 31 December 2018:
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 (credited)/charged to other comprehensive income
Notes
30
Year ended
31.12.18
Year ended
31.12.17
(2,007)
–
(2,007)
4,557
1,556
6,113
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 15.5% for the financial year 2018
(2017: 13.5%). 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 2018 is as follows:
US$000
Profit before tax
Notional tax charge computed at the weighted average statutory tax rate of 15.5% (2017: 13.5%)
(Recognition)/derecognition of deferred tax assets1
Credit for Ukrainian fuel excise tax against income tax2
Expenses not deductible for local tax purposes3
Income exempted for local tax purposes
Reassessment of prior year temporary differences4
Recognition of losses and temporary differences previously not recognised5
Effect from change in permanent differences
Effect of different tax rates on local profit streams6
Prior year adjustments to current tax7
Effect from share of profit from associates8
Other (including translation differences)
Total income tax expense
Year ended
31.12.18
Year ended
31.12.17
392,022
449,833
60,629
60,819
(8,576)
25,396
(7,408)
–
3,795
7,295
(56)
(2,385)
7,719
–
–
–
1,157
(569)
(974)
1,084
(29,945)
(1,957)
1,039
(4,154)
(995)
248
56,801
55,361
2
3
1 Recognition of US$8,576 thousand in 2018 relates to temporary differences arising from inflationary adjustments made in the past to the tax basis of property, plant and equipment for two Ukrainian
subsidiaries. Derecognition in 2017 of US$25,396 thousand in respect of temporary differences on restricted cash and deposits balances being of a non-recurring nature. Note 29 Commitments,
contingencies and legal disputes provides further information
Effective 1 January 2018, a temporary provision in the Ukrainian tax code allows a reduction in income tax payable for the amount of excise tax included in prices of fuel used for mining equipment. This
provision still applies for 2019
Effect in 2018 predominantly related to expenses not deductible in Ukraine whereas the effect in 2017 related to Ukraine and Switzerland. The effect 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 whereas the one in Switzerland is expected to be non-recurring
Effective 1 January 2019, the relevant accounting framework for tax purposes changed from local GAAP to IFRS resulting in a reduction of temporary differences as of 31 December 2018 being of a non-
recurring nature
Effect in 2017 related to previously unrecognised losses and temporary differences for a Ukrainian subsidiary that became profitable during 2017. As the entire balance of temporary differences and
available losses from previous periods was recognised as deferred tax assets, the effect is expected to be of a non-recurring nature
Effect in 2018 and 2017 related to different tax rates applying to different income streams in Swiss subsidiaries as a result of their specific tax status. The effect is of a recurring nature
Effect in 2017 related to final tax assessments received in Switzerland being of a non-recurring nature
6
7
8 Share of profit from associates is recognised net of taxes of the associates. This effect is of a recurring nature
4
5
127
Ferrexpo plc
Annual Report & Accounts 2018
Note 11: Taxation continued
The net balance of income tax payable changed as follows during the financial year 2018:
US$000
Opening balance
Income statement charge
Booked through other comprehensive income
Tax paid
Translation differences
Closing balance
The net income tax payable as at 31 December 2018 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
Year ended
31.12.18
Year ended
31.12.17
(18,247)
4,607
(43,517)
(41,269)
(2,007)
4,557
43,509
13,721
(248)
138
(20,510)
(18,247)
As at
31.12.18
61
–
As at
31.12.17
14
5,454
(20,571)
(23,715)
(20,510)
(18,247)
The non-current income tax receivable balance of US$5,454 thousand as at the end of the comparative period ended 31 December 2017
relates predominantly to prepayments made by a Ukrainian subsidiary and was classified as non-current due to the uncertainty in respect
of the timing of the recovery. The prepaid balance was fully offset against income tax payable during the financial year 2018.
Temporary differences at the reporting date between the tax bases of assets and liabilities and their carrying amounts for financial reporting
purposes and the recognition of available tax loss carry forwards results in the following deferred income tax assets and liabilities at
31 December 2018:
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
Consolidated statement of
financial position
Consolidated income statement
Notes
29
As at
31.12.18
3,771
As at
31.12.17
Year ended
31.12.18
Year ended
31.12.17
3,720
–
(21,836)
23,486
18,032
5,095
373
1,409
(1,051)
6,213
252
3,213
14,210
(11,505)
13,134
–
666
649
–
–
(10,654)
3,316
(2,681)
1,070
690
(32)
83
32,158
41,377
(10,174)
(11,738)
(4,212)
(969)
27,946
40,408
(3,690)
(329)
(545)
(600)
(379)
(371)
(3,326)
50
166
(62)
(187)
(2,105)
(4,564)
(1,350)
(3,110)
(2,354)
4,212
969
(352)
(381)
Net deferred tax assets/net change
27,594
40,027
(13,284)
(14,092)
STRATEGIC REPORTCORPORATE GOVERNANCEFINANCIAL STATEMENTS 128
Ferrexpo plc
Annual Report & Accounts 2018
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
CONTINUED
Note 11: Taxation continued
The movement in the deferred income tax balance is as follows:
US$000
Opening balance
Income statement charge
Booked through other comprehensive income
Translation differences
Closing balance
Year ended
31.12.18
Year ended
31.12.17
40,027
52,232
(13,284)
(14,092)
–
851
1,556
331
27,594
40,027
As at 31 December 2018, the Group had available tax loss carry forwards in the amount of US$92,654 thousand (2017: US$97,873
thousand) for which no deferred tax assets were recognised. US$59,883 thousand (2017: US$70,198 thousand) are related to losses
incurred in Ukraine and Austria and those losses do not expire. The remaining balance totalling US$32,771 thousand (2017: US$27,675
thousand) relates to losses incurred in Hungary, of which US$22,923 thousand (2017: US$22,957 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$440,328 thousand (2017: US$453,097 thousand). Other temporary differences of US$19,963 thousand have not been recognised
as of 31 December 2018 (2017: US$26,627 thousand), of which the vast majority relates to temporary differences on property, plant and
equipment in Ukraine.
Note 12: 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 2018.
Earnings for the year attributable to equity shareholders per share
Basic (US cents)
Diluted (US cents)
The calculation of the basic and diluted earnings per share is based on the following data:
US$000
Profit for the year attributable to equity shareholders
Basic and diluted earnings
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
31.12.18
Year ended
31.12.17
56.9
56.7
67.1
66.9
Year ended
31.12.18
Year ended
31.12.17
333,616
392,929
Year ended
31.12.18
Year ended
31.12.17
586,117
585,674
1,948
2,074
588,065
587,748
129
Ferrexpo plc
Annual Report & Accounts 2018
Note 12: Earnings per share and dividends paid and proposed continued
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$167,611 thousand as of 31 December 2018 (2017: US$197,236 thousand).
US$000
Dividends proposed
Final ordinary dividend for 2018: 6.6 US cents per Ordinary Share
Final special dividend for 2018: 6.6 US cents per Ordinary Share
Interim special dividend for 2018: 6.6 US cents per Ordinary Share
Total dividends proposed
Year ended
31.12.18
38,695
38,695
38,695
116,085
On 6 December 2018, the Group announced that the Directors had proposed to pay an interim special dividend of 6.6 US cents per
Ordinary Share totalling US$38,695 thousand. This dividend was paid on 14 January 2019 and, in accordance with UK law, the liability
recognised only on payment of the dividend in the financial statements for the year ending 31 December 2019.
As of 31 December 2017, a dividend payable was recognised in respect of an interim special dividend proposed by the Directors on
7 December 2017 and payable on 15 January 2018. The presentation of the comparatives as of 31 December 2017 has been restated to be
consistent with the current year presentation by derecognising the interim special dividend of US$19,365 thousand (comprising of US$16,008
thousand dividend payable and US$3,357 thousand withholding tax) and recognising a corresponding credit to retained earnings.
The balances impacted by this restatement are outlined below:
US$000
Trade and other payables
Other taxes
Total current liabilities
Retained earnings
Total equity attributable to shareholders of Ferrexpo plc
US$000
Dividends paid during the year
Interim dividend for 2018: 3.3 US cents per Ordinary Share
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 paid during the year
Year ended
31.12.17
48,428
10,952
Year ended
31.12.17
(after restatement)
32,420
7,595
416,061
396,696
2,310,226
2,329,591
596,472
615,467
Year ended
31.12.18
19,376
18,929
38,615
19,639
96,559
Although accounts are published in US Dollars and dividends are declared in US Dollars, the shares are denominated in UK Pounds
sterling and dividends are therefore paid in UK Pounds Sterling.
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
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
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
STRATEGIC REPORTCORPORATE GOVERNANCEFINANCIAL STATEMENTS 130
Ferrexpo plc
Annual Report & Accounts 2018
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
CONTINUED
Note 13: 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.
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 2018 (2017: 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.
131
Ferrexpo plc
Annual Report & Accounts 2018
Note 13: Property, plant and equipment continued
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 14 Goodwill and other
intangible assets.
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.
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. As at 31 December 2018, deferred pre-production stripping costs totalling US$101,305
thousand relate to components in operation and are included in mining assets (2017: US$110,124 thousand). Deferred pre-production
stripping costs in relation to components expected to be put into operation in a future period totalled US$34,498 thousand and are
included in assets under construction (2017: US$22,734 thousand). No production stripping costs are capitalised as of this point of time.
STRATEGIC REPORTCORPORATE GOVERNANCEFINANCIAL STATEMENTS 132
Ferrexpo plc
Annual Report & Accounts 2018
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
CONTINUED
Note 13: Property, plant and equipment continued
As at 31 December 2018, 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 2017
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
Additions
Transfers
Disposals
–
–
–
1,235
(49)
628
61
615
(697)
27 145,641
147,461
–
–
52
23,598
3,363
35,025
20,370
885
(83,293)
–
–
(2,565)
(109)
(7,498)
(4,721)
(136)
(1,205)
(16,234)
Translation differences
22
24
2,612
1,816
(3,441)
2,307
1,412
53
(302)
4,503
At 31 December 2018
1,640
4,762 193,581 173,792 118,018 224,808 151,498
7,027 192,323 1,067,449
Depreciation:
At 1 January 2017
Depreciation charge
Disposals
Impairment
Translation differences
At 31 December 2017
Depreciation charge
Disposals
Impairment
Translation differences
At 31 December 2018
Net book value at:
–
–
–
–
–
–
–
–
–
–
–
2
3
–
–
–
5
3
–
–
–
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)
(27)
55,520
(7,025)
39
(5,334)
51,402
42,954
46,705
91,286
69,258
4,199
2,551
308,360
6,907
9,220
9,710
23,945
15,891
702
–
–
(811)
(79)
11
–
546
427
(1,466)
(5,716)
(3,628)
(124)
255
970
18
743
–
9
168
12
362
1,241
–
–
66,378
(10,268)
8
58,855
51,711
54,960 110,740
82,282
4,786
2,731
366,073
31 December 2017
1,618
3,498 139,564
107,361
71,439
103,073
65,876
1,999 128,931
623,359
31 December 2018
1,640
4,754 134,726 122,081
63,058 114,068
69,216
2,241 189,592
701,376
Assets under construction consist of ongoing capital projects amounting to US$155,092 thousand (2017: US$106,197 thousand) and
capitalised pre-production stripping costs of US$34,498 thousand (2017: US$22,734 thousand). Once production commences, stripping
costs are transferred to mining assets.
Property, plant and equipment includes capitalised borrowing costs on qualifying assets of US$25,499 thousand (2017: US$17,810
thousand). The capitalised borrowing costs on general borrowings were determined based on the capitalisation rate of 9.65% (2017:
9.0%), 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 2018 was US$1,881 thousand
(2017: US$2,214 thousand). Leased assets and assets under hire purchase contracts are pledged as security for the related finance
leases and hire purchase liabilities. US$42,340 thousand of property, plant and equipment have been pledged as security for liabilities
(2017: US$47,921 thousand).
The gross value of fully depreciated property, plant and equipment that is still in use is US$40,041 thousand (2017: US$24,728 thousand).
133
Ferrexpo plc
Annual Report & Accounts 2018
Note 14: 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 the policy disclosed in Note 13 Property, plant and equipment.
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.
As at 31 December 2018, goodwill and other intangible assets comprised:
US$000
Cost:
At 1 January 2017
Additions
Disposals
Transfers
Translation differences
At 31 December 2017
Additions
Disposals
Transfers
Translation differences
At 31 December 2018
Accumulated amortisation and impairment:
At 1 January 2017
Amortisation charge
Disposals
Translation differences
At 31 December 2017
Amortisation charge
Disposals
Translation differences
At 31 December 2018
Net book value at:
31 December 2017
31 December 2018
Goodwill
Exploration
and evaluation
Patents and
licences
Computer
software
Other
intangible
assets
Total
29,033
2,705
1,881
4,333
101
38,053
–
–
–
–
–
–
–
–
138
3,270
3,408
(28)
–
(28)
–
2,882
382
(3,264)
(933)
(84)
(217)
80
30
(1,124)
28,100
2,621
4,546
4,905
137
40,309
–
–
–
–
–
–
396
37
1,053
(73)
68
(13)
75
(17)
342
(15)
1,930
3,058
(4)
(410)
(55)
(94)
–
350
28,496
2,658
5,581
5,290
1,598
43,623
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
769
172
–
22
963
290
(73)
(12)
2,064
300
(28)
152
2,488
428
(14)
(56)
1,168
2,846
–
–
–
–
–
–
–
–
–
2,833
472
(28)
174
3,451
718
(87)
(68)
4,014
28,100
2,621
3,583
2,417
137
36,858
28,496
2,658
4,413
2,444
1,598
39,609
STRATEGIC REPORTCORPORATE GOVERNANCEFINANCIAL STATEMENTS 134
Ferrexpo plc
Annual Report & Accounts 2018
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
CONTINUED
Note 14: Goodwill and other intangible assets continued
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 2018 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.
The key assumptions used for the impairment testing are:
Estimates/assumptions
Future production
Commodity prices
Capital expenditures
Basis
Proved and probable reserves
Contract prices and longer-term price estimates
Future sustaining capital expenditures
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$62 per
tonne to US$69 per tonne of 62% Fe fines CFR North China (2017: US$60 per tonne to US$63 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 real discount rate of 12.7% (2017:
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 15: Other non-current assets
As at 31 December 2018, 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
31.12.18
As at
31.12.17
24,993
10,283
6,552
559
–
218
32,104
10,501
135
Ferrexpo plc
Annual Report & Accounts 2018
Note 16: 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 2018, 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 in the first half of the financial year 2020 and as a consequence the entire
balance is classified as non-current.
As at 31 December 2018, the stockpiled ore valued at cost totalled US$217,688 thousand (2017: US$175,831 thousand). Critical estimates
in determining the net realisable value of lean and weathered ore includes i) utilisation of the ore over the period from 2020 to 2034,
representing an average of 10% of total available processing capacity, and using an asset specific WACC based pre-tax discount rate of
19.0%; and ii) forecast long-term iron ore prices of US$77 per tonne.
The net realisable value of lean and weathered ore is most sensitive to delays in the commencement of utilising the ore in the production
process, which depends on the completion of the capacity upgrade programme at FPM. Two separate stress tests assuming a one year
delay and a US$5 per tonne lower forecast long-term iron ore price would result in a reduction in the net realisable value of US$46,700
thousand and US$25,500 thousand, respectively.
At 31 December 2018, 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
31.12.18
As at
31.12.17
39,083
34,295
56,873
42,053
43,097
15,482
3,153
2,713
2,475
2,340
144,919
96,645
217,688
175,831
217,688
175,831
362,607
272,476
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.
Note 17: Trade and other receivables
Accounting policy
Trade receivables are stated at original invoice amount less an allowance for expected credit losses. The Group measures the loss
allowance at an amount equal to the 12-month expected credit losses of its customers based on publicly available default risk ratings
adjusted for current observable circumstances, forecast information and past history of credit losses. All of the Group’s receivable
balances are classified as current based on the agreed terms and conditions and the Group has no history of credit losses. 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 2018 is disclosed in Note 26 Financial instruments.
STRATEGIC REPORTCORPORATE GOVERNANCEFINANCIAL STATEMENTS 136
Ferrexpo plc
Annual Report & Accounts 2018
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
CONTINUED
Note 17: Trade and other receivables continued
At 31 December 2018, trade and other receivables comprised:
US$000
Trade receivables
Other receivables
Allowance for doubtful receivables
Total trade and other receivables
As at
31.12.18
As at
31.12.17
83,945
85,645
2,840
3,364
(1,090)
(682)
85,695
88,327
As trade receivables are non-interest bearing and final invoices are generally settled within 90 days after delivery, contracts with
customers are not deemed to contain a significant financing component.
Trade receivables at 31 December 2018 includes US$1,517 thousand (2017: US$1,237 thousand) owed by related parties. The detailed
related party disclosures are made in Note 33 Related party disclosures.
The cumulative effects from the application of the new standard IFRS 9 Financial instruments on the consolidated statement of financial
position as of 1 January 2018 and as at 31 December 2018 is disclosed in Note 3 New accounting policies.
The movement in the allowance for doubtful debts during the period under review was:
US$000
Opening balance
Impact of first-time application of IFRS 9
Increase
Release
Translation differences
Closing balance
Year ended
31.12.18
Year ended
31.12.17
682
218
452
(230)
(32)
1,090
926
–
177
(445)
24
682
During the financial year 2018, there was no movement in the allowance for doubtful debts relating to lifetime expected credit losses and
credit impaired assets.
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 31.12.18
US$000
Trade receivables
Other receivables
As at 31.12.17
US$000
Trade receivables
Other receivables
Gross
amount
Receivables
impaired
Receivables
neither past
due nor
impaired
Receivables past due but not impaired
Less than
45 days
45 to 90
days
Over 90
days
83,945
2,840
732
358
81,052
1,400
2,274
23
375
27
386
158
Gross
amount
Receivables
impaired
85,645
3,364
431
251
Receivables
neither past
due nor
impaired
84,154
2,923
Receivables past due but not impaired
Less than
45 days
45 to 90
days
Over 90
days
282
101
154
5
624
84
Of the total balance of receivables impaired as of 31 December 2018 US$712 thousand (2017: US$682 thousand) was past due.
The table above includes the impact from the application of the new expected credit loss impairment model under IFRS 9 Financial
instruments. The change of the balance of impairment losses on trade receivables recognised in the consolidated income statement as
of 31 December 2018 is not material and therefore not disclosed separately in the consolidated income statement. For further information
see the table above and Note 3 New accounting policies.
The Group’s exposures to credit, currency and commodity risks are disclosed in Note 26 Financial instruments.
137
Ferrexpo plc
Annual Report & Accounts 2018
Note 18: Prepayments and other current assets
As at 31 December 2018, 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
Prepaid expenses
Other
Total prepayments and other current assets
As at
31.12.18
As at
31.12.17
7,458
5,191
3,552
602
2,293
8,171
77
2,729
3,068
2,650
615
4,384
4,069
–
27,344
17,514
Prepayments at 31 December 2018 include US$1,181 thousand (2017: US$1,259 thousand) made to related parties. The detailed related
party disclosures are made in Note 33 Related party disclosures.
The cumulative effects from the application of the new standard IFRS 15 Revenue from contracts with customers on the consolidated
statement of financial position as at 1 January 2018 and as at 31 December 2018 are disclosed in Note 3 New accounting policies.
Note 19: 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 the 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 2018, 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
31.12.18
As at
31.12.17
44,730
23,081
107
111
44,837
23,192
Notes
Year ended
31.12.18
Year ended
31.12.17
22,444
20,565
127,363
99,536
(106,341)
(96,824)
2
292
(833)
43,758
22,444
(1,020)
(1,190)
42,738
21,254
US$13,328 thousand of the total VAT receivable balance in Ukraine was overdue as at 31 December 2018 (2017: US$678 thousand).
US$12,641 thousand of the aforementioned overdue balance was refunded by the end of January 2019. The allowance of US$1,020
thousand (2017: US$1,190 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.
STRATEGIC REPORTCORPORATE GOVERNANCEFINANCIAL STATEMENTS
138
Ferrexpo plc
Annual Report & Accounts 2018
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
CONTINUED
Note 19: Other taxes recoverable and payable continued
As at 31 December 2018, other taxes payable comprised:
US$000
Environmental tax
Royalties
VAT payable
Other taxes
Total other taxes payable
As at
31.12.18
1,449
6,669
235
3,212
11,565
As at
31.12.17
1,010
3,494
159
2,932
7,595
See Note 11 Taxation for information in respect of a withholding tax claim in Ukraine.
Note 20: Trade and other payables
Accounting policy
Trade and other payables are not interest-bearing, being generally short-term, and are stated at their original invoice amount.
As at 31 December 2018, trade and other payables comprised:
US$000
Materials and services
Payables for equipment
Other
Total current trade and other payables
As at
31.12.18
As at
31.12.17
30,446
30,040
3,755
2,084
91
296
34,292
32,420
Trade and other payables at 31 December 2018 includes US$1,428 thousand (2017: US$1,770 thousand) due to related parties (see Note
33 Related party disclosures).
The Group’s exposure to currency and liquidity risk related to trade and other payables is disclosed in Note 26 Financial instruments.
Note 21: 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
UK and in Singapore.
139
Ferrexpo plc
Annual Report & Accounts 2018
Note 21: Pension and post-employment obligations continued
Details of the major defined benefit schemes in Ukraine and Switzerland are provided below:
Ukraine
The Group’s subsidiaries in Ukraine make defined contributions to the Ukrainian State Pension scheme at statutory rates based on the
gross salary payments made to the employees. PJSC Ferrexpo Poltava Mining (“FPM”) and LLC Ferrexpo Yeristovo Mining (“FYM”) also
have a legal obligation to compensate the Ukrainian State Pension Fund for additional pensions paid to certain categories of its current
and former employees. All pension schemes in Ukraine are unfunded.
There was no change in the Ukrainian pension legislation during the financial year 2018 whereas in the comparative year the Ukrainian
pension legislation was changed in October 2017 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 have 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 of the comparative year 2017, FPM’s collective agreement was changed in order to remove FPM’s obligation of
additional payments to its employees reaching retirement age in order to improve their welfare. This change affected 6,992 employees
and resulted in a curtailment gain of US$655 thousand. No changes in FPM’s collective agreement were made during the financial year
2018.
At 31 December 2018, the pension schemes in Ukraine covered 4,377 current employees (2017: 4,302 people) following the above-
mentioned change of the collective agreement for FPM. There are 900 former employees currently in receipt of pensions (2017: 956
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 2018, the Swiss pension scheme covered 21 people (2017: 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 31.12.18
Year ended 31.12.17
Ukrainian
schemes
Swiss
scheme
Ukrainian
schemes
Swiss
scheme
14.00%
0.95% 13.00%
6.38%
1.00%
7.85%
1.25%
6.38% 0.00%
81.7
77.4
89.5
87.5
7.44%
9.22%
8.48%
81.5
77.2
As at
31.12.18
6,920
0.80%
1.00%
1.25%
0.00%
89.4
87.4
As at
31.12.17
5,094
(4,483)
(3,183)
2,437
1,911
19,001
18,603
21,438
20,514
18,913
18,504
2,437
1,911
88
99
STRATEGIC REPORTCORPORATE GOVERNANCEFINANCIAL STATEMENTS 140
Ferrexpo plc
Annual Report & Accounts 2018
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
CONTINUED
Note 21: Pension and post-employment obligations continued
Amounts recognised in the income statement or other comprehensive income are as follows:
US$000
Defined benefit cost/(gains) 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
Year ended
31.12.18
Year ended
31.12.17
1,234
–
–
2,416
(31)
23
943
(4,038)
(655)
2,116
(20)
22
Total defined benefit cost/(gains) charged in the income statement
3,642
(1,632)
Remeasurement cost/(gains) in other comprehensive income:
Remeasurement from demographic assumptions
Remeasurement from financial assumptions
Experience adjustment
Return on plan assets
Total remeasurement (gains)/cost in other comprehensive income
Total defined benefit cost
Thereof for Ukrainian schemes
Thereof for Swiss scheme
Thereof for schemes in other jurisdictions
229
(5,035)
3,895
36
(875)
2,767
1,893
878
(4)
(799)
7,682
2,468
(179)
9,172
7,540
7,232
301
7
The effect from remeasurement of financial assumptions relates to an increase of the discount rate for the Ukrainian schemes as of
31 December 2018 compared to a decrease as of the end of the comparative year ended 31 December 2017. The effect from the
experience adjustments relates to higher than assumed salary increases in Ukraine during the financial years 2017 and 2018.
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 (gains)/losses
Translation differences
Contributions paid by employer
Contributions paid by employees
Benefits paid and net transfers 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
31.12.18
Year ended
31.12.17
23,697
18,324
1,234
2,416
(947)
221
943
2,116
9,352
(480)
(1,700)
(1,539)
119
881
–
–
112
(424)
(669)
(4,038)
25,921
23,697
18,913
18,504
6,920
5,094
88
99
16,824
14,256
4,865
4,232
4,414
5,027
141
Ferrexpo plc
Annual Report & Accounts 2018
Note 21: Pension and post-employment obligations continued
The durations of the defined benefit obligation for the different schemes as at 31 December 2018 are 9.1 years (Ukraine) and 20.4 years
(Switzerland).
Contributions to the defined benefit plans, including benefits paid by employer and employee contributions, are expected to be US$1,566
thousand for the schemes in Ukraine and US$703 thousand in Switzerland in the next financial year.
The expenses in relation to the defined contribution plan in the UK and Singapore totalled US$60 thousand (2017: US$50 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 and net transfers 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
31.12.18
Year ended
31.12.17
3,183
2,835
31
344
119
881
(36)
(23)
(16)
20
354
112
(424)
179
(21)
128
4,483
4,483
3,183
3,183
As at
31.12.18
As at
31.12.18
As at
31.12.17
As at
31.12.17
29.4
32.7
12.7
25.2
100.0
1,318
1,466
569
1,130
4,483
26.6
35.6
10.5
27.3
847
1,133
334
869
100.0
3,183
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.
STRATEGIC REPORTCORPORATE GOVERNANCEFINANCIAL STATEMENTS 142
Ferrexpo plc
Annual Report & Accounts 2018
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
CONTINUED
Note 21: Pension and post-employment obligations continued
Following new rules in 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.
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)
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 31.12.18
1.0% or
1 year
Increase by
1.0% or
1 year
(1,603)
(1,136)
1,044
501
n/a
287
152
6
775
156
1.0% or
1 year
(8)
8
n/a
n/a
n/a
1.0% or
1 year
1,774
(946)
(496)
n/a
(336)
Decrease by
1.0% or
1 year
1,574
(135)
(6)
n/a
(157)
1.0% or
1 year
9
(8)
n/a
n/a
n/a
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
(1,178)
(247)
n/a
(335)
Decrease by
1.0% or
1 year
1,221
(162)
(6)
n/a
(102)
1.0% or
1 year
10
(9)
n/a
n/a
n/a
For the presentation of the effects of the changes of the significant assumptions shown in the table above, 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 the end of the
respective reporting period. The methods and assumptions used for the sensitivity analysis for the prior year are unchanged.
Note 22: 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 2018:
US$000
Opening balance
Unwind of the discount
(Credit)/charge to the income statement
Translation differences
Closing balance
Year ended
31.12.18
Year ended
31.12.17
2,070
1,071
272
(429)
27
150
904
(55)
1,940
2,070
143
Ferrexpo plc
Annual Report & Accounts 2018
Note 22: 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 for the different areas within the mine. The first minor restoration work of the Yerystivske mine is
expected to start after 2032 within the different dump areas, whereas the removal of equipment and the flooding of the pit will only begin
at the end of the mine’s life.
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 14% (2017: 13.0%) 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 23: Accrued liabilities and contract liabilities
As at 31 December 2018, accrued liabilities and contract liabilities comprised:
US$000
Accrued expenses
Accrued interest
Accrued employee costs
Advances from customers
Contract liabilities
Total accrued liabilities and contract liabilities
As at
31.12.18
6,123
6,438
As at
31.12.17
3,721
9,358
13,899
12,235
195
6,038
780
1,460
32,693
27,554
In the current period, management has reviewed the presentation of the accrued interest and has reclassified it from interest-bearing
loans and borrowings to accrued liabilities. See Note 25 Interest-bearing loans and borrowings for further information.
The cumulative effects from the application of the new standard IFRS 15 Revenue from contracts with customers on the consolidated
statement of financial position as at 1 January 2018 and as at 31 December 2018 are disclosed in Note 3 New accounting policies.
Note 24: 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 2018, cash and cash equivalents comprised:
US$000
Cash at bank and on hand
Total cash and cash equivalents
As at
31.12.18
62,996
62,996
As at
31.12.17
97,742
97,742
The debt repayments during the financial year ended 31 December 2018 totalled US$308,817 thousand (2017: US$238,602 thousand)
affecting the balance of cash and cash equivalents. Further information on the Group's gross debt is provided in Note 25 Interest-bearing
loans and borrowings.
The balance of cash and cash equivalents held in Ukraine amounts to US$21,416 thousand as at 31 December 2018 (2017: US$10,281
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 26 Financial instruments.
Note 29 Commitments, contingencies and legal disputes provides details on the Group’s balance of restricted cash and deposits, which
has been fully provided for as currently not available to the Group.
STRATEGIC REPORTCORPORATE GOVERNANCEFINANCIAL STATEMENTS 144
Ferrexpo plc
Annual Report & Accounts 2018
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
CONTINUED
Note 25: 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 26
Financial instruments 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
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
Notes
As at
31.12.18
As at
31.12.17
172,454
171,202
–
112,500
9,262
16,218
1,494
2,074
19,316
1,523
3,969
–
204,600
305,412
–
171,202
195,000
–
2,258
–
–
9,267
3,752
2,073
29
29
197,258
186,294
26
401,858
491,706
In the current period, management has reviewed the presentation of the accrued interest and has reclassified it from interest-bearing
loans and borrowings to accrued liabilities in order to better reflect the nature of this balance in the presentation. US$9,358 thousand have
been re-presented for the comparative year ended 31 December 2017 to be on a consistent basis. There has been no restatement of the
underlying financial information.
At 31 December 2018, the Group has a syndicated revolving US$400,000 thousand pre-export finance facility, of which US$205,000 thousand
is available (31 December 2017: US$195,000 thousand) and US$195,000 thousand is drawn by the Group (31 December 2017: nil). The initial
facility agreement for a total amount of US$195,000 thousand was signed on 16 November 2017 and fully drawn in March 2018. In August
2018, an amendment to the aforementioned facility agreement was signed, increasing the facility from US$195,000 thousand to US$400,000
thousand and extending the tenor by one year. The effective date of the increase and extension is 6 November 2018. Following a one-year grace
period, the facility will be amortised in 12 quarterly instalments, with the first instalment due on 6 February 2020 and the final repayment due on
6 November 2022. The Group has drawn on 4 March 2019 US$185,000 thousand under the afore-mentioned extended facility.
The aforementioned bank debt facility was guaranteed and secured as follows:
– Ferrexpo AG and Ferrexpo Middle East FZE, which are also joint borrowers, 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 July 2018, the Group made the final repayment of another syndicated revolving US$350,000 thousand pre-export finance facility. As at the
end of the comparative year ended 31 December 2017, US$131,250 thousand was available and US$112,500 thousand drawn by the Group.
In addition to the major bank debt facility mentioned above, the Group had outstanding unsecured Notes at par value totalling US$173,181
thousand as at 31 December 2018 (31 December 2017: US$346,385 thousand). The Notes have a 10.375% interest coupon payable semi-
annually. The Notes with maturity dates on 7 April 2019 and 2018, respectively, were repaid in two equal instalments of US$173,181 thousand.
As at 31 December 2018, the Group had open trade finance facilities in the amount of US$19,316 thousand (2017: nil). Trade finance
facilities are secured against receivables related to these specific trades.
145
Ferrexpo plc
Annual Report & Accounts 2018
Note 25: Interest-bearing loans and borrowings continued
The outstanding unsecured Notes are shown net of associated arrangement fees while for the revolving syndicated pre-export finance
facility, 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.
The table below shows the movements in the interest-bearing loans and borrowings:
US$000
Opening balance of interest-bearing loans and borrowings
Cash movements
Repayments of Eurobond issued
Proceeds from syndicated bank loans – secured
Repayments of syndicated bank loans – secured
Repayments of other bank loans – secured
Repayments of other bank loans – unsecured
Repayments of obligations under finance leases
Change of trade finance facilities, net
Total cash movements
Non-cash movements
Amortisation of fees
Others (including translation differences)
Total non-cash movements
Closing balance of interest-bearing loans and borrowings
Year ended
31.12.18
Year ended
31.12.17
491,706
723,154
(173,181)
195,000
–
–
(112,500)
(193,750)
(17,189)
(20,512)
(1,512)
(1,534)
(3,753)
(3,690)
19,288
(19,025)
(93,847)
(238,511)
4,696
7,014
(697)
49
3,999
7,063
401,858
491,706
Further information on the Group’s exposure to interest rate, foreign currency and liquidity risk is provided in Note 26 Financial instruments.
IFRS 16 Leases applies to annual reporting periods beginning on or after 1 January 2019. On transition date, lease liabilities of US$7,645
thousand will be recognised within net debt. For further information see Note 3 New accounting policies.
Note 26: 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 17 Trade and other receivables, 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 17 Trade and other receivables, loans and receivables are non-derivative
financial assets with fixed or determinable payments that are not quoted in an active market. Such assets are carried at amortised
cost using the effective interest method. Gains and losses are recognised in the income statement when the loans and receivables are
derecognised or impaired along with the amortisation process.
STRATEGIC REPORTCORPORATE GOVERNANCEFINANCIAL STATEMENTS 146
Ferrexpo plc
Annual Report & Accounts 2018
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
CONTINUED
Note 26: Financial instruments continued
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.
Impairment of financial assets
In addition to the individual assessment at each reporting date whether a financial asset or group of financial assets is impaired, the Group
also assesses the expected credit losses on financial assets carried at amortised cost. As all of the Group’s loan and receivable balances
are classified as current based on the agreed terms and conditions, the loss allowance is measured at an amount equal to the 12-month
expected credit losses based on publicly available credit default ratings adjusted for current observable circumstances, forecast information
and past history of credit losses. This assessment is performed individually for all financial assets that are individually significant and
collectively for those that are not individually significant and have similar credit risk characteristics. The carrying amount of the financial
assets is reduced by an allowance account with the change of the allowance being recognised in the consolidated income statement.
Individual balances are written off when management deems that there is no possibility of recovery.
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
As at 31.12.18
Financial
liabilities
measured at
amortised
cost
Total
Notes
Loans and
receivables
24
17
20
23
25
62,996
85,695
456
149,147
–
–
–
–
62,996
85,695
456
149,147
–
–
–
–
34,292
34,292
26,458
26,458
401,858
401,858
462,608
462,608
147
Ferrexpo plc
Annual Report & Accounts 2018
Note 26: Financial instruments continued
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
24
17
20
23
25
97,742
88,327
620
186,689
–
–
–
–
97,742
88,327
620
186,689
–
–
–
–
32,420
32,420
25,314
25,314
491,706
491,706
549,440
549,440
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 (Level 2)
except for the fair value of the Eurobond issued (Level 1), which is based on the market price quotation at the reporting date. The fair
values of interest-bearing loans and borrowings totalled US$401,089 thousand (2017: US$514,515 thousand).
Fair value measurements recognised in the statement of financial position
Except for the provisionally priced trade receivables (Level 2) disclosed in Note 17 Trade and other receivables, 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.
STRATEGIC REPORTCORPORATE GOVERNANCEFINANCIAL STATEMENTS 148
Ferrexpo plc
Annual Report & Accounts 2018
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
CONTINUED
Note 26: Financial instruments continued
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 is often self-liquidating, whereby the lending bank stipulates that all sales proceeds to be collected are applied to settle the loan, with
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.
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 29 Commitments,
contingencies and legal disputes), 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 2018, Ferrexpo AG, Ferrexpo Finance plc and Ferrexpo Middle East FZE were jointly and
severally liable under a US$400 million revolving pre-export finance facility, of which US$195,000 thousand was drawn as of 31 December
2018 (2017: nil) and US$205,000 thousand was available (2017: US$195,000 thousand).
At 31 December 2018, Ferrexpo plc, Ferrexpo AG and Ferrexpo Middle East FZE were guarantors to the Eurobond (“Notes”) issued
by Ferrexpo Finance plc totalling US$173,181 thousand and fully repaid on 7 April 2019. Additionally, the Notes benefited from a surety
agreement provided by FPM.
149
Ferrexpo plc
Annual Report & Accounts 2018
Note 26: Financial instruments continued
Certain Group companies act as guarantors for several finance facilities provided to Ukrainian subsidiaries: Ferrexpo AG amounting
to US$15,767 thousand (2017: US$38,902 thousand), Ferrexpo Middle East FZE amounting to US$6,595 thousand (2017: US$15,852
thousand) and Ferrexpo plc amounting to US$2,661 thousand (2017: US$7,984 thousand).
The total remaining contractual maturities of the guarantees provided under the facilities listed above is US$403,268 thousand (2017:
US$497,800 thousand).
Exposure to credit risk
The carrying amount of financial assets at 31 December 2018 was US$149,147 thousand (2017: US$186,689 thousand) and represents
the maximum credit exposure. See page 146 for further information.
Of the total maximum exposure to credit risk, US$26,068 thousand (2017: US$13,170 thousand) related to Ukraine.
The total receivables balance relating to the Group’s top three customers was US$40,670 thousand (2017: US$49,918 thousand), making
up 47.5% of the total amounts receivable (2017: 63.4%). 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 17 Trade and other receivables.
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.
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 48.
The following are the contractual maturities of financial liabilities:
US$000
Interest-bearing
Fixed rate loans and borrowings
Floating rate loans and borrowings
Total interest-bearing
Non-interest-bearing
Trade and other payables
Accrued liabilities
Future interest payable
Total non-interest-bearing
Total financial liabilities
As at 31.12.18
Less than
1 year
Between
1 to 2 years
Between
2 to 5 years
More than
5 years
Total
181,182
–
–
24,785
66,534 130,767
205,967
66,534 130,767
34,292
26,458
–
–
–
–
23,321
12,380
10,511
84,071
12,380
10,511
290,038
78,914
141,278
–
181,182
– 222,086
– 403,268
–
–
–
–
–
34,292
26,458
46,212
106,962
510,230
STRATEGIC REPORTCORPORATE GOVERNANCEFINANCIAL STATEMENTS 150
Ferrexpo plc
Annual Report & Accounts 2018
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
CONTINUED
Note 26: Financial instruments continued
The difference of the total of fixed and floating interest-bearing loans and borrowings compared to the balances disclosed in Note 25
Interest-bearing loans and borrowings mainly relates to arrangement fees paid for specific facilities, which are netted for the presentation
in the statement of financial position.
US$000
Interest-bearing
Fixed rate loans and borrowings
Floating rate loans and borrowings
Total interest-bearing
Non-interest-bearing
Trade and other payables
Accrued liabilities
Future interest payable
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
308,851
186,648
–
2,301
2,301
48,428
25,314
30,251
103,993
–
–
9,218
9,218
–
–
70
70
412,844
195,866
2,371
–
370,184
–
–
127,616
497,800
–
–
–
–
–
48,428
25,314
39,539
113,281
611,081
Currency risk
The Group is exposed to currency risk on financial assets and financial liabilities resulting from sales, purchases and borrowings that
are denominated in a currency other than the respective functional currencies of the Group’s subsidiaries. The functional currencies of
the Group’s subsidiaries are primarily the Ukrainian Hryvnia, US Dollars, Euro and Swiss Francs. The Group’s functional currency and
reporting currency is US Dollar.
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.
An appreciation of the Ukrainian Hryvnia increases, 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, with the opposite effect in case of a depreciation of
the Ukrainian Hryvnia. As the majority of sales and receivables are denominated in US Dollars, a change in the local currency will result in
operating exchange difference recorded in the income statement.
In case of a change of the local currency compared to the US Dollar, US Dollar-denominated loans held by the Ukrainian subsidiaries
result in non-operating exchange differences to the extent these are not matched by US Dollar-denominated assets. Fixed assets are held
in local currency amounts and a change in the functional currencies different to the US Dollar results in a change of the Group’s net assets
as 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 UK.
151
Ferrexpo plc
Annual Report & Accounts 2018
Note 26: Financial instruments continued
The Group’s exposure to foreign currency risk was as follows as of 31 December 2018:
US$000
Total financial assets
Thereof exposed to Ukrainian Hryvnia
Thereof exposed to US Dollar
Thereof exposed to Euro
Thereof exposed to Swiss Franc
Thereof exposed to other currencies
Total exposures to currencies other than local functional currencies
Total financial liabilities
Thereof exposed to Ukrainian Hryvnia
Thereof exposed to US Dollar
Thereof exposed to Euro
Thereof exposed to Swiss Franc
Thereof exposed to other currencies
Total exposures to currencies other than local functional currencies
As at
31.12.18
As at
31.12.17
149,147
186,689
–
–
6,837
6,906
49
674
1,898
9,458
145
673
1,446
9,170
(462,608)
(549,440)
–
–
(12,369)
(22,061)
(1,587)
(4,617)
(1,731)
(216)
(1,086)
(6,569)
(19,659)
(30,577)
No other subsidiaries of the Group have financial assets and liabilities denominated in the Ukrainian Hryvnia. The functional currency of
the Ukrainian subsidiaries is the Ukrainian Hryvnia and the translation of financial assets and financial liabilities does not therefore pose a
foreign currency risk exposure in the consolidated income statement of the Group as translation differences are reflected in the translation
reserve (see Note 30 Share capital and reserves).
Interest rate risk
The Group predominantly borrows bank funds that are at floating interest rates and is exposed to interest rate movements. 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. There was no provisionally priced iron ore exposure at 31 December 2018 (2017: 176,000 tonnes),
which would give rise to a fair value adjustment relating to the embedded provisional pricing mechanism as at 31 December 2018
(2017: gain of US$846 thousand). Final iron ore prices based on the relevant index are normally known within 60 days after the reporting
period. There were no provisionally priced receivable balances as at 31 December 2018. The difference between the provisionally priced
receivable balance recognised as at the end of the comparative period ended 31 December 2017 and the receivable balance taking into
account the known final prices was US$863 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.
STRATEGIC REPORTCORPORATE GOVERNANCEFINANCIAL STATEMENTS 152
Ferrexpo plc
Annual Report & Accounts 2018
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
CONTINUED
Note 26: 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
31.12.18
Income
statement/
equity
(922)
(256)
(657)
Year ended
31.12.17
Income
statement/
equity
(2,526)
(264)
76
(1,835)
(2,714)
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
31.12.18
Year ended
31.12.17
1,591
299
A decrease of 100bps would increase equity and profit by US$1,126 thousand for the year ended 31 December 2018 (2017: increase of
US$1,288 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 during the financial year 2018 as a result of the strong financial performance. The net debt has decreased from US$393,964
thousand at the beginning of the year to US$338,862 thousand as at 31 December 2018.
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, investments in major growth projects continued in 2018 and are expected to be continued in 2019.
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 Ferrexpo plc (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.
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 2018. See Note 12
Earnings per share and dividends paid and proposed for further information.
For more information about the Group’s interest-bearing loans and borrowings see Note 25 Interest-bearing loans and borrowings.
153
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Annual Report & Accounts 2018
Note 27: 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 31.12.18
Year ended 31.12.17
Year ended 31.12.16
2018 LTIP
2017 LTIP
2016 LTIP
392
–
–
–
803
–
–
–
765
The following expenses have been recognised in 2018 and 2017 in respect of the LTIP:
Total
392
803
765
Total
674
586
2018 LTIP
2017 LTIP
2016 LTIP
2015 LTIP
2014 LTIP
238
–
389
433
47
54
–
112
–
(13)
Year ended
31.12.18
WAFV (US$)
Year ended
31.12.17
WAFV (US$)
Year ended
31.12.18
No. (000)
Year ended
31.12.17
No. (000)
0.86
1.97
0.61
1.13
1.16
0.63
1.64
1.17
1.27
0.86
2,122
1,862
392
(594)
(100)
803
(112)
(431)
1,820
2,122
US$000
Year ended 31.12.18
Year ended 31.12.17
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 2018 LTIP awards were the share price at date of grant of US$3.11 (2017 LTIP awards: US$2.01),
the volatility of the share price of 71% (2017 LTIP awards: 74%) and a risk-free interest rate of 2.5% p.a. (2017 LTIP awards: 1.5% p.a.).
All awards vested during the financial years 2018 and 2017 have been exercised.
STRATEGIC REPORTCORPORATE GOVERNANCEFINANCIAL STATEMENTS 154
Ferrexpo plc
Annual Report & Accounts 2018
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
CONTINUED
Note 28: Employees
Employee benefits expenses for the year ended 31 December 2018 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
Notes
Year ended
31.12.18
Year ended
31.12.17
67,413
50,223
13,152
9,383
21
27
1,234
3,851
674
943
3,336
586
86,324
64,470
The table above includes compensation for Non-executive Directors, Executive Directors and other key management personnel as
outlined below:
US$000
Wages and salaries
Social security costs
Post-employment benefits
Other employee costs
Share-based payments
Year ended 31.12.18
Year ended 31.12.17
Non-
executive
and
Executive
Directors
Other key
management
Total
Non-
executive
and
Executive
Directors
Other key
management
Total
2,757
4,537
7,294
3,079
3,277
6,356
166
82
196
93
181
140
4
383
347
222
200
476
124
81
170
81
152
118
56
197
276
199
226
278
Total compensation for key management
3,294
5,245
8,539
3,535
3,800
7,335
The average number of employees during the financial year 2018 is detailed in the table below:
Average number of employees
Production
Marketing and distribution
Administration
Other
Total average number of employees
Year ended
31.12.18
Year ended
31.12.17
7,178
185
7,154
180
1,079
1,002
728
727
9,170
9,063
Note 29: 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.
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.
155
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Annual Report & Accounts 2018
Note 29: Commitments, contingencies and legal disputes continued
Operating lease commitments – Group as lessee
Future minimum rentals payable under non-cancellable operating leases as at 31 December 2018 are as follows:
US$000
Less than one year
Between one and five years
More than five years
Total operating lease commitments
Year ended
31.12.18
Year ended
31.12.17
2,807
4,587
1,433
8,827
2,569
4,542
2,271
9,382
In addition, the Group has future commitments for contingent lease payments of US$36,428 thousand (2017: US$33,088 thousand),
which are dependent on non-fixed rates.
During the year ended 31 December 2018, US$2,903 thousand was recognised as an expense in the income statement in respect of
operating leases (2017: US$2,291 thousand).
The Group leases land and buildings under operating leases. The leases on land run up to 49 years and with a lease period of five to ten
years on buildings.
IFRS 16 Leases applies to annual reporting periods beginning on or after 1 January 2019. On transition date, lease liabilities of US$7,645
thousand will be recognised within net debt along with corresponding right-of-use assets. For further information see Note 3 New
accounting policies.
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
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 31.12.18
Minimum
payments
2,267
2,267
(193)
Present
value of
payments
2,074
2,074
–
2,074
2,074
As at 31.12.17
Minimum
payments
Present value
of payments
4,296
2,131
6,427
(386)
3,969
2,072
6,041
–
6,041
6,041
As at
31.12.18
As at
31.12.17
67,529
29,681
Contingencies
On 4 February 2019, Ferrexpo announced that it had commissioned an independent review (the “Independent Review”) into the Group’s
relationship with Blooming Land and its sub-funds (the “Charity”).
For the year ended 31 December 2018, the Group made charitable contributions of US$9,500 thousand to the Charity (2017: US$24,000
thousand). Donations were ceased in May 2018. The Group has made donations to the Charity over the last 6 years totalling US$110,000
thousand. Further details on the Group’s relationship with the Charity, including the Independent Review currently being conducted, are
provided in the Independent Review Committee Report (page 69) and see also Principal Risks (page 45), Responsible Business (page
59), Corporate Governance Report (page 63), Audit Committee Report (page 71), and Note 7 Operating expenses, Note 33 Related party
disclosures and Note 34 Events after the reporting period to the consolidated financial statements.
A number of critical judgements have been made in relation to the Group’s relationship with the Charity. These are disclosed in:
– Note 7 Operating expenses – nature of Group’s community support donations; and
– Note 33 Related party disclosures – completeness.
STRATEGIC REPORTCORPORATE GOVERNANCEFINANCIAL STATEMENTS
156
Ferrexpo plc
Annual Report & Accounts 2018
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
CONTINUED
Note 29: Commitments, contingencies and legal disputes continued
As noted in the Independent Review Committee Report on page 69, the Independent Review is ongoing. The Group may be exposed to
the risk of civil, criminal or regulatory actions and liabilities (including fines and penalties) may accrue to the Group arising from the Group’s
relationship with the Charity, including (without limitation) in the following scenarios:
– if any of the critical judgements outlined in Note 7 Operating expenses and/or Note 33 Related party disclosures are incorrect, in whole
or in part;
– if funds donated to the Charity have been misapplied, including through misappropriation, with or without the knowledge or
involvement of Ferrexpo personnel and/or in circumstances where the Charity is considered to be performing services for or on behalf
of the Group;
– if the Group or any of its personnel have derived any direct or indirect benefit from the Charity; and
– if the financial statements for the current or prior periods omit related party or other disclosures that ought to have been made or the
financial statements need to be restated.
At the current time, the existence, timing and quantum of potential future liability, if any, including fines, penalties or damages, which
could be material or other consequences arising from the Independent Review cannot be determined and measured reliably and, as a
consequence, no associated liabilities have been recognised in relation to these matters in the consolidated statement of financial position
as of 31 December 2018.
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.
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, 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.
Following the commencement of the liquidation process of BFC and in accordance with the applicable local legislation, PJSC Ferrexpo
Poltava Mining (“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$153,929 thousand as of 31 December 2018).
On 22 April 2016, the liquidator of BFC issued certificates recognising UAH540 million (US$19,503 thousand as of 31 December 2018)
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$134,426 thousand as of 31 December
2018) 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 several hearings took place following the filing of FPM’s appeal without a ruling on the parties’ motions by the
Kyiv Commercial Court of Appeal. During the hearing on 18 July 2018, the court ruled in favour of FPM and the counterparty subsequently
filed its cassation appeal against this decision. On 11 December 2018, the Supreme Court of Ukraine upheld the cassation appeal and the
case was directed for new consideration to the Northern Commercial Court of Appeal. The case was heard by the Northern Commercial
Court of Appeal on 27 March 2019 without a decision taken during this first hearing. The next hearing is scheduled for 22 April 2019.
FYM’s claim on the same matter was dismissed by the Kyiv Commercial Court on 6 February 2019 and FYM filed its appeal against
this decision on 28 February 2019. The first hearing at the Northern Commercial Court of Appeal took place on 15 April 2019 without a
decision taken. The next hearing is scheduled for 20 May 2019. In relation to the claims of FBM, the Northern Commercial Court of Appeal
dismissed FBM’s appeal on 11 March 2019 and FBM filed its cassation appeal on 2 April 2019.
Note 30: 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 reacquired (treasury shares), are recognised at cost and deducted from equity. No gain or loss is
recognised in the income statement on the purchase, sale, issue or cancellation of the Group’s own equity instruments. Any difference
between the carrying amount and the consideration is recognised in 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.
Information on the Group’s share capital and reserves is provided on the following page.
157
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Annual Report & Accounts 2018
Note 30: Share capital and reserves continued
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 2018 was 613,967,956 Ordinary Shares (2017: 613,967,956) at a par value of £0.10 paid
for in cash, resulting in share capital of US$121,628 thousand (2017: US$121,628 thousand) per the statement of financial position.
As at 31 December 2018, other reserves attributable to equity shareholders of Ferrexpo plc comprised:
US$000
At 1 January 2017
Foreign currency translation differences
Tax effect
Total comprehensive loss for the period
Share-based payments
At 31 December 2017
Foreign currency translation differences
Tax effect
Total comprehensive income for the period
Share-based payments
At 31 December 2018
Uniting of interest
reserve
Treasury
share
reserve
Employee benefit
trust reserve
Translation
reserve
Total other
reserves
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)
–
–
–
–
–
–
–
–
–
–
–
674
12,117
(2,007)
10,110
–
12,117
(2,007)
10,110
674
31,780
(77,260)
(3,848)
(1,960,752)
(2,010,080)
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 buyback of 25,343,814 shares for a total cost of US$77,260 thousand. These shares are
currently held as treasury shares by the Group. The Companies Act 2006 forbids the exercise of any rights (including voting rights) and the
payment of dividends in respect of treasury shares.
Employee benefit trust reserve
This reserve represents the treasury shares held by Ferrexpo AG setting up an employee benefit trust reserve. The reserve is used to
satisfy future grants for senior management incentive schemes. Information on the Group’s share-based payments is provided in Note 27
Share-based payments. As at 31 December 2018, the employee benefit trust reserve includes 2,326,256 shares (2017: 2,916,419 shares).
Translation reserve
During the financial year 2018, the Ukrainian Hryvnia appreciated from 28.067 as at the beginning of the year to 27.688 as at 31 December
2018 and the exchange differences arising on translation of the Group’s foreign operations are initially recognised in the statement of other
comprehensive income. See also page 111.
Note 31: 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.
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 are
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 168.
The Group does not have any other interests of 20% or more in undertakings that are not disclosed on page 168, except for the
investment in the associate mentioned in Note 32 Investments in associates.
STRATEGIC REPORTCORPORATE GOVERNANCEFINANCIAL STATEMENTS 158
Ferrexpo plc
Annual Report & Accounts 2018
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
CONTINUED
Note 32: 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% (2017: 49.5%) 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
31.12.18
Year ended
31.12.17
5,947
5,360
2,165
5,527
(4,515)
(1,489)
245
(256)
7,037
5,947
For the year ended 31 December 2018 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
31.12.18
Year ended
31.12.17
Year ended
31.12.18
Year ended
31.12.17
21,686
22,002
10,741
11,076
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 2018, the associate’s total assets were US$15,531 thousand (2017: US$13,481 thousand) and the total liabilities were
US$1,428 thousand (2017: US$1,563 thousand) based on preliminary and unaudited statutory accounts. Any deviations from 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 33: Related party disclosures
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% (2017: 49.5%). 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 have been still considered as related party transactions and disclosed as such. Effective
20 April 2018, the companies controlled by Anatoly Trefilov are no longer considered as related parties.
The payments made to the Non-executive Directors and Executive Directors are disclosed in the Remuneration Report on pages 85 and 86.
Critical judgements
Completeness
The Board concluded that neither the Chief Executive Officer nor the Group’s executive management control or exercise significant
influence over Blooming Land or its sub-funds (the “Charity”) pursuant to relevant accounting standards IFRS 10 Consolidated financial
statements and IAS 28 Investments in joint ventures and associates or under Chapter 11 of the UK Listing Rules.
A change in the assessment, including as a result of the Independent Review may, under certain circumstances, expose the Group
to regulatory and other actions resulting in potential legal claims or penalties, fines or other liabilities. See Note 29 Commitments,
contingencies and legal disputes on page 154 for further information.
159
Ferrexpo plc
Annual Report & Accounts 2018
Note 33: Related party disclosures 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 31.12.18
Year ended 31.12.17
US$000
Other sales a
Total related party transactions within revenue
Materials b
Spare parts and consumables c
Total related party transactions within cost of sales
Selling and distribution expenses d
General and administration expenses e
Entities
under
common
control
877
877
8,429
2,959
11,388
Associated
companies
–
–
–
–
–
10,702
19,138
788
–
Other
related
parties
111
111
3
–
3
702
529
Entities
under
common
control
677
677
7,558
1,382
8,940
Associated
companies
Other
related parties
–
–
–
–
–
94
94
8
–
8
827
425
10,867
18,366
594
–
Total related party transactions within expenses
22,878
19,138
1,284
20,401
18,366
1,260
Finance expense
119
–
–
34
–
–
Total related party transactions
23,874
19,138
1,395
21,112
18,366
1,354
A description of the most material transactions, which are in aggregate over US$200 thousand in the current or comparative year 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
a
Sales of power, steam and water and other materials for US$109 thousand (2017: US$88 thousand) and income from premises leased to Kislorod PCC of US$131 thousand (2017: US$135 thousand);
Sales of diesel to DVD Trans totalling US$376 thousand (2017: US$313 thousand). The company ceased to be a related party in September 2018; in accordance with the Listing Rules, all transactions with
DVD Trans within one year from cessation are still considered as related party transactions and disclosed as such; and
a
Sales of scrap metal to OJSC Uzhgorodsky Turbogas totalling US$250 thousand (2017: US$127 thousand).
b Purchases of compressed air and oxygen and scrap metal from Kislorod PCC for US$4,536 thousand (2017: US$3,911 thousand);
b Purchases of cast iron balls from AutoKraZ Holding Co. for US$274 thousand (2017: US$851 thousand); and
b Purchases of cast iron balls from OJSC Uzhgorodsky Turbogas for US$3,536 thousand (2017: US$2,673 thousand).
c
c
c
c
Purchases of spare parts from CJSC Kyiv Shipbuilding and Ship Repair Plant (“KSRSSZ”) in the amount of US$1,201 thousand (2017: US$96 thousand);
Purchases of spare parts from OJSC Uzhgorodsky Turbogas in the amount of US$533 thousand (2017: US$294 thousand);
Purchases of spare parts from Valsa GTV of US$455 thousand (2017: US$756 thousand); and
Purchases of spare parts from OJSC Berdichev Machine-Building Plant Progress of US$724 thousand (2017: US$211 thousand).
d Purchases of advertisement, marketing and general public relations services from FC Vorskla of US$10,702 thousand (2017: US$10,867 thousand).
e
Insurance premiums of US$535 thousand (2017: US$403 thousand) paid to ASK Omega for workmen’s insurance and other insurances.
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 32 Investments in associates).
d Purchases of logistics services in the amount of US$19,138 thousand (2017: US$18,366 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.
d Purchases of logistics management services from Slavutich Ruda Ltd. relating to customs clearance services and the coordination of rail transit totalling US$702 thousand (2017: US$827 thousand).
Effective 20 April 2018, this Company is no longer considered as a related party. See page 158.
e
Legal services in the amount of US$375 thousand (2017: US$221 thousand) 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
e Consulting service fees and expenses totalling US$154 thousand (2017: US$205 thousand) paid to Nage Capital Management AG, which is controlled by Lucio Genovese, 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. In February 2019, he was re-appointed to the Board as a
Non-executive Director.
STRATEGIC REPORTCORPORATE GOVERNANCEFINANCIAL STATEMENTS
160
Ferrexpo plc
Annual Report & Accounts 2018
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
CONTINUED
Note 33: Related party disclosures 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
Year ended 31.12.18
Year ended 31.12.17
Entities
under
common
control
4,678
4,678
Associated
companies
–
–
Other
related
parties
–
–
Entities
under
common
control
781
781
Associated
companies
Other
related parties
–
–
–
–
During the period ended 31 December 2018, the Group purchased major spare parts and equipment from OJSC Berdichev Machine-Building Plant Progress totalling US$2,821 thousand (2017: US$6
thousand) in respect of the construction of the concentrate stockyard, from AutoKraZ Holding Co. totalling US$398 thousand (2017: nil) for cranes and lifters installed on truck chassis and from Valsa GTV
totalling US$212 thousand (2017: nil) for rubber-lined steel cover sheets for the mills.
The Group further procured services relating to the top soil removal and relocation of waste material and gravel in the amount of US$1,165 thousand (2017: US$713 thousand) from DVD Trans. The company
ceased to be a related party in September 2018; in accordance with the Listing Rules, all transactions with DVD Trans within one year from the cessation are still considered as related party transactions and
disclosed as such.
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:
As at 31.12.18
As at 31.12.17
US$000
Prepayments for property, plant and equipmentf
Total non-current assets
Trade and other receivables g
Prepayments and other current assets h
Total current assets
Trade and other payables i
Accrued liabilities and contract liabilities
Total current liabilities
Associated
companies
Other
related
parties
Entities
under
common
control
6,121
6,121
–
–
214
1,302
1,181
1,395
465
–
465
–
1,302
963
–
963
Entities
under
common
control
3,022
3,022
203
1,088
1,291
344
–
344
Associated
companies
Other
related parties
–
–
1,082
–
1,082
1,367
–
1,367
–
–
37
171
208
64
51
115
–
–
1
–
1
–
–
–
A description of the balances over US$200 thousand in the current or comparative year is given below.
Entities under common control
f
As at 31 December 2018, prepayments for property, plant and equipment totalling US$5,980 thousand (2017: US$2,722 thousand) were made to OJSC Berdichev Machine-Building Plant Progress. As at
the end of the comparative period ended 31 December 2017, US$256 thousand was prepaid to AutoKraZ Holding Co for property, plant and equipment.
h Prepayments and other current assets totalling US$858 thousand as at 31 December 2018 related to prepayments made to FC Vorskla for advertisement, marketing and general public relations services
(2017: US$858 thousand).
i
Trade and other payables included US$213 thousand (2017: US$172 thousand) related to the purchase of compressed air, oxygen and scrap metal from Kislorod PCC.
Associated companies
g As at 31 December 2018, trade and other receivables included US$1,302 thousand (2017: US$1,082 thousand) related to dividends declared by TIS Ruda LLC.
i
As at 31 December 2018, trade and other payables included US$963 thousand (2017: US$1,367 thousand) related to purchases of logistics services from TIS Ruda LLC.
Other related parties
h As at the end of the comparative year ended 31 December 2017, prepayments and other current assets totalling US$171 thousand related to prepayments made to Slavutich Ruda Ltd. for distribution
services. Effective 20 April 2018, this company is no longer considered as a related party. See page 158.
i
As at the end of the comparative year ended 31 December 2017, trade and other payables of US$59 thousand were in respect of distribution services provided by Slavutich Ruda Ltd.
161
Ferrexpo plc
Annual Report & Accounts 2018
Note 33: Related party disclosures continued
Blooming Land and its three sub-funds (the “Charity”)
In the year ended 31 December 2018, the Group made donations of US$9,500 thousand to the Charity (2017: US$24,000 thousand).
In 2017 and 2018, funding to Blooming Land was provided by one of the Group’s operational subsidiaries in Ukraine, Ferrexpo Poltava
Mining (“FPM”). Khimreaktiv LLC, controlled by Kostyantin Zhevago, the CEO and ultimate majority shareholder of Ferrexpo, also
independently donated funds to the Charity.
In July 2018, the Board received notification from Deloitte that, as part of their interim review relating to donations made by the Group
to Blooming Land in 2018, Deloitte had discovered that, according to copy bank statements, in 2017 temporary funding contributions
totalling approximately US$16,300 thousand were advanced by Khimreaktiv LLC into one of the Charity’s sub-funds. The Charity
subsequently repaid Khimreaktiv LLC using monies received from the Group as part of its regular donations. These transactions between
Khimreaktiv LLC and the sub-fund were considered related party transactions under IAS 24 Related party disclosures that ought
previously to have been disclosed. The transactions between the sub-funds and Khimreaktiv LLC were not considered to be related party
transactions of the Group under the UK Listing Rules. These copy bank statements and all related transactions shown are being further
considered as part of the ongoing Independent Review.
The Charity is considered by the Group to operate independently of its Chief Executive Officer and its executive management, and its
Chief Executive Officer and its executive management are not considered to control or exercise significant influence over the Charity.
Accordingly, the Charity is not consolidated by the Group. There is no agreement or arrangement between the Group and Khimreaktiv
LLC in relation to their contributions to the Charity.
For further information see Chairman’s Statement (page 18), Principal Risks (page 45), Responsible Business (page 59), Corporate
Governance Report (page 63), Independent Review Committee Report (page 69), Audit Committee Report (page 71) and Note 7
Operating expenses, Note 29 Commitments, contingencies and legal disputes and Note 34 Events after the reporting period to the
consolidated financial statements.
Note 34: Events after the reporting period
On 4 February 2019, the Board commenced an Independent Review into matters relating to the Group’s donations to Blooming Land,
including a review into whether Blooming Land’s use of Ferrexpo’s contributions was for their stated purpose and to review Blooming
Land’s status as a non-related party. An Independent Review Committee (“IRC”) was established and the work of the IRC and its advisers
in the UK and Ukraine remains ongoing.
As of the date of this report, the IRC has made progress in receiving explanations regarding the differences contained in the copy bank
statements, provided by the Charity as well as the receipt of third party evidence, including governmental confirmations that could
explain some but not all of the possible discrepancies in the application of funds by the Charity. The IRC is undertaking further work to
corroborate these explanations and evidence, however, there are indications that some could have been misappropriated.
The potential effect arising from new evidence discovered during the Independent Review on the consolidated financial statements,
including the critical judgements involved, is disclosed in Note 7 Operating expenses – Nature of the Group’s community support
donations, Note 29 Commitments, contingencies and legal disputes, and further information is provided in Note 33 Related party
disclosures. For further information see Chairman’s Statement (page 18), Principal Risks (page 45), Responsible Business (page 59),
Corporate Governance Report (page 63), Independent Review Committee Report (page 69) and Audit Committee Report (page 71).
On 7 April 2019, the Group made the final repayment of US$173,181 thousand in respect of the unsecured Notes outstanding as of the
end of the financial year ended 31 December 2018. See Note 12 Interest-bearing loans and borrowings for further information.
Subsequent to the year-end, the Group’s proposed dividends are disclosed in Note 12 Earnings per share and dividends paid and
proposed. Other than the above disclosed information, no material adjusting or non-adjusting events have occurred.
STRATEGIC REPORTCORPORATE GOVERNANCEFINANCIAL STATEMENTS 162
Ferrexpo plc
Annual Report & Accounts 2018
PARENT COMPANY STATEMENT OF FINANCIAL POSITION
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 2018 and 2017, which has been prepared in accordance with
Financial Reporting Standard 101 Reduced Disclosure Framework (“FRS 101”). Information on the principal accounting policies is outlined
in Note 3 Significant accounting policies.
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: amounts falling due within one year
Debtors: amounts falling due after more than one year
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
Retained earnings
Total capital and reserves
Notes
As at
31.12.18
As at
31.12.17
4
147,496
147,496
147,496
147,496
5
5
6
6
7
7
7
7
7
70,091
22,435
763,891
813,018
184
1,576
834,166
837,029
3,428
4,068
830,738
832,961
978,233
980,457
463
494
977,771
979,963
121,628
121,628
185,112
185,112
(77,260)
(77,260)
(3,848)
(4,522)
752,139
755,005
977,771
979,963
The profit after taxation for the Company, registration number 05432915, was US$97,790 thousand for the financial year ended
31 December 2018 (2017: US$24,562 thousand).
The financial statements were approved by the Board of Directors on 22 April 2019.
Steve Lucas
Chairman
Christopher Mawe
Chief Financial Officer
163
Ferrexpo plc
Annual Report & Accounts 2018
PARENT COMPANY STATEMENT OF CHANGES IN EQUITY
US$000
At 1 January 2017
Profit for the period
Total comprehensive income for the period
Equity dividends paid to shareholders (Note 7)
Share-based payments
At 31 December 2017
Issued capital
Share
premium
Treasury share
reserve
Employee
benefit trust
reserve
Retained
earnings
Total capital
and reserves
121,628
185,112
(77,260)
(5,108)
788,410 1,012,782
−
−
−
−
−
−
−
−
−
−
−
−
−
−
−
24,562
24,562
24,562
24,562
(57,967)
(57,967)
586
−
586
121,628
185,112
(77,260)
(4,522) 755,005
979,963
Application of new IFRSs (Note 3)
−
−
−
−
(3,786)
(3,786)
At 1 January 2018 – after application of new IFRSs
121,628
185,112
(77,260)
(4,522)
751,219
976,177
Profit for the period
Total comprehensive income for the period
Equity dividends paid to shareholders (Note 7)
Share-based payments
At 31 December 2018
−
−
−
−
−
−
−
−
−
−
−
−
−
−
−
97,790
97,790
97,790
97,790
(96,870)
(96,870)
674
−
674
121,628
185,112
(77,260)
(3,848) 752,139
977,771
STRATEGIC REPORTCORPORATE GOVERNANCEFINANCIAL STATEMENTS 164
Ferrexpo plc
Annual Report & Accounts 2018
NOTES TO THE PARENT COMPANY FINANCIAL STATEMENTS
CONTINUED
Note 1: Corporate information
The Company is incorporated and registered in England, which is considered to be the country of domicile, with its registered office at
55 St James’s Street, London SW1A 1LA, UK. The Company’s Ordinary Shares are traded on the London Stock Exchange.
The majority shareholder of the Company is Fevamotinico S.a.r.l. (“Fevamotinico”), a company incorporated in Luxembourg and ultimately
owned by The Minco Trust, of which Kostyantin Zhevago, the Group’s Chief Executive Officer, is a beneficiary. At the time this report was
published, Fevamotinico held 50.3% (2017: 50.3%) of the Company’s issued share capital.
Note 2: Basis of preparation
The financial statements are prepared under the historical cost convention and in accordance with Financial Reporting Standard 101
Reduced Disclosure Framework (“FRS 101”).
The financial statements are presented in US Dollars (US$), 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 disclosures 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 78.
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 reacquired (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.
Share-based payments
The accounting policy is consistent with the Group’s policy set out in Note 27 Share-based payments of the Group’s financial statements.
165
Ferrexpo plc
Annual Report & Accounts 2018
NOTES TO THE PARENT COMPANY FINANCIAL STATEMENTS
Note 3: Significant accounting policies continued
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 11 Taxation of the Group’s financial statements.
Changes in accounting policies
The accounting policies adopted and applied in the preparation of the financial statements are consistent with those of the previous year,
except for the adoption of new and amended IFRS and IFRIC interpretations effective as of 1 January 2018. The new and amended IFRS
and IFRIC interpretations adopted are consistent with the Group’s new accounting policies set out in Note 3 New accounting policies of
the Group’s financial statements.
IFRS 9 Financial instruments
A detailed description of the new standard IFRS 9 Financial instruments is provided in Note 3 New accounting policies of the Group’s
financial statements. The effect from the expected credit loss impairment model to be applied under the new standard is primarily
calculated for the Company’s intercompany loan and receivable balances outstanding as at the end of a reporting period. The calculation
was primarily based on publicly available default risk ratings of the Group.
The tables below provide the details of the cumulative effects from the first-time application of the new standards on the statement of
financial position as of 1 January 2018 and on the statement of financial position and profit after taxation as at 31 December 2018.
US$000
Statement of financial position
Assets
Debtors
Capital and reserves
Retained earnings
Profit and loss account
Statement of financial position
Assets
Debtors
Balance as at
01.01.18
Effect from
application of
IFRS 9
Year ended
31.12.17
831,667
(3,786)
835,453
751,219
(3,786)
755,005
Notes
As reported
as at
31.12.18
97,790
Effect from
application of
IFRS 9
Balance without
effect from new
IFRSs
200
97,590
5
833,981
(3,586)
837,567
All other standards, interpretations and amendments adopted as of 1 January 2018 have not had a significant impact on these
financial statements.
Use of critical estimates and judgements
The Company has not identified any area involving the use of critical estimates and judgements made by management in preparing the
separate Parent Company financial statements.
Note 4: Investment in subsidiary undertakings
Investment in subsidiary undertakings at 31 December 2018 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
At 31.12.18
At 31.12.17
147,496
147,496
147,496
147,496
See Note 31 Consolidated subsidiaries to the consolidated financial statements for further information on subsidiaries indirectly held by
the Company.
STRATEGIC REPORTCORPORATE GOVERNANCEFINANCIAL STATEMENTS 166
Ferrexpo plc
Annual Report & Accounts 2018
NOTES TO THE PARENT COMPANY FINANCIAL STATEMENTS
CONTINUED
Note 5: Debtors
Debtors as at 31 December 2018 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 31.12.18
At 31.12.17
67,775
19,273
1,979
337
2,793
369
70,091
22,435
763,891
813,018
763,891
813,018
833,982
835,453
The Company’s loans are contractually payable on demand but having assessed the expected repayment profile, this balance is
presented as falling due after more than one year.
Amounts owed by subsidiary undertakings include the financial guarantees provided by the Company and reflect the future guarantee fee
receivable recorded when the financial guarantees were recognised as a liability.
The table above includes the impact from the application of the new expected credit loss impairment model under IFRS 9 Financial
instruments. The balance of impairment losses on debtors included in the profit after taxation is US$200 thousand as of 31 December 2018.
For the cumulative effects from the application of the new standards IFRS 9 Financial instruments on the statement of financial position as
at 1 January 2018 and as at 31 December 2018 see Note 3 Significant accounting policies.
Note 6: Creditors
Creditors as at 31 December 2018 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 31.12.18
At 31.12.17
485
2,943
3,428
463
463
1,211
2,857
4,068
494
494
The Company’s policy is to provide financial guarantees under limited circumstances only for the benefit of wholly owned or substantially
owned subsidiaries.
As at 31 December 2018, the Company was a guarantor to the following major external debt facilities of the Group’s subsidiary Ferrexpo
Finance plc:
– Notes totalling US$173,181 thousand of a 10.375% Eurobond falling due on 7 April 2019. The first instalment of US$173,181 thousand
fell due and was repaid on 7 April 2018. The interest coupon is payable semi-annually; and
– a syndicated revolving US$400,000 thousand pre-export finance facility, of which US$205,000 thousand is available (31 December 2017:
US$195,000 thousand) and US$195,000 thousand is drawn (31 December 2017: nil). The facility was secured on 16 November 2017 and
drawn in March 2018. In August 2018, an agreement to increase and extend the facility was signed. The effective date of the increase and
extension was 6 November 2018. The facility was increased from US$195,000 thousand to US$400,000 thousand and the tenor was
extended by one year from 31 December 2020 to 31 December 2021. Following a one-year grace period, the facility will be amortised in
12 quarterly instalments with the first instalment due on 6 February 2020 and the final repayment due on 6 November 2022.
The Company earns guarantee fees from its subsidiaries for the financial guarantees provided in respect of the Group’s finance facilities
aforementioned.
167
Ferrexpo plc
Annual Report & Accounts 2018
Note 7: Share capital and reserves
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 2018 was 613,967,956 Ordinary Shares (2017: 613,967,956) at a par value of £0.10
paid for in cash, resulting in share capital of US$121,628 thousand (2017: US$121,628 thousand) per the statement of financial position.
Treasury share reserve
In September 2008, the Company completed a buyback of 25,343,814 shares for a total cost of US$77,260 thousand (2017: 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
2018, the employee benefit trust reserve included 2,326,256 shares (2017: 2,916,419 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 2018 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 was US$168,370 thousand as of 31 December 2018 (2017: US$197,236 thousand).
Dividends proposed and paid
On 6 December 2018, the Group announced that the Directors had proposed to pay an interim special dividend of 6.6 US cents per
Ordinary Share totalling US$38,695 thousand. This dividend was paid on 14 January 2019 and, in accordance with UK law, will be
recognised in the financial statements for the year ending 31 December 2019.
As of 31 December 2017, a dividend payable was recognised in respect of an interim special dividend proposed by the Directors on
7 December 2017 and payable on 15 January 2018. The presentation of the comparatives as of 31 December 2017 has been adjusted to be
consistent with the current year presentation by derecognising the interim special dividend of US$19,365 thousand (comprising of US$16,008
thousand dividend payable and US$3,357 thousand withholding tax) and recognising a corresponding credit to retained earnings.
For further information see Note 12 Earnings per share and dividends paid and proposed to the consolidated financial statements.
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 12 Earnings per share and dividends paid and proposed to the consolidated financial statements.
STRATEGIC REPORTCORPORATE GOVERNANCEFINANCIAL STATEMENTS 168
Ferrexpo plc
Annual Report & Accounts 2018
ADDITIONAL DISCLOSURES
See Note 31 Consolidated subsidiaries 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
31.12.18
%
31.12.17
%
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
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
Office A2207, Jafza One, Jebel Ali Free Zone, Dubai, U.A.E., P.O. Box 18341
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
Budivelnykiv 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
Ferrexpo Singapore PTE Ltd.
Marina Boulevard #05-02, Marina Bay Financial Centre, 018981 Singapore, Singapore
Marketing services
Ferrexpo Shipping International Ltd.
Ajeltake Road, MH-96960 Ajeltake Island – Majuro, Marshall Islands
Iron Destiny Ltd.
Ajeltake Road, MH-96960 Ajeltake Island – Majuro, Marshall Islands
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
Holding company
Shipping 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 Fund1 Heroiv Dnipra Street 23-a, 39802 Horishni Plavni, Poltava Region, Ukraine
Charity fund
99.1
100.0
100.0
100.0
100.0
100.0
100.0
99.1
99.1
51.0
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
99.1
99.1
100.0
100.0
100.0
100.0
100.0
100.0
99.1
99.1
51.0
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
99.1
Associate
TIS Ruda LLC
Available-for-sale investments 2
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
1 Charity fund controlled by the Group through its CSR Committee.
2 All investments relate to companies incorporated in Ukraine and are fully impaired.
169
Ferrexpo plc
Annual Report & Accounts 2018
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 2018 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
31.12.18
454,560
26,800
481,360
Year ended
31.12.17
335,451
31,745
367,196
10,506,164
10,394,440
43.27
32.27
Underlying EBITDA
Definition: The Group calculates the underlying EBITDA as profit before tax and finance plus depreciation and amortisation, net gains
and losses from disposal of investments and property, plant and equipment, share-based payments and write-offs and impairment
losses. 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 Segment information to the consolidated financial statements 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. 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
Write-offs
Depreciation and amortisation
Profit before tax and finance
Notes
Year ended
31.12.18
Year ended
31.12.17
502,897
550,705
(5,701)
(7,754)
27
7
(674)
(1,489)
(586)
(407)
(62,094)
(46,392)
432,939
495,566
STRATEGIC REPORTCORPORATE GOVERNANCEFINANCIAL STATEMENTS 170
Ferrexpo plc
Annual Report & Accounts 2018
ALTERNATIVE PERFORMANCE MEASURES CONTINUED
Diluted earnings per share
Definition: Earnings per share 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)
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
Year ended
31.12.18
Year ended
31.12.17
56.9
56.7
67.1
66.9
As at
31.12.18
As at
31.12.17
(338,862)
(393,964)
502,897
550,705
0.67x
0.72x
In the current period, management has reviewed the presentation of the accrued interest and has reclassified it from interest-bearing
loans and borrowings to accrued liabilities in order to better reflect the nature of this balance in the presentation reducing net debt by
US$9,358 thousand. See Note 5 Segment information to the consolidated financial statements for further information.
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
31.12.18
As at
31.12.17
24
25
25
62,996
97,742
(204,600)
(305,412)
(197,258)
(186,294)
(338,862)
(393,964)
For a reconciliation of underlying EBITDA to profit before tax and finance see page 169.
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
31.12.18
As at
31.12.17
13/14
135,113
102,953
171
Ferrexpo plc
Annual Report & Accounts 2018
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 committed facilities
Total liquidity
As at
31.12.18
As at
31.12.17
62,996
97,742
205,000
213,750
267,996
311,492
STRATEGIC REPORTCORPORATE GOVERNANCEFINANCIAL STATEMENTS 172
Ferrexpo plc
Annual Report & Accounts 2018
GLOSSARY
Act
AGM
Articles
The Companies Act 2006
The Annual General Meeting of the Company
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
Charity
Delivery including cost and freight
Donations made to a charity called Blooming Land which operates through three sub-funds
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
Directors
The Directors of the Company
173
Ferrexpo plc
Annual Report & Accounts 2018
GLOSSARY CONTINUED
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 a 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
LLC Ferrexpo Belanovo Mining, 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 PJSC Ferrexpo Poltava Mining, a company incorporated under
the laws of Ukraine
Finance and Risk Management Committee, a sub-committee of the Executive Committee
Financial Times Stock Exchange top 250 companies
LLC Ferrexpo Yeristovo Mining, 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
KPI
KT
LIBOR
LLC
Australasian Joint Ore Reserves Committee – the internationally accepted code for ore classification
GPL ore has been classified as either K22 or K23 quality, of which K22 ore is of higher quality (richer)
Key Performance Indicator
Thousand tonnes
The London Inter Bank Offered Rate
Limited Liability Company (in Ukraine)
STRATEGIC REPORTCORPORATE GOVERNANCEFINANCIAL STATEMENTS 174
Ferrexpo plc
Annual Report & Accounts 2018
GLOSSARY CONTINUED
LTIFR
LTIP
m3
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)
Mineral Resources
Concentration or occurrence of material of intrinsic economic interest in or on the earth’s crust in such
form, quality and quantity that there are reasonable prospects for eventual economic extraction
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
spot price
sterling/£
STIP
sub-funds
tailings
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
The current price of a product for immediate delivery
Pounds Sterling, the currency of the United Kingdom
Short-Term Incentive Plan
Three funds that operate under the Blooming Land charity
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
175
Ferrexpo plc
Annual Report & Accounts 2018
tolling
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
ton
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, net gains and losses from disposal of investments and property, plant and equipment,
share-based payments and write-offs and impairment losses
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
STRATEGIC REPORTCORPORATE GOVERNANCEFINANCIAL STATEMENTS 176
Ferrexpo plc
Annual Report & Accounts 2018
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
WWW.FERREXPO.COM
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FERREXPO PLC
55 ST JAMES’S STREET, LONDON SW1A 1LA
T +44 (0)20 7389 8300
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