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2019
Annual Report
FPM pit
Who we are
Since 1977, Ferrexpo has supplied
high quality iron ore pellets to the
global steel industry. We have
been listed on the London Stock
Exchange for over ten 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.
SEE PAGES 14–17
Our Purpose
We produce and market premium
quality iron ore pellets, vital for
sustainable steel production and
essential to modern life.
CAT 6060 hydraulic mining
shovel
01
Group Performance 2019
0.58X
Lost time injury frequency rate
(2018: 1.18x)
10.5MT
Total production
(2018: total production 10.6Mt)
US$1.5BN
+18%
Revenue
(2018: US$1.3BN)
68.4¢
+21%
Diluted EPS
(2018: 56.7 US cents)
US$473M
+62%
Net cash flow from operating activities
(2018: US$292M)
US$586M
+17%
Underlying EBITDAA
(2018: US$503M)
US$403M
+20%
Profit for the year
(2018: US$335M)
US$155M
+60%
Dividends paid
(2018: US$97M)
US$247M
+83%
Capital investmentA
(2018: US$135M)
0.48X
Net debt to underlying EBITDAA
(2018: 0.67x)
Alternative performance measures
Words with the symbol A are defined
in the Alternative Performance
Measures section of the Annual
Report on pages 180–182.
Strategic Report
Corporate Governance
Financial Statements
01 Group Performance 2019
02 At a Glance
06 Investment Case
08 Chairman’s Statement
13 Acting Chief Executive’s Review
14 Market Review
18 Business Model
20 Our Stakeholders
24 Case Study: Health & Safety
26 Section 172 Statement
28 Case Study: Workforce Engagement
30 Strategic Framework
32 Key Performance Indicators
34 Case Study: Supporting Community
36 Case Study: Energy Efficiency
38 Performance Review
46 Case Study: Tailings Dam
48 Responsible Business
50 Risk Management
52 Principal Risks
61 Viability Statement
62 Chairman’s Introduction
64 Board of Directors
66 Executive Committee
68 Corporate Governance Compliance
69 Corporate Governance Report
75 Independent Review Committee Report
76 Audit Committee Report
82 Nominations Committee Report
85 Remuneration Report
103 Directors’ Report
106 Statement of Directors’
Responsibilities
108 Independent Auditor’s Report
to the members of Ferrexpo plc
121 Consolidated Income Statement
122 Consolidated Statement of
Comprehensive Income
123 Consolidated Statement
of Financial Position
124 Consolidated Statement of
Cash Flows
125 Consolidated Statement
of Changes in Equity
126 Notes to the Consolidated
Financial Statements
174 Parent Company Statement
of Financial Position
175 Parent Company Statement
of Changes in Equity
176 Notes to the Parent Company
Financial Statements
179 Additional Disclosures
180 Alternative Performance Measures
183 Glossary
Strategic ReportCorporate GovernanceFinancial StatementsFerrexpo plcAnnual Report & Accounts 2019
02
At a Glance
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.
Pelletising magnetite concentrates
into pellets is an exothermic
process (i.e. releases heat
energy), which reduces energy
requirements to produce pellets
and lowers costs compared
to the hematite ores more
commonly used by the
Group’s competitors.
3.4BT
Manuilivske
1.4BT
Vasylivske
JORC classified resources
Former Soviet Union
(Non-JORC) classified resources
0.3BT
Galeschynske
1.7BT
Bilanivske
2.5BT
Gorishne-
Plavninske-
Lavrykivske
(“GPL”)
1.5BT
Zarudenske
1.1BT
Yerystivske
4.0BT
Brovarkivske
Kharchenkivske
2.8BT
55At current production rates, the
Group has enough reserves for
the next 55 years of production
Reserves and Resources
Ferrexpo has updated its Reserve and Resource Statement for its Gorishne-Plavninske-Lavrykivske (“GPL”) and Yerystivske projects. As a
result, total JORC reserves have increased to 1.6 billion tonnes (from 1.3 billion tonnes) and total resources have decreased to 5.7 billion tonnes
(from 6.5 billion tonnes). There has been a notable increase in the Fe magnetic content of GPL’s reserve and resource base (see below).
These statements are prepared in accordance with the guidelines set out in the Australasian Code for Reporting of Exploration Results,
Mineral Resources and Ore Reserves (the “JORC Code”, 2012 edition). At current production rates, the Group has enough reserves for the next
55 years of production. The changes compared to the Group’s previous Reserve and Resource Statement are as follows:
JORC Reserve Statements as at 1 January 20201
Deposit
Gorishne-Plavninske-Lavrykivske (“GPL”)
Yerystivske
JORC Reserves
Proved
Mt
403
227
630
Fe
total
%
Fe
magnetic
%
Probable
Mt
Fe
total
%
Fe
magnetic
%
33
34
33
26
27
26
718
281
999
31
33
32
23
26
24
1. Compared to the Group’s previous Reserve Statement there is a 285 million tonne increase in proved reserves and a 72 million tonne increase in probable reserves. Total JORC classified reserves
increased by 357 million tonnes to 1.6 billion tonnes. GPL, the area or reserve mined by FPM, has seen an increase in its proved reserves Fe total content from 27% to 33% and an increase in its Fe
magnetic content from 17% to 26%.
JORC Resource Statements as at 1 January 2020²
Deposit
Gorishne-Plavninske-Lavrykivske (“GPL”)
Yerystivske
Bilanivske
Galeschynske
JORC Resources
Measured
Mt
Fe
total
%
Fe
magnetic
%
Indicated
Mt
Fe
total
%
Fe
magnetic
%
567
254
336
–
1,157
33
34
31
–
33
25
27
24
–
25
1,217
524
1,149
268
3,158
31
33
31
55
33
23
26
23
–
22
Inferred
Mt
704
402
217
58
1,381
Fe
total
%
Fe
magnetic
%
31
33
30
55
32
23
25
21
–
22
2. Compared to the Group’s previous Resource Statement there is a 328 million tonne increase in measured resources, a 454 million tonne decrease in indicated resources and a 696 million tonnes
decrease in inferred resources. Total JORC classified resources decreased by 822 million tonnes to 5.7 billion tonnes. GPL has seen an increase in its Fe total content from 30% to 33% and an
increase in its Fe magnetic content from 20% to 25%.
Ferrexpo plcAnnual Report & Accounts 2019 03
P OL T A V A
Z OL O T N I S H I NO
F E R R E X PO
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
C R I M EA
28Number of capesize
vessels loaded in 2019
M OS T Y S K A
L V IV
K Y IV
U Z H H O R O D
C H O P
B A T ’ O V O
154Own barges
2,850
Own rail cars
D A N U B E R I V E R
P OR T I Z M A IL
P OR T
Y U Z H NY
P OR T
O D E SA
P OR T C O N ST A N T A
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.
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 for steel producers, 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
World class
customer base
Ferrexpo’s world class customer
base produces high quality steels
for value added finished products.
Other types of iron ore
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 ore, 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
— Can require pelletising which is more costly than sintering iron
ore fines
36%
Central Europe
13%
Western
Europe 5%
Turkey, Middle
East & India
30%
China & South
East Asia
16%
North East Asia
Strategic ReportCorporate GovernanceFinancial StatementsFerrexpo plcAnnual Report & Accounts 2019 04
At a Glance
continued
Efficient and
well-invested
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.
67%
Fine ore particles are collected
to produce 67% Fe concentrate
Ferrexpo plcAnnual Report & Accounts 2019 Efficient and
well-invested process
05
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.
Strategic ReportCorporate GovernanceFinancial StatementsFerrexpo plcAnnual Report & Accounts 2019 e
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06
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01
Premium product
— 100% of production is in the form of iron ore pellets
— Of which 96% contain 65% Fe (iron content), regarded globally
as a high quality product
Non-Chinese pellet premia
US$ per tonne
80
70
60
50
40
30
20
10
0
2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019
Pellet premia vary according to target market. Published BF premia are based on material sold
to non-Chinese markets and do not include an iron content adjustment.
02
Strong cash flow
— Iron ore pellets receive a price premium through
the commodity cycle
— One of the lowest pelletising costs in the industry
— Globally competitive on iron ore concentrate cost curve
— Operate in niche market with high barriers to entry
Eight-year history of key financials through the cycle
US$ per tonne
200
160
120
80
40
0
2014
2012
2013
Average price CFR FOB
EBITDA margin (%)
2015
2017
2016
C1 cash cost
2018
2019
50
%
40
%
30
%
20
%
10
%
0
%
CRU breakdown pellet cost curve
to China
100
Ferrexpo
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.
90
80
70
60
50
40
30
20
10
0
0
10
20
30
40
50
60
70
80
90
100
110
120
-10
y-axis: Business costs for pellet exports, 2019, US$/dmt CFR China
x-axis: Cumulative pellet exports, 2019, 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 an estimate of cash flow from that operation is obtained. Source: CRU Group.
Ferrexpo plcAnnual Report & Accounts 2019 07
03
Well-invested
asset base
— Over US$2.5 billion invested
since 2007, into our mining,
processing and logistics
operations
— Significant resource base with
multiple brownfield growth
opportunities
— Pellet output can increase
sustainably over the long term
Over US$2.5bn invested since IPO
FPM pit
FPM: modernisation & quality
upgrade c.US$1.5bn
Travelling grate-rotary
kiln cooler
FYM: new mine &
infrastructure c.US$722m
Logistics: barging, rail, cars,
port/transshipment c.US$374m
04
High quality
and diverse
customer
base
— Sell to customers producing
high value added steel
products which are
“crisis resistant”
— Balanced sales portfolio split
between Asia and Europe
05
Integrated
logistics
— Own 49.9% interest in port
of TIS Ruda (Yuzhny) on
the Black Sea
— Transport pellets from mine
to border points with own
rail cars
— Competitively load capesize
vessels
— Own river barge fleet
for delivery into Europe
— Geographically well
positioned to supply main
pellet markets in Europe,
Asia and Middle East
06
Disciplined
capital
allocation
— Ferrexpo is committed to
maintaining low net debt
— It aims to pay a sustainable
dividend through the
commodity cycle
— Investment capital is
principally allocated from
cash generation and invested
in incremental high IRR
projects to sustainably
increase output
07
Experienced
management
team
— Governance in line with
requirements of LSE
premium listing
— Local management with
detailed knowledge of
operations
— International management
with worldwide experience
In 2019, the Group was pleased
to renew and/or extend several key
long-term contracts as well as secure
a new long-term contract with a leading
German steel mill.
Strategic ReportCorporate GovernanceFinancial StatementsFerrexpo plcAnnual Report & Accounts 2019 08
Chairman’s
Statement
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CAT 793D truck
Ferrexpo plcAnnual Report & Accounts 2019
09
Board is committed to dividends and intends
to consider a potential final dividend for the
2019 financial year once the general market
situation and the effect of the COVID-19 virus
has become clearer. Overall, in 2019 the
Group paid out dividends of US$155 million,
a 60% increase on 2018 when US$97 million
was paid.
During the year, the Group paid taxes and
royalties of US$114 million in Ukraine (2018:
US$73 million) while it remained a major
customer of state infrastructure in areas such
as electricity, gas and railway facilities. The
Group was the largest exporter of iron ore
pellets in the region and accounted for
approximately 2% of Ukraine’s total exported
goods in 2019.
In 2019, Ferrexpo’s workforce totalled
11,292 people (including subcontractors).
Total wages and salaries paid to employees
were US$109 million (2018: US$86 million
invested in local communities projects).
Average salaries at FPM in 2019 were 60%
above the national average in Ukraine1.
In terms of community developments in
2019, US$6 million was invested directly into
local community projects (2018: US$6 million
invested in local community projects)
including refurbishment of an X-ray room in
a municipal hospital, creation of a salt spa
therapy room in a municipal hospital,
refurbishment of the local chess club,
continued support for our local rowing club,
Gornyak, as well as supporting preparations
for the 2020 Summer Olympic games
through the purchase of equipment, rowing
boats and oars. At five local schools classes
were updated with the latest technology such
as the physics room, IT, mathematics and
technical drawing classes. In terms of
infrastructure development, a new
community square was built with a children’s
playground as well as an audio system and
a big screen.
Ferrexpo’s scope 1 and 2 carbon intensity
ratio was 240kg of CO2 per tonne of pellets
produced in 2019 (2018: 237kg per tonne of
pellets). The increase was primarily as a result
of a 1% increase in electricity consumption
due to a 5% increase in tonnes of ore
processed during the year. The use of
sunflower husks to partially heat the Group’s
pelletisers, as an alternative energy source,
increased by 15% in 20192. For the first time,
Ferrexpo is publishing its estimate of its
downstream scope 3 emissions.
Downstream scope 3 emissions represent
the emissions from activities that relate to the
distribution and use of the Group’s pellets.
Ferrexpo’s scope 3 emissions in 2019 were
estimated to be 10.0 million tonnes (2018:
9.9 million tonnes). Ferrexpo’s calculation
of scope 3 emissions utilises independent
research from CRU. The research shows that
steel mills produce 38% less greenhouse
1. Source: www.ukrstat.gov.ua/
2. Sunflower husks are reported separately to CO2 emissions
given they are a sustainable energy source
Steve Lucas, Chairman
Health and safety
I am very pleased to be able to report that
the Group had no fatalities in 2019 (2018: one
fatality). Furthermore, the Group’s lost time
injury frequency rate (“LTIFR”) declined to
0.58x – a record for the Group and a strong
improvement on 2018 when the Group LTIFR
was 1.18x.
This performance is thanks to a relentless
focus in our operations on the safety of our
people, improving the reporting of near-miss
incidents and a determined focus on training.
COVID-19
The Board is closely monitoring the
impact of the virus on the world, our people
and our key customers and suppliers.
Meanwhile, the health of our staff is of the
highest priority and we have implemented a
number of measures to protect our workforce
as far as practicable.
Year in summary for all stakeholders
At the end of a year which has posed a
number of challenges, I am pleased to be
able to report a strong set of financial results
and significant progress on corporate
governance matters (see Corporate
governance below).
Ferrexpo’s operations continued to
perform strongly in 2019. Production of
high quality 65% Fe pellets from own ore
increased 3% to 10.1 million tonnes (2018: 9.8
million tonnes) while sales volumes increased
to 10.3 million tonnes (2018: 10.2 million
tonnes). Despite lower demand from some
steel mills compared to 2018, the Group
signed new long-term contracts for supply
into Germany and Taiwan as well as renewing
a long-term contract for supply into Japan.
Ferrexpo has a geographically diversified
sales portfolio which allowed the Group to
maintain consistent supply to the market
despite some periods of weaker demand
from specific regions during the year.
Reported underlying EBITDA for the year
rose by 17% to US$586 million compared to
US$503 million in 2018. Net cash flow from
operations increased by 62% to US$473
million compared to US$292 million.
Total dividends declared for the 2019
financial year amount to 13.2 US cents per
share (2018: 23.1 US cents per share). The
Tanks in flotation section of
beneficiation plant
US$155M
Total dividends paid in 2019
(2018: US$97m)
0.48X
Net debt to underlying EBITDA
(31 December 2018: 0.67x)
Strategic ReportCorporate GovernanceFinancial StatementsFerrexpo plcAnnual Report & Accounts 2019 10
Chairman’s Statement
continued
Ferrexpo rail cars
The following sections detail how we have
focused on corporate governance in 2019.
Independent review of Blooming
Land charity
As announced in February 2019, the
Group established an Independent Review
Committee (“IRC”) to investigate the use of
funds donated by Ferrexpo to a Ukrainian
charity called Blooming Land (the “Charity”).
The work of the IRC and its advisers included
a forensic review undertaken by BDO LLP, a
review of relevant documentation, interviews
with Ferrexpo employees and Directors,
correspondence with the Charity and other
third parties, together with advice from legal
counsel in the UK and Ukraine.
The IRC was unable to conclude as
to the ultimate use of all of Ferrexpo’s funds
by the Charity, a third party.
Donations to the Charity were suspended
in May 2018, and in August 2019 the Group
formally terminated the relationship. The
Board’s current policy regarding charitable
donations is to only support causes or
charities local to the Company’s operations.
Should the Company resume any national
corporate social responsibility programme in
Ukraine, the Board will ensure adherence to
the highest standards of diligence, oversight,
governance and reporting. For further
information see the Independent Review
report on page 75.
New Board appointments
In 2019, I was pleased to make a number
of appointments to the Board which I feel
significantly strengthen our team. As part of
the selection process, a wide range of factors
were taken into consideration, including
requirements for diversity, mining sector
experience and emerging market knowledge.
I now feel that, subject to one further
appointment which is in progress, we have
the right mix of skills on the Ferrexpo Board.
In February, we announced the
appointment of Lucio Genovese as a
Non-independent Non-executive Director.
Lucio has been involved in the mining and
commodities industry for over 30 years.
He has deep knowledge across the sector,
including in iron ore. He has extensive
experience of operating in emerging markets,
specifically in Russia and the CIS states. As a
previous Board member (from 2007 to 2014)
and, as a Board member of Ferrexpo AG,
Lucio has in-depth knowledge of the Group
which is extremely valuable to the Board.
In June, Graeme Dacomb joined as an
Independent Non-executive Director and as
the Chair of the Audit Committee. Graeme
was a partner at Ernst & Young for 26 years
where, for his last 12 years, he was a lead
gases if they use Ferrexpo’s magnetite iron
ore pellets instead of the more commonly
used iron ore fines.
Finally, in March 2019 the Group
commissioned Knight Piésold Consulting
to conduct an independent review of our
tailings storage facility in terms of design,
construction and operational management
(in addition to regular inspections by the
Ukrainian government and internal
specialists). The conclusion of the Knight
Piésold report was that our tailings facility
is an appropriate design for the volume of
tailings being deposited, it is well managed
and it has an appropriate inspection and
monitoring regime. The report raised a
number of key differences between the
structure of Ferrexpo’s tailings dam and the
Brumadinho dam in Brazil that failed in
January 2019, specifically the topography
of the area of construction of Ferrexpo’s
dam is on flat land (rather than valley fill), with
embankments at a shallower angle and dam
walls constructed using a mixture of materials
including coarse compacted rock (as
opposed to uncompacted material). The
report made a number of recommendations
for improving the dam’s operational
management controls, which the Company is
now looking to adopt. For further information
see the case study on pages 46 and 47.
Corporate governance
A number of corporate governance
changes were made during the year which are
described in further detail below. When
considering corporate governance, it is worth
taking into account that Ferrexpo’s production
base resides exclusively in Ukraine, currently
rated Caa1 by Moody’s. This is a non-
investment grade rating and classifies the
country as having substantial risks.
Since Ferrexpo’s IPO on the London
Stock Exchange in 2007, the Board has
managed a variety of risks including regional
geopolitical tensions as well as counterparty
risks in areas such as payments to local third
parties, recovery of VAT, the requirement
to prepay corporate profit tax and the
management of legal and other related
claims, amongst others.
For further information see the Risk
section on page 50.
partner in the extractive industry, responsible
for coordinating the provision of a full suite of
services to multinational mining and oil and
gas clients including Xstrata, Fresnillo and BP
across a broad range of countries including
emerging markets. In addition to audit
services, he provided critical advice to his
clients on corporate governance structures,
risk management, acquisitions, disposals and
financial systems and controls. From 2011 to
2018, Graeme was a member of the Financial
Reporting Review Panel.
In August, we announced the
appointment of Vitalii Lisovenko as Senior
Independent Director and Fiona MacAulay as
an Independent Non-executive Director and
as Chair of the Remuneration Committee.
Vitalii, who joined the Ferrexpo Board
in November 2016, has made a strong
contribution to the Board and has deep
knowledge of financial markets and the
Ukrainian business environment.
Fiona has extensive operational
experience in emerging markets in the
upstream oil and gas sector, having worked
for a number of large multinationals as well as
mid and small-sized companies. This includes
as CEO of Echo Energy Plc. Fiona is Chair of
Independent Oil & Gas Plc where she also
chairs the Technical, Health, Safety and
Environment and Remuneration Committees.
Fiona is also a member of the Exploration
Advisory Board of Cairn India, the largest
private sector producer of crude oil in India
as well as being on the board of Coro
Energy Plc, where she is a member of
the Remuneration Committee and chairs
the Health, Safety, Environment and
Sustainable Committee.
During the year, three Directors resigned:
Simon Lockett, Mary Reilly and Bert Nacken.
I would like to thank them for their
contributions to the Company.
In October 2019, Kostyantin Zhevago
informed the Board of his decision to step
aside, temporarily, from his position of Chief
Executive Officer of the Group to focus on
resolving certain matters in Ukraine relating to
one of the businesses he owned until 2015.
The Board, including Kostyantin, believes
that this temporary change of leadership was
necessary and in the interests of all
shareholders to enable him to focus on these
matters in Ukraine without impacting the
Company’s operations. Kostyantin remains
on the Board as a Non-independent
Non-executive Director and has the full
support of the Board.
We were very pleased that Chris Mawe
agreed to step into the role of Acting Chief
Executive Officer. His extensive knowledge
of the Group’s operations will ensure
business continuity.
As a result of Chris becoming Acting Chief
Executive Officer, Roman Palyvoda was
appointed Acting Chief Financial Officer given
his extensive financial experience within the
Group. Roman joined Ferrexpo in September
Ferrexpo plcAnnual Report & Accounts 2019 11
Construction of the Group’s new
concentrate stockyard
2008 in a senior financial role. Previously,
Roman worked at Renault Group for over five
years, latterly as the Financial Controller for
Russia, Ukraine and the CIS.
The Group has a strong executive
management team with a track record of
delivering the Group’s strategic objectives.
In addition, many of the senior management
team have been with the Group for at least
ten years, further adding stability during
volatile times.
For further information on members of
the Board, see page 64 in the Corporate
Governance section.
Last but not least, Ferrexpo
acknowledges the need for diversity in
its Board, management and employee
structures. A programme to deliver our
diversity objectives is ongoing.
Auditor appointment
In July 2019, Ferrexpo announced that
following the completion of an audit tender
led by the Company’s Audit Committee,
MHA MacIntyre Hudson, the UK member
of Baker Tilly International, was appointed
as the Company’s new auditor. Baker Tilly
International operates one of the top ten audit
networks in the world and, importantly, has
significant audit capability in Ukraine having
operated there since 1999.
Purpose, values and strategy
Our purpose is to produce and market
premium quality iron ore pellets, vital for
sustainable steel production essential to
modern life. Our values underpin our purpose
and culture.
In summary, these values are to Act
Responsibly, Make it Happen, Integrity in
What We Do, Diversity within One Team and
Continuous Innovation. For further information
on Our Values see page 18. These values
were first defined at the Group’s leadership
conference in Kyiv in October 2017 and were
subsequently refined and approved by the
executive management team and the Board.
Our strategic priorities can be found on
page 30. They are: to produce high quality
pellets, be a low cost producer, sell to a world
class customer portfolio, maintain a social
licence to operate and to maintain appropriate
capital allocation between a strong balance
sheet, returns to shareholders and investment
for growth.
Safety and responsibility is our number
one priority and the Board is strongly focused
on ensuring that it is embedded in everything
we do.
Ferrexpo has a unique culture that is very
focused on collaboration especially when the
Group is impacted by external factors, such
as the current coronavirus pandemic. I’m
proud to say that our team is hardworking
and conscientious and works tirelessly for the
good of the Group. We all very much believe
in the value Ferrexpo adds to all stakeholders
and to Ukraine. Our decisions are for the long
term and ensure a sustainable future for all.
Alongside our culture and values we have
a Code of Business Conduct, available on
our website at www.ferrexpo.com, which
sets out the specific standards of conduct
that we all commit to meet.
We also expect our suppliers to adhere
to our standards of conduct. All suppliers are
expected to comply with our anti-bribery and
anti-corruption policy, and to our Code of
Conduct which commits them to appropriate
ethical and human rights standards, including
anti-slavery.
The Board monitors culture in a number
of ways so that it is in alignment with our
Purpose, Values and Strategy, including site
visits and interacting with management and
employees as part of our duties. We also
review a number of cultural indicators from
employee surveys as well as accident
statistics, internal audit reports and
whistleblowing data, which is collected
via an independently managed hotline.
Strategic ReportCorporate GovernanceFinancial StatementsFerrexpo plcAnnual Report & Accounts 2019 12
Chairman’s Statement
continued
Workforce engagement
Outlook
Workforce engagement, as set out by
During 1Q 2020, COVID-19 began
FYM facilities and infrastructure
causing disruption to Chinese supply chains
impacting the distribution networks of steel
producers and their customers. This could
result in short-term volatility for the iron ore
market as high levels of steel inventory, built
up during this period, are released into the
supply chain once normal operations
resume. Early signs are indicating that the
Chinese economy is beginning to recover
from the peak of the COVID-19 virus.
The spread of the virus into Europe,
however, could result in further economic
uncertainty. Prior to the virus, we had
expected steel profitability in Europe to show
a mild recovery in key markets from the
second half of the year onwards.
Incumbent pellet suppliers that have the
ability to supply their domestic market and
to export will likely switch back to domestic
customers in 2020 given lower international
pellet premiums compared to 2018. In
addition, lower pellet premiums could see
some high-cost supply exiting the market.
Ferrexpo remains well placed to manage
our way through the current uncertainties,
due to our low cost position relative to our
peers, our well-invested asset base, our
premium customer portfolio and our strong
balance sheet.
Steve Lucas
Chairman
the 2018 Corporate Governance Code,
is managed via the Board and executive
management. The Board took the view
that the most appropriate way to achieve
meaningful and effective engagement
with the workforce was through the CSR
Committee, a sub-committee of the Board.
For further information see Workforce
engagement on page 28.
Iron ore pellet market
In 2019, steel demand was muted in some
regions, particularly in the second half of the
year, reflecting increased raw material costs
and weaker end-user demand. The Group,
however, had the ability to deploy product
to other markets to offset any regional
weakness. Overall, the price the Group
received for its pellets remained attractive
compared to historic levels. For further
information see Market Review on page 14
and Operations Review – Marketing on
page 42.
Capital allocation
The Group is committed to maintaining
low net debt, paying dividends to shareholders
and allocating capital to incremental
investments with high internal rates of return
with the aim to sustainably increase output.
We maintain a strong focus on liquidity
especially during the current very uncertain
business climate.
Ferrexpo people
I would like to thank all of Ferrexpo’s
workforce, the senior management team and
our Board members. Their hard work and
determination to overcome challenges this
year have once again proven our resilience
and our ability to stay focused when it is
needed most. This underpins our Purpose
and Values as a Group and secures the
long-term future for all.
I would also like to say a special thanks
to Nikolay Petrovich Goroshko who retired
as the General Director of Ferrexpo Yeristovo
Mining on 31 January 2020. Nikolay first
joined the Company in 1984 and oversaw the
Group’s listing in 2007 as the Chief Financial
Officer as well as heading the development
of Ferrexpo Yeristovo Mine – the first new
open pit mine in the former USSR since
Independence.
Flotation tank
Ferrexpo plcAnnual Report & Accounts 2019 Acting Chief Executive’s
Review
13
Continuing to unlock our
full potential through
disciplined capital
allocation.
By focusing on areas within our control,
such as completing existing capital projects
(to increase our pellet output by 14% to 12
million tonnes of pellet per annum by 2021),
continuing to improve our pellet quality and
further strengthening our customer
relationships, we have further developed
the business based on our strengths.
Ferrexpo has always had significant
organic growth potential. This potential,
however, requires careful consideration in
relation to country and iron ore price volatility
whilst maintaining a strong balance sheet
to ensure a sustainable and prosperous
future for all stakeholders. This strategy
requires evolution not revolution and sound
financial discipline.
The success of this strategy can be
measured by our track record of consistent
operational performance – total production
of 65% Fe pellets has increased by 6.4 million
tonnes or by 173% since 2007.
Since 2007, Ferrexpo has generated
US$3.8 billion in free cash flow from
operations. Shareholders have received
over US$750 million in dividends, whilst taxes
of US$829 million have been paid to the
Ukrainian government and we have invested
over US$2.5 billion into our mining,
processing and logistics operations, making
us one of the largest investors in Ukraine over
this period.
I’m very proud to say that Ferrexpo can
compete with the best peers in the world.
I would like to express my sincere gratitude
to the executive management team and
workforce for their full support during this
temporary period.
Chris Mawe
Acting CEO
Chris Mawe, Acting Chief Executive Officer
In October 2019, I was appointed Acting
Chief Executive Officer by the Board of
Ferrexpo. I joined Ferrexpo in 2008 as Chief
Financial Officer and I am pleased to serve as
interim CEO to ensure continuity and stability
through what has been a challenging 2019.
Strategic ReportCorporate GovernanceFinancial StatementsFerrexpo plcAnnual Report & Accounts 2019 14
Market Review
Market trends in 2019
Ferrexpo rail cars and pellet loading at port
01
Change in pricing
terms for pellet
producers
02
Iron ore supply deficit
in 1H 2019 following
major supply outage
in Brazil
03
Strong price reaction
with 62% Fe iron ore
fines price peaking at
US$125 per tonne for
the first time since 2014
04
High input costs and
weak steel demand
significantly reduced
steel mill profitability
05
Steel mills look to
reduce costs through
lower productivity
06
Iron ore supply
recovers in 2H 2019
07
62% Fe iron ore fines
price stabilises at
around US$88 per
tonne in 4Q 2019
08
Global 2019 steel
production increases
by 3% compared
to 2018
Ferrexpo plcAnnual Report & Accounts 2019 Table 1: Summary of industry key statistics for 2019 and 2018,
US$/tonne (unless otherwise stated)
Avg Platts 62% Fe iron ore fines price CFR China
Avg Platts 65% Fe iron ore fines price CFR China
65% Fe spread over 62% Fe
Avg Atlantic pellet premium
Avg Chinese spot pellet premium
C3 Freight
2019
93
104
11
57
28
18
Global steel production, (million tonnes)
1,870
1,808
Source: worldsteel.org
Table 2: Global pellet exporters, million tonnes
2018
Change
69
90
21
58
57
18
35%
16%
-48%
-2%
-51%
0%
3%
2019
32.7
16.3
10.3
9.1
8.9
7.2
7.0
6.5
4.7
5.0
3.8
3.0
2.2
2.3
2.1
0.2
2018
44.1
18.8
10.2
7.6
8.3
4.2
5.3
5.6
5.0
5.4
5.5
2.0
1.6
2.1
1.5
3.0
121.3
130.2
%
-26%
-13%
+1%
+20%
+7%
+71%
+32%
+16%
-6%
-7%
-31%
+50%
+38%
+10%
+40%
-93%
-7%
2019
Mkt share
2018
Mkt share
24%
12%
32%
13%
8%
7%
7%
5%
5%
5%
3%
4%
3%
2%
2%
2%
1%
0%
7%
5%
6%
3%
4%
4%
4%
4%
4%
1%
1%
2%
1%
2%
90%
93%
Vale – Group
Brazil, Oman
LKAB
Ferrexpo
Sweden
Ukraine
Bahrain Steel
Bahrain
IOC
Canada
Metalloinvest
Russia
US Steel
USA
Canada
USA
Ukraine
Russia
India
India
Australia
India
Chile
QCM
Cliffs
Metinvest
Severstal
BRPL
JSPL
Grange
KIOCL
CMP
Subtotal
Other
Total
Iran, Venezuela,
India, CIS
13.7
135.0
9.4
139.6
+46%
-3%
10%
7%
Source: CRU, Market Outlook January 2020, Company
Table 3: Average ore burden mix to produce hot metal
EU 28
China
Japan
South Korea
Sinter
(2019)
64%
78%
66%
70%
Sinter
(2018)
58%
79%
66%
70%
Lump
(2019)
10%
10%
22%
24%
Lump
(2018)
8%
11%
21%
21%
Pellets
(2019)
26%
12%
12%
6%
Pellets
(2018)
34%
10%
13%
9%
Source: CRU, Market Outlook January 2020
15
Summary of iron ore market in 2019
A significant supply deficit emerged in
the first half of 2019 due to the tragic tailings
dam accident in Brazil in January and poor
weather conditions in Australia and Brazil
during most of the period. This coincided
with strong steel production in China with
Chinese output rising 10% compared to
the first half of 2018.
Prices responded accordingly and the
62% Fe fines price rose US$45 per tonne
to an average first half 2019 price of US$91
per tonne and traded above US$125 per
tonne for the first time since 2014.
In the second half of the year, steel
production from Europe and North Asia
declined due to weak industrial production
and significantly lower profitability given
higher input costs. As such, steel mills
looked to reduce production through lower
productivity or by idling blast furnaces.
Following weather-related supply weakness
in the first half of 2019, iron ore supply
recovered from Brazil and Australia in the
second half of the year. As a result, the
benchmark 62% Fe fines price corrected
from August reaching a low of US$80 per
tonne in November. Overall, reduced steel
mill capacity utilisation led to increased
demand for lower quality ore and the price
premium between high grade 65% Fe ore
and 62% Fe ore narrowed to an average of
US$11 per tonne in 2019 from US$21 per
tonne in 2018.
Iron ore pellets in 2019
In the first half of 2019, the supply of
pellets to the global export market reduced
by 11 million tonnes, or by 8%, due to the
major supply disruptions in Brazil. This
underpinned a near all-time high for pellet
premiums in the first nine months of the year
– the Platts Atlantic pellet premium (which
remains based off the 62% Fe fines price)
averaged US$61 per tonne in the first half
of 2019. From the fourth quarter of 2019,
the Platts Atlantic pellet premium fell to an
average of US$37 per tonne as steel mills
looked to economise and reduce losses.
Overall in 2019, the total pellet export
market declined by 3% to 135 million tonnes
vs. 140 million tonnes in 2018.
Table 2: Global pellet exporters shows the
market share of the top pellet exporters in
2019 compared with 2018. Production from
Brazil declined by 26% due to the tailings
dam accident and resulting constraints on
wet processing and tailings storage.
Production from Sweden also declined while
there was a strong increase in production
from Russia, India and Iran as local
producers switched sales from domestic
markets to international markets to take
advantage of higher pellet premiums.
Strategic ReportCorporate GovernanceFinancial StatementsFerrexpo plcAnnual Report & Accounts 2019
16
Market Review
continued
Loading pellets for shipment to Asia at
the Group’s port facility
Average ore burden mix to produce
hot metal
In 2019, according to CRU, China
increased pellet imports by 63% from
19 million tonnes to 31 million tonnes. As
a result, China became the second largest
importer of pellets behind Europe which
imported 34 million tonnes (2018: 39 million
tonnes). This reflected a strong increase in
supply of pellets to China during the year
and higher profit margins of steel producers
in China compared to European steel
producers. It also reflected requirements
to reduce environmental emissions and
an increasing requirement to use higher
quality ore to produce more sophisticated
steel products.
Traditional pellet markets in 2019 (Europe,
Japan, South Korea, Taiwan) witnessed a
reduction in pellet consumption compared
with 2018, reflecting lower pellet availability
in the first half of 2019 and challenges in their
steel markets due to higher cost inputs
and weaker end-user demand.
Table 3: Average ore burden mix to
produce hot metal reflects this switch, with
Europe increasing consumption of sinter
and reducing pellet consumption which
was partially offset by an increase in pellet
consumption in China.
Vertical mill
Ferrexpo plcAnnual Report & Accounts 2019 Ferrexpo plc
Annual Report & Accounts 2019
17
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Pellet premiums and the pelletising
cost curve
Graph 1: Export cost curve of converting
concentrate to pellet shows the cost to
pelletise beneficiated ore. The pellet premium
determines which pellet producers can
sustain production in a lower pellet
premium environment.
In 2019, the average Platts Atlantic pellet
premium of US$59 per tonne supported
global production. The Chinese spot pellet
premium, however, was more volatile falling
to approximately US$16 per tonne in
September 2019 (see Graph 2: Monthly
average Chinese spot pellet premium in
2019). The Chinese market tends to act as
the market of last resort for exporters. At
these levels, and if demand elsewhere is
weak, a significant proportion of exporters
would have been loss making (as can be
seen from Graph 1), and historically supply
has exited the market around these levels.
Ferrexpo believes that the structure of
the pelletising cost curve (shown on Graph 1)
should support pellet premiums in 2020 and
over the medium to long term.
As can be seen from Graph 1, Ferrexpo
is a low cost pellet producer which supports
its cash generation through the cycle.
2020 pellet outlook
High barriers to entry, especially given
relatively low pellet premiums, are unlikely
to incentivise new pellet supply in 2020.
Incumbent producers can balance supply
by switching production from blast furnace
to direct reduction pellets or from international
export to domestic consumption. In 2020
pellet seaborne supply should not increase
due to international prices moderating to
historical levels and continued supply issues
from Brazil. An extended period of low pellet
premiums could result in some capacity
reduction for producers with high pellet
conversion costs.
At the end of 2019, industry levels of pellet
stocks were higher than the historical average
and it may take some time for the market to
absorb these, especially taking into account
the impact of the COVID-19 virus. This could
prevent pellet premiums from rising in the
short term.
Graph 1: Export cost curve of converting concentrate to pellet
Ferrexpo
Ferrexpo is one of the lowest cost
pellet producers in the world
40
35
30
25
20
15
10
5
0
0
10
20
30
40
50
60
70
80
90
100
110
120
y-axis: Pelletising conversion costs for pellet exports, 2019, ex-works, US$/dry metric tonne
x-axis: Cumulative pellet exports, 2019, Mt (dry)
Graph 2: Monthly average Chinese spot pellet premium in 2019, US$/tonne
45
40
35
30
25
20
15
10
5
0
Jan
Feb
Mar
Apr
May
Jun
Jul
Aug
Sep
Oct
Nov
Dec
Source: Platts
Balling drum
18
Ferrexpo plc
Annual Report & Accounts 2019
Business Model
We believe our business model is sustainable on the basis that
we have a competitive cost position on the iron ore cost curve, our
high quality product commands a price premium in a niche market
with high barriers to entry, we have a first class customer portfolio,
a well-invested asset base and favourable long-term industry
dynamics supporting pellet consumption. This enables the
business to be cash generative throughout the commodities cycle.
Our key resources
What we do
Sustainable stakeholder relationships
1.
2.
Long-life iron ore
deposit in Ukraine
Well-invested
production process
3. Skilled workforce
4.
Infrastructure network
(with access to water/
electricity/gas)
5. Global logistics capability
6.
Customer relationships
(with high quality ‘crisis-resistant’
steel mills)
7. Financial stability
Ore extraction
Drilling
Blasting
Excavation
Haulage
Ore to crusher
Crushing
Coarse crushing
Medium crushing
Screening
Fine crushing
Dry magnetic separation
Pelletising
Beneficiation
Thickening
Filtration
Balling
Induration
Grinding
Classification
Hydro separation
Magnetic separation
Flotation upgrade
Tailings
Employees
Wages and salaries paid
Customers
Revenue generated
Suppliers
Money spent on suppliers
Communities
Charitable donations
Environment
Money spent to safeguard the environment
Government
Taxes and royalties paid
Investors
Dividends declared for the financial year
Capital providers
Debt repaid and interest payments
US$109M
(2018: US$86M)
US$1.5BN
(2018: US$1.3BN)
US$944M
(2018: US$900M)
US$6M
(2018: US$15M)
US$16M
(2018: US$11M)
US$114M
(2018: US$73M)
US$155M
(2018: US$97M)
US$263M
(2018: US$352M)
Our purpose
Underpinned by our values
We produce and market premium
quality iron ore pellets, vital for
sustainable steel production and
essential for modern life.
Responsibility
Means at all times exercising
self-discipline, putting health and
safety first, being environmentally
responsible and being accountable
to our communities.
Make it happen
Means taking the initiative, being
engaged, not fearing failure, ensuring
work is done once and done well,
achieving superior business results by
stretching our capabilities and focusing
our efforts on adding value.
Ferrexpo plc
Annual Report & Accounts 2019
19
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We create value for our stakeholders through the careful
development of our long-life iron ore deposit in Ukraine, and
through its conversion into a high quality iron ore product.
Our ongoing success is dependent on the people who we
employ, continued investment into our operations, ongoing
development of our diversified global customer base and
the support of our communities.
Our key resources
What we do
Sustainable stakeholder relationships
1.
Long-life iron ore
deposit in Ukraine
2.
Well-invested
production process
3. Skilled workforce
4.
Infrastructure network
(with access to water/
electricity/gas)
5. Global logistics capability
6.
Customer relationships
(with high quality ‘crisis-resistant’
steel mills)
7. Financial stability
Ore extraction
Drilling
Blasting
Excavation
Haulage
Ore to crusher
Crushing
Coarse crushing
Medium crushing
Screening
Fine crushing
Dry magnetic separation
Pelletising
Beneficiation
Thickening
Filtration
Balling
Induration
Grinding
Classification
Hydro separation
Magnetic separation
Flotation upgrade
Tailings
Employees
Wages and salaries paid
Customers
Revenue generated
Suppliers
Money spent on suppliers
Communities
Charitable donations
Environment
Money spent to safeguard the environment
Government
Taxes and royalties paid
Investors
Dividends declared for the financial year
Capital providers
Debt repaid and interest payments
(2018: US$15M)
(2018: US$86M)
(2018: US$900M)
(2018: US$1.3BN)
US$109M
US$1.5BN
US$944M
US$6M
US$16M
US$114M
US$155M
US$263M
(2018: US$73M)
(2018: US$97M)
(2018: US$11M)
(2018: US$352M)
Integrity in what
we do
Means no double standards, being
truthful, honest and open at all times,
upholding high ethical standards and
delivering on our commitments.
Diversity within
one team
Means valuing difference, learning from
each other, respecting other opinions,
building on our strengths, harnessing
the capabilities of the whole team and
working collaboratively across boundaries
for the benefit of one Ferrexpo.
Continuous
innovation
Means showing courage, seeking
to improve not only the business
but ourselves, not being afraid to try
something new, investigating if there
is a better way, taking personal
accountability and accepting change.
20
Ferrexpo plc
Annual Report & Accounts 2019
Our Stakeholders
Employees
Customers
How we engaged
Why we engage
What matters most
How we are responding
the engagement
for 2020
How we assess the quality of
Comments for engagement
– Employee engagement surveys in 2017
and 2019
– Town hall meeting of 350 supervisors
and managers (representing their
departments) with the CHRO, Executive
Directors and Senior Independent
Director
– FPM and FYM quarterly town hall
meetings with General Managers
– Family days
– Annual performance review and career
development discussions
There are many reasons why it is good
business sense to engage with the workforce.
These include:
– Aligning Company values and culture
– Reinforcement of the importance of health
and safety and required procedures
– Communication and discussion of
Ferrexpo’s goals and strategy
– Recruitment and retention of talent
– Individual and team performance
– Career development
– Opportunity for employees to voice
– Biennial senior leadership conference
concerns
– 1–2–1 meetings
– Group presentations
– Regular updates and communication
Long-term customers are key to our success
and provide valuable feedback, which is
instrumental in building trusted relationships
and creating products to their satisfaction
Suppliers
– Regular meetings to assess supplier
performance and address issues
– To receive updates on new products
and services including new technologies
– Annual compliance week
Communities
– General Directors meet with village,
town, regional and district authorities
on a regular basis
– To provide customer feedback
– To monitor contractor performance
specifically regarding cost escalation
and schedules
– To address any grievances that a supplier
or contractor may have
To discuss relevant issues such as:
– the purchase of land
– agreeing the budget for charity donations
and approving the list of annual charity
projects
– agreeing joint projects with regional
government for good causes e.g. the
development of heating systems or
municipal transportation
days)
– Contract performance
– Local purchasing
– Cost inflation
– Foreign exchange risk
– Community projects
– Resettlement plans
– Health and safety
– Children’s health – our
aim is for all children in
the region to have a
healthy environment
today and in the future
– Satisfaction with
We are:
– Employee feedback
– Repeating the survey in
employer
– Job security
– asking Department Heads to discuss the
– In last employee engagement
August/September 2020
survey’s findings with employees to draw
survey over 50% of
– Quarterly town hall meetings
– Leadership succession
up specific Departmental Joint Action
participants responded
– Labour union feedback
to continue
– Pay and benefits
– Health and safety
– Personal development
– Motivation levels
– Commitment to goals
– Continuing to adjust and
enhance our Employee
Value proposition
of product
– Timely delivery
– Competitive pricing
Plans (January 2020)
– giving employees the opportunity to do
more of what they like and less of what
they dislike – assuming this is aligned
to reasonable business needs
quality
– We have regular communication with
customers to maintain and enhance
the business relationship
– We have six marketing teams located
around the world to build regional
relationships
– Consistent quality
– We constantly monitor our product
– Feedback is regularly
assessed following
communication with
customers
– Regular communication
to further strengthen
relationships
– In 2019, our payments
– We continue to engage regularly
– We receive feedback from our
– Continue regular supplier
ratio to suppliers was
19.1 days (2018: 18.4
with suppliers
– Annual Compliance Week
suppliers and contractors and
meetings
tailor future meetings to suit
– Expand our Annual
the needs of both parties
Compliance Week in 2020
to include more suppliers
– We engage with the community
– We assess the engagement
The focus of 2020 remains the
to understand challenges
– We provide charitable support to
responsible charities that are well
run and which provide all necessary
financial records as required by our
CSR and Audit Committees
by way of direct feedback
same as previous years – to
from our community and CSR
support children and the
meetings with relevant parties
younger generation through:
– education
– sports
– healthcare
– improved infrastructure
How we engaged
Why we engage
What matters most
How we are responding
Employees
Customers
– Employee engagement surveys in 2017
There are many reasons why it is good
and 2019
business sense to engage with the workforce.
– Town hall meeting of 350 supervisors
These include:
and managers (representing their
– Aligning Company values and culture
departments) with the CHRO, Executive
– Reinforcement of the importance of health
Directors and Senior Independent
Director
– FPM and FYM quarterly town hall
meetings with General Managers
– Family days
and safety and required procedures
– Communication and discussion of
Ferrexpo’s goals and strategy
– Recruitment and retention of talent
– Individual and team performance
– Annual performance review and career
– Career development
development discussions
– Opportunity for employees to voice
– Biennial senior leadership conference
concerns
– 1–2–1 meetings
– Group presentations
Long-term customers are key to our success
and provide valuable feedback, which is
– Regular updates and communication
instrumental in building trusted relationships
and creating products to their satisfaction
Suppliers
– Regular meetings to assess supplier
– To receive updates on new products
performance and address issues
and services including new technologies
– Annual compliance week
Communities
– General Directors meet with village,
To discuss relevant issues such as:
town, regional and district authorities
– the purchase of land
on a regular basis
– To provide customer feedback
– To monitor contractor performance
specifically regarding cost escalation
and schedules
– To address any grievances that a supplier
or contractor may have
– agreeing the budget for charity donations
and approving the list of annual charity
projects
– agreeing joint projects with regional
government for good causes e.g. the
development of heating systems or
municipal transportation
– Satisfaction with
employer
– Job security
– Leadership succession
– Pay and benefits
– Health and safety
– Personal development
– Motivation levels
– Commitment to goals
– Continuing to adjust and
enhance our Employee
Value proposition
– Consistent quality
of product
– Timely delivery
– Competitive pricing
– In 2019, our payments
ratio to suppliers was
19.1 days (2018: 18.4
days)
– Contract performance
– Local purchasing
– Cost inflation
– Foreign exchange risk
– Community projects
– Resettlement plans
– Health and safety
– Children’s health – our
aim is for all children in
the region to have a
healthy environment
today and in the future
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How we assess the quality of
the engagement
Comments for engagement
for 2020
– Employee feedback
– In last employee engagement
survey over 50% of
participants responded
– Labour union feedback
– Repeating the survey in
August/September 2020
– Quarterly town hall meetings
to continue
– Feedback is regularly
assessed following
communication with
customers
– Regular communication
to further strengthen
relationships
– We receive feedback from our
suppliers and contractors and
tailor future meetings to suit
the needs of both parties
– Continue regular supplier
meetings
– Expand our Annual
Compliance Week in 2020
to include more suppliers
We are:
– asking Department Heads to discuss the
survey’s findings with employees to draw
up specific Departmental Joint Action
Plans (January 2020)
– giving employees the opportunity to do
more of what they like and less of what
they dislike – assuming this is aligned
to reasonable business needs
– We constantly monitor our product
quality
– We have regular communication with
customers to maintain and enhance
the business relationship
– We have six marketing teams located
around the world to build regional
relationships
– We continue to engage regularly
with suppliers
– Annual Compliance Week
– We engage with the community
to understand challenges
– We provide charitable support to
responsible charities that are well
run and which provide all necessary
financial records as required by our
CSR and Audit Committees
– We assess the engagement
by way of direct feedback
from our community and CSR
meetings with relevant parties
The focus of 2020 remains the
same as previous years – to
support children and the
younger generation through:
– education
– sports
– improved infrastructure
– healthcare
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Ferrexpo plc
Annual Report & Accounts 2019
Our Stakeholders
continued
How we engaged
Why we engage
What matters most
How we are responding
the engagement
for 2020
Environment
– CSR Committee reporting to the Board
– Annual sustainability report
– We are committed to minimising the impact
of our operations on the environment
– It is also important to our employees,
customers, shareholders and capital
providers
– CO2 emissions
– Renewable energy
– Green steel
– Developing a comprehensive
environmental strategy
– Aiming to install solar panels on
the Group’s waste dumps
– On average 20% of the fuel used in
the Group’s pelletiser is biofuels
How we assess the quality of
Comments for engagement
– Reduction in CO2 emissions
– Increasing use of renewable
energy
– Subject to market conditions
and cash flows, commence
development of pilot solar
panel project
Government
– Regular meetings with local
government officials and tax
authorities
– Meetings with public officials
– Periodic invitations to round table
governmental initiatives
– Meeting with UK and Swiss embassies
Investors
– 1–2–1 meetings and telephone calls
with institutional investors
– Participation in equity conferences
– Annual and half year management
results roadshows
– Board engagement with shareholders
at the Annual General Meeting
We engage for a number of reasons:
– To represent the interests of the Company
– To correct common misconceptions and
poor media and social media reporting
– To provide a clear and accurate narrative
of our achievements which are for the good
of Ukraine
– To promote wider initiatives such as female
worker drivers and to lobby for legislative
change to promote more female-friendly
legislation generally
– As a publicly owned company we are
accountable to all of our investors
– We value their input and are pleased to meet
with them to provide updates and to explain
the attractions of investing in our business
Capital providers
– 1–2–1 meetings
– Loan providers require regular updates
on the performance of the Company
– Corporation tax
– Royalty payments
– Continue to meet with the government
– We evaluate the quality of
– Scheduled meetings with
on a regular basis so that good relations
engagement (including the
government officials
– Future investment plans
are maintained
seniority of the relevant party
– Scheduled participation
and the interest displayed)
and the interest in follow-up
meetings/actions
in government forums
in the country
– Employment
– Employee/community
wellbeing
– Making sure Ferrexpo is
a responsible employer
– Corporate governance
– Iron ore pellet market
– Appointment of new Directors,
new auditors and a new Senior
– Feedback from investors
dynamics
– Annual production
– Capital investments
– Shareholder returns
Independent Director
– Concluded Independent Review
– Normal shareholder
engagement to continue
– Widen shareholder base
by meeting new investors
– Financial performance
– Corporate governance
– Appointment of new directors,
new auditors and a new Senior
– Environmental emissions
Independent Director
– Concluded Independent Review
counterparty
– Our own evaluation of the
– Normal engagement
quality of interaction and
feedback from the relevant
to continue
– Available to respond to
specific requests and
ad hoc meetings
FOR MORE INFORMATION ON THE GROUP’S STAKEHOLDERS AND HOW WE HAVE ENGAGED
WITH THEM DURING 2019 SEE PAGES 28–29 AND PAGES 26–27 OF THE SECTION 172 STATEMENT
Ferrexpo plc
Annual Report & Accounts 2019
23
How we engaged
Why we engage
What matters most
How we are responding
Environment
– CSR Committee reporting to the Board
– We are committed to minimising the impact
– Annual sustainability report
of our operations on the environment
– It is also important to our employees,
customers, shareholders and capital
providers
– CO2 emissions
– Renewable energy
– Green steel
– Developing a comprehensive
environmental strategy
– Aiming to install solar panels on
the Group’s waste dumps
– On average 20% of the fuel used in
the Group’s pelletiser is biofuels
How we assess the quality of
the engagement
Comments for engagement
for 2020
– Reduction in CO2 emissions
– Increasing use of renewable
energy
– Subject to market conditions
and cash flows, commence
development of pilot solar
panel project
Government
Investors
– Regular meetings with local
government officials and tax
authorities
– Meetings with public officials
We engage for a number of reasons:
– To represent the interests of the Company
– To correct common misconceptions and
poor media and social media reporting
– Periodic invitations to round table
– To provide a clear and accurate narrative
governmental initiatives
of our achievements which are for the good
– Meeting with UK and Swiss embassies
of Ukraine
– To promote wider initiatives such as female
worker drivers and to lobby for legislative
change to promote more female-friendly
legislation generally
– 1–2–1 meetings and telephone calls
– As a publicly owned company we are
with institutional investors
– Participation in equity conferences
– Annual and half year management
results roadshows
– Board engagement with shareholders
at the Annual General Meeting
accountable to all of our investors
– We value their input and are pleased to meet
with them to provide updates and to explain
the attractions of investing in our business
Capital providers
– 1–2–1 meetings
– Loan providers require regular updates
on the performance of the Company
– Corporation tax
– Royalty payments
– Future investment plans
in the country
– Employment
– Employee/community
wellbeing
– Making sure Ferrexpo is
a responsible employer
– Continue to meet with the government
on a regular basis so that good relations
are maintained
– We evaluate the quality of
engagement (including the
seniority of the relevant party
and the interest displayed)
and the interest in follow-up
meetings/actions
– Scheduled meetings with
government officials
– Scheduled participation
in government forums
– Corporate governance
– Iron ore pellet market
dynamics
– Annual production
– Capital investments
– Shareholder returns
– Appointment of new Directors,
new auditors and a new Senior
Independent Director
– Concluded Independent Review
– Feedback from investors
– Normal shareholder
engagement to continue
– Widen shareholder base
by meeting new investors
– Financial performance
– Corporate governance
– Environmental emissions
– Appointment of new directors,
new auditors and a new Senior
Independent Director
– Concluded Independent Review
– Our own evaluation of the
quality of interaction and
feedback from the relevant
counterparty
– Normal engagement
to continue
– Available to respond to
specific requests and
ad hoc meetings
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Ferrexpo plc
Annual Report & Accounts 2019
Responsible
Business in Action
Case Study
Health
& Safety
Epiroc Pit Viper
Safe work at heights
Working from heights is a high risk activity for Ferrexpo’s
employees and contractors, and applies to a number of key
activities in the Company’s mines and in the Company’s
processing facilities. This area of safety is of particular
importance to Ferrexpo given the fall from height incident
that occurred in 2018 that led to a fatality, in addition to the
extensive pelletiser refurbishments that took place during
2019, the latter of which required contractors to dismantle
one of the Company’s pelletiser kilns that sits approximately
9 metres off the ground. Efforts in 2019 to improve safety for
those working at height concentrated on the following:
a) Newly implemented and standardised safety barriers,
which are typically installed whilst maintenance is
performed on walkways and equipment at height,
providing clearer signage for other passing workers
to recognise and avoid such areas;
b) Work descriptions and third party contracts now specify
personal protective equipment (“PPE”) requirements,
rather than providing generic references to PPE,
referencing the relevant items such as fall prevention
harnesses and safety ropes;
c) Pre-work skills assessments for contractors to ensure
those necessary safety skills are in place prior to work
commencing, rather than relying on qualification
certificates; and
d) Greater penalties for non-compliance, with contracts
terminated for supervisors and contractors that do not
comply, and authorisations revoked for future work on
Ferrexpo sites.
The Company is pleased to announce that the final pellet
line refurbishment, which required significant operating at
height by contract staff, was completed in 4Q 2019 without
a lost time injury (“LTI”), a significant improvement on
previous pellet line refurbishments.
Ferrexpo plc
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Ferrexpo believes
in employee
engagement in
all safety-related
activities.
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Reagent mixing room for flotation
in the beneficiation plant
Contractor safety
Whilst the majority of Ferrexpo’s workforce are employees,
around 20% of those at the Company’s sites are contractors,
and whilst these individuals are covered by the same health and
safety policies as Ferrexpo employees, their supervision and
quality of their PPE had often in the past been left to the
contracting firm, creating separate safety standards. In 2019,
and continuing into 2020, the Company has increased its focus
on contractor safety training, with a 44% increase in the number
of contractors undertaking safety courses in 2019. Ferrexpo has
also amended its technical documents to specify each piece of
PPE for each technical activity, rather than giving a general
requirement for PPE to be worn.
The Company continues to install tag out lock out systems,
which are safety mechanisms that prevent equipment from
being restarted whilst maintenance is being performed, across
its processing plant. The initiative started in 2018, and in 2019
these systems were installed in the flotation and crusher areas.
reduction in number of LTIs across the Group
in 2019. For further information see page 33
48%
44%
increase in the number of contractors
completing safety training in 2019 to
333 contractors
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Ferrexpo plc
Annual Report & Accounts 2019
Section 172 Statement
This section serves as Ferrexpo’s Section 172 Statement. Section 172 of the
Companies Act 2006 requires that a director of a company must act in a way
that he or she considers, in good faith, would be most likely to promote the
success of the company for the benefit of its members as a whole, and in
doing so have regard to other stakeholder interests, amongst other matters.
Six key considerations Directors must have regard to when
performing their duties are:
1. the likely consequences of any decision in the long term;
2. the interests of the Company’s employees;
3. the need to foster the Company’s business relationships with suppliers,
customers and others;
4. the impact of the Company’s operations on the community and the environment;
5. the desirability of the Company maintaining a reputation for high standards
of business conduct; and
6. the need to act fairly between members of the Company.
FOR MORE INFORMATION ON THE GROUP’S STAKEHOLDERS AND HOW WE
HAVE ENGAGED WITH THEM DURING 2019 SEE PAGES 20–23
Examples of Section 172 in practice
The following are examples of how the
Directors have had regard to the matters set
out in S172 (1)(a)(f) when discharging their
Section 172 duties and the effect of that on
certain of the decisions taken by them.
Board changes
There were a number of Board changes
made during 2019 which the Board believes
were in the best interests of the Company
and all stakeholders, as referred to in the
Chairman’s Statement, New Board
Appointments on page 10.
Lucio Genovese (Non-independent
Non-executive), Graeme Dacomb
(Independent Non-executive) and Fiona
MacAulay (Independent Non-executive)
joined in February, June and August
respectively. Vitalii Lisovenko, who joined
the Board in 2016, was appointed as Senior
Independent Director (“SID”) in August.
Following these appointments, Ferrexpo’s
Board consists of a majority of Independent
Non-executive Directors and together with
Vitalii’s appointment as SID ensured the
Group was in line with the high standards
of business conduct set out in the UK
Corporate Governance Code.
In October, Kostyantin Zhevago informed
the Board of his decision to step aside,
temporarily, from his position of Chief
Executive Officer of the Group to focus on
resolving certain matters in Ukraine relating
to one of his previously owned businesses
(Bank Finance & Credit). While the Board was
in agreement with Kostyantin’s decision, it
considered whether there would be any
immediate impact on key relationships
Kostyantin had developed as CEO of the
Group and any mitigating actions that could
be taken. This principally concerned
customers, long-term growth projects,
community and government relationships.
It was decided that Kostyantin would be
available to the Group Chief Marketing Officer
on certain customer relationship points and
be able to provide insights into long-term
growth projects if required, while Chris Mawe
and Vitalii Lisovenko would head
engagement with the government. Any
additional requirements for community
engagement would be handled by Chris
and the General Directors of the Group’s
three mines.
Overall, the Board, including Kostyantin,
was mindful of any long-term consequences
of Kostyantin stepping aside temporarily and
believed that it was in the interests of all
stakeholders so as to enable Kostyantin to
focus on resolving his ongoing matters in
Ukraine without impacting the Group’s
operations. Further, the Board considered
the decision to be in line with best practice
corporate governance. This provided
assurance that the step was in the long-term
interests of the Company.
The appointment of Chris Mawe as Acting
CEO was considered to be in the interests
of all stakeholders as, having been with the
Group since 2008 as CFO, he has previously
had interactions with all stakeholders and
was well placed to understand their relevant
concerns. The Board unanimously believed
that Chris’ appointment ensured stability and
continuity for the Group given he had been
instrumental in the Company’s strategic
direction and its impact on stakeholders for
over ten years.
Roman Palyvoda, who also joined the
Company in 2008, was promoted to Acting
CFO from Group Management Accountant.
Roman has a thorough understanding of the
financial position of the Group and his
appointment ensured further stability. In
particular, Roman has the skills and expertise
the Board considers necessary to engage
with investors and capital providers.
Dividends
In 2019, Ferrexpo paid US$155 million in
dividends to shareholders. When the Board
took the decision to approve and pay a
Ferrexpo plc
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dividend during the year, it took various
factors into account. This included the
Group’s cash balance before and after
payment, as well as the cash flow impact
payment would have on capital investment
projects and payments to employees,
suppliers and governments (taxes and
royalties). Payments of debt and interest
to lenders and covenants under loan
agreements were also considered as well
as the expectations of investors and any
longer-term implications on growth projects
or future debt repayments.
Overall, the Board determined that the
dividend payments were in the best interest
of all shareholders and that no other
stakeholders would be disadvantaged
as result of the payments.
After the year end, however, given the
general market uncertainty caused by the
spread of the COVID-19 virus, the Board
decided to defer consideration of a potential
final ordinary and/or special dividend to a
more appropriate time when the effect of the
virus on its workforce, customers and
suppliers had become clearer.
Establishment of the Independent
Review Committee (“IRC”)
In February 2019, the Board established
an Independent Review Committee to conduct
an independent review into donations made
to a third party charity, Blooming Land (the
“Charity”). Details of the review and the
conclusions of the IRC are set out in the IRC
Report on page 75 of this Annual Report.
The establishment of the IRC was considered
to be important for all stakeholders as
transparency and accountability are a vital
part of our relationship with internal and
external stakeholders and key to our
long-term reputation for high standards
of business conduct.
In reaching its decision to establish the
IRC, the Board considered the impact it
could have on various stakeholders including:
(1) the workforce, especially those individuals
who may be asked to participate in any
review; (2) the importance of transparency
to the Company’s capital providers, investors,
customers, suppliers and others; (3) potential
impacts on communities and the Group’s
CSR initiatives; and (4) maintaining
appropriate dialogue and engagement
with governments and regulatory bodies.
In order to manage competing demands,
and operational management’s expectations,
the Group identifies priority capital investments
which are included in the budget. It then
identifies “standby” capital investments and
lists them in order of priority. If actual financial
performance is greater than budget then
cash is allocated to these “standby”
capital projects.
Although payments to the Charity were
suspended in May 2018, pending the receipt
of further information from the Charity, the
Board was aware that the community would
be most impacted if donations were ceased
on a permanent basis and the Group’s
relationship with the Charity was terminated.
For this reason the Board had tried, at first,
to maintain an open dialogue with the Charity
to obtain the required information.
Subsequently, given that the Board felt
it wasn’t making sufficient progress with
the Charity, the Board decided to establish
the IRC. This was considered imperative
as a matter of good corporate governance
and in the long-term interests of the Group.
Furthermore, the Board believed it was in
the interests of a number of stakeholders,
in particular employees, to review if there had
been any involvement by Ferrexpo personnel
in any misappropriation of funds (and the IRC
was ultimately able to conclude that there
had been no such involvement by Ferrexpo
Directors, management or employees).
Budget and capital allocation
Every year when the budget is set there
are usually competing demands for capital
from different stakeholders of the Group
given the expected level of cash generation.
The most common conflict arises between
capital required for growth projects and the
Board’s desire to maintain a strong balance
sheet and to pay dividends to shareholders.
The Board believes that production
growth should be executed in a sustainable
manner so as not to put the Group’s balance
sheet under stress, as access to bank debt
can, at times, be limited due to country risk
constraints. As part of setting the budget, the
Group also needs to have regard to matters
such as investments in the workforce,
obligations owed to suppliers, debt servicing
costs and principal repayments to capital
providers and taxes, and royalties payable
to government entities.
KKD 1500/180 crusher
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Ferrexpo plc
Annual Report & Accounts 2019
Responsible
Business in Action
Workforce Engagement
Town hall meeting with Ferrexpo’s
workforce
4,769
the number of employees
across our worldwide operations
who participated in the 2019
employee engagement survey
245members of the workforce
who attended the engagement
forum in October 2019
Magnetic hydraulic
separator
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Annual Report & Accounts 2019
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strategy; and
The Board has designated the CSR Committee to lead engagement
with the workforce. Members of the CSR Committee in 2019 included
Yuriy Khimich (General Director of FBM), Viktor Lotous (Head of Managing
Board of FPM), Kostyantin Zhevago (Non-independent Non-executive
Director), Steve Lucas (Non-executive Director) and Greg Nortje (Group
Chief Human Resources Officer). As most of these CSR members are
based in Ukraine, or regularly visit Ukraine, and engage with the community
and workforce on a daily basis, the Board considered this method to be
the most appropriate way to engage. The CSR Committee will report
to the Board on workforce engagement matters on a regular basis.
In order to fully understand employee views, a survey consisting of
45 questions was developed to find out opinions on strategy alignment,
Group culture, employee development, reward and recognition, team
work and integration, effectiveness of leadership and areas of accountability
and performance. The survey elicited a good response, with over 50%
of total employees participating (4,769 employees across our worldwide
operations). This was the second employee engagement survey, with the
first taking place in 2017.
The results of the survey were fed back and considered by the Board
in July 2019 as well as to 60 of the Group’s top leaders at a leadership
conference in Kyiv in September 2019 (which has been held every
second year since 2015).
In October 2019, a town hall session was held at Horishni Plavni
(the main town surrounding our mines) with over 245 members of the
workforce attending. Senior management in attendance included Jim
North (Group Chief Operating Officer), Viktor Lotous (Head of Managing
Board of FPM), Nikolay Goroshko (General Director of FYM), Yuriy
Khimich (General Director of FBM) and Greg Nortje (Group Chief Human
Resources Officer), as well as Vitalii Lisovenko (Senior Independent
Director). The purpose of the forum was to:
— provide feedback from the employee engagement survey for 2019;
— communicate Ferrexpo’s results and immediate and long-term
— give members of the workforce the opportunity to discuss the
survey and bring any other matters to the attention of the senior
management.
As part of the question and answer session, the workforce raised a
number of topics including career progression opportunities, remuneration
and reward structures, potential impacts for the Group from changes to
mining royalties in Ukraine and operational improvements (including the use
of technology). The topics discussed have been fed back to the Board and
management, and each functional head in the business has been tasked
to identify any areas of improvement and to build on the existing strengths
with their colleagues. It is our intention to monitor these action plans and
assess their effectiveness on an annual basis.
Investing in and rewarding the workforce
Attracting and retaining a skilled and diverse workforce is central
to Ferrexpo’s success. By keeping people engaged, safe and
motivated, the Group maximises the ways in which it can generate
value for its stakeholders.
The Group is committed to developing the careers of its workforce
by providing its staff with training in skills, safety and other functional
areas. The average number of training hours provided to employees
was 17 hours in 2019. In addition, over 5,800 vocational training courses
were undertaken by employees in 2019, an increase of 19% on 2018.
30
Ferrexpo plc
Annual Report & Accounts 2019
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 per annum.
The Group looks to consistently
reduce business risk and
deliver sustainable value to all
stakeholders over the long term.
Top five strategic priorities
What we said we would do in 2019
What we did
What we aim to do in 2020
1. Produce high
quality pellets
– Maintain consistent quality in line
with customer expectations
– Complete refurbishment of final
pellet line (number 2)
– Production of 65% Fe pellet represented
– Production from own ore was in line
– Maintain consistent quality in line
96% of total pellet output in 2019
with 2018
with customer expectations
– Completed refurbishment of final pellet line
– Production from own ore of 65% Fe pellets
– Commence regular production of 67% Fe
– Installed new updraft drying system in
pelletiser number 2 which has improved
pellet strength
increased by 3% compared with 2018
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 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
– Renew long-term contracts as they expire
with key customers
– Maintain a geographically diversified
portfolio of crisis-resistant customers
– Eliminate fatal and serious accidents
by focusing on material operational
risk management
– Support the community through
various initiatives
– Reduce consumption of key inputs
such as electricity and gas, and
reduce emissions per tonne
– If market conditions are appropriate, look to
extend the Group’s debt maturity profile
– Subject to cash flows, continue to pay
dividends
– Subject to cash flows, further resume
development capex to expand the Group’s
concentrate and pelletising capacity
– Phase 1 of drill rig automation complete
– Continued to improve fixed plant
maintenance processes and
procedures
– Improved excavator rates and cycle times
for haul trucks, reducing diesel consumption
for every tonne per kilometre by 9% since
2016
– Ferrexpo was pleased to renew and extend
several key long-term contracts in 2019
– The Group also secured a new long-term
contract with a leading German steel mill
– 60% increase in dividends paid in 2019
– 83% increase in capital investment in 2019
vs. 2018
vs. 2018
FOR MORE ON OUR KEY PERFORMANCE
INDICATORS SEE PAGES 32–33
– No fatalities in 2019
– Continued to provide financial
– The lost time injury frequency rate (“LTIFR”)
support to community initiatives
decreased to 0.58x in 2019 (2018: 1.18x)
around the mine
– 15% increase in biofuel consumption
(sunflower husks) as a substitute for
gas consumption
DR grade pellets for market development
amounting to c.2% to 3% of total production
– Complete new grinding section in
concentrator
– Increase production levels to improve
efficiencies and reduce C1 cash cost
– Final consolidation of mining and mobile
maintenance activities into one organisation
– 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
– 67% Fe DR pellet trial shipments for
market development
– Eliminate fatal and serious accidents
by focusing on material operational
– Support the community through
risk management
various initiatives
– Reduce consumption of key inputs
such as electricity and gas, and
reduce emissions per tonne
– If market conditions are appropriate,
look to extend the Group’s debt maturity
profile 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
Belt type
magnetic separator
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Top five strategic priorities
What we said we would do in 2019
What we did
What we aim to do in 2020
– Production of 65% Fe pellet represented
– Production from own ore was in line
– Maintain consistent quality in line
96% of total pellet output in 2019
with 2018
– Completed refurbishment of final pellet line
– Installed new updraft drying system in
– Production from own ore of 65% Fe pellets
increased by 3% compared with 2018
pelletiser number 2 which has improved
pellet strength
– Phase 1 of drill rig automation complete
– Continued to improve fixed plant
maintenance processes and
procedures
– Improved excavator rates and cycle times
for haul trucks, reducing diesel consumption
for every tonne per kilometre by 9% since
2016
– Ferrexpo was pleased to renew and extend
several key long-term contracts in 2019
– The Group also secured a new long-term
contract with a leading German steel mill
– No fatalities in 2019
– The lost time injury frequency rate (“LTIFR”)
decreased to 0.58x in 2019 (2018: 1.18x)
– Continued to provide financial
support to community initiatives
around the mine
– 15% increase in biofuel consumption
(sunflower husks) as a substitute for
gas consumption
– 60% increase in dividends paid in 2019
vs. 2018
– 83% increase in capital investment in 2019
vs. 2018
FOR MORE ON OUR KEY PERFORMANCE
INDICATORS SEE PAGES 32–33
with customer expectations
– Commence regular production of 67% Fe
DR grade pellets for market development
amounting to c.2% to 3% of total production
– Complete new grinding section in
concentrator
– Increase production levels to improve
efficiencies and reduce C1 cash cost
– Final consolidation of mining and mobile
maintenance activities into one organisation
– 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
– 67% Fe DR pellet trial shipments for
market development
– Eliminate fatal and serious accidents
by focusing on material operational
risk management
– Support the community through
various initiatives
– Reduce consumption of key inputs
such as electricity and gas, and
reduce emissions per tonne
– If market conditions are appropriate,
look to extend the Group’s debt maturity
profile 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
1. Produce high
quality pellets
– Maintain consistent quality in line
with customer expectations
– Complete refurbishment of final
pellet line (number 2)
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 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
– Renew long-term contracts as they expire
with key customers
– Maintain a geographically diversified
portfolio of crisis-resistant customers
– Eliminate fatal and serious accidents
by focusing on material operational
– Support the community through
risk management
various initiatives
– Reduce consumption of key inputs
such as electricity and gas, and
reduce emissions per tonne
– If market conditions are appropriate, look to
extend the Group’s debt maturity profile
– Subject to cash flows, continue to pay
dividends
– Subject to cash flows, further resume
development capex to expand the Group’s
concentrate and pelletising capacity
32
Ferrexpo plc
Annual Report & Accounts 2019
Key Performance Indicators
See pages 180 to 182 for a reconciliation of Alternative
Performance Measures to the IFRS equivalent.
Financial KPIs
Underlying EBITDAA
The Group calculates 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 measures the Group’s ability to generate cash
as well as providing a useful measure of operating performance
excluding certain non-cash items. In 2019, EBITDA was US$586
million, reflecting higher average received prices and increased sales
volumes partially offset by higher costs.
US$586M
(2018: US$503M)
551
503
586
2017
2018
2019
Link to strategy
1 2 3 4 5
Closest equivalent IFRS measure: profit before tax and finance
Net debt to underlying EBITDAA
Ferrexpo uses net debt to underlying EBITDA to monitor its debt levels
relative to profitability. It is an industry standard measurement used to
determine relative levels of indebtedness. In 2019, net debt to
underlying EBITDA reduced to 0.48x.
0.48 X
(2018: 0.67x)
0.72
0.67
0.48
2017
2018
2019
Link to strategy
1 2 3 4 5
Profit for the year
In addition to Alternative Performance Measures, Ferrexpo considers
the IFRS results of the Group to be an important measurement of
profitability. In 2019, profit for the year was US$403 million reflecting a
16% increase in operating profit and lower net financial expense, offset
by a non-operating foreign exchange loss of US$18.5 million.
US$403M
(2018: US$335M)
394
335
403
2017
2018
2019
Link to strategy
1 2 3 4 5
Net cash flow from operating activities
Net cash flow from operating activities represents the cash flow
generation ability of the Company and indicates available cash flow for
investments, returns to shareholders and debt reduction. In 2019, net
cash flow from operating activities increased 62% to US$473 million,
reflecting an adjustment for non-cash operating losses (due to a
strong Hryvnia) higher EBITDA and a lower working capital outflow.
US$473M
(2018: US$292M)
473
353
292
2017
2018
2019
Link to strategy
1 2 3 4 5
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Annual Report & Accounts 2019
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Non-financial KPIs
Lost time injury frequency rate
and fatalities (“LTIFR”)
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 2019 was 0.58x.
0.58X
(2018: 1.18x)
1.17
1.18
0.58
2017
2018
2019
Link to strategy
1 2 3 4 5
Production volumes from own ore
Production volumes measure the Group’s ability to meet customer
demand as well as provide an indication of the Group’s operational
performance. In 2019, production from own ore was slightly above
2018 levels.
10.5MT
(2018: 10.5MT)
10.4
10.5
10.5
2017
2018
2019
Link to strategy
1 2 3 5
C1 cash costsA
This is the cash cost of production of iron pellets from own ore to the
factory gate, 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 2019, Ferrexpo’s C1 cash cost of production
increased to US$47.8 per tonne. This reflected local inflation of 4%,
appreciation of the Hryvnia vs. the US Dollar of 14% and repairs and
maintenance activities.
US$47.8/t
(2018: US$43.3 per tonne)
Sales volume by region
Ferrexpo believes it is important to have a diversified customer base to
be able to withstand periods of volatility in specific regions. In 2019,
general weakness in the European steel market resulted in an increase
in volumes to China.
Turkey, ME
& India
8%
6% 5%
China & South
East Asia
North East Asia
30%
16% 17% 16%
12% 13%
2017
2018
2019
2017
2018
2019
2017
2018
2019
Western Europe
15% 17% 18%
Central Europe
North America
49% 47%
36%
1%
2017
2018
2019
2017
2018
2019
0%
2017 2018
0%
2019
43.3
47.8
32.3
2017
2018
2019
Link to strategy
2 5
Link to strategy
3 5
34
Ferrexpo plc
Annual Report & Accounts 2019
Responsible
Business in Action
Case Study
Building positive relationships
Ferrexpo understands the need for positive interaction with the
communities that surround and support the Company’s operations.
Working with local community leaders, the Company aims to improve
the lives of those it interacts with either directly or indirectly, to ensure
a positive relationship for the future wellbeing of each community.
Ferrexpo provides this assistance either directly through the Ferrexpo
Charity Fund, an entity that is administered by FPM, or as direct
assistance from each Ferrexpo operating entity to local groups
that border that operating entity.
Expenditures are typically made to projects located within 10km
of the Company’s operations and in 2019 expenditure by these
Ferrexpo controlled entities amounted to UAH143 million, approximately
US$6 million (2018: UAH142 million). The largest single areas of focus
for this expenditure are: supplementing the local council budget in
Horishni Plavni for basic day-to-day activities, sport and recreation,
material aid to individuals, the local Palace of Culture, as well as
modernisation of local schools and hospitals.
Projects specific to 2019 include the creation of Ferrexpo Square
through renovation of derelict land in the centre of Horishni Plavni into
a meeting place that now includes audiovisual facilities for hosting
local concerts and cultural events, a central fountain and meeting
area, as well as a children’s playground. Funding for essential medical
procedures, that would otherwise be unaffordable for local individuals,
was provided to over 700 individuals in 2019 through the Charity Fund.
Ferrexpo’s Charity also continues to help modernise and equip local
schools and hospitals, and 2019 saw Ferrexpo equip the local
municipal hospital with two additional x-ray rooms.
Ferrexpo also continues to sponsor the Palace of Culture in the
local town of Horishni Plavni, which for 30 years has been a centre
for performances of local music, folk singing, traditional dance, choirs,
amateur theatre and even a circus collective. A total of 267 events
were held at the Palace of Culture in 2019, each hosted in one of the
Palace’s three performance halls.
Ferrexpo Square, Horishni Plavni
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CAT 6060 hydraulic
mining shovel
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Annual Report & Accounts 2019
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Case study
Eleven world medallists
One of the key aims of Ferrexpo’s community engagement
programme is to develop sports facilities for the local
population living close to the Company’s operations so that
they can enjoy a healthy and active lifestyle, all year round.
As part of this programme, Ferrexpo sponsors a number of
talented individuals, enabling them to participate in national
and international tournaments, to ultimately compete at the
highest level. Ferrexpo is proud to announce that 11 of the
athletes that it helps sponsor have had the honour of reaching
the pinnacle of their respective sports in 2019, with each
winning medals in European or World Championships. This
is an incredible achievement from a relatively small town in
central Ukraine. These 11 sportsmen and women participate
in a range of sports: six canoeists, two marksmen, two
swimmers and one boxer; all of whom Ferrexpo congratulates
on their excellent achievements!
A further mention goes to Liudmyla Kuklinovska, Liudmyla
Luzan and Inna Gryshchun, who are all local athletes who had
been invited to join the Ukrainian national squad that were due
to participate in the Tokyo Olympics in the summer of 2020,
each set to compete in their respective canoeing events.
Ferrexpo understands
the need for positive
interaction with the
communities that
surround and support
the Company’s
operations.
15%
increase in use of sunflower husks as a gas substitute
in 2019 compared with 2018.
Since September 2015, Ferrexpo has been partly using
sunflower husks as a fuel source in its pelletisers. For the
majority of our product types, testing has shown that we
can increase the use of biofuels in the pelletiser from
19% to 30%.
Ferrexpo uses sunflower husks as a fuel
alternative in its pelletisers
36
Ferrexpo plc
Annual Report & Accounts 2019
Responsible
Business in Action
Energy Efficiency
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Hydrocyclone
Energy efficiency
Mitigating impact
Ferrexpo’s Sustainable Continuous Improvement (“SCI”) team
is tasked with implementing efficiency saving initiatives across
the business, and, in 2019, this team commenced a process
to upgrade over 450 low voltage motors in the beneficiation and
pelletising plants, and 22 high voltage motors in the pelletising
plant. The existing motors typically date back to Soviet times,
and will be replaced with modern motors that comply with the
IE3 international standard of motor efficiency. Once complete, this
project will reduce the Company’s electricity consumption by over
42 million kilowatts, also reducing the Company’s Scope 2 CO2
emissions. Approximately a third of the relevant motors have been
replaced as part of this project, with the remaining expected to be
replaced during periods of maintenance downtime in the first half
of 2020.
The SCI team is also working to replace all lighting across
Ferrexpo’s processing plant with modern LED lighting, which delivers
an electrical saving of four million megawatts but also provides a
significant safety benefit of greatly improved visibility in working areas.
Over 900 lights have been replaced to date, with work completed
on ground-level lighting in the majority of working areas as of the
end of 2019.
Ferrexpo’s
Sustainable
Continuous
Improvement team
is tasked with
implementing
efficiency saving
initiatives across
the business.
38
Ferrexpo plc
Annual Report & Accounts 2019
Performance Review
Supplying
High quality
iron ore
Ferrexpo plc
Annual Report & Accounts 2019
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High quality
iron ore
Following the switch to the 65% Fe fines
index, the average realised pellet premium in
1H 2019 was in line with the average of 2018.
However, a fall in long-term customer
pellet premiums in 4Q 2019 and a
corresponding increase in spot sales to
China, reduced the average weighted pellet
premium for the year by 12% compared with
the average 2018 level. This decreased
revenue by US$73 million. For further
information see Market Review on page 14.
Ferrexpo’s agreed sales prices are based
on a variety of reference periods, ranging
from the average iron ore fines price for
a month to a quarterly lag. In 2019, this
difference in timing had a positive effect on
sales, increasing revenue by US$19 million
compared to 2018.
Seaborne freight revenue arising from
CFR sales increased revenue by US$25
million compared to 2018. This reflected
a higher proportion of sales to Asia.
Sales volumes for the period increased to
10.3 million tonnes (2018: 10.2 million tonnes),
increasing revenue by US$10 million. For
further information see Operational Review –
Marketing on page 42.
Lastly, the Group’s barging operations
increased revenue by US$5 million in 2019
compared with 2018.
Costs
C1 cash cost of production
The Group’s average C1 cash cost of
productionA was US$47.8 per tonne in 2019
compared with US$43.3 per tonne in 2018.
The increase in costs was primarily due
to domestic cost inflation and a strong local
currency against the US Dollar. Together
these factors added US$2.5 per tonne to the
C1 cash cost compared to 2018, reflecting
Ukrainian inflation of 4% while the Hryvnia
appreciated against the US Dollar by 14%
during the year. Over half of the Group’s
operating costs are in local currency and are
impacted by the Hryvnia exchange rate and
inflation. For further information see Currency
on page 40.
Repair and maintenance costs increased
by US$2.0 per tonne in 2019. This expenditure
was primarily focused on fleet truck repairs.
FYM pit
Roman Palyvoda, Acting Chief Financial Officer
Financial review
Summary
Group revenue and profit before tax
increased by 18% in 2019 compared with
2018. Strong cash flow generation, up 62%
year on year, funded dividend payments of
US$155 million and capital investment of
US$247 million, an increase in investment
of 84%, whilst net debt reduced by 17%
to US$281 million.
Revenue
Group revenue increased by 18% to
US$1.5 billion in 2019 (2018: US$1.3 billion),
principally due to a 17% increase in
Ferrexpo’s realised free on board (“FOB”)
price and an increase in pellet sales volumes.
Higher realised prices during the period
mainly reflected a significant increase in
the iron ore fines price.
In 2019, the 62% Fe iron ore fines price
increased 35% from an average of US$69
per tonne to US$93 per tonne. This increased
revenue by US$246 million. During the year,
in line with the industry, Ferrexpo progressively
switched to pellet pricing based off the 65%
Fe fines index rather than the 62% Fe fines
index, reflecting the higher iron content of
its pellets.
40
Ferrexpo plc
Annual Report & Accounts 2019
Performance Review
continued
New grinding section to increase FPM’s
concentrate capacity
An improvement in consumption norms
offset the majority of commodity cost
increases during the year.
In 2020, the Group expects royalties to
increase by approximately US$1 per tonne
due to new royalty tax legislation expected
to be adopted in March 2020, impacting the
Group from 2Q 2020.
The Group’s C1 cash cost represents
the cash costs of production of iron pellets
from own ore (to the mine gate), divided
by production volume from own ore, and
excludes non-cash costs such as
depreciation, pension costs and inventory
movements, also the costs of purchased
ore, concentrate and gravel.
information see the Independent Review
Report on page 75, Principal Risk 1 on
page 52, and Note 30 Contingencies to
the Consolidated Financial Statements.
Currency
Ferrexpo prepares its accounts in US
Dollars. The functional currency of the
Group’s operations in Ukraine is the Hryvnia,
which represents approximately half of the
Group’s operating costs. In 2019, the Hryvnia
appreciated 14% from UAH27.688 per US
Dollar on 1 January to UAH23.686 per US
Dollar as of 31 December 2019. For further
information see C1 cash cost of production
on page 39.
The C1 cash cost of production (US$
Local balances as of 31 December 2019
per tonne) is regarded as an Alternative
Performance Measure (“APM”). For further
information see page 180.
Selling and distribution costs
Total selling and distribution costs were
US$294 million (2018: US$260 million). This
included an increase in rail tariffs of 15% from
April 2019. International freight costs arising
from CFR sales increased by US$25 million
compared to 2018; this figure is also included
in revenue.
General, administrative and other
expenses
General and administrative and other
expenses was US$66 million compared
with US$45 million in 2018. This reflected an
increase in local personnel costs due to the
appreciation of the local currency against the
US Dollar and higher audit and professional
fees as a result of the independent review into
the Blooming Land Charity. For further
are converted into the Group’s reporting
currency at the prevailing exchange rate.
The appreciation of the Hryvnia resulted
in a US$265 million increase in net assets
in 2019 (2018: increase of US$12.1 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).
The operating foreign exchange loss in 2019
was US$46.8 million compared to a loss of
US$5.3 million in 2018.
Table 4: Ukrainian Hryvnia vs. US Dollar
Non-operating foreign exchange
gains/losses
Non-operating foreign exchange losses
are mainly due to the conversion of UAH
denominated intercompany payable balances
and the conversion of Euro denominated
loans (at the Group’s barging facility) into the
functional currency of the respective Group’s
subsidiary. The increase of the non-operating
foreign exchange losses to US$18.5 million
(2018: US$1.6 million) was driven by a 14%
appreciation of the Hryvnia during the year
against the US Dollar and the change in the
Euro/US Dollar exchange rate. For further
information see Note 9 to the Consolidated
Financial Statements.
Underlying EBITDAA
Underlying EBITDAA in 2019 increased
17% to US$586 million compared to US$503
million in 2018.
This reflected a 17% increase in the
Group’s received pellet price contributing
US$246 million to Group revenue compared
to 2018 together with higher sales volumes
contributing US$10 million. This was partially
offset by an increase of US$47 million in the
cash cost of production, higher selling and
distribution expenditure of US$12 million,
an increase in other of US$10 million
and a non-cash operating forex loss
of US$47 million.
Interest
Interest expense on loans and borrowings
declined 23% to US$34 million compared
to US$43 million in 2018 due to a lower
outstanding debt balance and final
repayment of higher cost Eurobonds in April
2019. The average cost of debt for the period
ended 31 December 2019 was 7.0% (average
31 December 2018: 8.2%). The decrease
was due to the repayment of US$173 million
10.375% Eurobonds.
Further details on finance expense are
disclosed in Note 10 Net finance expense
to the Consolidated Financial Statements.
Tax
In 2019, the Group’s tax expense was
US$56 million (2018: US$57 million). The
effective tax rate for 2019 was 12.2% (2018:
14.5%). This reflected the appreciation of
the Ukrainian Hryvnia against the US Dollar,
negatively impacting the profitability of the
Group’s local subsidiaries, as well as lower
global pellet premiums compared with 2018.
UAH per US$
26.596
27.688
23.686
25.846
27.200
Spot
16.03.20
Opening rate
01.01.19
Closing rate
31.12.19
Average
2019
Average
2018
Source: National Bank of Ukraine
Ferrexpo plc
Annual Report & Accounts 2019
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Dividends
Total dividends declared for the 2019
financial year amount to 13.2 US cents per
share (2018: 23.1 US cents per share). The
Board is committed to dividends and intends
to consider a potential final ordinary and/or
special dividend for the 2019 financial year
once the general market situation and the
effect of the COVID-19 virus have become
clearer. Overall, in 2019 the Group paid
out dividends of US$155 million, a 60%
increase on 2018 (US$97 million), and has
paid US$40 million in dividends to date
in 2020.
Debt and debt maturity profile
Ferrexpo has a strong balance sheet
with low levels of debt. Net debt to underlying
EBITDAA for the last 12 months was 0.48x
compared with 0.67x as of 31 December
2018. Net debt as of 31 December 2019
was US$281 million, down 17% compared
to 31 December 2018 (US$339 million). This
included a US$68 million increase in cash
to US$131 million (31 December 2018 cash:
US$63 million).
Gross debt as of 31 December 2019
was US$412 million compared with
US$402 million as of 31 December 2018.
Of this, US$7 million was as a result of the
first-time application of IFRS 16 Leases.
The Group has a US$400 million 2017
PXF facility which will amortise over 12
quarters (US$33 million per quarter)
commencing 1Q 2020. The Group has other
facilities of US$5 million which mostly relate
to export credit agency funding which will
amortise monthly over the next 18 months.
Ferrexpo may consider extending its debt
maturity profile in 2020 using the PXF market
or other debt capital markets.
During the year, Ferrexpo’s long-term
corporate and debt rating was upgraded
by Fitch to BB- (an upgrade of one notch)
with a stable outlook. The rating is capped
at the maximum level above Ukraine’s
Sovereign rating.
Related party transactions
The Group enters into arm’s length
transactions with entities under the common
control of Kostyantin Zhevago, a controlling
shareholder of the Group. For further
information see Note 34 Related party
disclosures to the Consolidated Financial
Statements.
Management of the Group has recently
received information that FC Vorskla (a
related party of the Group) provided a loan to
another related party, Collaton Limited, which
is controlled by Kostyantin Zhevago. The
amount of the loan as of 31 December 2019
was approximately US$17 million.
The effective tax rate in 2018 reflected strong
pellet premiums in the Chinese spot market.
In 2019, the Group paid income taxes of
US$84 million (2018: US$44 million), of which
US$73 million were paid in Ukraine (2018:
US$36 million).
Further details on taxation are disclosed in
Note 11 Taxation to the consolidated financial
statements.
Profit for the period
Profit for the period increased 20% to
US$403 million compared with US$335
million in 2018, reflecting a 16% increase
in operating profit and lower net financial
expense, offset by a non-operating foreign
exchange loss of US$18.5 million (2018: loss
of US$1.6 million).
Cash flows
Operating cash flow before working
capital increased 26% while the working
capital outflow in 2019 was US$30 million
compared to an outflow of US$116 million in
2018. The decrease in working capital largely
reflected a 58% reduction in inventory build of
stockpiled ore due to the redesign of the FPM
pit. Low grade ore that was stockpiled in prior
years will be processed once the Group
increases its beneficiation capacity to 12
million tonnes per annum (expected to be in
2021). Higher pricing in 2019 and a strong
sales month in December 2019 compared to
December 2018 increased trade receivables.
As a result of the higher operating cash flow
and the lower net working capital outflow,
the net cash flow from operating activities
increased 62% to US$473 million in 2019
(2018: US$292 million).
Capital investment was US$247 million, an
increase of 83% compared to 2018 (US$135
million), while dividends paid increased 60%
Refurbishment of one of the
Group’s pellet lines
to US$155 million compared to US$97 million
in 2018.
Capital investmentA
Capital expenditure in 2019 was US$247
million compared to US$135 million in 2018.
Of this, US$102 million was sustaining and
modernisation capex (2018: US$66 million)
at FPM. As in 2018, sustaining capex also
included a substantial refurbishment of one of
the Group’s four pellet lines during the period.
Investment at FYM of US$46 million (2018:
US$32 million) included capitalised stripping,
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 Concentrate
Expansion Programme (“CEP 1”) was
US$34 million (2018: US$24 million). The
project remains on track for completion by
the end of 2020 and is expected to increase
pellet production by 1.5 million tonnes per
annum in 2021. FPM also spent US$22
million on phase 1 of its press filtration project
during the year.
Ferrexpo invested US$11 million (2018:
US$4 million) in the development and
exploration of the Belanovo, Galeschyno
and the Northern Deposits.
The Group acquired 600 rail cars in
2019 for approximately US$26 million (2018:
US$3 million). While it invested approximately
US$4 million of sustaining capex at its
logistics company in Austria in 2019 (2018:
US$5 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.
42
Ferrexpo plc
Annual Report & Accounts 2019
Performance Review
continued
Overview of Ferrexpo’s operations
Operations review
Marketing
Total sales volumes in 2019 were 10.3
million tonnes (2018: 10.2 million tonnes)
with the Group’s premium 65% Fe pellet
representing 96% of total pellet output during
the year (2018: 94%).
Table 5 below shows the breakdown of
sales by key market regions. Sales to China
and South East Asia include sales to Vietnam
and Taiwan.
Table 5: Sales volume by market region
Central Europe
North East Asia
Western Europe
China and South
East Asia
Turkey, Middle East,
India
North America
Total sales
volume
(million tonnes)
2019
36%
16%
13%
2018
47%
17%
16%
30%
13%
5%
–
6%
1%
10,312
10,227
Ferrexpo benefits from a diversified sales
portfolio with leading steel mills throughout
the world, while its logistics routes to
customers provide a competitive advantage
given Ukraine’s central geographic location.
Ferrexpo’s average shipping duration to Asia
is 30 days compared to its main pellet-
producing competitors in Brazil (40 days),
Canada (55 days) and Scandinavia (50 days).
Ferrexpo is also very competitively placed
in terms of shipment days to Europe and
Turkey. This ensures that weakness in one
region can be compensated by sales into
other regions.
In the first half of 2019, overall long-term
customer performance was in line with
contract agreements and no volumes were
sold into the Chinese spot market. In the
second half of the year, weakness in Europe
(as previously discussed on pages 14 to 17
in the Market Review) saw volumes increase
to China, a majority of which were sold on
the spot market.
Despite periods of regional weakness
through the year, the Group was pleased to
renew and/or extend several key long-term
contracts as well as secure a new long-term
contract with a leading German steel mill.
The Group’s pricing formula for its
long-term contracts is based on a spot index
iron ore fines price. In 2019, this was a 65%
Fe index while in 2018, and in prior years,
this was the 62% Fe index, plus a negotiated
pellet premium and an adjustment for the
cost of international freight, typically the
C3 index.
Spot market sales to China are also made
on the 65% Fe iron ore fines price plus the
prevailing Chinese spot pellet premium.
The Chinese spot pellet premium can vary
significantly from negotiated long-term
contract pellet premiums.
Long-term sales contracts are typically
of two to five years’ duration although the
Group has sales contracts of varying tenors
up to 13 years. In general, a small proportion
of uncommitted volume is maintained for: (1)
new customer development; (2) adjusting for
production variations; and (3) opportunistic
spot sales.
For further information on sales see
Revenue in the Financial Review on page 39
and Market Review on page 14.
Production
Health and safety
Zero harm
Ferrexpo is pleased to report that
there were no fatalities in 2019 (2018:
one) and that it recorded its lowest lost
time injury frequency rate (“LTIFR”) since
listing in 2007.
Table 6: Lost time injury frequency rate
(including employees and contractors)
– FPM
– FYM
– FBM
Mining entities
Barging
Group
2019
2018
0.67
0.00
0.00
0.57
0.91
0.58
1.25
0.66
0.00
1.15
1.83
1.18
The Group has been focused on
developing a preventative approach to
safety based on an understanding of high
potential risk areas across the business,
and taking actions to mitigate these risks.
In recent years, Ferrexpo has focused on
improving reporting of near-miss events
without injury, referred to as serious
incident reports, to understand the
causes of such events. Together with
improved risk assessments, this
reporting is helping to reduce the number
of injuries incurred.
Ferrexpo will continue to improve and
adapt its safety practices. Efforts in 2020
are set to focus on contractor training,
to ensure the correct safety policies and
procedures are adhered to at site, as well
as ensuring that contractors maintain the
Group’s high standards in their personal
protective equipment. An analysis of
incidents in 2019 revealed three key
areas for future improvement: managing
activities in close proximity to rotating
equipment, transportation of employees
and employee walkways.
Ferrexpo plc
Annual Report & Accounts 2019
43
Pellet production
Pellet production from own ore was in line with 2018 at 10.5 million tonnes. Overall,
production levels were impacted by constraints in the processing and pelletising plants. FPM
completed a planned 58-day pellet line refurbishment in 4Q 2019. This marks the completion
of a refurbishment programme to its four pellet lines.
Once the Group’s current capital projects are completed, which include 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.
SEE CAPITAL INVESTMENT ON PAGE 45.
Table 7 summarises production in 2019 compared with 2018.
Lastly, it is encouraging to note that gas
consumed per pellet produced has fallen
34% since the Group’s IPO in 2007 from
18.4m3 per tonne to 12.1m3 per tonne in 2019.
This is as a result of better heat recuperation
from recycling exhaust gases and the
increased use of sunflower husks in the
Group’s pelletisers.
Ferrexpo will continue to implement
small-scale projects aimed at improving
productivity and efficiency to reduce
operating costs.
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Table 7: Production statistics
(000’t unless otherwise stated)
Iron ore processed
Average Fe content
2019
2018
28,475
27,083
Change
5.1%
33.45%
33.80% -0.35 ppt
Concentrate produced (“WMS”)
13,228
12,750
3.7%
Average Fe content
63.22%
63.36% -0.14 ppt
Pellets produced from own ore
10,519
10,506
0.1%
62% Fe pellets
Average Fe content
65% Fe pellets
Average Fe content
403
682
-40.9%
62.65%
62.53% -0.12 ppt
10,116
9,824
3.0%
64.92%
64.89% 0.03 ppt
Pellets produced from purchased concentrate
–
101
-100%
Total pellet production
10,519
10,607
-0.8%
Iron ore processed in 2019 increased 5%,
this underpinned a 3% increase in 65% Fe
pellet volumes to 10.1 million tonnes or 96%
of total production – a record percentage
of production for the Group.
Due to the refurbishment of the Group’s
final pellet line in 4Q 2019, the Group ended
the year with 186,000 tonnes of concentrate.
Mining and production efficiencies
The Group has continued to implement
initiatives which contribute to cost savings,
efficiency improvements and enhanced
health and safety standards.
The Group’s excavator rates have
benefited from the transition to 100%
liquid emulsion in the Company’s blasting
operations. This has improved the
fragmentation of blasted rock, resulting in
improved excavator efficiencies and reduced
waiting times for haul trucks. In addition,
an improved mine design at FPM has led
to improved cycle times for haul trucks.
Graph 3 shows that for every tonne-
kilometre, Ferrexpo’s diesel consumption
has reduced by 9% since 2016.
Graph 3: Mining haulage – diesel consumed
per kilometre hauled
)
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i
0.165
0.160
0.155
0.150
0.145
0.140
0.135
0.162
0.155
0.150
0.147
2016
2017
2018
2019
The first stage of implementation of FYM’s
automated drill rigs has been completed, and
drills are now operated by tele remote mode
from the Group’s centralised mine control
room. Use of drones to survey the pit area
has also been implemented at FYM.
Consolidation of FPM’s and FYM’s mining
and mobile maintenance activities into one
organisation has continued and will be
completed in 2020. As such, all maintenance
activities for mining will be carried out by one
team to optimise the use of resources and
improve fleet availability.
44
Ferrexpo plc
Annual Report & Accounts 2019
Performance Review
continued
CO2 emissions
Table 7: CO2 emissions
CO2 emissions (tonnes)
Scope 1 (direct) (tonnes)
Scope 2 (indirect) (tonnes)
2019
2018
2,624,280
2,605,082
579,415
588,781
1,940,551
1,925,670
Change
0.7%
-1.6%
0.8%
Pellets produced (tonnes, 000s)
10,519
10,607
-0.8%
Intensity ratio (kilogramme per tonne
of pellets produced)
240
237
Biofuels (reported separately) (tonnes)
104,313
90,631
1.1%
15.1%
Note: 2018 numbers have been restated due to the adoption of GHG Protocol emissions factors in this report (see above)
and this has resulted in an increase in the 2018 intensity ratio from 235 to 237 per kilogramme per tonne of pellet produced.
CO2 emissions
Overall emissions of greenhouse gases
in 2019 remained in line with 2018, with
the 1% increase in electricity consumption
the principal driver behind the Group’s
overall emissions intensity ratio increasing
from 237 in 2018 to 240 kilogrammes of
CO2 emissions per one tonne of pellets
produced in 2019. The increase in
electricity consumption is due to the 5%
increase in tonnes of ore processed.
Electricity accounts for approximately 75%
of the Group’s greenhouse gas emissions,
due to the large component of coal fired
power stations that contribute to Ukraine’s
national grid. Ferrexpo is considering
reducing its reliance on electricity from the
national grid with solar power, by installing
a 5MW pilot plant on the southern extent
of FPM’s waste dumps. If the pilot project
is approved and proves successful, it is
envisaged that the Group will expand the
use of solar power which could have
significant savings in terms of operating
cost and Ferrexpo’s Scope 2 greenhouse
gas emissions.
Scope 1 emissions relate to emissions
directly produced through the Group’s
own activities in Ukraine, such as diesel
consumption in mining vehicles. Scope 2
emissions are those that are generated by
third parties in the supply of electricity and
heat (steam) to the Group’s operations.
For the first time, Ferrexpo is publishing
an estimate of its downstream Scope 3
emissions. Downstream Scope 3
emissions represent the emissions from
activities that relate to the distribution and
use of the Group’s pellets. Ferrexpo’s total
Scope 3 emissions in 2019 are estimated
to be 10.0 million tonnes (2018: 9.9 million
tonnes), or the equivalent of 0.95 tonnes of
CO2-equivalent per tonne of pellets
produced (2018: 0.94 tonnes of CO2-
equivalent per tonne of pellets produced).
Ferrexpo’s calculation of its Scope 3
emission utilises independent research by
CRU for the allocation of emissions by
steel mills in their conversion of Ferrexpo’s
pellets to hot metal. This research1 shows
that steel mills produce 38% less
greenhouse gas if they use Ferrexpo’s
magnetite iron ore pellets instead of the
more commonly used iron ore fines which
requires sintering with coking coal before
being charged to the blast furnace. This
saving of Scope 3 greenhouse gases at
the steel mill far exceeds the additional
greenhouse gases produced in Ferrexpo’s
processing and pelletising magnetite ores
in Ukraine. As the Group’s understanding
of its Scope 3 emissions increases, the
intention is to add upstream activities,
such as goods purchased and business
travel, to the Company’s Scope 3
estimate.
In 2019, the Group has adopted the
standards published by the Greenhouse
Gas Protocol for the calculation of the
Company’s Scope 1 emissions. This has
resulted in a minor adjustment to the
reported emissions for 2018 (as shown
in table above), and as a result, the 2018
intensity ratio has increased from 235 to
40%
Scope 3 reduction in
greenhouse gas emissions
through steel mills using
Ferrexpo pellets instead of sinter
Graph 4: Scope 3 Emission factors
(for the conversion of iron ore to steel)
)
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1
0
Sinter
Pellets
237 per kilogramme per tonne of pellet
produced. Adoption of the Protocol has
also enabled Ferrexpo to publish figures
that include emissions of methane (CH4)
and nitrous oxide (N2O). Whilst emissions
of these gases are generally much lower
than the volumes of carbon dioxide
emitted, the greenhouse effect per tonne
emitted is much higher – 25 times more
for methane and almost 300 times more
for nitrous oxide. Inclusion of these gases
helps further standardise Ferrexpo’s
reporting in line with peers. A major
component of Ferrexpo’s emissions are
through its use of electricity (Scope 2),
and the emissions factor for this activity
is provided by the European Bank of
Reconstruction and Development.
1. CRU Research based on incremental adjustments of
pellets and sinter in the burden of a blast furnace of a
typical European steel mill. Emissions factor provided is
per tonne of hot metal produced and does not account
for further processing of steel into flat or long steel
products as this depends on the individual customer.
Ferrexpo plc
Annual Report & Accounts 2019
45
Night mining at FYM
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Capital investment
The Group’s approved capital projects can be seen in Table 8. Ferrexpo is on track to reach 12 million tonnes of pellets output per
annum by 2021.
Ferrexpo is currently considering a series of projects which will allow expansion of pellet capacity to 20 million tonnes per annum.
This includes further development of the Group’s beneficiating capacity, expansion of the Group’s pelletising capacity and de-bottlenecking
of logistics infrastructure including rail and port. A preliminary estimate of the required capital investment per tonne is approximately
US$150-US$200 per tonne of incremental output.
Table 8: Approved capital projects
Projects to reach
12MTPA
Description
Status
Expected completion
Total cost
Spend
FY 2019
Remaining
spend
New grinding
section
Process 6MTPA of crushed
ore into pellet feed
Construction and
assembly works under
way
Concentrate
stockyard
Decoupling of concentrator
and pellet plant by providing
concentrate storage capacity
Construction and
assembly works
under way
2020
2021
US$41M
US$8M
US$5M
US$38M
US$11M
US$13M
Phase 2 expansion
Press filtration
plant
Replacement of disc filtration
to reduce moisture in balling
plant
Construction and
assembly works
under way
Logistics
Rail cars
Continuation of programme
to replace state rail cars.
Number of rail cars as of
31 December 2019: 2,850
600 new rail cars
delivered in FY 2019
US$115M
US$23M
US$92M
Completed in four
phases of 6MTPA
Final phase
completed 2024
Completed
–
US$26M
–
The cost to complete the new grinding section in the beneficiation plant has increased by US$6 million due to labour, equipment and
construction material price inflation, exacerbated by the strong Hryvnia compared with the US Dollar. The project is approximately 85% complete
and FPM expects to begin commissioning in 3Q 2020.
The concentrate stockyard is approximately 60% complete. Works still to be completed include a thickening area, additional filtration and
compression capacity and the load-out area. FPM expects to begin technological commissioning in 2Q 2020 and to complete the loading
complex in 1Q 2021. The total cost of the project has increased by US$14 million due to the finalisation of a more detailed design, especially
regarding increased filtration capacity, and cost inflation exacerbated by the strong Hryvnia compared with the US Dollar.
Ferrexpo remains on track to reach 12 million tonnes of pellet output per annum by 2021.
46
Ferrexpo plc
Annual Report & Accounts 2019
Responsible
Business in Action
Tailings Dam
Ferrexpo’s tailings dam
1V:5HRiver drainage channelSimplified cross-section of tailings dam wall Ferrexpo plc
Annual Report & Accounts 2019
47
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Producing tailings is an inherent part of processing iron ore. Ferrexpo’s
magnetite ores have an iron content of approximately 25–35%, whereas
the Company’s iron ore pellets that are used by premium steel mills
around the world typically have an iron content of 65%. In order to achieve
this increase in iron content, Ferrexpo processes its ores to selectively
extract iron from the host rock and concentrate it in its pellets, whilst the
leftover waste material is referred to as tailings.
Ferrexpo’s tailings dam is located one kilometre east of the Company’s
processing plant and has been in operation since the Company began
processing iron ore in the 1970s. The facility is four kilometres wide, five
and a half kilometres long and 45 metres high and is segregated into
multiple smaller compartments into which wet tailings are deposited.
Following deposition, water used to transport tailings in a slurry is recycled
back to the processing plant to be utilised again, leaving behind the dry
tailings, which comprises an inert silty material. Ferrexpo’s tailings dam
is constructed in accordance with national mining regulations and is
regularly inspected by both the Company and government inspectors.
Following the tragic events surrounding a tailing dam failure in Brazil
in January 2019, the Company commissioned an independent third
party, Knight Piésold, to conduct a site visit and technical review of its
own tailings facility. This report, issued in September 2019, concluded
that the Company’s facility is well managed, appropriately designed for
the volume of tailings being produced, and that the Company has in place
an appropriate inspection and monitoring regime. A number of minor
actions have been made by the consultants to supplement the existing
network of monitoring boreholes, and this work is under way.
Ferrexpo’s tailings dam fundamentally differs in design from the tailings
facilities that suffered catastrophic failure in Brazil in 2015 and 2019, in that
Ferrexpo’s facility is located on flat land (as opposed to a steep slope), is
built to an overall slope angle of one in five (compared to slopes of up to
one in three), to a lower height (45 metres compared to 86 metres), and
the facility walls are constructed using compacted sand and rock. Whilst
these differences do not eliminate risk of failure, they demonstrate
fundamental differences in design and structure.
t Engineered tailings facilities
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Ferrexpo’s tailings dam
Case study
Ferrexpo’s tailings dam is constructed on flat land, to a design
set out by independent consultant Ukrgiproruda. The facility’s
walls consist of a series of sloped surfaces that raise the height
of the facility, which are interrupted by several flat benches, which
serve to reduce the overall slope angle to one in five. The style of
construction is upstream design, with tailings deposition limited
to internal paddocks measuring approximately 400 metres by 400
metres. At the base of the dam wall is a drainage channel, which
collects water from two drainage lines that sit within the dam wall,
and serve to divert water away from the base of the dam and
back to the Company’s processing plant. Around the perimeter
of the dam, there are 34 piezometric borehole lines to monitor
the water levels within the facility.
48
Ferrexpo plc
Annual Report & Accounts 2019
Responsible Business
sustainability reporting towards Scope 3
emissions reporting, which captures
emissions from both upstream and
downstream activities related to the
Company’s production of pellets.
For Ferrexpo, Scope 3 emissions primarily
relate to emissions from steel mills when our
pellets are converted into steel, but also a wide
range of other areas, including the transport
of pellets to our customers and the emissions
produced in making the truck tyres that we
use to mine our ores, which are two examples.
This is the first year in which we are reporting
our Scope 3 emissions, and we believe Scope
3 reporting enables stakeholders to quantify
the environmental benefits of steel mills using
iron ore pellets compared to other iron ore
products such as sinter or lump.
On safety, 2019 represented a strong year,
with zero fatalities and the lowest full year
LTIFR that we have published since our listing
in 2007.
The Group’s standalone Responsible
Business Report, which will comply with the
Global Reporting Initiative, will be published
in the first half of 2020.
Finally, on behalf of the CSR Committee, I
would like to thank all of Ferrexpo’s employees
and contractors for their hard work in 2019.
Yuriy Khimich
Chairman, Corporate Social
Responsibility Committee
Governance and management
framework
CSR-related data is collected and stored in
the Group’s accounting platform, which serves
as a comprehensive CSR database for each
of the Company’s three business units.
The CSR Committee, which is
accountable for most of the areas covered
by the Responsible Business Report, met
four times in 2019, and assists the Board in
its oversight of responsible business-related
activities. Following regulatory changes in
2019, the Company commenced its first
formal employee engagement process,
surveying over 4,500 employees, and
feedback provided via a number of sessions
at the Company’s operations. Further details
of this programme are provided on pages
28–29. It is the Company’s intention to
continue this process on an annual basis,
providing a regular channel for employee
feedback to the CSR Committee and the
Board of Directors.
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.
Changes to the CSR Committee
As of 12 February 2020, the CSR
Committee changed its name to Health, Safety,
Environment and Community (“HSEC”)
Committee. Further Fiona MacAulay
(Independent Non-executive Director) was
appointed Chair and Sergey Chebotaryov
(Health and Safety Director of the Group’s
operations) joined the Committee. Steve Lucas
(Non-executive Chairman) and Kostyantin
Zhevago (Non-independent, Non-executive
Director) stepped down from the Committee.
Yuriy Khimich, Chairman, Corporate Social
Responsibility Committee
At Ferrexpo, the work of the Corporate
Social Responsibility (“CSR”) Committee is
to ensure we achieve a safe and engaged
workforce, minimise our environmental
footprint, safeguard ethical business
practices and continue to support local
communities.
We also understand the need for clear and
transparent reporting in these four reporting
areas, as well as consistency with industry
best practices, to ensure stakeholders can
understand Ferrexpo’s performance and
compare it with our peer group. It is on that
basis that we are expanding our reporting this
year to encompass a number of external
initiatives – such as adopting the Greenhouse
Gas Protocol to ensure transparency in our
emissions calculations, which also enables
other gases to be incorporated into the
Company’s Scope 1 calculations. We also
recognise that there is a movement within
Governance structure
the Board
The Board
Oversight of responsible business matters and performance
Oversight of responsible business matters and performance
CSR Committee as of 31 December 20191
Chairman – Yuriy Khimich
Members – Kostyantin Zhevago, Steve Lucas, Greg Nortje, Viktor Lotous
Executive Committee
Focus on priorities and execution of responsible business activities
Health & Safety
Community
Workforce
Environment and
Sustainable Resources
Employees and
contractors
Communities
Suppliers
Customers
Capital providers and
shareholders
Government and
regulators
Strategic relationships – Licence to operate
1. Yuriy Khimich – FBM General Director; Kostyantin Zhevago – Non-independent Non-executive Director; Greg Nortje – Group Chief Human Resources Officer; Viktor Lotous – FPM Head of
Managing Board. The Group’s Chief Operating Officer, Jim North, although not a member of the CSR Committee, was present at all Committee meetings during the year. In April 2019, Bert
Nacken resigned as a Non-executive Director and as a CSR Committee member.
Ferrexpo plc
Annual Report & Accounts 2019
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Non-financial information statement
The Ferrexpo Group complies with the non-financial reporting requirements contained in Sections 414CA and 414CB of the Companies Act
2006. The table below, 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. In addition to its Annual Reports, Ferrexpo also publishes a standalone report covering its Responsible Business
activities, with the report for 2018 available on the Company’s website and the report for 2019 expected to be released in 2Q 2020.
Reporting requirements
Policies and standards
Additional information
Risks
Environmental
— Tailings Management
Employees
— Ethics and Responsible Business Policy
— Code of Conduct
— Health and Safety Policy
Human Rights
— Human Rights Policy statement
— Data Privacy Policy
— Anti-Slavery and Trafficking Statement
— Information and Cyber Security Policy
Social Matters
— Donations Policy
— Community Policy
Anti-Corruption
and
Anti-Bribery
— Anti-bribery Policy
— Anti-money Laundering
and Counter Terrorist Financing Policy
— Fraud Risk Management Policy
— Whistleblowing
Principal Risks
and impact on
business
activities
Non-financial
KPIs
Tailings dam, pages 46–47
Energy efficiency, pages 36–37
Greenhouse gas emissions, page 44
www.ferrexpo.com/responsibility/environment
Environmental risk
management,
pages 36–45
Health and safety, pages 24-25
Learning and development, pages 24–25, 28–29
Culture, pages 11, 59
Diversity, skills & composition, pages
70, 73, 82
www.ferrexpo.com/responsibility/people
Board Diversity Policy,
page 84
People risk,
page 53
Governance risk,
pages 50, 53
www.ferrexpo.com/responsibility/health-and-
safety
Independent Review Committee,
page 75
Chairman’s Statement, page 8
Community case study, pages 34–35
www.ferrexpo.com/responsibility/community
Community risk,
page 53
Chairman’s Statement, page 8
www.ferrexpo.com/responsibility/governance
Operational risk, pages
50–60
Business Model, pages 18–19
Risk Management, pages 50–51
Viability Statement, page 61
Going Concern Statement, page 105
Key Performance Indicators, pages 32–33
Principal risks, pages
52–60
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
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Annual Report & Accounts 2019
Risk Management
The Group has established risk management and internal
control systems which support the identification,
understanding and mitigation of the risks that it faces.
Approach
The Group’s risk management processes
provide a framework to support the
identification, prioritisation and management
of both emerging and principal risks involved
in the Group’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. This includes
assessing whether any emerging risks may
have become principal risks. Ferrexpo
considers an emerging risk to be newly
developing or changing risks that are
difficult to quantify.
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 emerging and
principal risks faced by the Group are
robustly assessed and that the Group’s
exposure to such risks is aligned with
its strategic objectives.
The Audit Committee assists the Board
in its regular monitoring of risk exposures and
the Group’s risk matrix, and is responsible for
evaluating the adequacy and effectiveness of
the established risk management and internal
control systems. It also oversees how
management monitors compliance with risk
management policies and procedures, with
assistance from the Group internal audit
function which conducts ad hoc reviews of
risk management controls and procedures
as part of its annual programme of work.
For more information relating to the Audit
Committee’s monitoring and assessment
of the effectiveness of the risk management
and internal control systems, see the Audit
Committee Report on page 76.
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 both emerging
and principal risks. 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.
2020 risk assessment
The risks set out in the matrix were
assessed by the Finance and Risk
Management Committee, Executive
Compliance Committee and 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.
At each Board meeting throughout the
year, the Board reviewed the risk register and
assessed the emerging and principal risks
facing the Company over both the short and
long term. The Viability Statement is set out
on page 61.
Risk matrix heat map
The principal 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.
See pages 52–60 for a full
summary of principal risks.
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3.4
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3.2
3.3
3.1
4.1
4.2
4.3
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Likelihood
ALMOST CERTAIN
Key
1.1
1.2
2
3.1
3.2
3.3
3.4
4.1
4.2
4.3
Ukraine country risk
(external risk)
Counterparty risk
(external risk)
Global steel demand
Change in pricing methodology
Lower iron ore prices
(external risk)
Pellet premiums and pellet supply
(external risk)
Seaborne freight rates
(external risk)
Operating risks and hazards including
mining, processing and logistics
(Company-specific risks)
Health and safety risks
(Company-specific risk)
Operating cost increases
(external and Company risk)
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Annual Report & Accounts 2019
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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, which includes principal and emerging risks
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
— Oversees CSR matters
and performance
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Committee
— Monitors centralised financial risk
management structures
Executive Compliance Committee
— Monitors Group compliance
— Monitors Group and local compliance officers
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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
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Annual Report & Accounts 2019
Principal Risks
The principal risks and uncertainties facing Ferrexpo’s
business as assessed by the Board are listed below.
We have indicated how our principal risks would impact our ability to deliver
against our strategy, which is:
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 2020
Decrease in expected risk in 2020
Risk balance for 2020
FOR MORE INFORMATION ON OUR STRATEGY
SEE PAGES 30–31
KKD 1500/180 crusher
Principal risks include, but are not
limited to, those that could result in events
or circumstances that might threaten the
Company’s business model, future
performance, solvency or liquidity
and reputation.
Due to the very nature of risk, any list
cannot be expected to be completely
exhaustive. New risks may emerge and the
severity or probability associated with known
risks may change over time.
The Group has an internal risk register
which considers emerging and principal risks
related to the business in terms of monetary
impact, probability, maximum foreseeable
loss, trend and mitigating actions. The risk
register is updated monthly and discussed
by executive management at the Group’s
Finance and Risk Management Committee,
where the completeness of the risk register
is also considered and any new identifiable
risks added. The risk register is also
discussed and reviewed by the Audit
Committee, at least quarterly per year.
The Board of Ferrexpo has ultimate
responsibility for the identification of emerging
and principal risks and associated strategies
to manage and mitigate such risks, and
confirms that during the year it carried out
a robust assessment of the Company’s
emerging and principal risks. The Acting
Chief Executive Officer, Acting Chief Financial
Officer, Chief Operating Officer and Chief
Marketing Officer manage specific risks on
a day-to-day basis related to their functions.
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
manage and mitigate them where possible.
In 2019, the kinds of risks included on the
register were similar to prior years. There was
an emergence of some country risk inherent
during times of government change. The
Group’s operations were not materially
impacted and Ferrexpo continued to operate
successfully. Risks relating to 2020 are
discussed below.
Ferrexpo plc
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Responsibility
Chief Executive Officer
Ferrexpo Board of Directors
Risk appetite
Medium
Link to strategy
1 2 3 4 5
1. Country
1.1. Ukraine country risk (external risk)
Root cause and impact
Transparency International ranks Ukraine as
126th out of 180 countries in terms of the level
of perceived corruption (with 180th being
regarded as the most corrupt). Ukraine’s ranking
has deteriorated compared to 2018 when it was
ranked 120th. Risks associated with these levels
of ranking included counterparties that are
involved in activities which are not in compliance
with relevant international standards, and a
weak judicial system that can be susceptible
to outside influences and can take an
extended period of time for courts to reach
final judgement.
Ongoing conflict and/or economic and/
or political events in Ukraine can constrain
Ferrexpo’s ability to raise finance. This could
impact the Group’s ability to repay debt
amortisation and could result in lower levels of
capital investment (including sustaining capex
which could result in lower production levels).
General country instability also has negative
social and economic consequences and could
impact Ferrexpo’s ability to operate without
disruption in Ukraine. It can also reduce
availability of high skilled labour as emigration
levels rise.
Kostyantin Zhevago, a controlling
shareholder of Ferrexpo, has a number of other
business interests in Ukraine, unconnected to
the Group. Developments at these other
businesses can inadvertently have a negative
impact on Ferrexpo’s reputation.
In this regard, a Ukrainian court has placed a
restriction over 50.3% of the shares in Ferrexpo
Poltava Mining (“FPM”) held by Ferrexpo AG
Switzerland, the sole shareholder in FPM.
Ferrexpo AG has appealed this court order.
The restriction does not affect ownership of the
shares but prohibits their transfer. The Group
believes this restriction is temporary and is in
connection with ongoing matters in Ukraine
involving Kostyantin Zhevago and one of the
businesses he owned until 2015. Ferrexpo’s
operations remain unaffected and continue
as normal. Furthermore, Ferrexpo AG has
no intention, and never has had any intention,
to transfer its shareholding in FPM. The Board
of Ferrexpo believes that an appeal should be
successful given the advice received that the
order has no proper or reasonable basis under
Ukrainian law.
During the year the controlling shareholder,
Kostyantin Zhevago, stepped down as CEO
in order to resolve certain matters in one of the
businesses he previously owned. While this is
a separate matter from Ferrexpo, there is a risk
that these matters may affect the business due
to his 50.3% shareholding.
FOR MORE INFORMATION SEE NOTES 30 AND 34 TO THE
CONSOLIDATED FINANCIAL STATEMENTS
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 or challenges.
It maintains a premium listing on the
London Stock Exchange and it is currently
in compliance with the UK Corporate
Governance Code and Market Abuse
Regulation.
Ferrexpo has a relationship agreement in
place with Kostyantin Zhevago, a controlling
shareholder, which stipulates that the majority
of Board Directors must be independent. For
all related party transactions strict procedures,
systems and controls are in place.
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 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 looks to maintain a talented
workforce through skills training and by
offering competitive wages, taking into
account movements of the Hryvnia against
the US Dollar and local inflation levels.
Ferrexpo has a high profile given its
international client base, its London listing
and bank lending from Western financial
institutions. Board Directors and relevant
senior management are tasked with
stakeholder engagement and government
relations to communicate the economic
contribution that Ferrexpo makes to Ukraine
and to show that it operates to world
class standards.
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Annual Report & Accounts 2019
Principal Risks
continued
1.2. Counterparty risk (external risk)
Responsibility
Ferrexpo Board of Directors
Risk appetite
Low
Link to strategy
4
In 2019, the Group established an
Independent Review Committee (“IRC”) to
investigate the use of funds donated by
Ferrexpo to a Ukrainian charity called Blooming
Land. The work of the IRC and its advisers
included a forensic review undertaken by BDO
LLP, a review of relevant documentation,
interviews with Ferrexpo employees and
Directors, correspondence with the Blooming
Land Charity and other third parties and advice
from legal counsel in the UK and Ukraine. The
review was unable to conclude that all funds
had been spent in accordance with the initial
intention, which leaves the Group open to
regulatory challenges.
Root cause and impact
Ferrexpo has counterparty exposure
through ongoing trading relationships as well
as with the Ukrainian government, in many
areas including taxation, mining licences to
operate as well as other permits. It also has
counterparty exposure through state
monopolies such as the supply of electricity,
gas and freight transportation. Ukraine has a
weak credit profile as defined by international
credit rating agencies. Financial instability
or lack of transparency at Ferrexpo’s
counterparties could lead to financial loss.
This could impact the Group’s ability to pay
dividends to shareholders, repay debt
amortisation and could result in lower levels of
capital investment, including sustaining capex
which could impact production levels.
FOR MORE INFORMATION SEE PAGE 75
Change
Mitigation
Ferrexpo deals with well-established steel
producers that have sound credit profiles.
Ferrexpo’s counterparties are subject
to regular and thorough review. The results
of these reviews are used to determine
appropriate levels of exposure, and available
alternatives, in order to reduce the potential
risk of financial loss.
The Group develops its supplier base in
order to avoid excessive dependence on any
supplier, actively encouraging a diversity of
supply where reasonable and practical.
Companies that would like to work with
Ferrexpo are required to undergo an
Accreditation Procedure, where their
documents, licences and financial stability are
checked. In 2019, Ferrexpo added automatic
screening and monitoring for sanctions and
other risks for counterparties registered in
Ukraine. Suppliers that pass accreditation can
participate in tenders. Additional checks and
further monitoring are required at this stage,
including checks for sanctions, adverse
media, bribery, use of forced labour, etc.
All supplier contracts must contain the
defined set of compliance clauses (related
to anti-bribery, sanctions, tax compliance,
modern slavery, etc). In 2019, these and other
requirements were consolidated into the
Business Partners’ Code of Conduct, which
is now referenced in all contracts.
The Executive Compliance Committee
(“ECC”), an executive sub-committee of the
Board, met eight times in 2019, and is charged
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).
Donations to the Blooming Land Charity
were suspended in May 2018, and in
August 2019 the Group formally terminated
the relationship.
The Board’s current policy regarding
charitable donations is not to donate on
a nationwide basis. Should the Company
resume any national CSR programme in
Ukraine, the Board will ensure adherence to
the highest standards of diligence, oversight,
governance and reporting.
Ferrexpo plc
Annual Report & Accounts 2019
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Responsibility
n/a – Ferrexpo’s market share of the total iron
ore market is very low, and as such, it cannot
influence supply or pricing.
Risk appetite
Medium
Link to strategy
3 5
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2. Global steel demand
Root cause and impact
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.
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. Higher scrap usage could also
impact overall demand for iron ore and hence
iron ore pricing.
In 2019, steel production increased in China
(+8.3%), India (+1.8%) and the Middle East
(+19.2%) while it decreased in most of the rest
of the world. Europe 28 production was down
4.9%, Japan down 4.8% and South Korea
down 1.4%.
Profit margins at steel mills in Germany fell
from around mid-teens at the start of 2019 to
low single digits by the end of the year. In China,
profit margins fell sharply in 3Q 2019 from
around break-even levels at the start of the year,
and ended the year with a small recovery
to positive single digits. Margins were under
pressure due to increased raw material costs
and weaker end-user demand. To date in 2020,
the outlook for steel mill margins is subject to
the impact of the coronavirus, which cannot be
fully assessed at present. During 1Q 2020, the
COVID-19 virus began causing disruption to
Chinese supply chains which in turn is
impacting the distribution networks of steel
producers and their customers. This is likely
to result in increased short-term volatility for the
iron ore market. Once supply chains return to
normal operation, there could be a prompt
drawdown of steel inventory, which has built
up during this period of disruption, causing
downward pressure on steel prices. Further,
a significant spread of the COVID-19 virus into
Europe could also impact steel demand and
subsequently pellet demand from the largest
pellet-consuming region.
FOR MORE INFORMATION SEE PAGES 14–17 OF THE MARKET REVIEW
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. 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.
3. Risks related to realised pricing
3.1 Change in pricing methodology
Root cause and impact
Ferrexpo’s achieved price can vary
significantly from period to period as it is
dependent on the global price for iron ore fines,
pellet premiums and freight.
The Group’s pricing formula for its long-term
contracts is based on the leading iron ore fines
indices plus a negotiated pellet premium and an
adjustment for the cost of international freight,
typically the C3 index.
In 2019, most pellet exporters to the
seaborne market, including Ferrexpo, agreed
with customers to base pellet pricing off the
65% Fe iron ore fines price. This represented
a major change for the industry and allowed
producers of 65% Fe pellets, such as Ferrexpo,
to directly capture the price premium for higher
grade ore.
Price negotiations for 2020 remain ongoing.
FOR MORE INFORMATION SEE PAGE 39 OF THE FINANCIAL REVIEW
Responsibility
Chief Marketing Officer
Chief Executive Officer
Risk appetite
Medium
Link to strategy
1 3 5
Change
Mitigation
Ferrexpo endeavours to achieve the
prevailing market price at all times; however, it is
a low cost producer and has always been cash
flow positive through the commodities cycle.
For more information on its position on
the cost curve see Market Review on page 17.
The Group also has the logistics capability
to divert sales to other markets to offset
any regional weakness.
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Ferrexpo plc
Annual Report & Accounts 2019
Principal Risks
continued
3.2. 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 investment. Lower levels
of maintenance investment could result in lower
production volumes, higher production costs,
reduced cash generation and a weakened
balance sheet. This could impact the Group’s
ability to pay dividends to shareholders,
repay debt amortisation and invest in future
production growth.
The 62% Fe iron ore fines price averaged
US$93 per tonne in 2019 compared to US$69
per tonne in 2018.
The iron ore forward curve for benchmark
62% Fe iron ore fines is currently in
backwardation with delivery in December 2020
at around US$80 per tonne compared to spot
on 16 March 2020 of approximately US$90 per
tonne. For further information see Iron Ore
Supply (Iron Ore Market Review on page 15).
Lower iron ore fines prices will reduce the
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
Group’s realised price and profitability.
Link to strategy
1 3 5
FOR FURTHER INFORMATION SEE PAGES 14–17 OF THE MARKET REVIEW
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. 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.
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Annual Report & Accounts 2019
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Responsibility
Chief Marketing Officer
Chief Executive Officer
Risk appetite
Medium
Link to strategy
1 3 5
3.3. Pellet premiums and pellet supply (external risk)
Root cause and impact
Pellet premiums
Historically, pellet premiums have been
correlated to steel mill profitability as they are the
most productive source of iron in a blast furnace
and thus trade at a price premium to other types
of iron ores. When steel producer profitability is
under pressure the reduction in usage of higher
cost raw materials could lead to lower demand
for iron ore pellets and/or a fall in pellet premiums.
Lower pellet premiums will reduce Ferrexpo’s
realised price and could impact the Group’s cash
generation ability. This could impact the Group’s
ability to pay dividends to shareholders, repay
debt amortisation and could result in lower levels
of capital investment (including sustaining capex).
Historically, a substantial portion of Ferrexpo’s
profitability has been due to the pellet premium.
The average Atlantic pellet premium from 2011 to
2019 was US$42 per tonne.
Pellet premiums are primarily influenced by
steel mill profitability; however, in the medium to
long term premiums may also be influenced by
increasing requirements to reduce air emissions
in the steel production process or an increase in
supply of lump ores.
High barriers to entry make it unlikely that
there will be significant new pellet supply entering
the market in 2020. Incumbent producers,
however, can switch supply from blast furnace
to direct reduction pellets or from international
export to domestic consumption. The Group
believes that in 2020 pellet seaborne supply will
not increase due to weaker international prices.
Further low pellet premiums could result in some
capacity reduction for producers with high pellet
conversion costs.
A producer in Brazil is likely to return to the
market (following a five-year outage due to a
tailings dam failure) at the end of 2020 which
could reduce pellet premiums; however, the
producer has indicated that it will operate at
around 30–35% of its 25 million tonne capacity
for at least five years, given reduced tailings
storage capacity.
FOR FURTHER INFORMATION ON TAILINGS SEE PAGES 14–17 OF THE
MARKET REVIEW
Change
Mitigation
Ferrexpo sells high quality pellets which
underpins demand for its product throughout
the commodity cycle. Should the pellet
premium decline, Ferrexpo has one of the
lowest pellet conversion costs in the industry,
which should ensure that it is able to remain a
competitive producer.
FOR FURTHER INFORMATION ON
PELLET PREMIUMS AND THE MARKET
ENVIRONMENT SEE PAGES 14–17
3.4. Seaborne freight rates (external risk)
Root cause and impact
Freight rates
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, and reduce
profitability, 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 world’s largest steel producer).
Ferrexpo’s received price is referenced to
transparent freight indices such as the Baltic
Exchange C3 freight price. In 2019, the C3 index
was in line with 2018 at an average of US$18 per
tonne. Freight rates are largely influenced by the
price of oil and demand for seagoing vessels
from bulk commodity producers.
As of 1 January 2020, the International
Maritime Organization enforced 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, due
to the installation cost of scrubbers or the higher
cost of compliant fuel, for iron ore suppliers
across the industry and reduce net prices
and thus impact profitability.
Responsibility
Chief Marketing Officer
Group Freight Manager
Risk appetite
Medium
Link to strategy
2 3 5
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.
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Annual Report & Accounts 2019
Principal Risks
continued
4. Operating risks
4.1. Operating risks and hazards including mining, processing and logistics (Company-specific risks)
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 accidents
and/or fatalities, lower mining volumes,
processing plant breakdowns and pelletiser
line failures.
Production stoppages will reduce output,
increase operating costs, and reduce the quality
of the product. 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 investmentA levels as well as
our ability to repay debt and pay dividends to
shareholders. 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 maintain and renew contracts
in the future.
Leadership development, in-depth technical
know-how and a well-developed succession
planning process is required to maintain detailed
operating expertise and is key to underpinning
the performance of the Group’s operations and
reducing operating risk.
FOR MORE INFORMATION SEE PAGES 42–45 OF THE OPERATIONS
REVIEW AND THE CASE STUDY ON PAGES 46–47.
Responsibility
Chief Operating Officer
Chief Marketing Officer
Chief Executive Officer
Risk appetite
Medium
Link to strategy
2 3 5
Change
Mitigation
In 2019, the Group completed a
programme to refurbish its pellet lines. Since
listing in 2007, Ferrexpo has spent US$959
million on sustaining and modernisation capital
(2019 sustaining capex: US$97 million; 2018
sustaining capex: US$66 million).
Ferrexpo operates one tailings dam
covering an area of 1,500 hectares. The dam
is constructed on flat topography. The dam
is split into three sections with each section
subdivided into smaller sections of 400 metres
by 400 metres. The walls of the dam and of the
sections within the dam are constructed using
engineered fill, including siliceous rock. Due
to this construction methodology, a total failure
or breach of the major walls of the tailings
impoundment is unlikely to occur. In the
unlikely event of failure of the compartment
walls or structure, the impact would be minimal
in terms of tailings release. The dam has been
designed by external consultant Ukrgiproruda,
with biannual inspections by the Ukrainian
mining regulator.
Following the tailings dam breach in Brazil
in January 2019, the Group commissioned
Knight Piésold Consulting to conduct an
independent review of our tailings storage
facility in terms of design, construction and
operational management. The conclusion of
the Knight Piésold report was that our tailings
facility is an appropriate design for the volume
of tailings being deposited, is well managed
and has an appropriate inspection and
monitoring regime. The report raised a number
of key differences between the structure of
Ferrexpo’s tailings dam and the Brumadinho
dam that failed in January 2019, specifically the
topography of the area of construction of
Ferrexpo’s dam is on flat land (rather than
valley fill), with embankments at a shallower
angle and dam walls constructed using a
mixture of materials including coarse
compacted rock (as opposed to uncompacted
material). The audit report made a number of
recommendations for improving the dam’s
operational management controls, which the
Company is now looking to incorporate.
As a result of the continued development
of the mines’ open pit operations, Ferrexpo
has recently implemented improved
geotechnical management processes.
This includes the use of international
geotechnical consultants to regularly review
the geotechnical management programme
as well as monitoring and operational controls
of the pit high walls.
Where possible, Ferrexpo owns its own
logistics infrastructure. As of 31 December
2019, this included 2,850 rail cars, which
reduces reliance on state rail cars for
transportation of pellets to border points, 154
barges to transport pellets into Central Europe,
and a 49.9% 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.
The Group operates a talent management
and leadership programme to ensure
management coverage of business-critical
roles. This involves the annual assessment
of all managers across the Group of
approximately 300 people. The results are
presented to the Operations Management
Committee, the Executive Management
Committee and to the Board.
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Annual Report & Accounts 2019
59
4.2. 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 large mining
machinery, amongst other things. Failure to
provide a safe work environment for the Group’s
workforce and failure to ensure the right safety
culture and subsequent safe behaviours can
impact the Group’s social licence to operate.
Fatalities and lost time injuries negatively impact
the workforce, their families and the
communities in which we operate, and
it can result in production stoppages due
to regulatory interventions.
Responsibility
Chief Operating Officer
Chief Marketing Officer
Chief Executive Officer
The Group was fatality free in 2019 (2018:
Risk appetite
one fatality) and the Group’s lost time injury
frequency rate (“LTIFR”) declined to 0.58x –
a record for the Group and a significant
improvement on the 2018 result when the
Group LTIFR was 1.18x.
Low
Link to strategy
1 2 3 4 5
FOR MORE INFORMATION SEE CASE STUDY ON PAGES 24–25
AND PAGE 42
Change
Mitigation
Analysis conducted on the Group’s
incidents highlighted non-compliant behaviour
and work practices being the primary cause of
accidents with a large proportion of these
events involving the Group’s contractors.
Actions taken during 2019 have been
largely focused on contractors and FPM
employees. Activities include:
— significant incident reporting and
investigation methods;
— significant risk training and awareness;
— leadership development programme to
ensure right safety culture is instilled in
the workplace;
— programme to improve housekeeping of
maintenance and production areas and
workplace conditions;
— increased frequency of external HSE audits
and review of subsequent action plans;
— development of a standardised reporting
procedure and alignment to international
best practice through benchmarking;
— implementation of Visible Leadership
programme;
— safety training 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 good operating discipline
and the strict adherence to safety
procedures and that protection of our
employees is paramount; and
— an increase in speed checks,
implementation of stationary speed
monitoring devices and speed cameras,
as well as enhanced drug and alcohol
testing to provide greater sampling of
the workforce.
A portion of all employees’ total
remuneration, especially the bonus structure,
is linked to team and individual safety
performance.
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Annual Report & Accounts 2019
Principal Risks
continued
4.3. Operating cost increases (external and Company risk)
Root cause and impact
Responsibility
The production of iron ore pellets is a more
As such, the Group’s cost of production
Chief Operating Officer
Risk appetite
Low
Link to strategy
2 5
capital-intensive process than other types of
iron ore production as it requires the enrichment
of relatively low grade iron ore into a high grade
iron ore product. As such, pellet producers
typically have higher operating costs per tonne
of output than producers of iron ore fines
or lump.
Approximately 30% Ferrexpo’s C1 cash cost
of production (US$ per tonne) is commodity
related, including fuel, gas, explosives, tires 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 60% 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.
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.
The Group is also increasing its mining activity
at FPM to sustain existing volumes of higher
grade ore and access new plots with higher
grade ore.
In 2019, the Group’s C1 cash cost of
production increased to US$47.8 per tonne
from US$43.3 per tonne. See pages 56 and 57
for a description of the factors impacting
operating costs.
In 2020, the Group expects royalties (which
are included in the C1 cash cost of production)
to increase by approximately US$1 per tonne
due to new royalty tax legislation expected to be
adopted in March 2020, impacting the Group
from 2Q 2020.
FOR MORE INFORMATION SEE PAGES 39–41 OF THE FINANCIAL REVIEW
Change
Mitigation
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.
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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 52 to 60.
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 dividends, non-essential capital
investment and repairs and maintenance,
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$585
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
Group’s current position and 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 long-term industry
dynamics supporting pellet consumption.
The Strategic Report was approved by
the Board and signed on its behalf by:
Steve Lucas
Chairman
The principal risks include those that
could result in results or circumstances that
might threaten the Group’s business model,
future performance, liquidity, solvency
or reputation.
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 the iron ore fines price, pellet
premiums and cost inflation. Based on
2020 expected production volumes of
approximately 11.5 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$5.0 per tonne.
While a general production cost increase
of 10% would decrease Group underlying
EBITDA by US$4.9 per tonne and a 10%
decrease in production volumes would
decrease underlying EBITDA by US$4.0
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
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Annual Report & Accounts 2019
Corporate Governance Report
Chairman’s Introduction
Steve Lucas, Chairman
793D haul trucks at FYM
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.
During the year, with the assistance of
external advisers, we reviewed and updated
existing arrangements in light of the revision
of the UK Corporate Governance Code in
2018 and also as required by law and best
practice. 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 and to reflect best practice.
The Board’s role includes managing the
risks facing the business. This includes
taking into account the risks associated with
the country of operation, operational and
financial risks including health, safety and
environmental risks, together with market
volatility, financing and refinancing
exposures.
This year saw the Independent Review
on charitable donations relating to Blooming
Land reach a conclusion. (See the
Independent Review Report on page 75).
Prior to this, all charitable payments had
been stopped (from May 2018) and the
Board terminated Ferrexpo’s relationship
with this charity on 30 August 2019. Since
then, the Board has taken further steps to
improve the control and oversight of CSR
payments as detailed below.
Controls over community support
donations
In 2019, Ferrexpo continued to support
communities on a local and national basis
(see Responsible Business section of the
Strategic Report on pages 48 to 49).
Community support activities took 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.
The Audit Committee reviewed reporting
from the external auditors in relation to their
procedures on CSR as part of their audit of
the Group.
Statement of Compliance
(In Accordance with Listing Rule
9.8.6R)
During the year to 31 December 2019,
the Company applied all Principles
and Provisions (marked A–R and 1–41
respectively), and complied with the
2018 UK Corporate Governance Code
(the “Governance Code”, which is
available at www.frc.org.uk).
Developments in 2019 concerning
Blooming Land
The Board took a number of steps in
2019 relating to Blooming Land.
Specifically:
–
It continued its policy of suspending any
further payments to the Charity in 2019
pending receipt of satisfactory
documentation and responses. Those
requirements were not met so no
payments were made to the Charity.
It conducted an Independent Review into
the payments to the Charity. The review
commenced in February 2019 and
concluded in August 2019 (see page 75
for more).
–
– As of 30 August 2019, it terminated
Ferrexpo’s relationship with the Charity.
During the year, the controls that existed
for all charitable donations were also
reviewed and improved. This included
reviewing the risk-based due diligence
procedures that had been in place since
2014. The current policies and procedures
in this field include:
– Third Party Due Diligence Guidance.
– A Know Your Client process.
– Procurement procedures throughout our
operations (the current versions were
adopted in 2016 and have been reviewed
periodically thereafter).
– A Donations Policy for charitable
activities has been in place since May
2017. This was reviewed in March 2018.
Compliance is being further improved by
introducing automated screening and
monitoring. In September 2019, the
Executive Compliance Committee reviewed
an enhanced risk-based approach which
will be further implemented into the
processes at Group level and at Operations.
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Annual Report & Accounts 2019
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New medium fine crushing
facility at FPM
It was also agreed that no new national
charity programme was to commence and a
number of recommendations were made
which included that should a new national
programme of charitable donations in future
be proposed, full diligence and enhanced
controls would be implemented. In such a
scenario, the Company would review its
Donations Policy and request the
compliance and legal teams to draft
guidelines on the process and procedures
that would be adopted to ensure proper
budgets, transparency and accountability
over donations made.
The Group’s local charitable donations in
2019 were not impacted by the Independent
Review into Blooming Land. For further
information see Responsible Business on
page 48.
The Company also considered its due
diligence and other compliance procedures
in relation to relationships with other
counterparties, unrelated to charitable
donations.
As part of the above, the Company
obtains external corporate governance and
legal advice as appropriate.
For further information
See Chairman’s Statement (page 8),
Principal Risks (page 54), Responsible
Business (page 48), Corporate Governance
Report (page 62), Independent Review
Committee Report (page 75), and Note 7
(page 132), Note 30 (page 167) and Note 34
(page 171) to the Consolidated Financial
Statements.
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Post AGM engagement
During the year we consulted with
shareholders on a number of important
issues, one of them following a significant
vote against Resolution 1 at the 2019 AGM
(to receive the 2018 Report and Accounts:
67% of votes for and 33% of votes against).
The Company considered the votes against
arose as a result of concerns over corporate
governance. Actions taken in response
included:
– the appointment of Graeme Dacomb and
Fiona MacAulay as Independent
Non-executive Directors and the Chairs
of the Audit and Remuneration
Committees respectively;
– the appointment of Vitalii Lisovenko as
Senior Independent Director;
– the appointment of MHA MacIntyre
Hudson as auditor; and
– the completion of the Independent
Review.
Since August, the Company has
continued its search for diverse candidates
to strengthen the profile of the Board. This
work remains ongoing (please see
Nominations Committee Report on
page 82).
Steve Lucas
Chairman
17 March 2020
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Annual Report & Accounts 2019
Board of Directors
Steve Lucas
Non-executive Chairman
Date of appointment
19 May 2016
Vitalii Lisovenko
Senior Independent
Non-executive Director
Date of appointment
28 November 2016
Chris Mawe FCA
Acting Chief Executive Officer
Date of appointments
7 January 2008 as Chief
Financial Officer
25 October 2019 as Acting
Chief Executive Officer
Raffaele (Lucio) Genovese
Non-independent
Non-executive Director
Date of appointment
12 February 2019
Fiona MacAulay
Independent
Graeme Dacomb
Independent
Non-executive Director
Non-executive Director
Date of appointment
12 August 2019
Date of appointment
10 June 2019
Other appointments
Non-executive director,
Tullow Oil plc since 2012;
Non-executive chairman,
Averda Holdings International
Limited since March 2020.
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.
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 alternate director,
Black Sea Trade and Development
Bank (Greece) since 2014.
Background and experience
Vitalii Lisovenko has spent most
of the past 20 years involved in
government finance, developing
particular expertise in debt
negotiation. In 2005, he served
as the head of the Trade and
Economic Mission at the Ukrainian
Embassy in London. He has also
worked in the banking and private
sector and he was an Associate
Professor of Finance at the Kyiv
State Economic University.
– Non-executive director, Acacia
– Executive director, Ukreximbank
Mining Plc, 2013–2019
(Ukraine), 2006–2010
– Non-executive director, Essar
– Executive director, Alfa Bank
Energy plc, 2012–2014
– Finance director, National
Grid plc, 2002–2010
– BG Group, 1994–2000,
latterly as group treasurer
– Shell International Petroleum
Co, 1983–1994, in various
senior financial roles
– Chartered Accountant.
Ukraine, 2010–2014
– Non-executive director,
Amsterdam Trade
Bank, 2013–2014
– PhD in Economics, Kyiv
National Economic University.
Committee membership
Steve is the Chairman of the
Nominations Committee and a
member of the Committee of
Independent Directors, and was
a member of the Independent
Review Committee (until 30 August
2019) and the CSR Committee
(until 5 November 2019).
Committee membership
Vitalii is the Chairman of the
Committee of Independent
Directors and a member of the Audit
and Remuneration Committees. He
chaired the Independent Review
Committee until its conclusion
on 30 August 2019 and was
appointed Senior Independent
Director on 19 August 2019.
Other appointments
None.
Background and experience
Chris Mawe has substantial
experience gained in senior
financial roles in the mining
industry in the UK and continental
Europe. He also has operational
and managerial experience in
the engineering industry.
Other appointments
Chief executive officer of Nage
Capital Management AG, a Swiss-
based investment and advisory firm,
since 2004; chairman of Firestone
Diamonds Plc since 2012; and
non-executive director of Mantos
Copper SA since September
2015, Ferrexpo AG since 2011 and
Nevada Copper Inc since 2016.
Background and experience
Lucio Genovese has over 30
years of experience in both the
merchant and financial sector of
the metals and mining Industry.
He has previously served as an
investment officer and a member of
the board of Taj Investment Limited.
Prior to that, he worked at Glencore
International AG where he held
several senior positions including
the CEO of the CIS region.
– Finance director, UK
Coal plc, 2004–2007
– Finance director, Carclo
plc, 1999–2004
– Independent Non-executive
Director, Ferrexpo plc, 2007–2014
– Investment officer, InCentive
Asset Management, 2000–2003
– Finance director of various large
– Senior executive officer,
subsidiaries of IMI plc, 1992–1999
– Chartered Accountant,
Coopers & Lybrand, 1991
– First-class honours degree
in Engineering, 1987.
Copper Division, Glencore
International, 1996–1999
– Chief executive officer,
CIS Operations, Glencore
International, 1992–1995
– Chartered Accountant
– Bachelor of Commerce and
Bachelor of Accounting from
the University of Witwatersrand,
Johannesburg, South Africa.
Committee membership
None.
Committee membership
None.
Kostyantin Zhevago
Non-independent
Non-executive Director
Date of appointments
14 June 2007 as Non-
executive Director
1 November 2008–25 October 2019
served as Chief Executive Officer
25 October 2019 as Non-
independent Non-executive Director
He is also a controlling
shareholder of Ferrexpo.
Other appointments
Other appointments
Other appointments
Non-executive chair of Independent
Non-executive director of Anglo
None.
Pacific Plc since 2019.
Oil & Gas plc since 2018; non-
executive director of Coro Energy
plc since 2017; non-executive
director of EPI Group Ltd since
2019; Exploration Advisory Board
of Cairn India Ltd since 2019.
Background and experience
Fiona MacAulay is a Chartered
Geologist with experience of
Background and experience
Graeme Dacomb is a Chartered
Accountant and a former audit
Background and experience
Kostyantin Zhevago has substantial
management and investment
worldwide oil and gas operations
partner of Ernst & Young LLP, where
experience gained over a 25-year
acquired over a 30-year career with
he worked as a lead audit
business career in Ukraine.
Mobil, British Gas, Amerada Hess
partner of the extractive sector.
Rockhopper and Echo Energy.
From 2011–2018 he was
a member of the Financial
Reporting Review Panel.
– Chief executive officer, Echo
– Chartered Accountant
– Non-executive director, New
Energy plc 2017–2018 and a non-
– Honours degree in Commerce
World Resources plc, 2008–2014
executive director 2018–2019
from University of Cape Town.
– Member of Parliament,
– Chief operating officer,
Rockhopper Exploration
plc, 2013–2017
– Chartered Geologist.
Ukraine, 1998–2019
– Chairman of the management
board and deputy chairman of
the supervisory board, Bank
F&C, Ukraine, 1996–2000
– Degree in International
Economics from the Kyiv National
Economic University, Kyiv, 1996.
Committee membership
Fiona is the Chair of the
Remuneration Committee and
a member of the Audit, CID
and Nominations Committees.
She was a member of the
Committee membership
Graeme is the Chairman of the
Audit Committee and a member
of the Remuneration Committee
and the Committee of Independent
Directors. He was also a member
Independent Review Committee
of the Independent Review
(12 to 30 August 2019). Fiona was
Committee (until 30 August 2019).
Committee membership
Kostyantin was a member
of the CSR Committee until
13 February 2020.
appointed the Chair of Health
Safety Environment and Community
Committee (formerly the CSR
Committee) on 13 February 2020.
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Kostyantin Zhevago
Non-independent
Non-executive Director
Date of appointments
14 June 2007 as Non-
executive Director
1 November 2008–25 October 2019
served as Chief Executive Officer
25 October 2019 as Non-
independent Non-executive Director
He is also a controlling
shareholder of Ferrexpo.
Other appointments
None.
Steve Lucas
Non-executive Chairman
Date of appointment
19 May 2016
Vitalii Lisovenko
Senior Independent
Non-executive Director
Date of appointment
28 November 2016
Chris Mawe FCA
Raffaele (Lucio) Genovese
Acting Chief Executive Officer
Non-independent
Non-executive Director
Date of appointment
12 February 2019
Fiona MacAulay
Independent
Non-executive Director
Date of appointment
12 August 2019
Graeme Dacomb
Independent
Non-executive Director
Date of appointment
10 June 2019
Date of appointments
7 January 2008 as Chief
Financial Officer
25 October 2019 as Acting
Chief Executive Officer
Other appointments
Other appointments
None.
Other appointments
Non-executive director,
Tullow Oil plc since 2012;
Non-executive chairman,
Averda Holdings International
Limited since March 2020.
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.
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 alternate director,
Black Sea Trade and Development
Bank (Greece) since 2014.
Background and experience
Vitalii Lisovenko has spent most
of the past 20 years involved in
government finance, developing
particular expertise in debt
negotiation. In 2005, he served
as the head of the Trade and
Embassy in London. He has also
worked in the banking and private
sector and he was an Associate
Professor of Finance at the Kyiv
State Economic University.
Background and experience
Chris Mawe has substantial
experience gained in senior
financial roles in the mining
industry in the UK and continental
Europe. He also has operational
and managerial experience in
Economic Mission at the Ukrainian
the engineering industry.
Chief executive officer of Nage
Capital Management AG, a Swiss-
based investment and advisory firm,
since 2004; chairman of Firestone
Diamonds Plc since 2012; and
non-executive director of Mantos
Copper SA since September
2015, Ferrexpo AG since 2011 and
Nevada Copper Inc since 2016.
Background and experience
Lucio Genovese has over 30
years of experience in both the
merchant and financial sector of
the metals and mining Industry.
He has previously served as an
investment officer and a member of
the board of Taj Investment Limited.
Prior to that, he worked at Glencore
International AG where he held
several senior positions including
the CEO of the CIS region.
– Independent Non-executive
Director, Ferrexpo plc, 2007–2014
– Investment officer, InCentive
Asset Management, 2000–2003
International, 1996–1999
– Chief executive officer,
CIS Operations, Glencore
International, 1992–1995
– Chartered Accountant
– Bachelor of Commerce and
Bachelor of Accounting from
the University of Witwatersrand,
Johannesburg, South Africa.
– Non-executive director, Acacia
– Executive director, Ukreximbank
– Finance director, UK
Mining Plc, 2013–2019
(Ukraine), 2006–2010
Coal plc, 2004–2007
– Non-executive director, Essar
– Executive director, Alfa Bank
– Finance director, Carclo
Energy plc, 2012–2014
– Finance director, National
Grid plc, 2002–2010
– BG Group, 1994–2000,
latterly as group treasurer
– Shell International Petroleum
Co, 1983–1994, in various
senior financial roles
– Chartered Accountant.
Ukraine, 2010–2014
– Non-executive director,
Amsterdam Trade
Bank, 2013–2014
– PhD in Economics, Kyiv
National Economic University.
– First-class honours degree
– Chartered Accountant,
Coopers & Lybrand, 1991
in Engineering, 1987.
plc, 1999–2004
– Finance director of various large
– Senior executive officer,
subsidiaries of IMI plc, 1992–1999
Copper Division, Glencore
– Chief executive officer, Echo
Energy plc 2017–2018 and a non-
executive director 2018–2019
– Chartered Accountant
– Honours degree in Commerce
from University of Cape Town.
– Chief operating officer,
Rockhopper Exploration
plc, 2013–2017
– Chartered Geologist.
– Non-executive director, New
World Resources plc, 2008–2014
– Member of Parliament,
Ukraine, 1998–2019
– Chairman of the management
board and deputy chairman of
the supervisory board, Bank
F&C, Ukraine, 1996–2000
– Degree in International
Economics from the Kyiv National
Economic University, Kyiv, 1996.
Committee membership
Steve is the Chairman of the
Nominations Committee and a
member of the Committee of
Committee membership
Vitalii is the Chairman of the
Committee of Independent
Directors and a member of the Audit
Independent Directors, and was
and Remuneration Committees. He
a member of the Independent
chaired the Independent Review
Review Committee (until 30 August
Committee until its conclusion
2019) and the CSR Committee
(until 5 November 2019).
on 30 August 2019 and was
appointed Senior Independent
Director on 19 August 2019.
Committee membership
Committee membership
None.
None.
Committee membership
Fiona is the Chair of the
Remuneration Committee and
a member of the Audit, CID
and Nominations Committees.
She was a member of the
Independent Review Committee
(12 to 30 August 2019). Fiona was
appointed the Chair of Health
Safety Environment and Community
Committee (formerly the CSR
Committee) on 13 February 2020.
Committee membership
Graeme is the Chairman of the
Audit Committee and a member
of the Remuneration Committee
and the Committee of Independent
Directors. He was also a member
of the Independent Review
Committee (until 30 August 2019).
Committee membership
Kostyantin was a member
of the CSR Committee until
13 February 2020.
Other appointments
Non-executive director of Anglo
Pacific Plc since 2019.
Other appointments
Non-executive chair of Independent
Oil & Gas plc since 2018; non-
executive director of Coro Energy
plc since 2017; non-executive
director of EPI Group Ltd since
2019; Exploration Advisory Board
of Cairn India Ltd since 2019.
Background and experience
Fiona MacAulay is a Chartered
Geologist with experience of
worldwide oil and gas operations
acquired over a 30-year career with
Mobil, British Gas, Amerada Hess
Rockhopper and Echo Energy.
Background and experience
Graeme Dacomb is a Chartered
Accountant and a former audit
partner of Ernst & Young LLP, where
he worked as a lead audit
partner of the extractive sector.
From 2011–2018 he was
a member of the Financial
Reporting Review Panel.
Background and experience
Kostyantin Zhevago has substantial
management and investment
experience gained over a 25-year
business career in Ukraine.
66
Ferrexpo plc
Annual Report & Accounts 2019
Executive Committee
Nikolay Goroshko
General Director, FYM
Nikolay became General
Director of FYM in November
2012, and retired on 31
January 2020.
Skills and experience
He is a graduate economist
of the Kyiv National Economic
University, specialising in
Industrial Planning.
Chris Mawe FCA
Acting Chief Executive Officer
For more information see page
64 for details.
Jason Keys
Chief Marketing Officer
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.
Skills and experience
He is a Certified Professional
Accountant and has a Bachelor
of Commerce degree from the
University of Western Australia.
Jim North
Chief Operating Officer
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.
Skills and experience
He has an Advanced Diploma
in Metallurgy and a degree in
Business Administration.
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Nikolay Kladiev
Chief Financial Officer, FPM
Nikolay spent several years as
an audit manager with Ernst &
Young and as CFO of a large
Russian factory.
Skills and experience
He is a Chartered Accountant
(UK) and has a Masters in
International Economic
Relations from the Kyiv National
Economic University.
Greg Nortje
Chief Human
Resources Officer
Greg joined Ferrexpo in January
2014. He previously held a
variety of international human
resource leadership positions
with Anglo American and
BHP Billiton.
Skills and experience
He has Advanced Management
qualifications from the University
of Stellenbosch Business
School and the Gordon Institute
of Business Science, a Bachelor
of Arts degree and a
postgraduate Diploma in
Education from the University
of the Witwatersrand.
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.
Skills and experience
He is a graduate of Kryvyi Rih
Mining and Ore Institute, and
of the Kyiv National Economic
University, specialising
in Finance.
Roman Palyvoda
Acting Chief Financial Officer
Roman was appointed as
Acting Chief Financial Officer on
14 November 2019. He joined
Ferrexpo in September 2008
as the Group Management
Accountant. Previously he
worked at Renault Group,
most recently as the Financial
Controller for Russia, Ukraine
and the CIS.
Skills and experience
He studied International
Relations in Finance at the
National University of Lviv,
graduating with honours, and
Business Management at the
Institut d’etudes politiques
de Paris.
As Roman’s appointment as
Acting Chief Financial Officer is
temporary he has not joined the
Board of Directors.
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Ferrexpo plc
Annual Report & Accounts 2019
Corporate Governance Compliance
The Company is subject to the UK Corporate Governance Code. A revised version of the Corporate Governance Code was published in
2018, and came into effect for financial years beginning on 1 January 2019 and accordingly, the Company has reported against the
requirements of the revised Corporate Governance Code in this Annual Report. A copy of the Code can be found at frc.org.uk.
Statement of compliance (in accordance with Listing Rule 9.8.6R(5))
The Board considers the Company has complied throughout the year ended 31 December 2019 with all the provisions of the Corporate
Governance Code except as set out below:
– Provision 11: From 29 April 2019 – 12 August 2019, less than half of the Board (excluding the Chairman) was comprised of Independent
Non-executive directors.
– Provision 12: From 29 January 2019 – 19 August 2019, the Company did not have a Senior Independent Director.
– Provision 17: From 29 January 2019 – 15 January 2020, the Nominations Committee was not comprised of a majority of Independent
Non-executive directors.
– Provision 24: From 29 April 2019 – 12 August 2019, the Audit Committee did not meet the minimum membership requirement of three
Independent Non-Executive directors, and from 29 April 2019 – 10 June 2019 it did not have a member with relevant financial experience
(although both Messrs Lucas and Mawe were in attendance).
– Provision 32: From 29 April 2019 – 12 August 2019, the Remuneration Committee did not meet the minimum membership requirement of
three Independent Non-executive Directors.
With the exception of Provision 17, all of these areas of non-compliance were resolved during the reporting year. For more information on
the Independent Non-executive Director appointment process, selection of the Senior Independent Director and Board succession planning
in 2019, see page 83.
The Board confirms that at the date of this report, unless otherwise explained above, the Company fully complied with all relevant
provisions of the Corporate Governance Code. Further information on the Company’s compliance with the Principles of the Corporate
Governance Code can be found on the following pages:
Board leadership and
Company purpose
Division of responsibilities
Composition, succession,
evaluation
Audit, risk, internal control
Remuneration
Principle A: Section 172 Statement page 26, Chairman’s Statement page 8, Skills Matrix page 71
Principle B: Chairman’s Statement, Purpose, Values and Strategy page 11
Principle C: Audit Committee Report from page 76
Principle D: Our Stakeholders page 20
Principle E: Employee Engagement page 28, Non-Financial Information Statement page 49,
Whistleblowing policy page 81
Principle F: Role Descriptions page 72, Board Evaluation page 74
Principle G: Role Descriptions page 72
Principle H: Time Commitment page 71, Corporate Governance At a Glance page 69
Principle I: The Board page 70, Skills Matrix page 71
Principle J: Appointment Process and Succession Planning page 83, Board Diversity Policy page 83
Principle K: Skills Matrix page 71, Appointment Process and Succession Planning page 83, Board
Composition page 70
Principle L: Board Evaluation page 74
Principle M: External Audit page 81, Internal Audit page 81
Principle N: Audit Committee Report page 76
Principle O: Internal Control and Risk Management page 80, Risk Management page 50, Principal
Risks page 52
Principle P: Remuneration Policy, page 87
Principle Q: Procedure for developing policy on remuneration, page 85
Principle R: Directors should exercise independent judgement when authorising remuneration
outcomes, page 94
Disclosure Guidance and Transparency Rules
By virtue of the information included in this Governance Report and the Directors’ Report, we comply with the corporate governance
statement requirements of the FCA’s Disclosure Guidance and Transparency Rules.
Ferrexpo plc
Annual Report & Accounts 2019
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Corporate Governance Report
At a glance
Shareholders
The Board
Audit
Committee
Remuneration
Committee
Nominations
Committee
Responsibilities
include:
– Monitoring integrity
of financial
statements.
– Reviewing internal
control and risk
management
systems.
– Relationship with
external auditor.
FOR MORE
INFORMATION:
AUDIT
COMMITTEE
REPORT
SEE PAGE 76
Responsibilities
include:
– Reviewing and
approving all
aspects of
remuneration for
Executive Directors
and members of
the Executive
Committee.
– Aligning
remuneration policy
and practices to
support strategy.
– Engaging with
shareholders to
receive feedback
on remuneration
policy and
outcomes.
FOR MORE
INFORMATION:
DIRECTORS’
REMUNERATION
REPORT
SEE PAGE 85
Responsibilities
include:
– Considering and
approving the
knowledge, skills
and experience mix
required for the
Board to best
deliver the
Company’s
objectives.
– Identifying and
nominating (for
Board approval)
candidates to fill
Board vacancies,
having due regard
to the need to
satisfy the Board’s
skills requirements.
FOR MORE
INFORMATION:
NOMINATIONS
COMMITTEE
REPORT
SEE PAGE 82
Committee of
Independent
Directors
(“CID”)
Responsibilities
include:
– Ensuring
compliance with
related party
transaction rules
and the
Relationship
Agreement.
– Authorising (if
appropriate) related
party transactions
on behalf of the
Board.
– Conflicts of interest
procedure under
the 2006
Companies Act.
FOR MORE
INFORMATION:
SEE PAGE 72
Health, Safety,
Environment and
Community (“HSEC”)
Committee (formerly
CSR Committee)
Responsibilities
include:
– Formulating and
monitoring the
implementation of
the Group’s policy
on CSR issues as
they affect
operations.
Chief Executive
Officer and Executive
Committee1
Responsibilities
include:
– 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:
RESPONSIBLE
BUSINESS
SECTION
SEE PAGE 48
FOR MORE
INFORMATION:
SEE PAGES
66–67
1. The Executive Compliance Committee, the Finance and Risk Management Committee, and the Executive Related Party Matters Committee all report to the Executive Committee.
Controlling shareholder – Relationship Agreement
The Company’s majority shareholder is Fevamotinico S.a.r.l., which owns 50.3% of the issued share capital of Ferrexpo plc. Fevamotinico
S.a.r.l. is wholly-owned by The Minco Trust. The Minco Trust is a discretionary trust that has three beneficiaries, consisting of Kostyantin
Zhevago and two other members of his family. Mr Zhevago is therefore considered a controlling shareholder of the Company. In accordance
with the UK Listing Rules, Mr Zhevago, The Minco Trust and Fevamotinico S.a.r.l. have entered into a Relationship Agreement with the
Company (the “Relationship Agreement”) to ensure that the Group is capable of carrying on its business independently, that transactions and
arrangements between the Group, Fevamotinico S.a.r.l., The Minco Trust and Mr Zhevago (and each of their associates) are at arm’s length
and on normal commercial terms, and that at all times a majority of the Directors of the Company shall be independent of Fevamotinico
S.a.r.l., The Minco Trust and Mr Zhevago. Under the Relationship Agreement, Mr Zhevago is entitled to appoint himself as a Director or
another person as his representative Director, in each case in a non-executive capacity. The Relationship Agreement terminates if, inter alia,
the shareholding of Mr Zhevago and his associates in the Company falls below 24.9%.
Statement of Compliance with UK Listing Rules, Rule 9.8.4 (14)
– Ferrexpo has complied with the independence provisions contained in UK Listing Rule 9.2.2ADR(1) during 2019.
– So far as Ferrexpo is aware, each of Mr Zhevago and Fevamotinico S.a.r.l. and their associates have also complied with the independence
provisions contained in UK Listing Rule 9.2.2ADR(1) during 2019.
– So far as Ferrexpo is aware, the procurement obligation set out in LR 9.2.2B(2)(a) (which requires Mr Zhevago and Fevamotinico S.a.r.l. to
procure that The Minco Trust, the non-signing controlling shareholders (being the beneficiaries of The Minco Trust other than Mr Zhevago)
and their associates comply with the independence provisions contained in UK Listing Rule 9.2.2ADR(1)) has also been complied with
during 2019.
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Annual Report & Accounts 2019
Corporate Governance Report
continued
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;
– approving 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 CID, monitoring and authorising related party transactions.
Certain aspects of the Board’s responsibilities have been delegated to the Committees shown in the chart below to ensure compliance
with the Companies Act 2006, FCA Listing Rules and Disclosure Guidance and Transparency Rules and the Governance Code. The terms of
reference for each of the Audit Committee, Nominations Committee, Remuneration Committee and HSEC Committee (formerly called the
CSR Committee) are available on the Company’s website at 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.
Board composition and independence
As of 31 December 2019, the Board (excluding the Chairman) comprised one Executive Director, two Non-independent Non-executive
Directors, and three Independent Non-executive Directors who are considered by the Board to be independent in accordance with the
Corporate Governance Code. This structure ensures that the Executive Director is 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 2019 is presented in the table below:
Board member
Role
Audit
Remuneration
Nominations
S Lucas
C Mawe
Non-executive Chairman
Acting Chief Executive Officer
K Zhevago
Non-independent Non-executive Director
R L Genovese
Non-independent Non-executive Director
V Lisovenko
G Dacomb
F MacAulay
Senior Independent Non-executive Director
Independent Non-executive Director
Independent Non-executive Director
••
•
•
••
•
•
•
••
CSR1
•
•
CID
•
••
•
•
1. The CSR Committee also included some members of senior management; see the Strategic Report on page 48.
• 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 64 and 65.
Board balance
Gender diversity
Tenure
Nationality
1
1
2
3
Non-independents
Independents
Chairman
Executive
1
6
2
1
4
2
1
4
Male
Female
l 1–5 years
l 6–9 years
l >9 years
l Ukraine
l UK
l Swiss
Ferrexpo plc
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experience
Financial risk
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Board
governance
Leadership
and strategy
Ukrainian
experience
UK
market
Government
relations
Investor
relations
Sustainability
Executive
compensation
NP1
NP1
Skills matrix
S Lucas
C Mawe
K Zhevago
V Lisovenko
R L Genovese
G Dacomb
F MacAulay
1. Not previously.
Time commitment
It is expected that a Non-executive Director of the Company will normally spend at least two days a month, on average, on Ferrexpo’s
affairs. The expected time commitment for the Senior Independent Director, the Committee Chairmen and in particular the Chairman of the
Board is considerably more than that.
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 2019.
All of the Non-executive Directors and Non-independent Non-executive Directors have been able to make themselves available for the
majority of the ad hoc Board and Committee meetings and update calls held during the year, notwithstanding their external commitments.
The attendance of the Directors at Board and Committee meetings during 2019 is shown in the table below.
Board and Committee meeting attendance in 2019
Attended/Eligible to attend
Director
Board
Audit
Remuneration
Nominations
CID
CSR
Scheduled
Ad hoc
Scheduled
Ad hoc
Scheduled
Scheduled
Scheduled
Ad hoc
Scheduled
S Lucas
K Zhevago
C Mawe
S Lockett (to January 2019)
M Reilly (to April 2019)
B Nacken (to April 2019)
V Lisovenko
R L Genovese
G Dacomb (from June 2019)
F MacAulay (from August 2019)
5/5
5/5
5/5
2/2
2/2
5/5
5/5
2/2
1/1
20/21
20/21
20/21
6/11
7/11
21/21
19/21
8/9
6/7
3/3
5/5
2/2
2/2
2/2
4/4
2/2
1/1
1/1
0/1
3/3
2/2
1/1
2/2
2/2
4/4
1/1
1/1
3/3
2/2
2/2
5/5
2/2
1/1
2/2
2/2
2/2
3/4
4/4
1/2
During the year, there were a significant number of ad hoc Board meetings which dealt with Blooming Land, the resignation of auditors and
Board appointments.
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Ferrexpo plc
Annual Report & Accounts 2019
Corporate Governance Report
continued
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 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, the role of the Remuneration Committee in the Remuneration Report on page 87 and the role of the Independent Review
Committee in the IRC Report on page 75.
Role
Description
Chairman
CEO
Senior
Independent
Director
Non-executive
Directors
Company
Secretary
Executive
Committee
Committee of
Independent
Directors (“CID”)
Mr Zhevago
and his role
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.
At least once annually the Chairman holds meetings with the Non-executive Directors without the Executive Director
present. Mr Lucas’ other current responsibilities are set out in the biographical notes on page 64. 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, implement Group strategy through executive
committees, chair the Executive Committee, and oversee and implement Board-approved actions. Mr Mawe as
Acting CEO has no other directorships of quoted companies.
Simon Lockett was the Senior Independent Director (“SID”) until January 2019. Vitalii Lisovenko was appointed as
the Senior Independent Director on 19 August 2019. 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 chairs the Committee of Independent Directors. At least once a year, the
Senior Independent Director meets the Non-executive Directors, without the Chairman present, to evaluate the
Chairman’s performance. The Senior Independent Director is also available to discuss with shareholders any issues
that the Chairman has 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 85); and monitor executive succession planning (for Board succession
planning, see the Nominations Committee Report on page 82. From time to time, where delegated by the Board,
individual Non-executive Directors may take on additional functions in areas in which they have particular knowledge
or expertise.
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
Non-executive Directors. The Committee considers and, if appropriate, authorises on behalf of the Board, related
party transactions and otherwise ensures compliance with the related party transaction rules and 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 Executive
Related Party Matters Committee (“ERPMC”) 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.
On 28 October 2019, the Company announced that Mr Zhevago had informed the Board of his decision to step aside,
temporarily, from his position of Chief Executive Officer of the Group to focus on resolving certain matters in Ukraine
relating to one of the businesses he owned until 2015. Mr Mawe was appointed as Acting Chief Executive Officer to the
Group, and took over the executive responsibilities of Mr Zhevago. Mr Zhevago remains on the Board as a Non-
independent, Non-executive Director. As part of the transition from Chief Executive Officer to Non-executive Director,
Mr Zhevago remains available to Mr Mawe (and other members of the management team) to provide advice on areas
within his knowledge and expertise. This is in addition to the general role of Mr Zhevago as a Non-executive Director.
Further, it was agreed that Mr Zhevago could undertake any non-executive duties which were specifically delegated
to him by the Board or the Acting Chief Executive Officer. These included Mr Zhevago participating in internal Ferrexpo
meetings and discussions in relation to growth projects for the Group; interacting with the Chief Marketing Officer in
relation to sales and marketing strategy (given Mr Zhevago’s knowledge and relationships with existing customers of the
Group); and attending Executive Committee meetings in an advisory capacity, as appropriate. Mr Zhevago does not have
any authority to bind the Group (for example, to enter into contracts or other legally binding documents or commitments
on behalf of the Group) without the express permission of the Board or the Acting Chief Executive Officer.
Ferrexpo plc
Annual Report & Accounts 2019
73
Board leadership
Board activity in 2019
Five scheduled Board meetings were held in 2019, all in Switzerland (supplemented by other ad hoc meetings, telephone conferences, site
visits and written resolutions as required from time to time). Regular matters discussed at these meetings included:
– Non-executive Director recruitment and appointments;
–
interactions with auditors;
– new auditor appointment;
– 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;
– updates in relation to the work of the Independent Review Committee as part of the Independent Review into charitable donations made to
Blooming Land;
– related party matters (including Directors’ interests/conflicts);
–
investor relations report (including shareholder feedback);
– strategy, business plan and budget;
–
formal risk review;
– compliance matters;
– CSR matters, including health and safety, and community spending; and
– Board refreshment, succession planning, Director independence and Committee composition.
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Matters reviewed as required included:
– review of half year or annual results, going concern and viability, dividend policy and recommendations, investor presentation;
– evaluation of the performance of the Board, Chairman and each Director;
– review of the AGM statement, and proxy agency comments and recommendations;
– annual review of bank relationships with the Company within and outside Ukraine;
– approval of Ethnic, Diversity and Inclusion Policy of the Company; and
– annual review of treasury policy.
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In 2019, the Board also held sessions at which the relevant executive heads of department led detailed presentations on operations,
finance, HR and management succession planning, sales and marketing, and communications. This included a presentation by the Chief
Human Resources Officer to members of the Remuneration Committee to consider and approve the remuneration policy for 2020.
The Board visited the Group’s operations in Horishni Plavni (formerly known as Komsomolsk), Ukraine, between 2 and 4 October 2019.
During that visit, the Board inspected the operations, received presentations from executive management in respect of operations, safety and
strategy, and held an informal meeting of Directors and management.
The Board meets for dinner on the evening before each scheduled Board meeting. This provides an opportunity for the Directors to
discuss key matters concerning the Company in a more informal setting, and assists in promoting an open dialogue and collegiate
relationship between members of the Board.
The Board is supported by the Executive Committee, which meets approximately monthly. All information submitted to the Board by
management is reviewed and approved by the Executive Committee prior to submission.
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Ferrexpo plc
Annual Report & Accounts 2019
Corporate Governance Report
continued
Board evaluation
Board training and
development
Performance evaluation
The annual performance evaluation of
the Board and its Committees was carried
out internally in 2019 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
Chairman with assistance from
Mr Genovese and the Company Secretary.
The Chairman of the Board then discussed
the feedback from the questionnaires, and
the comments made, with each Director
individually before relaying the conclusions
to the Board.
The 2019 evaluation concluded that the
Board and its Committees as reconstituted
were well equipped to work effectively
and 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 and Chairman
encourage full and frank discussion. The
process revealed areas that could be
improved. These included earlier circulation
of papers where possible, additional
engagement with Executive Committee
members and improved reporting to such
members from Executive Directors who
attended regularly. The evaluation also
noted the need to recruit an additional
female Independent Non-executive Director
who would be Ukrainian as it was felt the
Board would benefit from additional
Ukrainian presence to assist in the
understanding of operating in the country
generally. It was also agreed that the CSR
Committee would be renamed the Health,
Safety, Environment and Community
Committee and reconstituted in 2020 to
provide better focus on key factors affecting
the business. In February 2020, the CSR
Committee was renamed the Health, Safety,
Environment and Community (“HSEC”)
Committee and duly reconstituted.
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 November 2019, the
Board had a training session with its legal
advisers Herbert Smith Freehills. 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 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. Mr Lisovenko, for example,
received training on specific legal and
corporate governance aspects in his new
role as Senior Independent Director.
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. Induction training was
provided during the year for Mr Dacomb
and Ms MacAulay.
The Senior Independent Director and
Induction training included meeting
the other Non-executive Directors have
evaluated, and will continue to monitor, the
performance of the Chairman.
senior executives of the Executive
Committee, a detailed and structured site
visit, meeting the Company Secretary,
necessary training on corporate governance
aspects, and receiving various key
Company documentation and reports.
Ferrexpo plc
Annual Report & Accounts 2019
75
To assist the IRC in its deliberations, the
IRC received a report from its advisers. After
careful consideration of the report together
with the work of the IRC itself, the IRC was
satisfied that none of Ferrexpo’s Directors,
management or employees had any
involvement in any possible
misappropriation of funds.
The IRC was able to reaffirm in August
2019 that the Charity is not a related party
of the Group, Mr Zhevago (a controlling
shareholder of Ferrexpo) or its executive
management, as defined under applicable
accounting standards or Chapter 11 of the
UK Listing Rules.
Vitalii Lisovenko
Chairman of the Independent Review
Committee
17 March 2020
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For further information
See Principal Risks 1 (page 54), Corporate
Governance Report (page 63), and Note 7
(page 132), Note 30 Contingencies (page
167) and Note 34 (page 170).
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Independent
Review Committee
Report
Vitalii Lisovenko, Chairman of the Independent
Review Committee
Dear Shareholder
On 4 February 2019, Ferrexpo
announced an independent review (the
“Independent Review”) into matters relating
to the Group’s donations to a Ukrainian
charity called Blooming Land, which
operates through three sub-funds
(the “Charity”).
Blooming Land coordinated the
Company’s CSR programme on a national
basis in Ukraine, alongside Ferrexpo’s local
CSR programme which supports
communities and individuals surrounding
the mines.
The Board suspended donations to the
Charity in May 2018, and following the
suspension a number of irregularities were
reported to the Board, including
inconsistencies in copy bank statements
provided by the Charity (as more particularly
described in the Group’s Annual Report and
Accounts 2018). This ultimately led to the
Board establishing the Independent Review
Committee (“IRC”) to lead the Independent
Review into the Group’s relationship with
the Charity.
The IRC was chaired by Vitalii Lisovenko
and its other members were Steve Lucas,
Graeme Dacomb and Fiona MacAulay. Mary
Reilly and Bert Nacken were also members
of the IRC prior to their resignation in
April 2019.
The IRC concluded its review on
30 August 2019, and details of the
conclusions reached by the IRC are set
out below.
Terms of reference
The IRC operated under terms of reference
prepared with input from its legal advisers
and approved by the Board.
These authorised 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;
– reviewing the relationship and
transactions between the Charity and
Khimreaktiv LLC (an entity connected
with Rosava which in turn is controlled
by Kostyantin Zhevago, a controlling
shareholder of the Group);
– determining whether any significant
influence as defined under IAS 24 may
exist between Ferrexpo’s executive
management 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.
Work of the IRC
As part of the Independent Review,
the IRC met regularly and appointed
independent forensic accountants and legal
counsel in the UK and Ukraine to assist
with the Independent Review. The work
undertaken by the IRC and its advisers
included a forensic review of the copy bank
statements undertaken by BDO LLP, a
review of relevant documentation, interviews
with Ferrexpo employees and Directors,
correspondence with the Charity and other
third parties, visits to some of the sites of the
charitable events and the provision of UK
and Ukrainian legal advice.
Whilst a significant amount of work was
undertaken by the IRC and its advisers, it
was not possible to explain a number of
discrepancies (outlined in the Company’s
2018 Annual Report and Accounts) relating
to the Charity and its use of funds donated
by the Group. As a result, the IRC was
unable to conclude as to the ultimate use
of all of the funds by the Charity. In August
2019, the IRC reported that indications
remained that some of the funds could have
been misappropriated.
76
Ferrexpo plc
Annual Report & Accounts 2019
Audit Committee Report
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 2019.
– Key issues and critical judgements
considered by the Committee.
– Ferrexpo’s systems of internal controls
and risk management.
– Review of the internal audit function.
– The assessment of the external auditor’s
independence and effectiveness.
– The “fair, balanced and understandable”
assessment.
The Viability Statement is set out in the
Strategic Report on page 61.
During the year, the Audit Committee had
four scheduled and three ad-hoc meetings
(see page 71). Due to changes at Board
level, the Committee was not quorate for a
short period during 2019 but this was
rectified following my appointment and that
of Fiona MacAulay.
Graeme Dacomb, Chairman
of the Audit Committee
Dear Shareholder
I am pleased to present to you the
Report of the Audit Committee for 2019.
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.
Activity during 2019
Key activities of the Audit Committee during 2019 are set out below.
The Committee appointed new auditors
MHA MacIntyre Hudson (see below)
following a thorough tendering process and
they were on-boarded following meetings
with senior management in Finance and
generally. Subsequently, they attended Audit
Committee meetings and have met
personnel in London, Switzerland and
Ukraine (including internal audit) during the
course of their audit. The Committee
approved their audit plan for 2019 and the
auditors have been in regular contact with
me, the CFO and the Acting CFO.
The Committee reviewed the Annual
Report, associated preliminary year-end
results and interim results, focusing on key
areas of judgement, complexity and
accounting policies.
An important matter covered in these
meetings was the accounting treatment of
the charitable donations made to Blooming
Land (the “Charity”) in 2018. The main work
relating to the review of the charitable
donations to the Charity was covered by the
Independent Review Committee (“IRC”) (see
page 75 for more detail). In accounting for
the Charity, a critical judgement relates to
significant influence or control of the Charity.
In the Audit Committee Report of the 2018
Annual Report (see page 71 of the 2018
Annual Report), after detailed analysis,
including work carried out by the IRC, the
Audit Committee reported that the Charity
operated independently of Ferrexpo. Further
work carried out in 2019 did not alter
that judgement.
February
– Reviewed a presentation on the
ongoing tax cases in Ukraine.
– Discussions on CSR-related
matters, including donations made
to the Charity.
– Considered assumptions used for
going concern and the long-term
viability assessment and
impairment test.
– Received an update on the
progress of the audit and analysed
further work required.
March
– 2018 year-end review.
– Reviewed significant risks disclosed
in the Annual Report and Accounts
for 2018.
April
– Received an update on CSR-related
matters, including donations to the
Charity.
June
– Reviewed report of the CFO
concerning the appointment of an
external auditor.
– Reviewed recommendations from
– Conducted auditor tender process
– Reviewed auditors’ responsibilities
Internal Audit.
statement.
– Reviewed the Internal Audit plan for
– Reviewed auditors’ independence
2019.
and recommended the
appointment of an external auditor
to the Board.
statement.
– Reviewed and discussed the status
of the CSR-related matters and
disclosure provisions.
– Considered the draft of the auditors’
– Reviewed Internal Audit quality
survey results.
– Updated Internal Audit charter.
– Reviewed risk matrix and register.
– Reviewed compliance report.
– Reviewed Directors’ Interests list
and transactions with Related
Parties.
– Considered the draft Annual Report
opinion.
and Accounts for 2018.
– Final review of the Annual Report
– Received an update from Internal
and Accounts for 2018.
Audit.
– Considered business continuity
plans and related internal controls
for FPM.
– Reviewed Company’s approach to
the risk of high wall failure.
– Reviewed compliance report.
– Reviewed risk matrix and register.
– Reviewed an update on Directors’
Interests list and transactions with
Related Parties.
– Reviewed Viability Statement.
– Reviewed internal control
environment.
– Reviewed Audit Committee Report.
– Reviewed draft of auditors’ reports
to the Audit Committee.
Ferrexpo plc
Annual Report & Accounts 2019
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The internal control and risk
management procedures at Ferrexpo are
set out later in this report and the principal
risks to the Group are set out on pages 52
to 60 of the Strategic Report. Throughout
the year, the Committee has robustly
assessed the principal risks and emerging
risks facing the business.
The significant issues and judgements
considered by the Committee in respect of
the 2019 Annual Report are set out on
pages 78 to 79. 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 of the significant
areas in which estimates and critical
judgements had to be made is given in Note
4 to the Consolidated Financial Statements
from page 129. To satisfy itself that the
accounting for these issues was reasonable
and appropriate, and that disclosure in the
financial statements was suitable and clear,
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,
Acting 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 and estimates used as
disclosed in Note 4 to the Consolidated
Financial Statements on page 129.
Graeme Dacomb
Chairman of the Audit Committee
17 March 2020
Membership and meetings
During the year, the Committee’s terms
of reference were also updated to reflect the
new Corporate Governance Code.
As at the year end, the Audit Committee
comprised three Independent Non-
executive Directors: Graeme Dacomb
(Chairman of the Committee), Vitalii
Lisovenko and Fiona MacAulay. During the
year, the Committee recruited two audit
members to re-establish a quorum. All
members of the Audit Committee are
considered to possess appropriate
knowledge and skills relevant to the activities
of the Group, and Graeme Dacomb has
recent and relevant financial experience,
including accounting and auditing, due to
his career as an audit partner with Ernst &
Young LLP. The Audit Committee met four
times for scheduled meetings and three
times for ad-hoc meetings during 2019.
The attendance record of the Committee
members is shown in the table on page 71.
In addition to its members, other
individuals and external advisers, and the
Chairman of the Board, may be invited to
attend meetings of the Audit Committee at
the request of the Committee Chairman.
The Audit Committee has an opportunity to
meet with the external auditors at the end of
its scheduled meetings, without Executive
Directors or management present.
July
– Presentation of half-year accounts.
– Going concern assessment.
– Reviewed risk matrix and register.
– Reviewed Directors’ Interests list and
transactions with Related Parties.
September
– Reviewed preliminary audit plan
for 2019.
November
– Received a report on the outcome of
the 2018 Internal Audit plan and a
progress update on 2019.
– Reviewed the preliminary Internal
Audit plan for 2020.
– Considered a risk analysis of the
Internal Audit plan.
– Considered a report from external
auditors on progress of the
preliminary audit for 2019.
– Considered the work plan for the
2019 year-end.
– Reviewed external audit planning
report.
– Received an update on the planned
process for the viability and going
concern assessment and the
impairment test at year-end.
– Reviewed whistleblowing report.
– Reviewed risk matrix and register.
– Noted compliance report.
– Reviewed Directors’ Interests list
and transactions with Related
Parties.
– Approved Committee terms of
reference and 2020 meeting
schedule.
– Reviewed risk matrix and register.
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Ferrexpo plc
Annual Report & Accounts 2019
Audit Committee Report
continued
Audit tender
Following the resignation of Deloitte LLP, the Company carried out an audit tender during 2019 for which a number of tender responses
were received. Following receipt of two tender proposals, the Company considered, inter alia, the firms’ experience in mining and the size of
the member firm in Ukraine. The Audit Committee subsequently recommended to the Board that MHA MacIntyre Hudson be appointed as
auditors for 2019.
Significant issues and judgements
The significant issues and judgements considered by the Committee in respect of the 2019 Annual Report are set out below:
Issues
Judgements/actions taken
Presentation of operating
expenses: nature of the
Company’s community support
donations (Note 7 to the
Consolidated Financial
Statements) in comparative year
In the absence of conclusive evidence that funds have not been used as intended, the Company has
judged that it remains appropriate for it to present its community support donations to the Charity
during the comparative year ended 31 December 2018 as such in the Consolidated Financial
Statements within operating expenses on the basis that all material donations made by the Company
have been applied as previously reported by the Charity to the Company. The Company has not
made any further donations to the Charity since May 2018; therefore, no donations to the Charity are
included in the table in Note 7 to the Consolidated Financial Statements for the financial year ended
31 December 2019.
Taxation: tax legislation in Ukraine
(Note 11 to the Consolidated
Financial Statements)
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.
Inventories: lean and
weathered ore (Note 17 to
the Consolidated Financial
Statements)
Commitments, contingencies
and legal disputes (Note 30
to the Consolidated Financial
Statements)
Related party disclosures –
completeness and arm’s
length nature (Note 34 to
the Consolidated Financial
Statements)
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.
On 4 February 2019, the Group announced that it had commissioned an independent review (the
“Independent Review”) into the Group’s relationship with third party charity fund Blooming Land (the
“Charity”) and the use of the funds donated by the Group to the Charity prior to the financial year
2019. The payments made by the Group to the Charity during the financial years 2013 to 2018
totalled US$110 million. The Group may be exposed to the risk of civil, criminal or regulatory actions
and liabilities in relation to matters considered by the Independent Review. The Independent Review
was conducted by the Independent Review Committee (“IRC”) and its advisers between February
and August 2019.
Whilst a significant amount of work has been undertaken by the IRC and its advisers, it has not
been possible to explain some discrepancies outlined in the 2018 Annual Report and Accounts in
respect of the ultimate use of funds donated by the Group to the Charity.
After careful consideration of the report received from its advisers together with the work of the
IRC itself, the IRC announced on 30 August 2019 that it is satisfied that none of the Group’s
Directors, management or employees have had any involvement in any possible misappropriation of
funds by the Charity.
If any of the critical judgements outlined in Note 7 Operating expenses and/or Note 34 Related
party disclosures and/or the conclusion of the IRC are incorrect, in whole or in part, liabilities
(including fines and penalties) may accrue to the Group. 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 2019.
The Committee concluded that neither the Group nor Kostyantin Zhevago controls or exercises
significant influence over Blooming Land or its sub-funds 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.
Ferrexpo plc
Annual Report & Accounts 2019
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Issues
Judgements/actions taken
Loan relationship between
related parties of the Group
(Note 34 to the Consolidated
Financial Statements)
The Group has supported FC Vorskla with sponsorship for many years. FC Vorskla is a professional
football club in Poltava, Ukraine that competes in the Ukrainian Premier League. The Group’s
sponsorship provides brand recognition for the Group both within Ukraine and internationally, and
in addition given FC Vorskla’s proximity to the Group’s operations, provides benefit to the local
community surrounding the mines.
The sponsorship payments are made by Ferrexpo Middle East FZE to two entities: FC Vorskla
Cyprus Limited, a company incorporated in the Republic of Cyprus, and Football Club “Vorskla” LLC,
a company incorporated in Ukraine (together, “FC Vorskla”). FC Vorskla is considered to be a related
party of the Group as Kostyantin Zhevago, the Group’s previous Chief Executive Officer and a
controlling shareholder of Ferrexpo plc, controls FC Vorskla and is the honorary president.
As disclosed in Note 34, management of the Group recently received information that FC Vorskla
had provided a loan, which as at 31 December 2019 was US$16,978,000, to another related party,
Collaton Limited, which is controlled by Kostyantin Zhevago.
Following the identification of the loan provided by FC Vorskla to Collaton Limited, the Board has
taken steps to obtain further information in relation to the arrangements, and has engaged third party
advisers to assess the situation.
As of the date of approval of these financial statements, the Board’s enquiries remain ongoing.
Based on the responses received to date from FC Vorskla, the Group understands that the loan to
Collaton Limited was made in connection with the construction and renovation of certain sports
facilities of FC Vorskla, including its central stadium and training facilities in Poltava. Given that the
enquiries by the Board and its advisers remain ongoing, the Board is unable to conclude at this
stage whether the payments made to FC Vorskla or the loan provided to Collaton Limited have been
used in their entirety for the legitimate purposes of the football club in Ukraine. If it transpires that any
of the payments made by the Group to FC Vorskla or the loan provided by FC Vorskla to Collation
Limited were not used for the legitimate purposes of the football club in Ukraine, or there has been
any non-compliance with legal, regulatory or other requirements, liabilities (including fines and
penalties) may accrue to the Group. See also Note 30 Commitments, contingencies and legal
disputes to the Consolidated Financial Statements.
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Ferrexpo plc
Annual Report & Accounts 2019
Audit Committee Report
continued
Internal control and risk management
The Board has overall responsibility for
the Company’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
Company’s objectives, and to meet the
Company’s particular needs and the risks
to which it is exposed, rather than eliminate
risk altogether. Consequently, it can only
provide reasonable, and not absolute,
assurance against material misstatement
or loss.
The day-to-day responsibility for
managing risk and the maintenance of the
Company’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 Company. This process was
followed throughout 2019 and up to the date
of approval of this Annual Report. The
Group has also adopted a risk-based
approach in establishing the Company’s
system of internal control and in reviewing
its effectiveness. To assist in managing key
internal risks, it has established a number of
Company-wide procedures, policies and
standards and has set up a framework for
reporting matters of significance.
Internal controls – general
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
matrix and register, and may request more
detailed investigations into specific areas of
concern if appropriate.
Key elements of the internal control and
risk management system include:
– The Group has in place a series of
policies, practices and controls in relation
to the financial reporting and
consolidation process, which are
designed to address key financial
reporting risks, including risks arising
from changes in the business or
accounting standards and to provide
assurance of the completeness and
accuracy of the content of the
Annual Report.
– 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
2019), 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, 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
Executive Related Party Management
Committee (“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 Committee and
Executive Committee and then, if
necessary, to the Board for approval.
– The FRMC, which is an executive
sub-committee, reviews financial
information and management accounts,
and meets regularly.
– Clearly defined treasury policy (details of
which are given in Note 27 to the
Consolidated Financial Statements on
pages 158 to 165, which are 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 audit team
based in Ukraine (see below) which
monitors, tests and improves internal
controls operating within the Company 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
Company, 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
Company’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 Board.
Ferrexpo plc
Annual Report & Accounts 2019
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The Committee and the Board continued to
review ongoing litigation affecting the
Company throughout the year (see Note 30
to the Consolidated Financial Statements on
page 166 to 168 and received regular
update reports and presentations from legal
counsel.
Full details of the Company’s policy on
risk and uncertainties are set out in Note 27
to the Consolidated Financial Statements on
pages 158 to 165. See also the Principal
Risks section of the Strategic Report from
page 52.
Internal audit
The internal audit function has a
Company-wide remit, and the Head of
Internal Audit (who has mining experience),
reports directly to the Chairman of the Audit
Committee and 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
2019 assessment, with the rigour of the
internal audits and with management’s
response to the audit findings and
recommendations. An Internal Audit plan for
2020 was approved by the Audit Committee
in November 2019.
The Internal Audit plan for 2019,
approved by the Audit Committee, focused
on the operational risks relating to 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 external 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 Company’s internal control
systems, and formed 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 Company’s external
auditors when performing their role in the
Company’s reporting to shareholders.
The effectiveness of the audit process
and the overall performance, independence
and objectivity of the external 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 2020
review in respect of the 2019 Annual Report
and Accounts was relayed to the relevant
partners of MHA MacIntyre Hudson. This
review takes the form of an assessment
(using a questionnaire) of the auditors’
performance under various headings: the
robustness of the audit, the quality of
delivery, and the calibre of the audit team.
The auditors also provide to the Audit
Committee information about policies and
processes for maintaining independence
and monitoring compliance with relevant
current requirements, including those
regarding the rotation of audit partners and
staff, the level of fees that the Company
pays in proportion to the overall fee income
of the firm. The Committee reviewed these
arrangements during the year and believes
that they are 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 2019.
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 and
FRC’s Ethical Standards. 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 2019 are shown in Note 7 to
the Consolidated Financial Statements on
page 133. For 2019, MHA MacIntyre Hudson
did not perform any non-audit services.
Financial reporting
The Board has asked the Audit
Committee to advise whether it considers
the 2019 Annual Report and Accounts,
taken as a whole, to be fair, balanced and
understandable and that it provides the
information necessary for shareholders to
assess the Company’s position, and
performance, business model and strategy.
In providing its advice, the Committee
noted that the factual content of the Annual
Report and Accounts has been carefully
checked internally, and that the document
has been reviewed by senior management
in order to ensure consistency and overall
balance. The Committee has also
conducted its own detailed review of the
disclosures in the Annual Report and
Accounts, taking into account its own
knowledge of Ferrexpo’s strategy and
performance, the consistency between
different sections of the report, the
accessibility of the structure and narrative
of the report, and the use of key
performance indicators.
The Committee is satisfied that, taken
as a whole, the 2019 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 Corporate Governance Code. The
Viability Statement is set out in the Strategic
Report on page 61 and a statement setting
out the Board’s assessment of the
Company as a going concern is contained
in the Directors’ Report on page 105 and
Note 2 to the Consolidated Financial
Statements on page 126.
Whistleblowing policy
In accordance with the Corporate
Governance Code, the Board is responsible
for reviewing the Company’s whistleblowing
arrangements, and receives regular reports
from the Audit Committee and the Head of
Internal Audit which detail any new
whistleblowing incidents and, where
appropriate, steps taken to investigate
such incidents.
Graeme Dacomb
Chairman of the Audit Committee
17 March 2020
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Ferrexpo plc
Annual Report & Accounts 2019
Nominations Committee Report
Steve Lucas, Chairman of the Nominations
Committee
Dear Shareholder
I am pleased to present the Nominations
Committee Report for 2019.
In 2019, the Committee was formally
convened twice (2018: twice). Informal
meetings also occurred. Due to the reduced
number of Non-executive Directors for part
of the year, key functions of the Committee
such as Board appointments were
performed by the Board during this period.
At the formal meetings of the Committee,
it considered:
– the composition and refreshment of the
Board;
– the criteria for Non-executive and
Executive Director appointments;
– the engagement of executive search
agencies to assist with such
appointments;
– Deciding upon a shortlist of candidates
for interview. Committee members
interviewed shortlisted candidates and
made recommendations to the Board;
– Formalising search processes and
making recommendations to the Board
for the appointments of Lucio Genovese,
Fiona MacAulay and Graeme Dacomb as
Non-executive Directors; and
– Reviewing the results of the Group’s
annual talent review and succession
plans for business-critical roles.
The Board is committed to promoting
behaviours that support an inclusive and
diverse workplace, and which reflects the
Company’s values. This commitment is set
out in the Company’s Equality, Diversity and
Inclusion policy, approved by the Board in
2019. The Board recognises that it has an
important role to play in creating an
environment in which all contributions are
valued, different perspectives are embraced,
and biases are acknowledged and
mitigated. The Committee approved plans
and targets associated with the
implementation of the policy to the year
2030 that aims to address gender diversity
imbalances in the workforce while also
delivering sustainable talent pipelines for
succession to senior leadership roles. The
Board shares ownership with the Executive
Committee of the policy and progress
updates will be presented to the Board for
review every six months to assess progress
against the targets and enable adjustments
to be made to the programme where
necessary. The Committee terms of
reference were updated to comply with the
UK Corporate Governance Code 2018.
It was also agreed to undertake an
internally facilitated Board performance
evaluation for the year to 31 December 2019
(for further information see Performance
Evaluation on page 74). The Company shall
conduct an external Board evaluation in 2021.
Following the resignation of three
Non-executive Directors in early 2019, the
Committee led search processes to recruit
three new Non-executive Directors, to
ensure that the skills and experience lost as
a result of these resignations were replaced,
and to ensure continued diversity on the
Board taking into account the targets of the
Hampton-Alexander and Parker Reviews.
During the year, members of the Committee
(and the Board as a whole) were very active
in interviewing candidates for various Board
roles and in recommending the appointment
of Lucio Genovese, Graeme Dacomb and
Fiona MacAulay who all joined the Board
in 2019.
The Committee also recommended the
appointment of Vitalii Lisovenko as the
Senior Independent Director, who then,
as Senior Independent Director, joined
the Committee on 19 August 2019.
As of 31 December 2019, the
Nominations Committee was composed
of the Senior Independent Director and the
Chairman of the Board. Fiona MacAulay
joined the Committee on 15 January 2020.
At the date of this report, the Committee is
seeking to make a further appointment of a
suitable Independent Non-executive Director
to strengthen the Board and relevant Board
Committees and, in particular, is looking
for diverse candidates with knowledge
and experience of the Ukrainian business
environment.
Steve Lucas
Chairman of the Nominations
Committee
17 March 2020
Ferrexpo plc
Annual Report & Accounts 2019
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Membership and meetings
The Nominations Committee is chaired
by Steve Lucas and its other members are
Vitalii Lisovenko and Fiona MacAulay. The
Nominations Committee meets at least once
a year, as required by its terms of reference,
and met on two scheduled occasions in
2019 (although other informal meetings also
occurred). Due to the reduced number of
Non-executive Directors on the Board
during certain periods of 2019, matters
ordinarily within the purview of the
Committee (such as Board appointments)
were considered by the full Board during
the period March to May.
Appointment process and succession
planning
Succession planning and Board
transition were a priority for the Committee
in 2019, and will continue to be in 2020.
During the year, the Committee discussed
and interviewed candidates for various
positions on the Board.
Odgers Berndtson and Savannah Group
were retained by the Committee to assist
with the search to replace three Directors
who resigned in the first half of 2019. They
are accredited under the UK government’s
Enhanced Code of Conduct for Executive
Search Firms and the Voluntary Code of
Conduct on diversity best practice. Odgers
Berndtson has previously worked for the
Group in recruiting for non-executive
appointments and accordingly has a good
understanding of the Board’s requirements,
and the markets in which the most suitable
candidates are likely to be found. Both
firms have no other connection with
the Company.
Prior to each search commencing, the
Nominations Committee agreed the skills
and experience it considered necessary for
the role and provided this to the search
firms. Lists of potential candidates were then
identified by Odgers Berndtson and
Savannah Group and discussed with
Committee members to agree shortlists to
be interviewed. In each case, the initial list
of potential candidates included gender-
diverse candidates. Shortlisted candidates
were interviewed by members of the
Committee and, where practical, other
Directors.
Board diversity policy update
Board objective
Progress in 2019
Foster a diverse and inclusive
workplace culture aligned with the
Company’s Values, Purpose and
Strategy through an organisational
structure that is fit for purpose,
resourcing this structure with the
right capabilities and empowered
leadership able to deliver required
business outcomes.
Increase Board gender diversity
and women in management
below the Board.
– Formal adoption of Equality, Diversity and Inclusion
policy in 2019.
– Board approved a Company purpose statement
aligned with Ferrexpo’s Strategy and Values
– Operational human resources policies reviewed to
identify, eliminate or mitigate any disadvantage or
unlawful discrimination to underrepresented
groups.
– Operational facilities audit conducted to ensure
accommodation of people with disabilities.
– Third Business Leadership Development
Programme held-targeting 20 identified business
critical-role high-potential successors.
– Third biannual ‘top 70’ leadership conference held
in Kyiv to cascade business strategy and enhance
leadership capability.
Integrated mining operating model developed and
in execution.
–
– Review of technical skills training by the FPM
Training Centre completed to ensure workforce
capability supports business requirements;
planned remedial actions in execution from 2020.
– Board skills matrix developed, including diversity
requirements and communicated to recruitment
partners; only firms adhering to the Voluntary Code
of Conduct on diversity best practice used.
– Fiona MacAulay appointed to the Board on
12 August 2019 increasing the Board’s gender
diversity to 14%.
– Recruitment initiated and in progress to enhance
gender diversity across Ferrexpo to 30% by
mid-year 2020.
– Women in management currently at 18%
(2018: 20%).
– Female Human Resources Director appointed
in February 2019 enhancing FPM operational
executive team gender diversity to 11%.
– Support provided to local secondary schools in
Horishni Plavni to encourage maths and science
education.
– Five female truck drivers trained and deployed on
day shift at Ferrexpo Belanovo Mining.
– Board review conducted of the Company’s talent
pipeline and succession plans for senior business-
critical leadership roles, including identification of
female candidates for accelerated development.
– Undergraduate bursary programme targeting
women approved for launch in 2020.
– Monitor Diversity programme outcomes and make
adjustments to ensure overall objectives are met.
– Workforce analysis undertaken and shared with
operational executive and the Executive
Committee resulting in programme adjustments.
– Plans developed in 2019 for implementation over
the next five years covering diversity and
elimination of unconscious bias training for middle
and senior management, Science, Technology,
Engineering and Mathematics (“STEM”)
ambassador visits to local schools and colleges,
rollout of flexible and remote working policy for
mothers of small children, and “bring a daughter
to work” days.
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Ferrexpo plc
Annual Report & Accounts 2019
Nominations Committee Report
continued
Conduct for executive search firms. The final
decisions to make appointments to the
Board are, however, made on merit against
objective criteria, so as to ensure that the
strongest possible candidates for the role
are recruited.
The Committee will continue to
ensure that the Diversity Policy is considered
when conducting all 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
Ferrexpo’s policy is to employ a diverse
workforce and thought is given to recruit as
widely as possible, taking into account,
amongst other things, gender, race, social
background, education and disability.
Gender diversity
Currently, 29% of the workforce is
female. 18% of management positions are
held by women, and the aim of the Board is
to increase this figure to 25% by 2030.
This ambition poses a challenge in the
face of the limited number of women
pursuing technical careers in the mining
industry, which is made more acute in
Ukraine where women are still legally
prohibited from pursuing certain professions
requiring night shift work and working in
hazardous environments. To support the
achievement of the target for women in
management, steps are planned to lobby
government for changes in the law and a
variety of programmes have been launched
to recruit, retain, develop and promote
women within the workforce. Externally,
these programmes include the introduction
of an undergraduate bursary scheme
specifically targeting women pursuing STEM
studies, sponsorship of local science
expositions and robotics competitions, as
well as support for local secondary schools
offering maths and science studies.
Internally, initiatives are focused on retaining
and growing internal talent, including
individual mentorship and coaching of
identified successors.
The Nominations Committee then
recommended:
– Lucio Genovese,
– Graeme Dacomb, and
– Fiona MacAulay
as the preferred candidates for the following
roles: Non-executive Director, Chair of the
Audit Committee and Chair of the
Remuneration Committee respectively.
They were interviewed by all other
members of the Board before being
formally appointed.
The Nominations Committee and the
Board also received presentations on
succession planning and during the year
appointed:
– the Acting CEO, and
– the Acting CFO.
Subsequently, Graeme Dacomb was
appointed to the Remuneration Committee
and Fiona MacAulay joined the Audit
Committee to fill prior vacancies. Fiona
MacAulay was appointed Chair of the
HSEC Committee.
In the course of the year, the Committee
reviewed the Company’s talent pipeline and
succession plans for business-critical roles
and confirmed development plans for
approximately 500 identified high potentials
which included actions to mitigate identified
knowledge and skills gaps over the short to
medium term.
Election and re-election
Graeme Dacomb and Fiona MacAulay,
who were appointed to the Board in 2019,
will stand for election by shareholders at the
Company’s AGM in May 2020. In
accordance with the Corporate 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 diversity
in terms of cultural and professional
background, expertise and gender, and
believe that the present composition of the
Board is broadly satisfactory, although it is
seeking to increase female membership.
During the year the Company approved the
Equality, Diversity and Inclusion policy
(“Diversity Policy”). The Committee seeks to
apply this policy by ensuring that all available
suitable candidates are taken into account
when drawing up shortlists of candidates for
appointment to the Board, and seeks only to
engage executive search consultants who
have signed up to the Voluntary Code of
In taking this into account, the
Nominations Committee notes that the
Company’s operations are primarily based
in Ukraine which is partially reflected in the
Board and senior management. The
diversity of the Board and senior
management reflects the broader societal
aspects of Ukraine, where the majority of
the Group’s workforce are based. The
Group is undertaking certain actions to
promote diversity as set out in this report.
Long-term strategies to improve female
diversity in senior management of the
organisation and their direct reports include:
i) a graduate bursary scheme to encourage
female applicants to specific sectors; ii)
lobbying the Ukrainian government to relax
legislation to allow female workers greater
access to working in mining areas and in
carrying out previously male-orientated
roles; iii) expanding the awareness of school
programmes detailing the opportunities
open to females of STEM careers in mining;
iv) female support/mentorship scheme for
career development; and v) continued
leadership development for women
in mining.
Disability
Ferrexpo is proud to employ registered
disabled staff representing more than 4% of
our Ukrainian workforce. This helps us to
reflect the diversity in wider society as well
as deliver on our legal obligations.
The Corporate Governance Report was
approved by the Board on 17 March 2020.
Steve Lucas
Chairman
17 March 2020
Ferrexpo plc
Annual Report & Accounts 2019
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Remuneration Report
A statement to shareholders from the Chairman of the Remuneration Committee1
In what is my first year as Chair of the Remuneration Committee, I am pleased to introduce the Directors’ Remuneration Report for the year
ended 31 December 2019.
Our current Directors’ Remuneration Policy was approved by over 97% of shareholders at the AGM in May 2017 and, since it has been in
operation for three years, is due to be renewed at the 2020 AGM. As a result, since I joined the Ferrexpo Board in August 2019 we have
undertaken a review of our Remuneration Policy and practices. This review considered both the effectiveness of the current Remuneration
Policy, its alignment with our strategy and compliance with investors’ best practice expectations. In summary, the conclusion of the review
was that while the policy was generally considered to be working in aligning pay and performance, a number of refinements should be made
as part of seeking shareholder approval for a new policy at the 2020 AGM. However, in light of our Chief Executive temporarily stepping down
from his executive responsibilities and being replaced on an interim basis by the Chief Financial Officer, the Committee in consultation with the
wider Board concluded that the 2020 AGM would not be the appropriate time to make material changes to the current policy. However, our
intention is to undertake a full consultation exercise with our major institutional shareholders during 2020 over the refinements we would like to
make to the policy. We consider a full investor consultation process to be better undertaken once we have greater clarity over the future
make-up of our executive Board. Accordingly, the policy being presented for renewal at the 2020 AGM is a ‘roll-over’ of our existing policy
which is intended to operate for only a period of 12 months. It is my intention to then seek shareholder approval for a policy that will reflect our
evolving strategy, the views of our major shareholders and developments in institutional investor ‘best practice’ at the 2021 AGM.
With regard to this report, as in previous years, it is split into two distinct sections, with our proposed 2020 policy set out in full and followed
by details on how we implemented the current policy in 2019 and how we intend to implement the policy in 2020. The elements subject to
audit are highlighted throughout.
Our approach to remuneration
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. This approach applies across the executive leadership
team and has resulted in a robust link between pay and performance to date. The remuneration of our CEO, who has temporarily stepped
aside to focus on resolving certain matters in Ukraine, operates differently from the approach applicable across the rest of the executive
leadership team. His remuneration is provided through a flat fee of US$240,000 per year plus he is remunerated through the capital
appreciation and dividends payable on his shareholding in the Company. The Board considers that his large shareholding in the business is
sufficient to strongly align his interests with those of other shareholders.
Performance and reward in 2019
As detailed in the Performance Review, 2019 was a solid year at Ferrexpo with favourable pricing for our high-grade iron ore pellets helping
the Company offset a 10% increase in the Group’s C1 cash cost of production which was the result of strong local currency and inflation in
Ukraine. Notwithstanding muted steel demand in some regions, particularly in the second half of the year, higher input costs and ongoing
investment programmes, we delivered a 20% growth in profit on the 2018 result and achieved healthy cash flows. Good strategic progress in
solidifying the platform for future growth was achieved with the conclusion of phase one of our investment programme to refurbish our pellet
lines which commenced in 2014 and engineering studies continued to expand pelletising capacity above nameplate capacity of 12 million
tonnes per annum toward 20 million tonnes per annum over the medium term. The Committee believes that this performance is fairly reflected
in executive remuneration outcomes for the year outlined below.
In determining bonus outcomes under the short-term incentive plan (“STIP”) for 2019, the Committee reviewed actual performance against
the range of financial and operational targets set at the start of the year along with undertaking an assessment of performance against the
non-financial targets set. In light of the strong financial performance, with EBITDA increasing by 17% and NOPAT increasing by 18%, robust
operational performance and a combination of effective management of tax and strong cash management the Acting CEO achieved a bonus
at 89% of the maximum. However, given the Company’s current focus on cost control, the Committee used its discretion to reduce the bonus
to 83% of the maximum with this reduction being consistent with the approach taken across the Executive Committee.
With regard to the Company’s long-term performance, the long-term incentive plan awards that were granted in 2017 were eligible to vest
from 31 December 2019 based on the Company’s relative total shareholder performance versus other global mining companies. In light of
Ferrexpo’s strong relative performance, delivering an annualised total shareholder return of 36% per annum, 97% of the award will vest. In light
of the overall performance of the Company across the three-year period the Committee was comfortable with this level of vesting.
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 2018 and the UK Corporate Governance Code.
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Ferrexpo plc
Annual Report & Accounts 2019
Remuneration Report
continued
Applying Remuneration Policy in 2020
Given that the Committee is proposing a ‘roll over’ of the current Remuneration Policy and its implementation in 2020 there are no material
changes in how we are applying policy in 2020. The key points to note include:
– Executive Director salaries for current roles will be frozen at their 2019 levels reflecting the Group focus on effective management of costs;
– The Acting CEO’s pension remains set in line with the wider workforce in Switzerland;
– The annual bonus opportunity will remain at 150% of salary for the Acting CEO (and the same rate will apply on reversion to his prior role
as CFO). The performance metrics will continue to be a balanced scorecard of financial, operational and personal targets set with
reference to the Company’s financial plans and the individual’s responsibilities. For the first time a small portion of the bonus will be based
on the Company’s safety record with safety also being retained as a factor considered when overall bonuses are declared at the year end
(i.e. poor safety could be used as a reason to override formula based outcomes);
– A long-term incentive award will be granted to the Acting CEO over 137,500 shares (which had a face value of c.35% of his CFO salary at the
time of determining the award size, with the award size set with reference to his permanent full-time role of CFO as opposed to the role of
Acting CEO). The recovery and withholding provisions have also been adjusted to ensure that they are considered enforceable in Switzerland.
Corporate governance considerations
As detailed above, in light of the changes to the Board during the year, no significant changes are proposed to the Remuneration Policy
from 2020. The Committee notes that we already include many best practice features in our policy such as post-vesting shareholding
requirements in the long-term incentive plan. However, part of the discussions with shareholders during 2020 will cover our approach to the
new features included in the 2018 UK Corporate Governance Code such as the use of discretion (e.g. our ability to adjust incentive outcomes),
our pension policy (which is to align with the wider workforce in the relevant location) and our current policy on share ownership (where we
have in employment share ownership guidelines and will develop relevant post-employment guidelines).
From a disclosure perspective, we continue to include Schedule 8 revisions around enhancing the pay scenario chart disclosure (see page
91) and quantifying the impact of share price appreciation on long-term incentive outcomes (see page 91).
Key activities of the Committee
The Committee’s key activities during the 2019 financial year were:
– Determining the 2018 bonus outturn;
– Determining vesting of the 2016 long-term incentive awards;
– Setting 2019 annual bonus targets;
– Determining the size of 2019 long-term incentive awards and the performance targets;
– Approving awards under the Company’s share plans;
– Signing off the 2018 Remuneration Report;
– Reviewing the Committee’s advisers;
– Reviewing the Remuneration Policy;
– Determining the remuneration of the Acting Chief Executive and Acting Chief Financial Officer;
– Reviewing draft 2020 annual bonus targets; and
– Reviewing salary levels of the Executive Committee and the Company Secretary.
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. As noted above, the
Remuneration Committee exercised downwards discretion with respect to the 2019 annual bonus award as detailed above.
Fiona MacAulay
Chairman of the Remuneration Committee
Ferrexpo plc
Annual Report & Accounts 2019
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PART A: POLICY SECTION (NOT SUBJECT TO AUDIT)
As detailed in the Statement to Shareholders from the Chairman of the Remuneration Committee, we are not making material changes to
the Remuneration Policy we introduced at the 2017 AGM. The limited changes that we are to make relate to tightening up the wording in the
recovery and withholding provisions within the short-term and long-term incentive plans with a view to improving enforceability in Switzerland
and introducing a specific safety target for a small proportion of the annual bonus (albeit this does not require a change to the current policy).
The policy in relation to making payments to Non-executives has also been updated to take account of the specific circumstances of
Mr Zhevago (as detailed on page 88). It is the Committee’s intention to return to shareholders with a new Remuneration Policy at the 2021
AGM with the ‘roll-over’ of policy described below intended to provide a period of grace for the current temporary executive changes to the
Board to be resolved prior to returning to shareholders with a fully considered Remuneration Policy that takes account of our evolving strategy
as well as recent changes to governance ‘best practice’.
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 Chairman of the Board, 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, annual
link a high proportion of remuneration to performance;
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.
From the policy review work undertaken in 2019, the Committee is satisfied that the Remuneration Policy and its application takes due
account of the six factors listed in the UK Corporate Governance Code:
– Clarity – our policy is well understood by our management team and has been clearly articulated to our shareholders. A key part of our
Chief Human Resources Officer’s role is engaging with our wider employee base on all our people matters (including remuneration) and we
monitor the effectiveness of this process through the feedback received. The Board is comfortable that our remuneration policy is clearly
understood by our employees.
– Simplicity – the Committee is very mindful of the need to avoid overly complex remuneration structures which can be misunderstood and
deliver unintended outcomes. Therefore, one of the Committee’s objectives is to ensure that our executive remuneration policies and
practices are as simple to communicate and operate as possible, while also supporting our strategy.
– Risk – our remuneration policy is designed to ensure that inappropriate risk-taking is not encouraged and will not be rewarded via: (i) the
use of a balanced scorecard in the short-term incentive which employs a blend of financial, operational and non-financial; (ii) the use of
equity in our long-term incentive plan (together with shareholding guidelines); and (iii) malus/clawback provisions.
– Predictability – our incentive plans are subject to individual caps, with our share plans also subject to market standard dilution limits. The
scenario charts on page 91 illustrate how the rewards potentially receivable by our executives vary based on performance delivered and
share price growth.
– Proportionality – there is a clear link between individual awards, delivery of strategy and our long-term performance. In addition, the
significant role played by incentive/at-risk pay, together with the structure of Executive Directors’ service contracts, ensures that poor
performance is not rewarded.
– Alignment to culture – Ferrexpo has a strong operational focus which is reflected in its incentives with safety at the heart of its activities and
this is supported through the use of a specific safety measure in the annual bonus and the ability to reduce the formula-based outcomes
based on safety performance.
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Ferrexpo plc
Annual Report & Accounts 2019
Remuneration Report
continued
Executive Director policy table
This section of our report summarises the policy for each component of Executive Director remuneration which will be effective from the
2020 AGM subject to shareholder approval. The framework governing the LTIP was approved by shareholders at the 2018 AGM.
The Chief Executive (who has temporarily stepped aside as detailed in the Chairman’s Statement on page 10) has a remuneration package
which includes an honorarium of US$240,000 per year (before applicable income taxes) with no performance-related pay, as described earlier
in this report, and his incentive, following a return to his former office, would be derived entirely from his shareholding in the Company. During
the period that Mr Zhevago operates as CEO, 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 Mr Zhevago and apply exclusively
to the Acting CEO and would apply to any other Executive Director appointment. The principles below also 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.
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.
Benefits
Competitive in the
market in which the
individual is employed.
Benefits are paid to comply with local
statutory requirements and as applicable
to attract or retain executives of a suitable
calibre. They include life insurance and
medical insurance. Where appropriate,
additional benefits may be offered,
including, but not limited to, allowances for
accommodation, relocation, tax advice
and legal advice.
Business and, where
relevant for current
Executive Directors,
individual performance are
considerations in setting
base salary.
Not performance related.
Not performance related.
Base salary increases are
applied in line with the
outcome of the review, which
will not exceed 5% p.a. (or, if
higher, the applicable inflation
rate) on an annualised basis
over the period over which
this policy applies. Increases
above this level may be
applied where appropriate to
reflect changes in the scale,
scope and responsibility
attaching to the role and
market comparability.
The employer contribution
will be a percentage of
pensionable salary and
associated benefits
(excluding variable pay). The
employer contribution will
normally be up to 15% of
salary subject to compliance
with local statutory
requirements.
Benefits’ 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.
Ferrexpo plc
Annual Report & Accounts 2019
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Purpose and link to strategy
Operation
Opportunity
Performance metrics
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,
and 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.
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 case of individual gross misconduct,
an error in assessing performance against
the condition, corporate failure (for which
the individual was partly or wholly
responsible) and/or in the event that the
individual is found legally responsible for:
– a material misstatement of the Annual
Accounts; or
– a failure of risk management or
reputational damage to the Company.
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 case of individual gross misconduct,
an error in assessing performance against
the condition, corporate failure (for which
the individual was partly or wholly
responsible) and/or in the event that the
individual is found legally responsible for:
– a material misstatement of the Annual
Accounts; or
– a failure of risk management or
reputational damage to the Company.
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.
Performance related.
Performance measures
can include financial,
non-financial and personal
achievement criteria
measured over one
financial year.
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.
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.
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.
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.
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 set with reference to 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.
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Annual Report & Accounts 2019
Remuneration Report
continued
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 on
page 85, 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 Acting CEO. 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
Not performance related.
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
and/or in relation to the
Non-executive Director who
will be a representative of
employees 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.
Additional remuneration may
be provided in connection
with fulfilling the Company’s
business (e.g. any expenses
incurred fulfilling Company
business may be reimbursed
including any associated tax,
and payments may continue
to be made to Mr Zhevago in
line with his contractual terms
for the reason stated below).
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 as is currently the case with the former CEO. The former CEO continues to receive remuneration on the same basis as when he
was CEO and operates under his pre-existing contract; this includes a base salary of US$240,000 per annum and benefits. This reflects the
facts that: (i) while he no longer retains any executive responsibilities, he remains available to the Acting CEO (and other members of the
management team) to provide advice on areas within his knowledge and expertise; and (ii) it was agreed that he could undertake non-
executive duties which were specifically delegated to him by the Board or the Acting CEO. Therefore, his role requires greater time
commitment than that of other Non-executives. Non-executive Directors in other normal circumstances are not eligible to participate in any
incentive plans, or receive benefits (other than the reimbursement of business expenses and any tax arising from undertaking Company
business) or any additional elements of remuneration to that stated above.
Ferrexpo plc
Annual Report & Accounts 2019
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Pay-for-performance: scenario analysis
The former CEO (who has temporarily stepped aside as detailed in the Chairman’s Statement on page 10) 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 (i.e. fixed at US$240,000 per annum plus any benefits) and does not vary with performance.
For the Acting CEO (and in his role as CFO), who is the sole current 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”. The scenario has been prepared using his
base salary as allowing for the current premium for being Acting CEO as detailed on page 96.
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)
Maximum policy award at 200%
of salary with 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 vesting in
line with Target (60% of
maximum)1
Below threshold
No STIP payable
Threshold not achieved (nil)
1. Excludes increase in value arising from share price growth.
Base salary, pension
and benefits as at
1 January 2020
Acting CEO
CHF (’000s)
Fixed
100%
On target
38%
Maximum
28%
1,188
28%
31%
34%
3,095
41%
867
5,090*
0
1,000
2,000
3,000
4,000
5,000
6,000
Fixed Pay
Annual Bonus
LTIP
LTIP value with 50% share price growth
*Total (including 50% share price growth on LTIP)
Potential reward opportunities illustrated above are based on the policy and current practice, applied to the Swiss base salary of the Acting
CEO in force at 1 January 2020. For the STIP, the amounts illustrated for the CFO are those potentially receivable in respect of performance for
2020. 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 Acting CEO has been included at the normal policy maximum at 200% of salary although in practice awards
are granted significantly below this level. It should also be noted that the Committee reviews the efficacy of the LTIP prior to grant each year.
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Ferrexpo plc
Annual Report & Accounts 2019
Remuneration Report
continued
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.
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 (who has temporarily stepped down as CEO) 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
Date of contract
1 November 2008
7 January 2008
Notice period
From employer
6 months
12 months
From employee
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).
Ferrexpo plc
Annual Report & Accounts 2019
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If the individual is considered a “good” leaver (e.g. for reasons of death, ill-health, injury or disability; their employing company ceasing to be
a member of the Group; the business (or part) of the business in which they are 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.
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 Director1
S Lucas
Graeme Dacomb
L Genovese
V Lisovenko
F MacAulay
Position
Chairman
Non-executive Director
Non-executive Director
Non-executive Director
Non-executive Director
Date of first appointment
Date of re-election
19 May 2016
10 June 2019
12 February 2019
28 November 2016
Annual re-election
Election at 2020 AGM
Annual re-election
Annual re-election
12 August 2019
Election at 2020 AGM
1. Excluding Mr Zhevago whose terms are disclosed in the table on page 90.
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.
94
Ferrexpo plc
Annual Report & Accounts 2019
Remuneration Report
continued
PART B: REMUNERATION IN 2019 (AUDITED)
The following section provides details of how the remuneration policy was implemented during the year. Throughout this report,
the remuneration of Mr Zhevago (who has temporarily stepped aside from his executive role as detailed in the Chairman’s Statement on
page 10) 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 2019
The Committee comprises four Independent Non-executive Directors. Fiona Macaulay was appointed Chair of the Remuneration
Committee with effect from 12 August 2019, taking over from Bert Nacken who chaired the Committee prior to this. The other members of
the Committee during the year were Graeme Dacomb, 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 71. A summary of the topics
discussed at meetings in 2019 is detailed below:
– Review of the Directors’ and Executive Committee remuneration policy.
– Review of remuneration of members of the Executive Committee and Company Secretary, including salaries, STIP and LTIP policy.
– Review of incentive outcomes.
– Review of the policy governing recovery provisions relating to incentive awards.
– Review of feedback from shareholders including in respect of the 2019 AGM.
– Review of general market practice on executive remuneration.
– Review of corporate governance developments.
– 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. The Company Chairman and other members of
management may also attend meetings by invitation where appropriate. No Director is present when their own remuneration is being discussed.
Advisers
Following a competitive tender, the Committee appointed Korn Ferry in October 2019 to provide advice to the Committee. Prior to this the
Committee received advice on Committee matters from Mercer | Kepler. Both Korn Ferry and Mercer | Kepler are members of the
Remuneration Consultants Group and adhere to its code of conduct.
Korn Ferry also provides general remuneration advice to management. Korn Ferry’s fees for services provided to the Committee in 2019
totalled £36,000 which were charged on the basis of a fixed fee for specified services and on a time and materials basis for any work outside
of this scope. 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 2019 totalled £8,146 based on time and materials. The Committee evaluates the support
provided by its advisers periodically and is satisfied that advice received is independent and objective and that the advisers did not have any
connections with Ferrexpo which may impair their 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).
Ferrexpo plc
Annual Report & Accounts 2019
95
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 2019 and the prior year.
K Zhevago (CEO)7
C Mawe (CFO)8
All figures shown in currency of payment
2019
2018
2019
2018
1 Salary
2 Benefits
3 STIP
4 LTIP
5 Pension
Total
US$200,000
US$240,000
CHF698,417
CHF651,525
US$48,630
–
–
–
–
–
CHF195,411
CHF191,339
CHF865,000
CHF735,000
£250,705
£291,975
CHF7,948
CHF10,941
CHF69,848
CHF68,922
US$248,630
plus CHF7,948
US$240,000
plus CHF10,941
CHF1,828,676
plus £250,705
CHF1,646,786
plus £291,975
6 Total (single currency)
US$256,630
US$251,195
CHF2,146,746
CHF2,115,062
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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/provision and healthcare).
3. STIP: this is the total bonus earned on performance during the year. Further details are provided on pages 96 to 98.
4. LTIP: the market value of shares that vested on performance to 31 December of the relevant year (2019: 97.32% vested on performance; 2018: 100% vested on performance). The market value
is based on the share price on the normal date of vesting: 31 December 2019 of 158.95 pence; 31 December 2018 of 194.65 pence. The above value is inclusive of 11,746 shares that were paid
as a result of dividend accrual on LTIP shares vesting. Further details are provided on page 98. The impact of share price appreciation on the value of the LTIP is reflected in the CFO’s LTIP Award
Vesting table on page 98.
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: 2019 – US$1 = CHF1.0066, CHF1 = £0.7882, £1 = US$1.2770; 2018 – US$1 = CHF0.9773, CHF1 = £0.7659.
7. For Mr Zhevago represents remuneration earned during the period from 1 January 2019 until 25 October 2019 when he stepped aside from his CEO role. Following this date, Mr Zhevago was a
Non-executive Director and his remuneration for the period is disclosed in the table below.
8. Mr Mawe was appointed Acting CEO on 25 October 2019 and received a temporary additional annualised salary of CHF200,000 to reflect his additional responsibilities.
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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 2019 and the prior year.
Non-executive Directors
S Lucas (Chairman)
G Dacomb1
L Genovese2
V Lisovenko (Senior Independent Director)3
F MacAulay4
K Zhevago5
Former Non-executive Directors
S Lockett6
M Reilly7
B Nacken7
All figures shown in currency of payment, US$000
2019
2018
Fees
Benefits
Pension
Total
Fees
Total
440
67
88
227
46
40
16
57
57
–
–
–
–
–
30
–
–
–
–
–
–
–
–
2
–
–
–
440
67
88
227
46
72
16
57
57
440
440
–
–
–
–
135
135
–
–
190
170
170
–
–
190
170
170
1. Graeme Dacomb was appointed to the Board with effect from 10 June 2019.
2. Lucio Genovese was appointed to the Board with effect from 12 February 2019.
3. Vitalii Lisovenko was appointed Senior Independent Director with effect from 19 August 2019.
4. Fiona MacAulay was appointed to the Board with effect from 12 August 2019.
5. Kostyantin Zhevago stepped aside from the role of CEO on 25 October 2019 following which he was appointed a Non-independent Non-executive Director of the Company. He continues to
receive an annualised fee of US$240,000. This reflects the facts that while he no longer retains any executive responsibilities, he remains available to the Acting Chief Executive (and other members
of the management team) to provide advice on areas within his knowledge and expertise and it was agreed that the former CEO could undertake non-executive duties which were specifically
delegated to him by the Board or the Acting CEO. Therefore his role requires greater time commitment than that of other Non-Executives.
6. Simon Lockett resigned from the Board on 28 January 2019.
7. Mary Reilly and Bert Nacken did not stand for re-election at the Group’s AGM on 7 June 2019 and as such ceased to be Directors on this date.
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Ferrexpo plc
Annual Report & Accounts 2019
Remuneration Report
continued
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 2019, 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 to increase executive salaries in 2019 to align to CPI per location. This increase was with effect from
1 January 2019. No increase was awarded in 2020. The increase awarded to Mr Mawe in January 2019 is reflected in the table below.
Executive Director
K Zhevago
C Mawe1
Position
CEO
CFO
Base salary at:
1 January 2020
1 January 2019
N/A
CHF661,320
US$240,000
CHF651,525
Increase
0%
1.5%
1. Mr Mawe’s salary was adjusted retrospectively to 1 January 2019 by Swiss CPI of 1.5% after the publication of the Remuneration Report for 2018.
Mr Zhevago stepped aside from the role of CEO on 25 October 2019 with Mr Mawe being appointed the Acting CEO. As noted in the letter
from the Chair, the Committee determined that while Mr Mawe is undertaking the role of Acting CEO he will receive additional salary of
CHF200,000 to reflect his additional responsibilities. Consequently, with effect from 25 October 2019, Mr Mawe’s aggregate base salary was
adjusted to CHF861,320 per annum. Mr Mawe’s pension and bonus will be calculated as a percentage of his total salary received over the
relevant year. With regard to Mr Zhevago’s fee, while he no longer retains any executive responsibilities, he remains available to the Acting
CEO (and other members of the management team) to provide advice on areas within his knowledge and expertise and it was agreed that the
former CEO could undertake non-executive duties which were specifically delegated to him by the Board or the Acting CEO. Therefore his
role requires greater time commitment than that of other Non-Executives and the amount of salary provided was already below that of a
traditional Chief Executive Officer in light of his shareholding.
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 for all Swiss employees operate according to a sliding
scale, increasing as the employee gets older to a maximum of 10%. No additional benefit is receivable on early retirement.
Executive Director
K Zhevago
C Mawe
Increase in value
for 2019 less
Director’s
contribution
(CHF000)
9
70
Normal retirement date
07.01.2039
31.01.2027
Mr Zhevago is entitled to 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. In 2019, the value of accommodation provided was US$90,837. He did not claim this
entitlement in 2018. Ferrexpo AG provides Mr Mawe with CHF170,316 of accommodation allowance and CHF24,931 of health insurance per
annum which is subject to annual adjustment in light of the insurer’s changes to premium rates. Pension and other benefits will operate in
2020 as set out in the Executive Director remuneration policy earlier in the report. In line with best practice, the pension provision to Mr Mawe
is in line with the standard provision to employees in Switzerland.
2019 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 based on the budget for 2019 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 actual iron
ore prices and sales pricing outside of a 5% band, operating forex losses or gains, and other major raw material cost price items such as gas,
electricity and fuel prices as appropriate, to the extent that these were not under the direct control of management. These adjustments ensure
that the targets fulfil their original intent and are no more or less challenging than when set in light of the adjustments made. No adjustments
were made to safety, sales or production indicators such as volumes and costs.
The Committee has discretion to manage bonus outcomes retrospectively; it can confirm, increase, reduce or cancel bonus payments to
reflect current market conditions and affordability. 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 2019, as determined by the Committee for the CFO, is summarised on the next page.
Ferrexpo plc
Annual Report & Accounts 2019
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Business scorecard (60% of STIP)
KPI
Measure/target
Financial
Group EBITDA (US$)
NOPAT (US$)
Weighting
for CFO%
15.0%
15.0%
Threshold
50%
484
317
Target
100%
537
352
Stretch
150%
591
387
Scorecard
outcome
584
414
Operational
FPM Production volume
(Mt)
5.0%
10,400
10,600
10,900
10,519
FPM Full cash costs
(C1) (US$/t)
FPM Total movement
cost (US$/t)
FYM Total movement
cost (US$/t)
5.0%
53.7
52.7
50.7
53.0
5.0%
2.48
2.35
2.21
1.93
5.0%
1.98
1.85
1.74
1.86
Sales and
Marketing
Realised DAP/FOB price
(US$)
5.0%
-4.00
-2.50
-1.00
-1.69
Actual Seaborne freight
per wmt compared to
C3 (US$/t)
5.0%
4.50
3.00
1.50
1.50
Max
as a %
of salary
Bonus
awarded
as a %
of salary
22.5%
21.5%
22.5%
22.5%
7.5%
4.0%
7.5%
4.4%
7.5%
7.5%
7.5%
4.8%
7.5%
6.3%
7.5%
7.5%
Assessment
Above
target
Stretch
achieved
Above
threshold
Above
threshold
Stretch
achieved
Above
threshold
Stretch
achieved
Stretch
achieved
Total
Safety
Zero harm –
5% deduction
due to fatality
60.0%
Personal objectives (40% of STIP)
90.0% 78.5%
0.00%
Discretionary
modifier
Scorecard outcome
78.5%
Objectives
Minimise
additional tax
arising from
tax audits
Additional finance
secured in 2019
to cover PXF
amortisation in
2020
Smooth
and improve
external audit
process
Improve overall
corporate
governance,
for the Board
and Company
Secretarial
function
Weighting
for CFO%
10.0%
Threshold
50%
Target
100%
Stretch
150%
Additional
US$5 million
Additional
US$3 million
Additional
US$1 million
tax due
tax due
tax due
Scorecard
outcome
Stretch
achieved
Assessment
Additional tax
charge less than
US$1 million
Max
as a %
of salary
Bonus
awarded
as a %
of salary
15.0%
15.0%
10.0% Half covered Fully covered
Additional
US$1 million
Target
PXF amortisation
fully secured in 2019
to cover 2020
15.0%
10.0%
10.0% Minimum of
half audit
process
improvements
implemented
Audit process
improvements
fully
implemented
resulting in a
smooth
auditor
transition and
audit
Smooth audit
transition and
fully
implemented
and improved
audit
processes
Stretch
achieved
New auditors fully
on-boarded and
improved audit
processes
implemented
15.0%
15.0%
10.0%
Noticeable
improvements
effected in
one area
Noticeable
improvements
effected in
two areas
Noticeable
improvements
effected in all
three areas
Stretch
achieved
15.0%
15.0%
Improvements
implemented with
the adoption of new
governance process,
strong progress on
Board refreshment
and the appointment
of a new Group
Company Secretary
Total
40.0%
Total STIP (Composite result of business scorecard and personal objectives achievement)
60.0% 55.0%
150.0% 133.5%
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Ferrexpo plc
Annual Report & Accounts 2019
Remuneration Report
continued
The Committee considered the CFO’s personal performance against his personal targets during 2019 as shown above and confirmed that
the CFO had achieved all his personal targets relating to managing the Group’s debt position relating to managing finance to cover the
impending PXF amortisation due in 2020, as detailed in the Performance Review on page 41, as well as enabling 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 while also implementing processes to improve overall governance, the operation of the Board and the Company’s Secretariat
function. It was also noted that the CFO had, through various personal actions, contributed towards the transition to fully on-board the
Group’s new external auditors and had taken actions to effectively manage the Group’s overall tax position.
Whilst the formulaic outturn under the business and personal portions of the STIP resulted in a bonus of 134% of salary, the Committee
determined that in order to align the outcome with underlying performance and the shareholder experience over the year, this should be
reduced by approximately 10% of salary to 124% of salary to reflect the approach taken with the wider members of the Executive Committee
to take account of the current Group focus on cost efficiencies.
STIP framework for 2020
The STIP framework for 2020 is in line with the principles of the remuneration policy and the 2019 framework. Financial and operational
targets, including cost reduction measures and personal KPIs, continue to be set as in previous years. Mr Mawe’s 2020 STIP opportunity is
150% of salary for maximum performance, and 100% for target performance, calculated as a percentage of salary earned during 2020 (i.e.
including allowance for Acting CEO for the duration of the post). The measures and weightings for the STIP in 2020 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.
KPI
Financial (EBITDA, debt)
Operational (safety, production, sales volume)
Personal
Total
LTIP award vesting – audited
Weighting
for CFO
25.0%
35.0%
40.0%
100.0%
The performance period for the 2017 LTIP awards ended on 31 December 2019. The 2017 LTIP rewarded TSR outperformance of a
tailored comparator group, as set out below. Under the 2017 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 Korn Ferry. From 1 January 2017 to 31 December 2019,
Ferrexpo’s TSR outperformance was 7.7% p.a. resulting in 97.32% of the 2017 LTIP awards vesting.
Date of grant
Number of
shares
Share price at
date of grant1
Value awarded
based on grant
price
Vesting
percentage
Number of
shares vesting
Value vesting
based on grant
price
Share price at
date of vesting2
Value based on
vesting price3
C Mawe
02/05/2017
150,000
117.4p
£176,100
97.32% 145,980
£185,170
158.95p £250,705
20/04/2016
150,000
29.8p
£44,725
100% 150,000
£44,725
194.65p
£291,975
Impact of
share price
appreciation
£74,605
(40%)
£247,250
(85%)
1. Based on the average share price over the three-month period preceding the start of the performance period.
2. Based on the market value of shares on the normal vesting date.
3. Excludes value of share purchase of 11,746 shares in lieu of dividends throughout 2019.
LTIP granted in 2019 – audited
Mr Mawe was granted a 2019 LTIP award at a face value of 40% of salary.
Executive Director
C Mawe
Date of grant
Number of
shares
Face value
Vesting for
minimum
performance
Face value
(% of salary)
(% of maximum)
End of performance period
25/04/2019
100,000
£205,6601
39%
20%
31/12/2021
1. Based on the average share price over the three-month period preceding the start of the performance period and an average exchange rate of CHF1 = £0.7880.
Ferrexpo plc
Annual Report & Accounts 2019
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The LTIP award will vest to the extent that the TSR performance condition is met with performance measured over the period to
31 December 2021. A two-year holding period will apply to any shares that vest. Clawback provisions also apply to the award. TSR is
measured against an index of iron ore and diversified miners. The constituents of the index for the recent awards are summarised in the
table below:
Focused iron ore miners
Weighting
Assore
Atlas Iron2
Cliffs
Fortescue Metals
Kumba Iron Ore
Mount Gibson
Global diversified miners
Anglo American3
BHP
Rio Tinto
Vale
Glencore
20161
60%
2017
60%
2018
60%
2019
60%
Weighting
40%
40%
40%
40%
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 2017 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.
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 vs.
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 2020
This Directors’ Remuneration Report is published prior to the grant date of awards under the LTIP, which are normally made in April. The
Committee intends to grant Mr Mawe an LTIP award of over 137,500 shares (which had a face value of c.35% of his CFO salary based on the
share price prevailing at the time of setting the award size). The award has a similar value to the shares granted in 2019 with this quantum not
impacted by salary allowance for role as Acting CEO. 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. For 2019, fees for incoming NEDs were reduced to align
with market benchmarks. The fee rates applicable for existing NEDs and new appointments from 2019 are disclosed below. There are
currently no proposed changes for 2020.
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
US$440,000
US$100,0001
US$20,000
US$55,0002
US$440,000
US$135,000
US$35,000
US$55,000
1. Mr Zhevago continues to receive a base fee of US$240,000 p.a. whilst in the role of Non-independent Non-executive Director and is also eligible for specific benefits as disclosed on pages 95 and 96.
2. As per 2018, the fee includes US$20,000 for chairmanship of the Committee of Independent Directors (“CID”) and US$35,000 for acting as the Senior Independent Director (“SID”).
100
Ferrexpo plc
Annual Report & Accounts 2019
Remuneration Report
continued
Directors’ shareholdings – audited
Total interests of the Directors in office (and connected persons) as at 31 December 2019:
K Zhevago1
C Mawe
S Lucas
G Dacomb
L Genovese
V Lisovenko
F MacAulay
S Lockett (to January 2019)
M Reilly (to April 2019)
B Nacken (to April 2019)
At 31 December 20192
At 31 December 2018
296,077,944
296,077,944
266,055
254,309
–
–
–
–
–
–
–
20,000
–
N/A
N/A
–
N/A
50,000
–
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.
2. Or upon ceasing to be a Director of the Company if earlier.
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. Performance shares that
have vested under the LTIP but which are still subject to the two-year holding period will continue to vest at the conclusion of the two-year
holding period unless the Committee determines otherwise. As at 17 March 2020, being a date not more than one month prior to the date of
notice of the AGM, the Executive Directors’ shareholdings are as follows:
K Zhevago
C Mawe
Shareholding requirement
(% salary)
100%
100%
Owned
outright
296,077,944
270,202
Subject to
performance1
–
100,000
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 28 February 2020 and a share price of 129.25 pence.
Details of LTIP awards held by Mr Mawe (which are subject to performance) are provided below.
Current
shareholding2
(% salary)
–
51.4%
Guideline
met?
Yes
No
C Mawe
Total
Award
At 1 January
2019
Granted
(2019 award)
Exercised
Lapsed
2016 Award
150,0001
2017 Award
150,0002
–
–
2019 Award
–
100,000
150,000
–
–
150,000
100,000
150,000
–
–
–
–
Total at
31 December
2019
Price on
date of award
(pence)
Date
from which
exercisable
Expiry
date
0
36.5
01.01.19
25.04.26
150,000
100,000
250,000
148.6
01.01.20
04.05.27
202.4
01.01.22
29.04.29
1. This award has vested 100% under the TSR performance condition described above. At the normal date of vesting (31 December 2018) the market price of a share was 194.65 pence.
2. This award vested at 97.32% of maximum under the TSR performance condition described above. At the normal date of vesting (31 December 2019) the market price of a share was 158.95
pence.
With the exception of the reinvestment of the January 2020 dividend to purchase 4,147 shares for Mr Mawe, there have been no changes
in the interests of the Directors from the end of the period under review to 17 March 2020. Total outstanding (i.e. awarded but not yet vested)
awards granted under the LTIP as at the end of 2019 are equivalent to 0.1% 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 2019, 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 2019, 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.
Ferrexpo plc
Annual Report & Accounts 2019
101
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 2018 and 2019
compared to that for other employees.
Salary
Taxable benefits
Annual bonus
CEO1
0%
0%
n/a
Other
employees2
4.0%
0.0%
21.1%
1. The CEO figure is based on a full year equivalent for Mr K Zhevago had he not temporarily stepped aside from his role in October 2019.
2. Refers to senior executives.
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 2018 and 31 December 2019, and the percentage change.
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1. Includes dividends and share buy-backs.
2019
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155
2018
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97
Year-on-year
change
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60.4%
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Comparison of Company performance and Executive Director pay
The graph shows the value, at 31 December 2019, of £100 invested in Ferrexpo’s shares on 31 December 2009 compared with the
current value of the same amount invested in the FTSE 250 and All-Share indices and in the shares of the LTIP comparator group. The FTSE
250 and All-Share indices are chosen because Ferrexpo was a constituent member of the FTSE 250 for most of the period.
Historical TSR performance
Growth in the value of a hypothetical £100 holding over the ten years to 31 December 2019.
400
300
200
100
— Ferrexpo
— 2019 LTIP Index
— FTSE 250 Index
— FTSE All-Share Index
0
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
31 Dec
2019
Chief Executive Officer’s pay
US$000
K Zhevago
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
Single figure total remuneration
341
348
291
243
243
243
243
255
251
257
STIP vesting (% max)
LTIP vesting (% max)
K Zhevago did not participate in the STIP
K Zhevago did not participate in the LTIP
102
Ferrexpo plc
Annual Report & Accounts 2019
Remuneration Report
continued
Statement of shareholder voting
The following table shows the results of the binding vote on the existing remuneration policy at the 2017 AGM and the advisory vote on the
2018 Annual Report at the 2019 AGM.
Remuneration policy (at 2017 AGM)
2018 Annual Report on Remuneration (at 2019 AGM)
For
Against
Withheld
Shares
(millions)
434
484
%
97.4%
98.7%
Shares
(millions)
12
6
%
2.6%
1.3%
Shares
(millions)
1.4
0.9
As stated below the Committee has consulted with shareholders about the changes to the policy proposed at the 2017 AGM.
Shareholder consultation
The Remuneration Committee wrote to the Company’s largest shareholders in March 2020 outlining its intention to ‘roll-over’ the
existing policy for a further 12 months, except for some minor changes, in light of the CEO temporarily stepping down from his executive
responsibilities and being replaced on an interim basis by the CFO and, therefore, a need for greater clarity over the future make-up of the
Executive in the course of 2020. The Committee will undertake a full consultation exercise with the Company’s major institutional shareholders
during 2020 over the refinements it would like to make to the policy to reflect the Company’s evolving strategy and wider market best practice
expectations. Feedback received was broadly in favour of the ‘roll-over’ and minor changes proposed.
Other transactions involving Directors are set out in Note 34 Related Party disclosures to the Consolidated Financial Statements.
This report was approved by the Board on 17 March 2020.
Signed on behalf of the Board
Fiona MacAulay
Chairman of the Remuneration Committee
Ferrexpo plc
Annual Report & Accounts 2019
103
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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
250 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
2019. There have been no significant events
since the balance sheet date, other than the
proposed dividend disclosed in Note 12 to
the Consolidated Financial Statements.
Information about the Group’s strategy,
business model and likely future
developments is included in the Strategic
Report on pages 1 to 61.
Information about the use of financial
instruments by the Group is given in Note 27
to the Consolidated Financial Statements.
Dividends
Results for the year are set out in the
consolidated income statement on page 121.
The Directors have not recommended a
final ordinary or special dividend at this
stage. The Board is committed to dividends
and intends to reassess its decision to
declare a final ordinary and/or special
dividend for the 2019 financial year once the
general market situation and the effect of the
COVID-19 virus has become clearer.
Overall, in 2019 the Group paid out
dividends of US$155 million, a 60% increase
compared to 2018 (US$97 million).
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 (retired 29 April 2019)
– Mary Reilly (retired 29 April 2019)
– Kostyantin Zhevago
– Lucio Genovese (appointed
12 February 2019)
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 9.8.4R (1))
See Note 11 to the Consolidated Financial
Statements
Details of long-term incentive
schemes (LR 9.8.4R (4))
Contracts of significance
(LR 9.8.4R (10))
Details of waivers of dividends
by shareholders (LR 9.8.4R
(12) and (13))
Relationship Agreement with
controlling shareholder
(LR 9.8.4R (14)). Also see Note
34: Related party disclosures
Disclosures concerning
greenhouse gas emissions
Financial instruments
Remuneration Report
See Note 34 to the Consolidated Financial
Statements. Transactions with FC Vorskla are
considered to be contracts of significance under
the Listing Rules
The employee benefit trust contains 1.7 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
Corporate Governance Report
Strategic Report
The Group does not hold any derivative financial
instruments. Group policy on financial instruments
is set out in Note 27 to the Consolidated Financial
Statements
Events since the balance
sheet date
See Note 35 to the Consolidated Financial
Statements
Statement of Directors’
responsibilities in respect of
the Annual Report and
Accounts
Information that fulfils the
requirements of DTR 7.2
(other than DTR 7.2.6)
Corporate Governance Report
Corporate Governance Report
Page
136
85–102
170
–
69
44
158
173
106
62
– Graeme Dacomb (appointed 7 June 2019)
– Fiona MacAulay (appointed
12 August 2019)
All of the Directors will retire at the
forthcoming AGM and, being eligible, will
offer themselves for election or re-election.
Further details about the Directors and
their roles within the Group are given in the
Directors’ biographies on pages 64 to 65.
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 85 to 102.
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 which 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 28 to 29. Employee numbers are
stated in Note 29 to the financial statements.
The Group employs fewer than 250 staff in
the United Kingdom and so does not
disclose its policies on employee
involvement or employing disabled people.
However, it will give fair consideration to
applications for employment from
disabled people.
Political donations
The Group made no political donations,
political expenditure or political contributions
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.
104
Ferrexpo plc
Annual Report & Accounts 2019
Directors’ Report
continued
Subject to applicable statutes and other
shareholders’ rights, shares may be issued
with such rights and restrictions as the
Company may by ordinary resolution
decide, or (if there is no such resolution or
so far as it does not make specific provision)
as the Board may decide. At each AGM, the
Board proposes to put in place annual
shareholder authority for the Company’s
Directors to allot new shares in accordance
with relevant institutional investor guidelines.
Details of the issued share capital of the
Company are shown in Note 31 to the
Consolidated 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
Restrictions on voting
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
7 June 2019. This authority will expire at the
conclusion of the Company’s 2020 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 2019.
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 Act 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.
Substantial shareholdings
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.
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
As at 31 December 2019, the Company had been advised, in accordance with the
Disclosure Guidance and Transparency Rules, of the following notifiable interests in its
voting rights.
Name of shareholder
Ordinary Shares
Number of voting rights
% of the Company’s total voting
rights at date of notification
Fevamotinico S.a.r.l.1
296,077,944
296,077,944
50.30%
1. Fevamotinico S.a.r.l. is a wholly owned subsidiary of The Minco Trust of which Kostyantin Zhevago is a beneficiary.
As at 17 March 2020, 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.
Ferrexpo plc
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assessment; and iii) events and conditions
beyond the period of management’s going
concern assessment, the Group 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 Directors consider it appropriate to
continue 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 Thursday 28 May 2020 at
55 St James’s Street, London SW1A 1LA.
Further information will be sent to
shareholders in a separate letter from
the Chairman summarising the business
of the meeting together with the Notice
convening the AGM.
The Strategic Report on pages 1 to 61
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 17 March 2020.
For and on behalf of the Board
Steve Lucas
Chairman
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 Dollar revolving
pre-export finance (“PXF”) facility for
US$400 million 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.
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 69). 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 38 to 60. The Viability
Statement is set out in the Strategic Report
on page 61. The financial position of the
Group, its cash flows, liquidity position and
borrowing facilities are described in the
Performance Review on pages 38 to 45. In
addition, Note 27 to the Consolidated
Financial Statements on pages 158 to 165
sets out the Group’s objectives, policies and
processes for managing its capital; its
financial risk management objectives and
details of its financial instruments; its
exposure to credit risk, liquidity risk, as well
as currency risk and interest rate risk.
The Directors have assessed that, taking
into account: i) its available cash and cash
equivalents at the date of authorisation of
the consolidated financial statements; ii) the
Group’s cash flow projections for the period
of management’s going concern
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Annual Report & Accounts 2019
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
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
subsidiary undertakings included in the
consolidation taken as a whole
(b) the Strategic Report includes a fair
review of the development and
performance of the business and the
position of the Company and the
subsidiary 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, is fair,
balanced and understandable, and
provides the information necessary for
shareholders to assess the Group’s
position, performance, business model
and strategy.
The Directors’ Report (including
Corporate Governance Report) comprises
the information on pages 62 to 106.
This responsibility statement was
approved by the Board of Directors on
17 March 2020 and is signed on its behalf
by:
– make an assessment of the Group’s
ability to continue as a going concern.
Steve Lucas
Chairman
Chris Mawe
Acting Chief Executive Officer
17 March 2020
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Financial contents
Notes Content
Independent Auditor’s Report
Primary Statements
Consolidated Income Statement
Consolidated Statement of Comprehensive Income
Consolidated Statement of Financial Position
Consolidated Statement of Cash Flows
Consolidated Statement of Changes in Equity
Notes to the Consolidated Financial Statements
Section 1: Basis of Preparation
1 Corporate information
2 Basis of preparation
3 New accounting policies
4 Use of critical estimates and judgements
Section 2: Results for the Year
5 Segment information
6 Revenue
7 Operating expenses
8 Other income
9
10 Net finance expense
11 Taxation
12 Earnings per share and dividends paid and proposed
Foreign exchange gains and losses
Section 3: Assets and Liabilities
Inventories
13 Property, plant and equipment
14 Leases
15 Goodwill and other intangible assets
16 Other non-current assets
17
18 Trade and other receivables
19 Prepayments and other current assets
20 Other taxes recoverable and payable
21 Trade and other payables
22 Pension and post-employment obligations
23 Provisions
24 Accrued and contract liabilities
Section 4: Financial Instruments and Financial Risk Management
25 Cash and cash equivalents
26
27 Financial instruments
Interest-bearing loans and borrowings
Section 5: Other
28 Share-based payments
29 Employees
30 Commitments, contingencies and legal disputes
31 Share capital and reserves
32 Consolidated subsidiaries
33 Investments in associates
34 Related party disclosures
35 Events after the reporting period
Parent Company Financial Statements
Additional Disclosures
Alternative Performance Measures
Glossary
Page
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Ferrexpo plc
Annual Report & Accounts 2019
Independent Auditor’s Report
to the members of Ferrexpo plc on the audit of the financial statements
For the purpose of this report, the terms “we” and “our” denote MHA MacIntyre Hudson in relation to UK legal, professional and regulatory
responsibilities and reporting obligations to the members of Ferrexpo plc. For the purposes of the table on pages 111 to 115 that sets out
the key audit matters and how our audit addressed the key audit matters, the terms “we” and “our” refer to MHA MacIntyre Hudson and/or
our component teams. The Group financial statements, as defined below, consolidate the accounts of Ferrexpo plc and its subsidiaries (the
“Group”) and include the Group’s share of associates. The “Parent Company” is defined as Ferrexpo plc. The relevant legislation governing
the Parent Company is the United Kingdom Companies Act 2006 (“Companies Act 2006”).
Opinion
In our opinion:
– the financial statements give a true and fair view of the state of the Group’s and Ferrexpo plc’s affairs as at 31 December 2019 and of the
Group’s profit and cash flows 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 Ferrexpo plc financial statements have been properly prepared in accordance with United Kingdom Generally Accepted Accounting
Practice (United Kingdom Accounting Standard Financial Reporting Standard 101 “Reduced Disclosure Framework”, and applicable law);
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 statement of cash flows;
– the consolidated and Parent Company statement of changes in equity;
– the related consolidated Notes 1 to 35; and
– the related Parent Company Notes 1 to 8.
The financial reporting framework that has been applied in the preparation of the Group financial statements is applicable law and IFRSs as
adopted by the European Union. The financial reporting framework that has been applied in the preparation of the Parent Company financial
statements is applicable law and United Kingdom Accounting Standards, including FRS 101 “Reduced Disclosure Framework” (United
Kingdom Generally Accepted Accounting Practice).
Basis for opinion
We conducted our audit in accordance with International Standards on Auditing (UK) (ISAs (UK)) and applicable law. Our responsibilities under
those standards are further described in the auditor’s responsibilities for the audit of the financial statements section of our report.
We are independent of the Group and the Parent Company in accordance with the ethical requirements that are relevant to our audit of
the financial statements in the UK, including the FRC’s Ethical Standard as applied to listed public interest entities, and we have fulfilled our
other ethical responsibilities in accordance with these requirements. We confirm that the non-audit services prohibited by the FRC’s Ethical
Standard were not provided to the Group or the Parent Company.
We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion.
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Overview of our audit approach
Materiality
Scope
The materiality that we used for the Group financial statements was US$20 million, which was determined as
5% of the three-year average of profit before tax (“PBT”) and special items.
Performance materiality was set at 75% of materiality.
We directed and supervised Baker Tilly member firms (“Component Auditors”) to report on the operations of
the five material subsidiaries comprising the three mining and processing entities in Ukraine and the Swiss and
Middle East marketing companies.
Material subsidiaries were determined based on:
1) financial significance of the component to the Group as a whole; and
2) assessment of the risk of material misstatements applicable to each component.
Our audit scope results in all major operations of the Group being subject to audit work, covering in excess of
96% of the Group’s revenue, 98% of the Group’s profit and 97% of the net assets.
Key audit matters
The key audit matters that we identified in the current year were:
– Corporate Social Responsibility (“CSR”) Donations to Blooming Land Charitable Foundation (“Blooming Land”)
– Completeness of related party relationships and transactions
– Taxation – transfer pricing
– Management override of controls
– Completeness of provisions and potential litigations
Our assessment of the Group’s key audit matters is consistent with 2018 except for:
– The inclusion of completeness of provisions and potential litigations
First-year audit transition We developed a detailed audit transition plan, designed to deliver an effective transition from the Group’s
predecessor auditor, Deloitte LLP (“Deloitte”). Our audit planning and transition commenced on 4 July 2019,
following our appointment. Our transition activities were performed for components located in the UK,
Switzerland and Ukraine, which included (but were not limited to) meeting relevant partners and senior staff
from Deloitte, reviewing the Audit Committee meeting minutes and reviewing Deloitte’s 2018 audit working
papers. Our transition focused on obtaining an understanding of the Group’s system of internal control,
evaluating the Group’s accounting policies and areas of accounting judgement, and meeting with
management across all major divisions.
The scope of our audit and our key audit matters
As part of designing our audit, we determined materiality and assessed the risks of material misstatement in the financial statements and the
financial report. In particular, we looked at where the Directors made subjective judgments, for example, in respect of significant accounting
estimates that involved making assumptions and considering future events that are inherently uncertain.
Capability of the audit in 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.
We evaluated management’s incentives and opportunities for fraudulent manipulation of the financial statements (including the risk of override
of controls), and determined that the principal risks were related to posting inappropriate journal entries to both reduce costs and inflate
operating profit, and management bias in accounting estimates.
110
Ferrexpo plc
Annual Report & Accounts 2019
Independent Auditor’s Report
to the members of Ferrexpo plc on the audit of the financial statements continued
Audit procedures performed by the engagement team included, but were not limited to:
– 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 the 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;
– discussing among the engagement team including significant component audit teams and involving relevant internal specialists, including
tax, valuations, pensions and IT;
– discussions with Group and local management, internal audit and the Group’s internal and external legal counsel, including consideration of
known or suspected instances of non-compliance with laws and regulations and fraud;
– enquiring of the Audit Committee concerning actual and potential litigation and claims;
– evaluation of the operating effectiveness of management’s controls designed to prevent and detect irregularities;
– assessment of matters reported on the Group’s whistleblowing helpline and the results of management’s investigation of such matters;
– reading key correspondence with regulatory authorities such as the Financial Conduct Authority;
– challenging assumptions and judgements made by management in its significant accounting estimates, in particular, 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;
– identifying and testing journal entries, in particular, any journal entries posted with understatement of costs, journals that are backdated or
posted by senior management;
– the Group audit team visited the mines in December 2019 and observed the progress of key capital projects and the mining operations;
and
– the use of data analytics software to interrogate the journals posted in the year and to review areas where the incentive to override controls
may be greatest. We also used our data analytics tool to identify potential transactions with related parties.
There are inherent limitations in the audit procedures described above and the further removed non-compliance with laws and regulations
is from the events and transactions reflected in the financial statements, the less likely we would become aware of it. Also, the risk of not
detecting a material misstatement due to fraud is higher than the risk of not detecting one resulting from error, as fraud may involve deliberate
concealment by, for example, forgery or intentional misrepresentations, or through collusion.
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.
We did not identify any key audit matters relating to irregularities, including fraud.
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. We have determined the matters described below to be the key audit matters to be
communicated in our report.
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Corporate Social Responsibility (“CSR”) Donations to Blooming Land Charitable Foundation (“Blooming Land”)
Key audit
matter description
How the scope of our
audit responded to
the key audit matter
As part of the Group’s Corporate Social Responsibility programme in Ukraine, the Group made CSR donations of
US$9.5 million to a charitable organisation called Blooming Land in the year ended 31 December 2018. The Group
had been making CSR payments to Blooming Land since 2013 for a total amount of approximately US$110 million.
In May 2018, the Group suspended payments to Blooming Land citing delays in obtaining adequate information
from the charitable organisation and pending the outcome of a review into Blooming Land’s 2017 audited financial
statements.
In August 2018, the then Group’s auditors reported to the Board of Directors a number of concerns in respect of
the activity of Blooming Land and recommended launching an independent forensic investigation into a number of
matters relating to the donations made to Blooming Land. In February 2019, an independent review was launched
by the Group by establishing an Independent Review Committee (“IRC”). The IRC conducted its investigation on
the basis of the terms of reference outlined on page 75, which included, inter alia, gaining assurance over the
ultimate use of the funds donated to Blooming Land, determining whether significant influence or control existed by
the Group’s CEO over Blooming Land and considering any potential legal or regulatory exposures. As part of its
activities, the IRC commissioned an independent forensic investigation that was conducted by independent
forensic accountants and by legal counsel in the UK and Ukraine.
The IRC formally announced the conclusion of its work in August 2019. That followed the receipt of a report from
its advisers in respect of the results of the independent forensic investigation that they had conducted. The
conclusions issued by the IRC in respect of the independent review conducted noted that the Committee had not
been able to gain assurance about the ultimate use of all of the funds by Blooming Land and that indications
remained that some of the funds could have been misappropriated.
As some of the US$9.5 million CSR donations to Blooming Land in the year ended 31 December 2018 may have
been misappropriated or misapplicated, the presentation of such amounts as part of the Group’s community
support donations in the comparative figures for the year ended 31 December 2018 may be inappropriate. The
misappropriation or misapplication of the funds donated to Blooming Land may also expose the Group to the risk
of civil, criminal or regulatory action resulting in potential legal claims, penalties, fines or other liabilities.
This is considered a key audit matter in view of the increased risk of: i) lack of comparability between the
community support donations amount for the current year and that presented for the comparative year to
31 December 2018; and ii) omission of liabilities for any breaches of laws and regulations arising from any
misappropriation or misapplication of funds.
The critical judgements in respect of the nature of the Group’s community support donations are disclosed in the
Key Estimates and Critical Judgements section of the Audit Committee Report on page 78 and in Note 7 to the
financial statements. Provisions/contingencies in respect of the CSR payments made to Blooming Land are
disclosed in Note 30 to the financial statements.
We reviewed the scope and work plan and evaluated the independent forensic investigation report produced by
the IRC’s external legal counsel and the appointed forensic accountants to assess whether the approach and effort
undertaken was consistent with, and capable of achieving, the terms of reference of the investigation. Our review of
the report was also aimed at determining whether the findings included sufficient evidence of misappropriation or
misapplication of the funds advanced to Blooming Land and whether any misappropriation or misapplication could
be quantified in respect of the year ended 31 December 2018.
We also considered the recommendations made in the forensic report for the Group to undertake further actions to
obtain assurance about the ultimate use of funds by Blooming Land. We reviewed and evaluated the extent and
results of the further procedures undertaken in that respect by the Group and considered whether the additional
procedures were in line with the report recommendations.
We also reviewed the findings of the forensic report to assess the existence or likelihood of any civil, criminal or
regulatory action against the Group as a result of the CSR payments to Blooming Land, and the quantification of
any related liability.
We also held discussions with the Group’s legal counsel in the UK and Ukraine to identify any developments that
occurred after the end of the forensic investigation that may indicate the existence or likelihood of an action against
the Group for breach of laws and regulations and any associated liability.
We held discussions with the Committee of Independent Directors, in connection with its monitoring of various tax
and other investigations in Ukraine involving Blooming Land, to assess whether there are developments in those
investigations that provide evidence of misappropriation or misapplication of funds or of a possible liability of
the Group.
We also reviewed the minutes of the meetings of the IRC and held discussions with some of its members to assess
whether the work of the Committee was consistent with the terms of reference of the investigation and whether
there was evidence of misappropriation or misapplication of funds by Blooming Land or of any related action
against the Group, and any associated liability, not highlighted by the forensic report.
Key observations
Based on the procedures performed, we noted no material issues from our work.
112
Ferrexpo plc
Annual Report & Accounts 2019
Independent Auditor’s Report
to the members of Ferrexpo plc on the audit of the financial statements continued
Completeness of related party relationships and transactions
Key audit
matter description
The Group enters into a number of related party transactions and has reported an expense of US$43.8 million
(2018: US$43.3 million) and other income of US$1.4 million (2018: US$0.9 million) in 2019. Of which US$24.9 million
and US$1.4 million respectively relates to transactions with entities that are controlled by the Group’s majority
shareholder and Group’s previous Chief Executive Officer as detailed in Note 34.
Our risk assessment and audit approach reflected the identification of a significant risk in respect of the existence
of unidentified or undisclosed related parties and transactions, including the risk relating to significant transactions
outside the normal course of business that could involve related parties.
We therefore considered completeness of related party transactions to be a Key Audit Matter in light of the
potential for unidentified or undisclosed related party transactions. This risk was considered greatest in respect of
transactions outside the normal course of business.
The related party disclosures are set out in Note 34 to the Financial Statements and the Group’s controls are
described in the Report of the Audit Committee on page 80.
How the scope of our
audit responded to
the key audit matter
We reviewed and evaluated management’s process for identifying and recording related parties into their register.
We reviewed the minutes of meetings of the Board of Directors and relevant sub-committees to assess whether
there are new related party transactions entered into in 2019 that are significant or outside the normal course of
business.
We used our data analytics tool to search for transactions which had not been included in the related party
disclosures.
We also used our data analytics tool to identify potential transactions with related parties.
We challenged management on potential counterparties we identified which included some linkages to the Group
to establish whether they should have been included in the register.
We reviewed a sample of suppliers in Ukraine to establish whether they are genuine businesses against information
held on public records.
We performed independent searches of the Board of Directors’ other appointments and shareholdings and did not
identify any counterparties on the list which were not included in the related party disclosures.
The Group has supported FC Vorskla, which is wholly owned by the Group’s previous Chief Executive Officer, via a
sponsorship for many years. In 2019, the Group paid US$10.8 million (2018: US$10.7 million) for the sponsorship of
FC Vorskla. We have benchmarked the amounts paid versus the commercial income of other football clubs in
Ukraine. We have also obtained external evidence confirming that Ferrexpo’s logo is printed on the football team’s
shirt, is included on the club’s official website and we saw evidence of advertisements at the club ground via the
club’s webcam feed.
As disclosed in Note 34, the Board has taken steps to obtain some further information in relation to FC Vorskla.
Payments are made by the Group to FC Vorskla under a sponsorship agreement which dictates that the
sponsorship funds must be used by FC Vorskla exclusively to finance the ordinary business of the football club. It
has come to the Group’s attention that FC Vorskla has provided a loan to Collaton Limited, a company under the
control of the Group’s former Chief Executive Officer, totalling US$17 million as at 31 December 2019. We have
seen representations from FC Vorskla confirming that loan amounts were advanced to Collaton Limited as it
participated in the financing of sport facilities projects of the club which are expected to involve an investment in
excess of €25 million between 2017 and 2020. However, the Board of Directors of Ferrexpo was unable to
conclude, as at the date of approval of the Annual Report, whether the payments made to FC Vorskla have been
used in their entirety for the legitimate purposes of the football club in Ukraine and have ceased payments to FC
Vorskla until the conclusion of the Group’s enquiries.
As disclosed in Note 30, if it transpires that any of the payments made by the Group to FC Vorskla or the loan
provided by FC Vorskla to Collaton Limited were not used for the legitimate purposes of the football club in Ukraine,
or there has been any non-compliance with legal, regulatory or other requirements, liabilities (including fines and
penalties) may accrue to the Group. At the current time, the existence, timing or quantum of potential future liability,
if any, including fines, penalties or damages, which could be material, or other consequences arising from the
payments made by the Group to FC Vorskla, 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 2019. We have reviewed the disclosures for completeness based upon our review of
the evidence available.
Key observations
We are satisfied that the related party transactions and balances are appropriately disclosed in the financial
statements.
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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 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. Following the completion of this audit, the SFS issued its
official tax audit report on 27 December 2018, claiming a tax adjustment totalling UAH448 million (US$18,914
thousand as at 31 December 2019) and issued the formal claim on 12 March 2019 after having considered the
objections of the Group’s subsidiary according to its earlier tax audit report.
The Group’s subsidiary initiated legal proceedings and filed a claim to the first court instance in Poltava on
22 March 2019. The Poltava court of first court instance confirmed on 4 September 2019 the position of the
Group’s major subsidiary. The SFS filed its appeal in November 2019 and the Northern Commercial Court of
Appeal confirmed on 21 December 2019 the decision of the first court instance and supported the position of the
Group’s subsidiary in full. The SFS subsequently filed the application of cassation to the Supreme Court of Ukraine.
As of the date of approval of these financial statements, the case has not yet been heard by the Supreme Court of
Ukraine.
This matter is described in Note 11 to the financial statements.
Significant judgement is required in applying the transfer pricing rules and in determining the probability of any loss
in connection with the Ukrainian tax audit.
The taxation disclosure including accounting policies and description of key sources of estimation uncertainty are
set out in Note 11 and considered by the Audit Committee on page 78 of the Annual Report.
This year, IFRIC 23 – Uncertainty over Income Tax Treatments is effective for the Group to implement.
The IFRIC 23 framework can be challenging to apply in the context of contentious transfer pricing, in that the
treatment of transfer pricing cases will typically shift from matters of policy and application in an enquiry to matters
of evidence and jurisprudence in an adjudication by a court. In an enquiry, a tax authority has the disadvantage of
not knowing the full facts and circumstances upfront in the same way as a taxpayer. The framework therefore asks
the taxpayer to equalise this dynamic by basing any IFRIC 23 analysis on the assumption that there is no
information asymmetry as between the taxpayer and the tax authority. Further, in an enquiry it is accepted that any
disagreement will likely be settled by a negotiation in the first instance. There will be many factors to account for in
predicting the outcome of a negotiation such as the nature of the dispute as well as wider commercial and policy
pressures. This notwithstanding, the IFRIC 23 framework will work much better for these types of disputes
because it is possible to take a view concerning different aspects of a negotiation and to therefore apply weightings
to the likely scenarios that could play out.
It is much more difficult to apply this framework to an adjudication which is more likely to be binary in its possible
outcomes. The nature of court proceedings is that there is a need for clear adjudication on matters of law and
jurisprudence. This means that negotiation does not come into it at all, albeit the parties are free to settle the
dispute at any time. Rather the court process is an impartial evidence-based process that involves judges applying
the law to the facts. The lower courts will usually resolve points of fact and the higher courts will usually address
points of law. Adjudication of points of law tends to be a more technically involved process whose outcome is
extremely difficult to predict. Consequently, the higher the level of court hearing a matter, the more difficult it
becomes to apply the IFRIC 23 framework. This is because the highest courts operate at the highest levels of
discretion and can therefore decide matters as they see fit.
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Ferrexpo plc
Annual Report & Accounts 2019
Independent Auditor’s Report
to the members of Ferrexpo plc on the audit of the financial statements continued
Taxation – transfer pricing continued
How the scope of our
audit responded to
the key audit matter
We have involved transfer pricing tax specialists to assess the appropriateness of the transfer pricing policies and
documentation in place prepared by management.
On a sample basis, we verified the calculation of prices for transactions that occurred in 2017 to be in line with the
transfer pricing policy.
We have reviewed the correspondence with SFS and calculation of the assessed risk with assistance from UK tax
and transfer pricing specialists. In addition, we have reviewed recent similar cases in Ukraine and the results of the
court proceedings.
The consideration of IFRIC 23 requires the Group to consider the position at each financial year end based upon
the information as at that date. We have challenged management and considered a sensitivity analysis upon the
application of IFRIC 23 to consider the significant judgements made in relation to the following:
– The likelihood of the Group winning the court case at each financial year end;
– The likelihood of the tax authorities paying the court fees to progress the challenge;
– The likelihood of the case being sent back to a lower court for review;
– The likelihood of partial acceptance from the court in favour of both parties;
– The likelihood of a settlement being reached with the tax authorities; and
– The likelihood of the tax authorities winning the court case.
Key observations
The results of our testing were satisfactory and we concur that the recorded tax provisions and disclosures are
appropriate.
Management override of controls
Key audit
matter description
How the scope of our
audit responded to
the key audit matter
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 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 held discussions with a broader range of senior management, being the Acting Chief Executive Officer,
Acting Chief Financial Officer, Group Financial Controller 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 whistleblower reports
for any actual or suspected non-compliance with controls.
– 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 judgements 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.
– 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.
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Completeness of provisions and potential litigations
Key audit
matter description
The Group is involved in a few legal proceedings, both for and against the Company. For a smaller number of
claims against the Company, management has assessed the probability of success of the claims as remote and
accordingly has not accounted for or disclosed the claims.
As disclosed in Note 30, 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”).
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 34 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 2019.
Management judgement is involved in assessing the accounting for claims, and in particular in considering the
probability of a claim being successful and we have accordingly designated this as a focus area of the audit. The
risk related to the claims is mainly associated with the completeness of the disclosure, and the completeness of the
provisions in the financial statements.
How the scope of our
audit responded to
the key audit matter
In response to the risk of completeness of the disclosures and the completeness of the provisions in the financial
statements, we obtained external confirmations directly from the Group’s legal advisers. We discussed the cases
with management, and reviewed correspondence and other documents exchanged between the Group and the
other parties involved.
We read the minutes of the Board meetings, and inspected the Company’s legal expenses, in order to ensure all
cases have been identified.
We tested provisions recorded in the accounting records and reviewed the disclosures for completeness based on
our procedures detailed above.
Key observations
Based on the procedures performed, we noted no material issues from our work.
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Ferrexpo plc
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Independent Auditor’s Report
to the members of Ferrexpo plc on the audit of the financial statements continued
How we tailored the audit scope
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 entity and finance company are UK based, while the head office
and marketing companies are based in Switzerland and the primary mining operations are located in Ukraine.
Considering operational and financial performance and risk factors, we focused our assessment on the significant components and
performed full scope audits of the 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, and Ferrexpo Finance plc. Our full scope and specified audit procedures cover revenue (in excess
of 96% of Group total), profit before tax (98% of Group total) and net assets (97% of Group total).
The remaining 23 components represent 2% of the Group’s profit before tax and individually do not represent more than 1% 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$1.1 million to US$14.6 million (2018: US$9.1
million to US$14.5 million).
Revenue (%)
Profit before tax (%)
Net assets (%)
4
96
2
46
52
3
26
71
Full scope
Specified audit procedures
Analytical procedures
Full scope
Specified audit procedures
Analytical procedures
Full scope
Specified audit procedures
Analytical procedures
The Group audit team was involved in the audit work performed by the component auditors in Ukraine and Switzerland through a
combination of our Group planning meetings and calls, a visit to the Ukrainian team and operations, provision of referral instructions (including
detailed supplemented procedures), review and challenge of related component interoffice 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 UK; 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.
Our application of materiality
The scope of our audit was influenced by our application of materiality. We set certain quantitative thresholds for materiality. These, together
with qualitative considerations, helped us to determine the scope of our audit and the nature, timing and extent of our audit procedures on the
individual financial statement line items and disclosures and in evaluating the effect of misstatements, both individually and in aggregate on the
financial statements as a whole.
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.
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Based on our professional judgement, we determined materiality for the financial statements as a whole as follows:
Group financial statements
Parent Company financial statements
Overall materiality
Group materiality
(US$ million)
Parent Company materiality
(US$ million)
15.0
9.0
20
15
10
5
0
12.0
9.0
20
15
10
5
0
2019
2018
2019
2018
1.5% of Parent Company’s net assets (2018: 1.5%).
We consider the chosen benchmark to be
appropriate due to the nature of the Company’s
operations being a holding company of the Group.
We set our 2019 performance materiality of
US$12 million (2018: US$9 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.
How we
determined it
Rationale for the
benchmark applied
We have determined materiality by using 5% of a
three-year average (2017–2019) of profit before tax.
The profit before tax for 2017–2019 has been
normalised in determining materiality to exclude items
which, due to their variable financial impact and/or
expected infrequency of the underlying events, are
not considered indicative of continuing operations of
the Group.
These items do not form part of the Group’s internally
or externally monitored primary key performance
indicators, and which if included, would distort
materiality year-on-year. We consider this approach
of using a 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 set our 2019 performance materiality of
US$15 million (2018: US$9 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.
For each component in the scope of our Group audit, we allocated a materiality that is less than our overall Group materiality.
We agreed with the Audit Committee that we would report to it all audit differences in excess of US$1 million (2018: US$0.9 million) 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.
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Ferrexpo plc
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Independent Auditor’s Report
to the members of Ferrexpo plc on the audit of the financial statements 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 12 months from the date of approval of the financial statements. 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 and in light of the emergence and spread of the coronavirus (COVID-19), 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.
We confirm that we have
nothing material to report,
add or draw attention to in
respect of these matters.
Principal risks and Viability Statement
Based solely on reading the Directors’ statements and considering whether they were consistent with the
knowledge we obtained in the course of the audit, including the knowledge obtained in the evaluation of
the Directors’ assessment of the Group’s and the 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 52 to 60 that describe the principal risks and explain how they are being
managed or mitigated;
– the Directors’ confirmation on page 61 that they have carried out a robust assessment of the principal
risks facing the Group, including those that would threaten its business model, future performance,
solvency or liquidity; or
– the Directors’ explanation on page 61 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.
Reporting on 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.
We have nothing to report
in respect of these
matters.
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.
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.
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Responsibilities for the financial statement and the audit
Responsibilities of the Directors for the financial statements
As explained more fully in the Directors’ responsibilities statement, the Directors are responsible for the preparation of the financial statements
and for being satisfied that they give a true and fair view, and for such internal control as the Directors determine is necessary to enable the
preparation of financial statements that are free from material misstatement, whether due to fraud or error.
In preparing the financial statements, the Directors are responsible for assessing the Group’s and the Parent Company’s ability to continue
as a going concern, disclosing as applicable, matters related to going concern and using the going concern basis of accounting unless the
Directors either intend to liquidate the Group or the Parent Company or to cease operations, or have no realistic alternative but to do so.
Auditor’s responsibilities for the audit of the financial statements
Our objectives are to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement,
whether due to fraud or error, and to issue an auditor’s report that includes our opinion. Reasonable assurance is a high level of assurance,
but is not a guarantee that an audit conducted in accordance with ISAs (UK) will always detect a material misstatement when it exists.
Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected
to influence the economic decisions of users taken on the basis of these financial statements.
A further description of our responsibilities for the audit of the financial statements is located on the Financial Reporting Council’s website at:
www.frc.org.uk/auditorsresponsibilities. This description forms part of our auditor’s report.
Use of our report
This report is made solely to the Company’s members, as a body, in accordance with Chapter 3 of Part 16 of the Companies Act 2006. Our
audit work has been undertaken so that we might state to the Company’s members those matters we are required to state to them in an
auditor’s report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other
than the Company and the Company’s members as a body, for our audit work, for this report, or for the opinions we have formed.
REPORT ON OTHER LEGAL AND REGULATORY REQUIREMENTS
Opinions on other matters prescribed by the Companies Act 2006
In our opinion the part of the Directors’ Remuneration Report to be audited has been properly prepared in accordance with the Companies
Act 2006.
In our opinion, based on the work undertaken in the course of the audit:
– the information given in the Strategic Report and the Directors’ Report for the financial year for which the financial statements are prepared
is consistent with the financial statements; and
– the Strategic Report and the Directors’ Report have been prepared in accordance with applicable legal requirements.
In the light of the knowledge and understanding of the Group and the Parent Company and their environment obtained in the course of the
audit, we have not identified any material misstatements in the Strategic Report or the Directors’ Report.
Matters on which we are required to report by exception
Companies Act 2006 exception reporting
Under the Companies Act 2006 we are required to report to you if, in our opinion:
We have no exceptions to report
arising from this responsibility.
– we have not received all the information and explanations we require for our audit; or
– adequate accounting records have not been kept by the Parent Company, or returns adequate
for our audit have not been received from branches not visited by us; or
– the Parent Company financial statements are not in agreement with the accounting records
and returns.
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.
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Independent Auditor’s Report
to the members of Ferrexpo plc on the audit of the financial statements continued
Other matters
Appointment
Following the resignation of Deloitte as auditor, the Company’s Audit Committee and Board approved the appointment of MHA MacIntyre
Hudson, the UK member of Baker Tilly International, as the Company’s auditor for the year ended 31 December 2019. The appointment of
MHA MacIntyre Hudson for subsequent financial years will be subject to approval by the shareholders at each Annual General Meeting.
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).
Rakesh Shaunak FCA
Senior Statutory Auditor
For and on behalf of
MHA MacIntyre Hudson
Chartered Accountants and Statutory Auditors
London, United Kingdom
17 March 2020
Ferrexpo plc
Annual Report & Accounts 2019
121
Consolidated Income Statement
US$000
Revenue
Operating expenses
Other operating income
Operating foreign exchange losses
Operating profit
Share of profit from associates
Profit before tax and finance
Net finance expense
Non-operating foreign exchange losses
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
31.12.19
Year ended
31.12.18
6
5/7
8
9
33
10
9
11
1,506,724
1,274,030
(968,443)
(844,470)
5,614
(46,752)
497,143
4,114
3,314
(5,295)
427,579
5,360
501,257
432,939
(23,191)
(18,491)
459,575
(56,282)
403,293
(39,332)
(1,585)
392,022
(56,801)
335,221
402,370
333,616
923
1,605
403,293
335,221
12
12
68.6
68.4
56.9
56.7
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Ferrexpo plc
Annual Report & Accounts 2019
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 that may be reclassified to profit or loss in
subsequent periods
Items that will not be reclassified subsequently to profit or loss:
Notes
Year ended
31.12.19
Year ended
31.12.18
403,293
335,221
266,163
(20,487)
11
12,178
(2,007)
245,676
10,171
Remeasurement (losses)/gains on defined benefit pension liability
22
(6,898)
Net other comprehensive (loss)/income not being reclassified to profit or loss in
subsequent periods
Other comprehensive income for the year, net of tax
Total comprehensive income for the year, net of tax
(6,898)
238,778
642,071
875
875
11,046
346,267
Total comprehensive income attributable to:
Equity shareholders of Ferrexpo plc
Non-controlling interests
639,722
344,587
2,349
1,680
642,071
346,267
Ferrexpo plc
Annual Report & Accounts 2019
123
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Consolidated Statement of Financial Position
US$000
Assets
Property, plant and equipment
Right-of-use assets
Goodwill and other intangible assets
Investments in associates
Inventories
Other non-current assets
Deferred tax assets
Total non-current assets
Inventories
Trade and other receivables
Prepayments and other current assets
Income taxes recoverable and prepaid
Other taxes recoverable and prepaid
Cash and cash equivalents
Total current assets
Total assets
Equity and liabilities
Issued capital
Share premium
Other reserves
Retained earnings
Equity attributable to equity shareholders of Ferrexpo plc
Non-controlling interests
Total equity
Interest-bearing loans and borrowings
Defined benefit pension liability
Provision for site restoration
Deferred tax liabilities
Total non-current liabilities
Interest-bearing loans and borrowings
Trade and other payables
Accrued and contract liabilities
Income taxes payable
Other taxes payable
Total current liabilities
Total liabilities
Total equity and liabilities
The financial statements were approved by the Board of Directors on 17 March 2020.
Steve Lucas
Chairman
Christopher Mawe
Acting Chief Executive Officer
Notes
As at
31.12.19
As at
31.12.18
13
14
15
33
17
16
11
17
18
19
11
20
25
31
31
5/26
22
23
11
5/26
21
24
11
20
1,044,426
701,376
10,976
47,552
8,064
255,026
24,093
38,608
–
39,609
7,037
217,688
32,104
27,946
1,428,745
1,025,760
199,714
144,919
99,864
42,653
184
37,377
131,020
510,812
85,695
27,344
61
44,837
62,996
365,852
1,939,557
1,391,612
121,628
185,112
121,628
185,112
(1,764,808)
(2,010,080)
2,810,622
1,352,554
2,568,187
864,847
78
2,050
1,352,632
866,897
274,011
33,628
3,016
140
310,795
138,367
65,627
39,257
21,248
11,631
276,130
586,925
197,258
21,444
1,940
352
220,994
204,600
34,292
32,693
20,571
11,565
303,721
524,715
1,939,557
1,391,612
124
Ferrexpo plc
Annual Report & Accounts 2019
Consolidated Statement of Cash Flows
US$000
Profit before tax
Adjustments for:
Depreciation of property, plant and equipment, right-of-use assets and amortisation of
intangible assets
Finance expense
Finance 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
Non-operating foreign exchange losses
Other adjustments
Operating cash flow before working capital changes
Changes in working capital:
Increase in trade and other receivables
Increase in inventories
Increase in trade and other payables (incl. accrued and contract liabilities)
Decrease/(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
Acquisition of non-controlling interests
Net cash flows used in investing activities
Cash flows from financing activities
Proceeds from borrowings and finance
Repayment of borrowings and finance
Principal elements of lease payments
Arrangement fees paid
Dividends paid to equity shareholders of Ferrexpo plc
Net cash flows used in financing activities
Net increase/(decrease) in cash and cash equivalents
Cash and cash equivalents at the beginning of the year
Currency translation differences
Cash and cash equivalents at the end of the year
Notes
Year ended
31.12.19
459,575
Year ended
31.12.18
392,022
82,130
21,267
(1,436)
417
(153)
1,241
(4,114)
736
437
3,534
1,022
46,752
18,491
(7,307)
622,592
(23,479)
(37,152)
19,590
11,371
592,922
(33,932)
(83,730)
(1,884)
473,376
(247,478)
1,165
1,344
3,519
(2,189)
(243,639)
225,000
(223,774)
(5,118)
(131)
(154,922)
(158,945)
70,792
62,996
(2,768)
131,020
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
10
10
7
33
18
23
22
28
9
9
20
11
13/15
26
26
26
25
Ferrexpo plc
Annual Report & Accounts 2019
125
Consolidated Statement of Changes in Equity
US$000
At 1 January 2018
Profit for the year
Other comprehensive income
Total comprehensive income for
the year
Share-based payments (Note 28)
Equity dividends to shareholders of
Ferrexpo plc
Attributable to equity shareholders of Ferrexpo plc
Issued capital
(Note 31)
Share premium
(Note 31)
Other reserves
(Note 31)
Retained
earnings
(Note 12)
Total
capital and
reserves
Non-controlling
interests
(Note 32)
Total
equity
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
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Profit for the year
Other comprehensive income
Total comprehensive income for
the year
Share-based payments (Note 28)
Equity dividends to shareholders of
Ferrexpo plc
Effect from increase of shareholding in
subsidiary
–
–
–
–
–
–
–
–
–
–
–
–
–
402,370
402,370
923
403,293
244,250
(6,898)
237,352
1,426
238,778
244,250
395,472
639,722
2,349
642,071
1,022
–
1,022
(155,087)
(155,087)
–
–
2,050
2,050
(4,321)
(2,271)
–
–
1,022
(155,087)
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121,628
185,112
(1,764,808)
2,810,622
1,352,554
78
1,352,632
126
Ferrexpo plc
Annual Report & Accounts 2019
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. 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. Fevamotinico
is ultimately wholly owned by The Minco Trust, of which Kostyantin Zhevago, the Group’s previous Chief Executive Officer, is one of the
beneficiaries. At the time this report was published, Fevamotinico held 50.3% (2018: 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”) and with the Companies Act 2006, as applicable to companies
reporting under IFRS.
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 105 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.
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 year based on the officially published rates by the National
Bank of Ukraine (“NBU”). The foreign exchange differences arising are recognised in other comprehensive income and 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.
Ferrexpo plc
Annual Report & Accounts 2019
127
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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 2018 except for the adoption of
new amendments and improvements to IFRSs effective as of 1 January 2019.
New standards and amendments adopted with an impact on the Group’s consolidated financial statements
IFRS 16 Leases
The Group applied IFRS 16 Leases, as issued in January 2016, for the first time as of 1 January 2019. The standard replaces 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”) and eliminates the classification of leases as either operating or
finance for the lessee 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.
In accordance with the transition provisions set out in IFRS 16, the Group elected to apply the standard retrospectively, with the cumulative
impact of the first-time adoption recognised at the date of initial application. On transition, the Group grandfathered its previous assessment
of operating leases under IAS 17 and recognised for these lease contracts right-of-use assets and corresponding lease liabilities in the
consolidated statement of financial position with no impact on retained earnings. The lease liabilities were measured at the present value of
the remaining lease payments, discounted using the Group’s incremental borrowing rate at initial application which is the interest rate that the
Group would have to pay to borrow over a similar term the funds necessary to obtain an asset of a similar value to the right-of-use asset in a
similar economic environment. The corresponding right-of-use assets were measured at an amount equal to the lease liability, adjusted by the
amount of any prepaid or accrued lease payments relating to that lease recognised in the consolidated statement of financial position as at
the end of the comparative year ended 31 December 2018. The balance of lease liabilities and right-of-use assets relating to leases classified
as finance leases as at the end of the comparative year ended 31 December 2018 was carried forward to the date of initial application. The
new requirements of the standard as to whether a contract contains a lease component or not were applied to the identification of new lease
contracts signed subsequent to 1 January 2019.
On transition, the Group elected to apply the following practical expedients and exemptions, as permitted under the transition provisions set
out in the standard:
– application of a single discount rate to a portfolio of leases with similar characteristics;
– recognition exemption for low-value and short-term leases, which are therefore recognised in the consolidated income statement on a
straight-line basis; and
– accounting for each lease component and any associated non-lease components as a single lease component instead of separating the
non-lease components from the lease ones.
Currently, the Group leases land, buildings and equipment. The vast majority of land leases are for land used for the extraction of ore and
are not within the scope of IFRS 16, according to the scope exemptions set out in the standard. The new standard primarily resulted in the
recognition of right-of-use assets and lease liabilities in respect of long-term rental contracts for several of the Group’s office premises with
rental periods of five to ten years, land not used for the direct extraction of ore as well as for leased equipment.
The following table provides a reconciliation between the balance of operating lease commitments as at 31 December 2018 and the lease
liability recognised on 1 January 2019:
US$000
Operating lease commitments as at 31 December 2018
Recognition exemption for mining land1
Land under permanent use2
Short-term leases recognition exemption
Total minimum lease payments
Less: amounts representing finance charges
Add: leases previously classified as finance leases
Lease liabilities recognised as at 1 January 2019
Thereof non-current portion
Thereof current portion
Balance as at
01.01.19
8,827
(331)
971
(348)
9,119
(1,418)
2,074
9,775
4,799
4,976
1. Leases used for the extraction of ore are not within the scope of IFRS 16 according to the scope exemptions set out in the standard.
2. Land not used for the direct extraction of ore in Ukraine, the country of the Group’s mining operations. These lease agreements with the Ukrainian government typically have a duration of up to 49 years requiring
land lease payments in the form of rental taxes based on annually determined rates by the government. The accounting policy in Note 14 Leases provides further information.
128
Ferrexpo plc
Annual Report & Accounts 2019
Notes to the Consolidated Financial Statements
continued
Note 3: New accounting policies continued
The lease liability is measured at the net present value of the remaining lease payments, discounted using the interest rate implicit in the lease
or, when not available, the incremental borrowing rate computed for a group of leases with similar characteristics as regards to type of asset,
lease term, contract currency and economic environment.
The following tables provide the details of the cumulative effects from the application of the new standard IFRS 16 Leases on the consolidated
statement of financial position as of 1 January 2019 and the consolidated statement of financial position and the consolidated income
statement as at 31 December 2019:
US$000
Consolidated statement of financial position
Assets
Property, plant and equipment
Right-of-use assets
Liabilities
Interest-bearing loans and borrowings − non-current
Interest-bearing loans and borrowings − current
US$000
Consolidated income statement
Operating expenses
Net finance expense
Consolidated statement of financial position
Assets
Property, plant and equipment
Right-of-use assets
Liabilities
Interest-bearing loans and borrowings − non-current
Interest-bearing loans and borrowings − current
Notes
as at 01.01.19
Balance
Effect from
application of
IFRS 16
Year ended
31.12.18
13
14
26
26
699,495
9,582
(4,799)
(4,976)
(1,881)
9,582
(4,799)
(2,902)
701,376
−
−
(2,074)
Notes
As reported
as at 31.12.19
Effect from
application of
IFRS 16
Balance
without effect
from new IFRSs
7
7
13
14
26
26
(968,443)
(23,191)
160
(503)
(968,603)
(22,688)
1,044,426
(1,881)
1,046,307
10,976
10,976
−
(274,011)
(138,367)
(3,844)
(3,264)
(270,167)
(135,103)
The adoption of IFRS 16 Leases has not had any material impact on the underlying EBITDA and on basic and diluted earnings per share.
The impact on the net cash flows from operating activities from payments for short-term and low-value leases was US$425 thousand for the
year ended 31 December 2019.
Further information in relation to the Group’s leases and lease-related commitments are provided in Note 14 Leases and Note 30 Commitments,
contingencies and legal disputes.
Amendment to IAS 19 Employee benefits: Plan amendment, curtailment or settlement
The Group applies the new amendment to IAS 19 Employee benefits, as published by IASB on 7 February 2018, for the first time as of
1 January 2019. The purpose of the new amendments is to harmonise the accounting practices in terms of plan amendments, curtailments
and settlements and to provide further relevant information on such changes to the plan. As at 1 January 2020, the collective pension plan
(multi-employer plan) in Switzerland is going to harmonise the conversion rates for the mandatory and the supplementary portion of the
scheme, which is considered to be a plan amendment. The plan amendment occurred on 1 April 2019. The effect of US$409 thousand is
reflected in the past service costs as of 31 December 2019 as a one-time effect in the Group’s consolidated income statement. The service
cost and net interest cost have been adjusted in line with the amended IAS 19.
New standards, interpretations and amendments adopted without an impact on the Group’s consolidated financial statements
– Annual Improvements to IFRS Standards 2015–2017 Cycle contains amendments to IFRS 3 Business combinations and IFRS 11 Joint
arrangements, IAS 12 Income taxes and IAS 23 Borrowing costs.
– Amendments to IAS 28 Long-term interests in associates and joint ventures clarifies that other interests in associates and joint ventures,
including long-term interests not accounted for using the equity method of accounting and that, in substance, form part of the net
investment in those associates and joint ventures, fall within the scope of IFRS 9.
– IFRIC 23 Uncertainty over income tax treatments clarifies and changes the method of calculating provisions for uncertain income tax
positions accounted for under IAS 12 Income taxes. The new interpretation requires the determination of the provision based on the single
most likely amount in a range of possible outcomes or the sum of the probability-weighted amounts in a range of possible outcomes, if
it is not probable that the tax authorities accept a tax treatment. The Group applied IFRIC 23 for the first time as of 1 January 2019 and
the first-time application had no material impact on the Group’s taxable results, tax bases, unused tax losses, unused tax credits and tax
rates. See Note 11 Taxation for the critical judgement involved in the assessment of the Group’s tax position in accordance with IFRIC 23.
– Amendments to IFRS 9 Financial instruments: Prepayment features with negative compensation clarifies the classification of particular pre-
payable financial assets and the accounting for financial liabilities following a modification.
Ferrexpo plc
Annual Report & Accounts 2019
129
Note 3: New accounting policies continued
New standards, interpretations and amendments 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.
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 does not expect a material impact on its consolidated financial statements from these amendments.
Amendments to IAS 1 and IAS 8: Definition of material
The amendments were issued in October 2018 and are effective for the financial year beginning on 1 January 2020 subject to EU
endorsement. The amendments introduce a revised definition of material information. In the new definition, reference is made to the concepts
of obscured information and reasonable expectation that the information is going to influence the decisions that the primary users of
general purpose financial statements make on the basis of those financial statements. The Group does not expect a material impact on its
consolidated financial statements from these amendments.
Furthermore, 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.
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Note 4: Use of critical estimates and judgements
The preparation of consolidated financial statements in conformity with IFRSs 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:
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– Note 17 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 34 Related party disclosure – 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 186.
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
28
7
Notes
6
7
Year ended
31.12.19
501,257
417
1,022
1,241
82,130
586,067
Year ended
31.12.18
432,939
5,701
674
1,489
62,094
502,897
Year ended
31.12.19
Year ended
31.12.18
1,506,724
1,274,030
(581,743)
(507,939)
924,981
766,091
130
Ferrexpo plc
Annual Report & Accounts 2019
Notes to the Consolidated Financial Statements
continued
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
25
26
26
As at
31.12.19
131,020
As at
31.12.18
62,996
(138,367)
(204,600)
(274,011)
(197,258)
(281,358)
(338,862)
The Group made debt repayments of US$229,374 thousand during the year ended 31 December 2019 (2018: US$308,817 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 180 to 182.
Net debt as at 31 December 2019 included an effect of US$7,108 thousand as a result of the first-time application of the new standard IFRS
16 Leases. For further information on the impact of the adoption of the new standard IFRS 16 Leases see Note 3 New accounting policies.
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. In terms of the associated commodity risk see Note 27 Financial instruments for further information.
The control of goods passes when title for the goods passes to the customer as determined by the contractual sales terms based on the
International Commercial Terms (“Incoterms”). 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.
For CIF and CFR contracts the Group must contract for and pay the freight necessary to bring the goods to the named port of destination.
Consequently, 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 measured at the transaction price contractually agreed between the parties based on applicable
market rates for the specific freight services to be provided. The time of satisfaction of the performance obligation is 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.
Note 6: Revenue continued
Revenue for the year ended 31 December 2019 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
Ferrexpo plc
Annual Report & Accounts 2019
131
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Year ended
31.12.19
Year ended
31.12.18
1,352,953
1,146,734
94,617
74,929
1,447,570
1,221,663
54,168
4,986
48,778
3,589
1,506,724
1,274,030
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Revenue for the year ended 31 December 2019 includes the effect from the derecognition of contract liabilities of US$4,637 thousand (2018:
US$6,006 thousand) deferred as revenue in the comparative year ended 31 December 2018. As at 31 December 2019, freight-related
revenue in the amount of US$8,572 thousand was deferred in relation to the performance obligations not fulfilled and included in the balance
of the contract liabilities. See Note 24 Accrued and contract liabilities for further information.
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
Other
Total exports
Year ended
31.12.19
529,159
331,964
197,195
183,560
168,875
14,685
250,721
161,186
89,535
412,613
347,892
64,721
62,717
62,717
8,800
Year ended
31.12.18
565,820
290,825
274,995
193,540
172,108
21,432
221,985
127,336
94,649
176,135
125,315
50,820
64,183
64,183
−
1,447,570
1,221,663
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 183 to 186.
During the year ended 31 December 2019, sales made to three customers accounted for 40% of the revenues from export sales of ore pellets
and concentrate (2018: 40%).
Sales to one customer that individually represented more than 10% of total sales in either the current or prior year amounted to US$331,964
thousand (2018: US$290,825 thousand).
132
Ferrexpo plc
Annual Report & Accounts 2019
Notes to the Consolidated Financial Statements
continued
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
On 4 February 2019, the Group announced that it had established the Independent Review Committee (“IRC”) to carry out an independent
review into the use of funds donated by the Group to the third party charity fund Blooming Land (the “Charity”) prior to the financial year 2019.
Whilst a significant amount of work was undertaken by the IRC and its advisers during the financial year 2019, it has not been possible to
explain some discrepancies outlined in the 2018 Annual Report & Accounts in respect of the ultimate use of funds donated by the Group to
the Charity. For further information see the Independent Review Committee Report on page 75.
Taking into account the conclusions of the IRC, as announced by the Group on 30 August 2019, and in absence of conclusive evidence that
funds have not been used as intended, the Group has judged that it remains appropriate for it to present the amount of US$9,500 thousand
of its community support donations to the Charity during the comparative year ended 31 December 2018 as such and within operating
expenses in the comparative year included in its consolidated financial statements. The Group has not made any further donations to the
Charity since May 2018 and therefore no donations to the Charity are included in the table below for the financial year ended 31 December 2019.
In certain circumstances, the Group could be exposed to regulatory and other actions resulting in potential legal claims or penalties, fines or
other liabilities. See Note 30 Commitments, contingencies and legal disputes on page 166 for further information.
Operating expenses for the year ended 31 December 2019 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 and right-of-use assets
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
Write-offs for the year ended 31 December 2019 primarily consisted of obsolete inventories and property, plant and equipment as
outlined below:
US$000
(Write-back)/Write-off of inventories
Write-off of property, plant and equipment
Write-off of receivables and prepayments
Total write-offs
As at
31.12.19
(103)
1,271
73
1,241
Year ended
31.12.19
581,743
294,336
66,036
26,328
Year ended
31.12.18
507,939
260,422
45,246
30,863
968,443
844,470
Notes
30/34
Year ended
31.12.19
551,141
101,770
(2,673)
81,240
890
30,506
49,587
3,229
5,893
1,241
417
Year ended
31.12.18
481,366
79,471
(34,801)
61,377
718
29,742
50,270
1,691
15,130
1,489
5,701
As at
31.12.18
1,072
395
22
1,489
Ferrexpo plc
Annual Report & Accounts 2019
133
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Note 7: Operating expenses continued
Auditor remuneration
US$000
Audit services
Ferrexpo plc Annual Report
Additional fees charged by the previous auditor for the audit of the 2018 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
31.12.19
Year ended
31.12.18
1,178
1,834
217
3,229
–
3,229
–
–
1,352
–
182
1,534
150
1,684
7
7
3,229
1,691
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.
Audit services for the year ended 31 December 2019 include US$1,834 thousand relating to audit services provided by the previous audit firm of
the Group for the comparative year ended 31 December 2018.
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 2019 consisted of the following:
US$000
Lease income
Other income
Total other income
Year ended
31.12.19
Year ended
31.12.18
450
5,164
5,614
397
2,917
3,314
134
Ferrexpo plc
Annual Report & Accounts 2019
Notes to the Consolidated Financial Statements
continued
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 2019 consisted of the following:
US$000
Operating foreign exchange losses
Revaluation of trade receivables
Revaluation of trade payables
Other
Total operating foreign exchange losses
Non-operating foreign exchange losses
Revaluation of interest-bearing loans
Conversion of cash and cash equivalents
Other
Total non-operating foreign exchange losses
Total foreign exchange losses
Year ended
31.12.19
Year ended
31.12.18
(47,229)
(4,922)
523
(46)
(358)
(15)
(46,752)
(5,295)
(1,240)
(4,255)
(12,996)
(18,491)
(65,243)
95
(801)
(879)
(1,585)
(6,880)
The translation differences and foreign exchange gains and losses are predominantly dependent on the fluctuation of the exchange rate of the
Ukrainian Hryvnia against the US Dollar. The table below shows the closing and average rates of the most relevant currencies of the Group
compared to the US Dollar.
US$
UAH
EUR
Average exchange rates
Closing exchange rates
As at
31.12.19
25.846
0.893
As at
31.12.18
27.200
0.847
Year ended
31.12.19
23.686
0.893
Year ended
31.12.18
27.688
0.874
Exchange differences arising on translation of non-US Dollar functional currency operations (mainly in Ukrainian Hryvnia) are included in the
translation reserve. See Note 31 Share capital and reserves for further details.
Ferrexpo plc
Annual Report & Accounts 2019
135
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 years. Interest
income is recognised as it accrues using the effective interest method.
Finance expense and income for the year ended 31 December 2019 consisted of the following:
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US$000
Finance expense
Interest expense on loans and borrowings
Less capitalised borrowing costs
Interest on defined benefit plans
Bank charges
Interest expense on lease liabilities
Other finance costs
Total finance expense
Finance income
Interest income
Other finance income
Total finance income
Net finance expense
Notes
Year ended
31.12.19
Year ended
31.12.18
22
(33,589)
(43,468)
14,617
(2,730)
(710)
(630)
8,125
(2,390)
(778)
−
(1,585)
(1,713)
(24,627)
(40,224)
1,379
57
1,436
843
49
892
(23,191)
(39,332)
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136
Ferrexpo plc
Annual Report & Accounts 2019
Notes to the Consolidated Financial Statements
continued
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 forwards of available unused tax credits and tax
losses, to the extent that it is more likely than not that they will be recovered in a future period against taxable profit.
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.
Deferred tax liabilities are recognised in respect of taxable temporary differences associated with investments in subsidiaries, associates
and interests in joint ventures, except where the Group is able to control the reversal of the temporary differences and it is probable that the
temporary difference will not reverse in the foreseeable future. Deferred tax assets in relation to temporary differences on such investments
and interests are recognised to the extent that it is probable that there are sufficient taxable profits available against which the benefits of the
temporary differences can be utilised and that they are expected to reverse in the foreseeable future.
The carrying amount of deferred income tax assets is reviewed at each reporting date and reduced to the extent that it is no longer probable
that sufficient taxable profit will be available to allow all or part of the deferred income tax assets to be utilised. Additionally, unrecognised
deferred income tax assets are reassessed at each reporting date and are recognised to the extent that it has become probable that future
taxable profit will allow the deferred tax assets to be recovered.
Income tax effects on items directly recognised in other comprehensive income or equity are also recognised in other comprehensive income
or equity.
Deferred tax assets and deferred tax liabilities are offset if a legally enforceable right exists to set off current tax assets against current tax
liabilities and the deferred taxes relate to the same taxable entity and the same taxation authority.
Critical 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. Following
the completion of this audit, the SFS issued its official tax audit report on 27 December 2018, claiming a tax adjustment totalling UAH448
million (US$18,914 thousand as at 31 December 2019) and issued the formal claim on 12 March 2019. The Group’s subsidiary initiated legal
proceedings and filed a claim to the first court instance in Poltava on 22 March 2019. The Poltava court of first court instance confirmed on
4 September 2019 the position of the Group’s major subsidiary. The SFS filed its appeal in November 2019 and the Second Administrative
Court of Appeal confirmed on 21 December 2019 the decision of the first court instance and supported the position of the Group’s subsidiary
in full. The SFS subsequently filed an application of cassation to the Supreme Court of Ukraine. As of the date of approval of these financial
statements, the case has not yet been heard by the Supreme Court of Ukraine.
On 18 February 2020, the SFS commenced two new tax audits for cross-border transactions between the Group’s major subsidiary in
Ukraine and two other subsidiaries of the Group. The audits are covering transactions during the financial years 2015 to 2017 and 2016 to
2017, respectively.
The Group considers that it has complied with applicable legislation for all cross-border transactions undertaken and continues to expect
that it can successfully defend its methodology applied to determine the prices between its subsidiaries. Consequently, no provision has
been recorded as at 31 December 2019, neither for the years subject to the aforementioned court proceedings nor for transactions and years
subject to the newly commenced audits by the SFS in Ukraine. As of the approval of these financial statements, no claim has been made by
the SFS in respect of the newly commenced audits.
Upon the application of new interpretation IFRIC 23 Uncertainty over income tax treatments as of 1 January 2019 (see also Note 3 New
accounting policies for further information), the Group reviewed and reassessed its exposure in respect of the ongoing court proceedings
and the newly commenced audits of cross-border transactions in Ukraine under the provisions of the new interpretation. Considering the
two favourable court decisions and further third party advice obtained, the management of the Group concluded that it is probable that the
Supreme Court of Ukraine will also rule in favour of the Group’s major subsidiary in Ukraine and that, if any new claims should be made by
the SFS, the Group will continue to successfully defend its pricing methodology applied during these years. An unexpected outcome of the
ongoing court proceeding would have an adverse impact on the Group’s total income tax expense and effective tax rate in a future period.
Ferrexpo plc
Annual Report & Accounts 2019
137
Note 11: Taxation continued
The income tax expense for the year ended 31 December 2019 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
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Year ended
31.12.19
Year ended
31.12.18
52,106
10,297
62,403
(6,121)
(6,121)
56,282
44,086
(569)
43,517
13,284
13,284
56,801
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Tax effects on items recognised in the statement of other comprehensive income consisted of the following for the year ended 31 December 2019:
US$000
Tax effect of exchange differences arising on translating foreign operations
Total income tax effects recognised in statement of other comprehensive income
Notes
31
Year ended
31.12.19
20,487
20,487
Year ended
31.12.18
2,007
2,007
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 11.3% for the financial year 2019
(2018: 15.5%). 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 2019 is as follows:
US$000
Profit before tax
Notional tax charge computed at the weighted average statutory tax rate of 11.3% (2018: 15.5%)
(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
Effect of different tax rates on local profit streams5
Prior year adjustments to current tax6
Effect from share of profit from associates7
Other (including translation differences)
Total income tax expense
Year ended
31.12.19
459,575
52,072
(10,433)
(3,686)
2,539
(25)
4,911
646
10,297
(783)
744
56,282
Year ended
31.12.18
392,022
60,629
(8,576)
(7,408)
3,795
(56)
7,719
1,157
(569)
(974)
1,084
56,801
1. Recognition in 2019 primarily relates to the change of the tax law in Switzerland and is in connection with available transitional measures for companies losing the special tax status available under the old tax
law. Recognition 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. Both effects are
considered to be of a non-recurring nature.
2. 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 2020 and is considered to be of a recurring nature.
3. Effect predominantly relates to expenses not deductible in Ukraine, which 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.
4. Effective 1 January 2019, the relevant accounting framework for tax purposes changed from local GAAP to IFRSs resulting in a reduction of temporary differences as of 31 December 2018 being of a non-
recurring nature.
5. Effect in 2019 and 2018 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.
6. Effect in 2019 related to a retrospective tax adjustment made for the financial year 2018 in respect of prices charged by the Ukrainian subsidiaries to the Group’s sales companies in Switzerland and the United
Arab Emirates and an allowance recognised on the reduction of the income tax payable for the amount of excise tax in 2018. The amount in 2018 related to final tax assessments received in Switzerland. These
effects are considered to be of a non-recurring nature.
7. Share of profit from associates is recognised net of taxes of the associates. This effect is of a recurring nature.
The Group operates across a number of jurisdictions and its effective tax rate is subject to various factors outside of the Group’s controls. This
includes the volatility in the global iron ore pellet market and foreign exchange rate movements, primarily between the Ukrainian Hryvnia and the
US Dollar. The effective tax rate of the financial year 2019 was 12.2% (2018: 14.5%), reflecting the appreciation of the Ukrainian Hryvnia against
the US Dollar, negatively impacting the profitability of the Group’s local subsidiaries, as well as lower global pellet premiums compared with
2018. The effective tax rate of the comparative year ended 31 December 2018 reflected strong pellet premiums in the Chinese spot market.
The Group expects that its future effective tax rate will be in a range of 11.0% to 16.0% depending on the aforementioned factors. As
mentioned under critical judgements on page 136, the Group is involved in ongoing court proceedings in respect of its cross-border
transactions and an unexpected adverse outcome would have an adverse impact on the Group’s total income tax expense and its effective
tax rate in the future. The Group’s future effective tax rate could also be impacted by legislative changes and changes in the statutory tax rates
in any of its key jurisdictions.
138
Ferrexpo plc
Annual Report & Accounts 2019
Notes to the Consolidated Financial Statements
continued
Note 11: Taxation continued
The net balance of income tax payable changed as follows during the financial year 2019:
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 2019 consisted of the following:
US$000
Income tax receivable balance
Income tax payable balance
Net income tax payable
Year ended
31.12.19
(20,510)
(62,403)
(20,487)
83,730
(1,394)
Year ended
31.12.18
(18,247)
(43,517)
(2,007)
43,509
(248)
(21,064)
(20,510)
As at
31.12.19
184
(21,248)
(21,064)
As at
31.12.18
61
(20,571)
(20,510)
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 result in the following deferred income tax assets and liabilities at
31 December 2019:
US$000
Allowance for restricted cash and deposits
Property, plant and equipment
Right-of-use assets
Inventory
Tax losses recognised
Intangible assets
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
Financial assets
Financial lease obligations
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
30
As at
31.12.19
4,408
As at
31.12.18
Year ended
31.12.19
Year ended
31.12.18
3,771
–
–
26,871
23,486
(577)
5,095
1,123
897
363
9,313
766
1,286
–
373
1,127
463
–
(1,051)
3,213
(2,890)
(11,505)
47
666
602
9,258
100
609
–
(2,681)
(32)
45,027
32,158
8,090
(10,174)
(6,419)
(4,212)
38,608
27,946
(505)
(3,690)
3,216
(3,326)
(4,336)
(1,199)
–
(519)
–
–
(329)
(545)
(4,336)
(1,204)
329
26
–
–
50
166
(6,559)
(4,564)
(1,969)
(3,110)
6,419
(140)
4,212
(352)
Net deferred tax assets/net change
38,468
27,594
6,121
(13,284)
Ferrexpo plc
Annual Report & Accounts 2019
139
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Note 11: Taxation continued
The movement in the deferred income tax balance is as follows:
US$000
Opening balance
Income statement charge
Translation differences
Closing balance
Year ended
31.12.19
27,594
6,121
4,753
38,468
Year ended
31.12.18
40,027
(13,284)
851
27,594
As at 31 December 2019, the Group had available tax loss carry forwards in the amount of US$112,889 thousand (2018: US$92,654
thousand) for which no deferred tax assets were recognised. US$76,411 thousand (2018: US$59,883 thousand) are related to losses incurred
in Ukraine and Austria and those losses do not expire. The remaining balance totalling US$36,478 thousand (2018: US$32,771 thousand)
relates to losses incurred in Hungary, of which US$23,627 thousand (2018: US$22,923 thousand) expire after more than eight years.
No deferred tax liabilities have been recognised on temporary differences in the amount of US$715,834 thousand (2018: US$440,328
thousand) arising from undistributed profits from subsidiaries as no distributions are planned. Other temporary differences of US$660
thousand have not been recognised as of 31 December 2019 (2018: US$19,963 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 2019.
Earnings for the year attributable to equity shareholders – per share in US cents
Basic
Diluted
Profit for the year attributable to equity shareholders – US$000
Basic and diluted earnings
Weighted average number of shares – thousands
Basic number of Ordinary Shares outstanding
Effect of dilutive potential Ordinary Shares
Diluted number of Ordinary Shares outstanding
Year ended
31.12.19
Year ended
31.12.18
68.6
68.4
56.9
56.7
402,370
333,616
586,715
1,568
586,117
1,948
588,283
588,065
140
Ferrexpo plc
Annual Report & Accounts 2019
Notes to the Consolidated Financial Statements
continued
Note 12: Earnings per share and dividends paid and proposed continued
Dividends proposed and paid
Prior to the dividend proposed below and 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$201,647 thousand as of 31 December 2019 (2018:
US$167,611 thousand).
US$000
Dividends proposed
Interim special dividend for 2019: 6.6 US cents per Ordinary Share
Total dividends proposed
The interim special dividend for 2019 was declared on 2 January 2020 and paid on 17 January 2020.
US$000
Dividends paid during the year
Interim dividend for 2019: 6.6 US cents per Ordinary Share
Final 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 paid during the year
Year ended
31.12.19
38,736
38,736
Year ended
31.12.19
38,621
38,621
38,847
38,833
154,922
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 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
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
31.12.18
38,695
38,695
38,695
116,085
Year ended
31.12.18
19,376
18,929
38,615
19,639
96,559
Ferrexpo plc
Annual Report & Accounts 2019
141
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:
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– Buildings:
– Vessels:
– Plant and equipment:
– Vehicles:
– Fixtures and fittings:
20–50 years
8–40 years
3–15 years
7–15 years
2.5–10 years
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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 2019 and as at the end of the comparative year ended 31 December 2018.
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.
142
Ferrexpo plc
Annual Report & Accounts 2019
Notes to the Consolidated Financial Statements
continued
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.
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 2019, deferred pre-production stripping costs totalling US$114,067 thousand
relate to components in operation and are included in mining assets (2018: US$101,305 thousand). Deferred pre-production stripping costs
in relation to components expected to be put into operation in a future period totalled US$94,098 thousand and are included in assets under
construction (2018: US$34,498 thousand). No production stripping costs are capitalised as of this point of time.
Ferrexpo plc
Annual Report & Accounts 2019
143
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Note 13: Property, plant and equipment continued
As at 31 December 2019, property, plant and equipment comprised:
US$000
Cost:
Exploration
and
evaluation
Land
Mining
assets
Buildings and
tailings dam
Vessels
Plant and
equipment
Vehicles
Fixtures
and fittings
Assets under
construction
Total
At 1 January 2018
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
Application of IFRS 16
(Note 3)
At 1 January 2019 − after
application of IFRS 16
Additions
Transfers
Disposals
–
–
–
–
–
(8,407)
(655)
–
–
(9,062)
1,640
4,762 193,581 173,792 118,018 216,401 150,843
7,027
192,323 1,058,387
–
–
–
1,958
188
50
782
7,809
656
244 308,926
320,613
77
–
–
–
35,455
4,294
70,069
68,250
3,316 (181,461)
–
(878)
(314)
(3,227)
(7,475)
(392)
(2,594)
(14,880)
Translation differences
277
980
32,707
30,952
(1,713)
43,467
30,430
978
41,577
179,655
At 31 December 2019
1,917
7,777 226,476 239,371 121,067 334,519 242,704
11,173 358,771 1,543,775
Accumulated depreciation and impairment:
At 1 January 2018
Depreciation charge
Disposals
Impairment
Translation differences
At 31 December 2018
Application of IFRS 16
(Note 3)
At 1 January 2019 – after
application of IFRS 16
Depreciation charge
Disposals
Impairment
Translation differences
At 31 December 2019
Net book value:
–
–
–
–
–
–
–
–
–
–
–
–
–
5
3
–
–
–
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
–
–
(811)
(79)
11
–
546
427
(1,466)
(5,716)
(3,628)
255
970
18
743
702
(124)
–
9
–
–
66,378
(10,268)
168
12
362
1,241
8
58,855
51,711
54,960 110,740
82,282
4,786
2,731
366,073
–
–
–
–
(6,854)
(327)
–
–
(7,181)
8
58,855
51,711
54,960 103,886
81,955
4,786
2,731
358,892
3
–
–
–
5,540
15,999
9,372
35,830
24,279
–
–
(674)
6
–
–
(2,286)
(6,302)
754
142
10,421
9,861
(749)
20,975
15,700
921
(387)
–
526
–
–
369
157
91,944
(9,649)
1,271
56,891
11
74,816
76,903
63,583 159,159
115,774
5,846
3,257
499,349
At 31 December 2018
1,640
4,754
134,726
122,081
63,058
114,068
69,216
2,241 189,592
701,376
Application of IFRS 16
(Note 3)
At 1 January 2019 – after
application of IFRS 16
–
–
–
–
–
(1,553)
(328)
–
–
(1,881)
1,640
4,754
134,726
122,081
63,058
112,515
68,888
2,241 189,592
699,495
At 31 December 2019
1,917
7,766 151,660 162,468
57,484 175,360 126,930
5,327 355,514 1,044,426
Assets under construction consist of ongoing capital projects amounting to US$261,261 thousand (2018: US$155,092 thousand) and
capitalised pre-production stripping costs of US$94,098 thousand (2018: US$34,498 thousand). Once production commences, stripping
costs are transferred to mining assets.
Property, plant and equipment includes capitalised borrowing costs on qualifying assets of US$44,693 thousand (2018: US$25,499
thousand). The capitalised borrowing costs on general borrowings were determined based on the capitalisation rate of 9.45% (2018: 9.65%),
which is the average effective interest rate on general borrowings during the year. The Group has no specific borrowings in relation to
qualifying assets during either reporting period.
144
Ferrexpo plc
Annual Report & Accounts 2019
Notes to the Consolidated Financial Statements
continued
Note 13: Property, plant and equipment continued
The carrying value of equipment held under finance leases and hire purchase contracts was US$1,881 thousand as at the end of the
comparative year ended 31 December 2018 and has been reclassified to right-of-use assets on 1 January 2019 following the application of
the new standard IFRS 16 Leases. For further information on the impact of the first-time adoption of the new standard IFRS 16 Leases see
Note 3 New accounting policies. Leased assets and assets under hire purchase contracts were pledged as security for the related finance
leases and hire purchase liabilities.
US$25,243 thousand of property, plant and equipment have been pledged as security for liabilities (2018: US$42,340 thousand).
The gross value of fully depreciated property, plant and equipment that is still in use is US$83,349 thousand (2018: US$40,041 thousand).
Note 14: Leases
Accounting policy
The Group leases buildings, equipment and land not used for the direct extraction of ore. The leases for land used for the extraction of ore are
not within the scope of IFRS 16 according to the scope exemptions set out in the standard.
The right-of-use assets and corresponding lease liabilities recognised as at 31 December 2019 primarily refer to long-term rental contracts for
several of the Group’s office premises with rental periods of five to ten years, leased equipment and land not used for the direct extraction
of ore.
The lease agreements for land in Ukraine are with the Ukrainian government and have typically a duration of up to 49 years requiring land
lease payments in the form of rental taxes based on annually determined rates by the government. Consequently, related right-of-use assets
and lease liabilities are recognised over a lease term of 12 months only, reflecting the period over which substantially fixed lease payments are
expected. Beyond this period, payments are subject to non-market driven changes in either the normative value of land and/or in the rental
tax rate and are disclosed in Note 30 Commitments, contingencies and legal disputes as commitments as they cannot be considered in-
substance fixed payments or as variable lease payments that depend on an index or a rate.
Right-of-use assets
The right-of-use asset is recognised at the commencement date of the lease (when the asset is ready for use) and initially measured at cost.
The cost includes the balance of the lease liability recognised, initial direct costs and lease payments made at or before the commencement
date.
In subsequent periods, the value of the right-of-use assets is adjusted for accumulated depreciation, impairment losses and remeasurement
of the lease liability, if any. The depreciation is on a straight-line basis over the shorter of the estimated useful life of the underlying asset and
the lease term.
Lease liabilities
At the commencement date, lease liabilities are measured at the net present value of the remaining lease payments, discounted using
the interest rate implicit in the lease or, when not available, the incremental borrowing rate computed for a group of leases with similar
characteristics as regards to type of asset, lease term, contract currency and economic environment.
The carrying amount of the lease liabilities is subsequently increased to reflect the interest on the lease liability and decreased by the lease
payments made during the period. Lease payments are split between principal elements and interest and are allocated to net cash flows from
financing activities and operating activities, respectively. The carrying amount is subject to remeasurement in subsequent periods to reflect
any lease modifications.
As at 31 December 2019, the net book value of the right-of-use assets included in the consolidated statement of financial position and the
associated depreciation charge included in the consolidated income statement comprised:
US$000
Net book value:
At 1 January 2019
At 31 December 2019
Depreciation charge:
Year ended 31 December
2019
Exploration
and
evaluation
Land
Mining
assets
Buildings and
tailings dam
Vessels
Plant and
equipment
Vehicles
Fixtures
and fittings
Assets under
construction
Total
–
–
–
1,907
2,244
2,159
–
–
–
5,683
4,665
1,217
–
–
–
1,881
4,003
94
52
17
12
1,843
41
5
–
–
–
9,582
10,976
5,265
During the year ended 31 December 2019, the additions to right-of-use assets totalled US$7,222 thousand.
Leased assets and assets under hire purchase contracts are pledged as security for the related finance leases and hire purchase liabilities.
Ferrexpo plc
Annual Report & Accounts 2019
145
Note 14: Leases continued
As at 31 December 2019, the carrying amount of the lease liabilities consisted of the following:
US$000
Non-current
Current
Note
26
26
Year ended
31.12.19
At 1 January
2019
6,580
3,540
4,799
4,976
The total cash outflow for leases falling under the scope of IFRS 16 Leases during the year ended 31 December 2019 was US$5,982
thousand. During the year ended 31 December 2019, US$425 thousand was recognised as an expense in the consolidated income
statement in respect of short-term leases with a corresponding impact on the net cash flows from operating activities. Furthermore, interest
expense on lease liabilities in the amount of US$630 thousand was recognised in the consolidated income statement during the year ended
31 December 2019.
For further information on the impact of the first-time adoption of the new standard IFRS 16 Leases, including the impact on the consolidated
income statement as at 31 December 2019, see Note 3 New accounting policies and Note 30 Commitments, contingencies and legal
disputes in terms of lease-related commitments, including the Group’s operating lease commitments at the end of the comparative year
ended 31 December 2018 accounted for under the old standard IAS 17 Leases.
Note 15: Goodwill and other intangible assets
Accounting policy
Goodwill
If the cost of acquisition in a business combination exceeds the identifiable net assets attributable to the Group, the difference is considered
as purchased goodwill, which is not amortised. After initial recognition, goodwill is measured at cost less any accumulated impairment losses.
Goodwill is reviewed for indication of impairment annually and, in case those are identified, an impairment assessment is conducted.
An impairment loss recognised for goodwill is never reversed in a subsequent period. In the case that the identifiable net assets attributable
to the Group exceed the cost of acquisition, the difference is recognised in profit and loss as a gain on bargain purchase. For each business
combination, the Group measures the non-controlling interest in the acquiree either at fair value or at the proportionate share of the acquiree’s
identifiable net assets. If the initial accounting for a business combination cannot be completed by the end of the reporting period in which
the combination occurs, only provisional amounts are reported, which can be adjusted during the measurement period of 12 months after
acquisition date.
Exploration and evaluation assets
See the policy disclosed in Note 13 Property, plant and equipment.
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Ferrexpo plc
Annual Report & Accounts 2019
Notes to the Consolidated Financial Statements
continued
Note 15: Goodwill and other intangible assets continued
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 2019, goodwill and other intangible assets comprised:
US$000
Cost:
Goodwill
Exploration
and evaluation
Patents and
licences
Computer
software
Other
intangible assets
Total
At 1 January 2018
28,100
2,621
4,905
137
40,309
Additions
Disposals
Transfers
Translation differences
At 31 December 2018
Additions
Disposals
Transfers
Translation differences
At 31 December 2019
Accumulated amortisation and impairment:
At 1 January 2018
Amortisation charge
Disposals
Translation differences
At 31 December 2018
Amortisation charge
Disposals
Translation differences
At 31 December 2019
Net book value:
At 31 December 2018
At 31 December 2019
–
–
–
396
–
–
–
37
4,546
1,053
(73)
68
(13)
75
(17)
342
(15)
28,496
2,658
5,581
5,290
–
–
–
5,034
33,530
–
–
1,168
351
4,177
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
(22)
(1,168)
879
5,270
963
290
(73)
(12)
5
(9)
3,306
995
9,587
2,488
428
(14)
(56)
1,168
2,846
321
(22)
71
569
(8)
232
1,538
3,639
1,930
3,058
(4)
(410)
(55)
1,598
1,924
(64)
(3,306)
13
165
–
–
–
–
–
–
–
–
–
(94)
–
350
43,623
1,929
(95)
–
7,272
52,729
3,451
718
(87)
(68)
4,014
890
(30)
303
5,177
28,496
33,530
2,658
4,177
4,413
3,732
2,444
5,948
1,598
39,609
165
47,552
Ferrexpo plc
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Note 15: 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 2019 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 2044, 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.
A number of significant judgements and estimates are used when preparing the financial long-term model of the Group. These judgements
and estimates as well as the key assumptions used are reviewed by the Audit Committee with a specific consideration given to the price
forecasts, production volumes and costs and the discount rate used.
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
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.
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$77.0 per tonne to
US$90.9 per tonne of 65% Fe fines CFR North China.
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% (2018:
12.7%) per annum. These rates reflect the time value of money and risk associated with the asset, and are in line with the rates used by
competitors with a similar background.
Sensitivity to changes in assumptions
Management believes that due to the available headroom resulting from the Group’s impairment testing of its operating assets, no reasonable
change in the above key assumptions would cause the carrying value of these operating assets to materially exceed its recoverable amount.
Note 16: Other non-current assets
As at 31 December 2019, 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
31.12.19
19,368
4,224
501
24,093
As at
31.12.18
24,993
6,552
559
32,104
148
Ferrexpo plc
Annual Report & Accounts 2019
Notes to the Consolidated Financial Statements
continued
Note 17: Inventories
Accounting policy
Inventories are stated at the lower of cost and net realisable value.
Costs incurred in bringing each product to its present location and condition are accounted for as follows:
– Raw materials – at cost on a first-in, first-out basis.
– Finished goods and work in progress – at cost of direct materials and labour and a proportion of manufacturing overheads based on
normal operating capacity, but excluding borrowing costs.
– Lean and weathered ore – at cost, if lower than net realisable value.
The net realisable value is the estimated selling price in the ordinary course of business, less estimated costs of completion (conversion into
pellets or concentrate) and the estimated costs necessary to sell the product or goods.
Major spare parts and servicing equipment that meet the definition of property, plant and equipment are, in accordance with IAS 16, included
in property, plant and equipment and not in inventory.
Critical estimates
Lean and weathered ore
Iron ore of various grades is being extracted at the Group’s two operating mines GPL and Yerystivske. In order to maximise the operational
efficiency and output of the processing facility at FPM, management determines the optimal mix and grade of ore to be delivered to the
processing facility from each mine. During the last financial years, 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 second half of the financial year 2020 and, as a consequence, a portion of
the balance has been reclassified to current.
As at 31 December 2019, the stockpiled ore valued at cost totalled US$257,252 thousand (2018: US$217,688 thousand). Critical estimates in
determining the net realisable value of lean and weathered ore include: 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 14.5%; and ii)
forecast long-term iron ore prices of US$91.7 per tonne of 65% Fe fines CFR North China.
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$36,500
thousand and US$39,600 thousand, respectively.
At 31 December 2019, inventories comprised:
US$000
Lean and weathered ore
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
31.12.19
2,226
43,008
81,782
59,010
11,393
2,295
199,714
255,026
255,026
454,740
As at
31.12.18
–
39,083
56,873
43,097
3,153
2,713
144,919
217,688
217,688
362,607
Inventories classified as non-current mainly comprise lean and weathered ore that are, based on the Group’s current processing plans, not
planned to be processed within the next year. It is the Group’s intention to process this ore at a later point of time and it is expected that it will
take more than one year to process this stockpile, depending on the Group’s future mining activities, processing capabilities and anticipated
market conditions.
Ferrexpo plc
Annual Report & Accounts 2019
149
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Note 18: 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 lifetime 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. Therefore, the Group measures the lifetime
expected credit losses of its customers as the 12-month expected 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 2019 is disclosed in Note 27 Financial instruments.
At 31 December 2019, trade and other receivables comprised:
US$000
Trade receivables
Other receivables
Expected credit loss allowance
Total trade and other receivables
As at
31.12.19
97,335
4,373
(1,844)
99,864
As at
31.12.18
83,945
2,840
(1,090)
85,695
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 2019 include US$2,578 thousand (2018: US$1,517 thousand) owed by related parties. The detailed related
party disclosures are made in Note 34 Related party disclosures.
The movement in the expected credit loss allowance for trade and other receivables during the year under review was:
US$000
Opening balance
Impact of first-time application of IFRS 9
Increase
Release
Translation differences
Closing balance
Year ended
31.12.19
Year ended
31.12.18
1,090
−
1,175
(438)
17
1,844
682
218
452
(230)
(32)
1,090
During the financial year 2019, there was no movement in the expected credit loss allowance for trade and other receivables 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 using a provision matrix:
As at 31.12.19
US$000
Expected loss rate
Trade receivables – Gross carrying amount
Other receivables – Gross carrying amount
Expected credit loss allowance
As at 31.12.18
US$000
Expected loss rate
Trade receivables – Gross carrying amount
Other receivables – Gross carrying amount
Expected credit loss allowance
Current
0.2%
91,799
3,741
153
Current
0.3%
81,317
2,274
230
Less than
45 days
2.7%
1,742
4
47
Less than
45 days
7.4%
1,400
137
114
45 to 90
days
3.7%
1,219
22
46
45 to 90
days
8.5%
375
27
34
Over 90
days
50.2%
2,575
606
1,598
Over 90
days
56.7%
853
402
712
Total
1.8%
97,335
4,373
1,844
Total
1.3%
83,945
2,840
1,090
The change of the balance of impairment losses on trade receivables recognised in the consolidated income statement as of 31 December
2019 and during the comparative year ended 31 December 2018 was not material and therefore not disclosed separately in the consolidated
income statement. For further information see the table above.
The Group’s exposures to credit, currency and commodity risks are disclosed in Note 27 Financial instruments.
150
Ferrexpo plc
Annual Report & Accounts 2019
Notes to the Consolidated Financial Statements
continued
Note 19: Prepayments and other current assets
As at 31 December 2019, 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
As at
31.12.19
As at
31.12.18
5,895
6,295
7,637
381
2,290
20,066
89
7,458
5,191
3,552
602
2,293
8,171
77
Total prepayments and other current assets
42,653
27,344
Prepayments at 31 December 2019 include US$1,662 thousand (2018: US$1,181 thousand) made to related parties. The detailed related
party disclosures are made in Note 34 Related party disclosures.
Freight costs in the amount of US$4,006 thousand were included in the balance of prepaid expenses at the beginning of the year and
recognised in the consolidated income statement during the year ended 31 December 2019 (2018: US$7,213 thousand).
Note 20: Other taxes recoverable and payable
Accounting policy
Value added tax
Revenues, expenses and assets are recognised net of the amount of value added tax (“VAT”), except:
– where VAT incurred on a purchase of assets or services is not recoverable from the taxation authority, in which case VAT is recognised as
part of the cost of acquisition of the asset or as part of 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
year end.
As at 31 December 2019, 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
Write-off
Translation differences
Closing balance, gross
Allowance
Closing balance, net
As at
31.12.19
37,262
115
37,377
As at
31.12.18
44,730
107
44,837
Year ended
31.12.19
43,758
153,025
Year ended
31.12.18
22,444
127,363
(165,506)
(106,341)
(291)
6,485
37,471
(2,090)
35,381
−
292
43,758
(1,020)
42,738
Notes
2
US$809 thousand of the total VAT receivable balance in Ukraine was overdue as at 31 December 2019 (2018: US$13,328 thousand).
US$12,641 thousand of the overdue balance as at the end of the comparative year ended 31 December 2018 was refunded by the end
of January 2019. The allowance of US$2,090 thousand (2018: US$1,020 thousand) is related to uncertainties in terms of the timing of the
recovery of VAT receivable balances. US$1,027 thousand (2018: US$1,020 thousand) relates to VAT incurred for a mine still being developed
and the refund is only expected when operative. US$1,063 thousand (2018: nil) relates to a VAT receivable being subject to court proceedings.
Ferrexpo plc
Annual Report & Accounts 2019
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Note 20: Other taxes recoverable and payable continued
As at 31 December 2019, other taxes payable comprised:
US$000
Environmental tax
Royalties
VAT payable
Other taxes
Total other taxes payable
As at
31.12.19
1,771
6,641
241
2,978
11,631
Note 21: 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 2019, trade and other payables comprised:
US$000
Materials and services
Payables for equipment
Other
Total current trade and other payables
As at
31.12.19
54,013
11,296
318
65,627
As at
31.12.18
1,449
6,669
235
3,212
11,565
As at
31.12.18
30,446
3,755
91
34,292
Trade and other payables at 31 December 2019 includes US$1,899 thousand (2018: US$1,428 thousand) due to related parties (see Note 34
Related party disclosures).
The Group’s exposure to currency and liquidity risk related to trade and other payables is disclosed in Note 27 Financial instruments.
Note 22: Pension and post-employment obligations
Accounting policy
The defined benefit costs relating to the plans operated by the Group in the different countries are determined and accrued in the
consolidated financial statements using the projected unit credit method for those employees entitled to such payments. The underlying
assumptions are defined by management and the defined benefit pension liability is calculated by independent actuaries at the end of each
annual reporting period.
Remeasurements, comprising actuarial gains and losses, are immediately reflected in the statement of financial position. The corresponding
charge or credit is recognised in the other comprehensive income of the period in which it occurred and immediately reflected in retained
earnings as not reclassified to the income statement in subsequent periods.
The costs of managing plan assets are deducted from the return on plan assets reflected in other comprehensive income. All other scheme
administration costs are charged to the income statement. The net interest is calculated by applying the discount rate to the net defined
benefit pension liability or plan assets. Any past service costs are recognised in the income statement at the earlier of when the plan
amendment occurs or when related restructuring costs are recognised.
The service costs (including current and past) are included in cost of sales, selling and distribution expenses and general and administrative
expenses in the consolidated income statement whereas the net finance expenses are included in finance expenses. The effects from
remeasurements are recognised in other comprehensive income.
The defined benefit pension liability is the aggregate of the defined benefit obligation less plan assets of funded schemes. The Group operates
funded and unfunded schemes.
The Group’s expenses in relation to defined contribution plans are charged directly to the income statement.
The Group mainly operates defined benefit plans for qualifying employees of its subsidiaries in Ukraine and Switzerland. All local defined
benefit pension liabilities are calculated by independent actuaries applying accepted actuarial techniques. In addition to the aforementioned
schemes, the Group operates a defined benefit scheme in Austria and contribution plans for qualifying employees in the UK and in Singapore.
152
Ferrexpo plc
Annual Report & Accounts 2019
Notes to the Consolidated Financial Statements
continued
Note 22: Pension and post-employment obligations continued
Details of the major defined benefit schemes in Ukraine and Switzerland are provided below:
Ukraine
The Group’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.
At 31 December 2019, the pension schemes in Ukraine covered 3,514 current employees (2018: 3,623 people) and there are 860 former
employees currently in receipt of pensions (2018: 900 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 the employees make contributions to the pension scheme as a percentage of the insured
salaries depending on the age of the employees.
At 31 December 2019, the Swiss pension scheme covered 22 people (2018: 21 people).
The principal assumptions used in determining the defined benefit obligation are shown below:
Year ended 31.12.19
Year ended 31.12.18
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
Ukrainian
schemes
12.3%
5.3%
7.4%
5.3%
81.5
77.2
Swiss
scheme
0.2%
1.0%
1.5%
0.0%
89.7
87.6
Ukrainian
schemes
14.0%
6.4%
7.9%
6.4%
81.7
77.4
As at
31.12.19
7,934
(4,755)
3,179
30,449
33,628
30,352
3,179
97
Swiss
scheme
1.0%
1.0%
1.3%
0.0%
89.5
87.5
As at
31.12.18
6,920
(4,483)
2,437
19,001
21,438
18,913
2,437
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Annual Report & Accounts 2019
153
Note 22: Pension and post-employment obligations continued
Amounts recognised in the income statement or other comprehensive income are as follows:
US$000
Defined benefit cost charged in the income statement:
Current service cost
Past service cost
Interest cost on defined benefit obligation
Interest income on plan assets
Administration cost
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Year ended
31.12.19
Year ended
31.12.18
1,258
(466)
2,752
(34)
24
1,234
–
2,416
(31)
23
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Total defined benefit cost charged in the income statement
3,534
3,642
Remeasurement cost/(gains) in other comprehensive income:
Remeasurement from demographic assumptions
Remeasurement from financial assumptions
Experience adjustment
Return on plan assets
Total remeasurement cost/(gains) in other comprehensive income
Total defined benefit cost
Thereof for Ukrainian schemes
Thereof for Swiss scheme
Thereof for schemes in other jurisdictions
(660)
4,888
2,670
34
6,932
10,466
9,438
1,017
11
229
(5,035)
3,895
36
(875)
2,767
1,893
878
(4)
The effects from remeasurement of financial assumptions relate to the changes of the discount rate used for the Ukrainian schemes.
As of 31 December 2019, the discount rate was decreased from 14.0% to 12.3% whereas at the end of the comparative period ended
31 December 2018 the rate was increased from 13.0% to 14.0%. The effect from the experience adjustments relates to higher than assumed
salary increases in Ukraine during the financial year 2019 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 losses/(gains)
Contributions paid by employer
Contributions paid by employees
Benefits paid and net transfers through pension assets
Plan amendments
Translation differences
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
31.12.19
25,921
1,258
2,752
6,898
(1,884)
121
(210)
(466)
3,993
38,383
30,352
7,934
97
23,903
8,317
6,163
Year ended
31.12.18
23,697
1,234
2,416
(947)
(1,700)
119
881
–
221
25,921
18,913
6,920
88
16,824
4,865
4,232
154
Ferrexpo plc
Annual Report & Accounts 2019
Notes to the Consolidated Financial Statements
continued
Note 22: Pension and post-employment obligations continued
The durations of the defined benefit obligation for the different schemes as at 31 December 2019 are 9.5 years in Ukraine and 21.4 years
in Switzerland.
Contributions to the defined benefit plans, including benefits paid by employer and employee contributions, are expected to be US$2,128
thousand for the schemes in Ukraine and US$769 thousand in Switzerland in the next financial year.
The expenses in relation to the defined contribution plan in the UK and Singapore totalled US$53 thousand (2018: US$60 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
31.12.19
4,483
Year ended
31.12.18
3,183
34
324
121
(210)
(34)
(24)
61
4,755
4,755
31
344
119
881
(36)
(23)
(16)
4,483
4,483
As at
31.12.19
As at
31.12.19
As at
31.12.18
As at
31.12.18
29.5
34.0
13.4
23.1
100.0
1,403
1,617
637
1,098
4,755
29.4
32.7
12.7
25.2
100.0
1,318
1,466
569
1,130
4,483
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.
Note 22: Pension and post-employment obligations continued
Changes to the significant assumptions would have the following effects on the defined benefit obligation in the different jurisdictions:
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Swiss
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Other
jurisdictions
Ukrainian
schemes
Swiss
scheme
Other
jurisdictions
Year ended 31.12.19
1.0% or
1 year
(2,670)
1,520
217
n/a
535
Increase by
1.0% or
1 year
(1,364)
226
2
803
168
1.0% or
1 year
(8)
9
n/a
n/a
n/a
1.0% or
1 year
3,053
(1,478)
(446)
n/a
(626)
Decrease by
1.0% or
1 year
1,925
(200)
(1)
n/a
(168)
1.0% or
1 year
10
(8)
n/a
n/a
n/a
Ukrainian
schemes
Swiss
scheme
Other
jurisdictions
Ukrainian
schemes
Swiss
scheme
Other
jurisdictions
Year ended 31.12.18
Increase by
Decrease by
1.0% or
1 year
(1,603)
1,044
501
n/a
287
1.0% or
1 year
(1,136)
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)
1.0% or
1 year
1,574
(135)
(6)
n/a
(157)
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1.0% or
1 year
9
(8)
n/a
n/a
n/a
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)
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 for the Ukrainian schemes, but the sensitivity for local
inflation is used instead.
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 23: Provisions
Accounting policy
General
Provisions are recognised when the Group has a present obligation (legal or constructive) as a result of a past event and it is probable that an
outflow of resources embodying economic benefits will be required to settle the obligation and a reliable estimate can be made of the amount
of the obligation.
Site restoration
Site restoration provisions are made in respect of the estimated future costs of closure and restoration and for environmental rehabilitation
costs (determined by an independent expert) in the accounting period when the related environmental disturbance occurs. The provision
is discounted, if material, and the unwinding of the discount is included in finance costs. At the time of establishing the provision, a
corresponding asset is capitalised where it gives rise to a future benefit and depreciated over future production from the mine to which it
relates. The provision is reviewed on an annual basis for changes in cost estimates, discount rates or the life of operations.
The provision for site restoration changed as follows during the financial year 2019:
US$000
Opening balance
Unwind of the discount
Charge/credit to the income statement
Translation differences
Closing balance
Year ended
31.12.19
1,940
307
437
332
Year ended
31.12.18
2,070
272
(429)
27
3,016
1,940
156
Ferrexpo plc
Annual Report & Accounts 2019
Notes to the Consolidated Financial Statements
continued
Note 23: Provisions continued
The costs of restoration of the different deposits in the Group’s open pit mines are based on amounts determined by an independent and
credited institute taking into account the codes of practice and laws applicable in Ukraine. The useful lives of the different pits and mines are
determined by the same institute based on expected annual stripping and production volumes having taken into account the expected timing
and effect of future mine-life extension programmes. It is expected that the restoration works of the GPL mine will start after the years 2040,
2044 and 2061 for the different areas within the mine. The first minor restoration work of the Yerystivske mine is expected to start for some
dump areas after 2026, whereas the removal of equipment and the flooding of the pit will only begin at the end of the mine’s life in 2044.
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 an average nominal pre-tax discount rate of 12.2% (2018: 14.0%) and the costs are expected to be incurred once the restoration
works begin in the different areas of the mines.
Uncertainties in estimating the provision include potential changes in regulatory requirements, decommissioning and reclamation alternatives
and the discount and inflation rates to be used in the calculations.
Note 24: Accrued and contract liabilities
Accounting policy
Accrued expenses are recognised for amounts to be paid in a future period for goods or services received, which have not been billed to the
Group as at the end of the reporting period.
Contract liabilities consist of the portion of freight revenues under CIF and CFR Incoterms, which is deferred and recognised over time as the
performance obligation is fulfilled, and released at the point of time when the freight services are completed.
As at 31 December 2019, accrued and contract liabilities comprised:
US$000
Accrued expenses
Accrued interest
Accrued employee costs
Advances from customers
Contract liabilities
Total accrued and contract liabilities
As at
31.12.19
7,439
4,306
17,482
50
9,980
39,257
As at
31.12.18
6,123
6,438
13,899
195
6,038
32,693
Note 25: Cash and cash equivalents
Accounting policy
Cash and cash equivalents include cash at bank and on hand and short-term deposits with original maturity of 90 days or less. Cash at bank
and on hand and short-term deposits are recorded at their nominal amount as these present an insignificant risk of changes in value.
As at 31 December 2019, cash and cash equivalents comprised:
US$000
Cash at bank and on hand
Total cash and cash equivalents
As at
31.12.19
131,020
131,020
As at
31.12.18
62,996
62,996
The debt repayments during the financial year ended 31 December 2019 totalled US$229,374 thousand (2018: US$308,817 thousand)
affecting the balance of cash and cash equivalents. Further information on the Group’s gross debt is provided in Note 26 Interest-bearing
loans and borrowings.
The balance of cash and cash equivalents held in Ukraine amounts to US$28,351 thousand as at 31 December 2019 (2018: US$21,416
thousand). The Group’s exposure to liquidity, counterparty and interest rate risk as well as a sensitivity analysis for financial assets and
liabilities are disclosed in Note 27 Financial instruments.
Note 30 Commitments, contingencies and legal disputes provides details on the Group’s balance of restricted cash and deposits, which has
been fully provided for during the financial years 2015 and 2016 as not available to the Group.
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Note 26: Interest-bearing loans and borrowings
Accounting policy
Interest-bearing loans and borrowings (excluding lease liabilities) are measured at amortised cost. All loans are in US Dollars. See also Note 27
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
Lease liabilities
Trade finance facilities
Total current interest-bearing loans and borrowings
Non-current
Syndicated bank loans – secured
Other bank loans – unsecured
Lease liabilities
Total non-current interest-bearing loans and borrowings
Total interest-bearing loans and borrowings
Notes
As at
31.12.19
As at
31.12.18
–
172,454
133,333
–
1,494
3,540
–
9,262
1,494
2,074
–
19,316
138,367
204,600
266,667
195,000
764
6,580
274,011
412,378
2,258
–
197,258
401,858
30
30
27
At 31 December 2019, the Group has a syndicated revolving US$400,000 thousand pre-export finance facility, which is fully drawn. As at the end
of the comparative year ended 31 December 2018, US$205,000 thousand were available and US$195,000 thousand were drawn by the Group.
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 was 6 November 2018. Following a one-year grace
period, the facility will be amortised in 12 quarterly instalments, with the first instalment due on 7 February 2020 and the final repayment due on
6 November 2022.
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 certain assigned sales
contracts are exclusively received.
As at the end of the comparative year ended 31 December 2018, the Group had outstanding unsecured Notes at par value totalling US$173,181
thousand in addition to the major bank debt facility listed above. The final payment was made on 7 April 2019. The Notes had a 10.375% interest
coupon payable semi-annually.
As at 31 December 2019, the Group had no open trade finance facilities (2018: US$19,316 thousand). Trade finance facilities are secured
against receivable balances related to these specific trades.
158
Ferrexpo plc
Annual Report & Accounts 2019
Notes to the Consolidated Financial Statements
continued
Note 26: Interest-bearing loans and borrowings continued
The outstanding unsecured Notes were 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
Notes
Year ended
31.12.19
401,858
Year ended
31.12.18
491,706
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
Principal and interest elements of lease payments
Change of trade finance facilities, net
Total cash movements
Non-cash movements
Amortisation of prepaid arrangement fees
First-time adoption IFRS 16
Additions to lease liabilities
Others (incl. translation differences)
Total non-cash movements
(173,181)
(173,181)
225,000
195,000
(20,000)
(112,500)
(9,560)
(1,717)
(5,600)
(19,316)
(4,374)
1,462
7,701
5,297
434
14,894
(17,189)
(1,512)
(3,753)
19,288
(93,847)
4,696
−
−
(697)
3,999
3
Closing balance of interest-bearing loans and borrowings
412,378
401,858
Further information on the Group’s exposure to interest rate, foreign currency and liquidity risk is provided in Note 27 Financial instruments.
Note 27: Financial instruments
Accounting policy
Financial assets and liabilities are recognised when the Group becomes a party to the contractual provisions of the financial instrument.
Non-derivative financial instruments
Non-derivative financial instruments comprise investments in equity and debt securities (e.g. promissory notes), trade and other receivables,
cash and cash equivalents, loans and borrowings (including lease liabilities) and trade and other payables.
Derivative financial instruments
Except for the provisionally priced receivables disclosed in Note 18 Trade and other receivables, the Group does not hold any derivative
financial instruments.
Initial measurement
Non-derivative financial instruments
Financial assets and financial liabilities (excluding lease liabilities) are initially measured at fair value. Any transaction costs that are directly
attributable to the acquisition or issue of financial assets or financial liabilities are added or deducted from its fair value except for financial
assets and financial liabilities at fair value through the income statement. For those financial assets and financial liabilities, the transaction costs
are recognised immediately in the income statement.
All regular way purchases and sales of financial assets are recognised on the trade date (i.e. the date that the Group commits to purchase or
sell the asset). Regular way purchases or sales are those that require delivery of assets within the period generally established by regulation or
convention in the marketplace.
The subsequent measurement is based on the classification of the financial instruments.
Subsequent measurement
Financial assets
Loans and receivables
Except for the provisionally priced receivables disclosed in Note 18 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.
Other
Other non-derivative financial assets are measured at amortised cost using the effective interest method less any impairment losses.
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Note 27: Financial instruments continued
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 (excluding lease liabilities)
Interest-bearing loans and borrowings (excluding lease liabilities) 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.
The accounting classification of each category of financial instruments and their carrying amounts are set out below:
US$000
Financial assets
Cash and cash equivalents
Trade and other receivables
Other financial assets
Total financial assets
Financial liabilities
Trade and other payables
Accrued liabilities
Interest-bearing loans and borrowings
Total financial liabilities
US$000
Financial assets
Cash and cash equivalents
Trade and other receivables
Other financial assets
Total financial assets
Financial liabilities
Trade and other payables
Accrued liabilities
Interest-bearing loans and borrowings
Total financial liabilities
Notes
Loans and
receivables
As at 31.12.19
Financial
liabilities
measured at
amortised cost
Lease
liabilities
Total
25
18
21
24
26
131,020
99,864
402
231,286
–
–
–
–
–
–
–
–
65,627
29,209
402,258
497,094
–
–
–
–
–
–
10,120
10,120
131,020
99,864
402
231,286
65,627
29,209
412,378
507,214
Notes
Loans and
receivables
As at 31.12.18
Financial
liabilities
measured at
amortised cost
Lease
liabilities
Total
25
18
21
24
26
62,996
85,695
456
149,147
–
–
–
–
–
–
–
–
34,292
26,458
399,784
460,534
–
–
–
–
–
–
2,074
2,074
62,996
85,695
456
149,147
34,292
26,458
401,858
462,608
The presentation of the carrying amount of the financial liabilities has been changed in the current year following the adoption of the new
standard IFRS 16 Leases. In order to be consistent with the presentation in the current year, the amount of US$2,074 thousand has been
reclassified from financial liabilities measured at amortised cost to lease liabilities for the comparative year ended 31 December 2018. The total
of financial liabilities remained unchanged. For further information on the impact of the adoption of the new standard IFRS 16 Leases see Note
3 New accounting policies.
160
Ferrexpo plc
Annual Report & Accounts 2019
Notes to the Consolidated Financial Statements
continued
Note 27: Financial instruments continued
Fair values and impairment testing
Financial assets and other financial liabilities
The fair values of cash and cash equivalents, trade and other receivables and payables are approximately equal to their carrying amounts due
to their short maturity.
Interest-bearing loans and borrowings
The fair values of interest-bearing loans and borrowings are based on the discounted cash flows using market interest rates (Level 2) except
for the fair value of the Eurobond issued (Level 1), which was based on the market price quotation at the reporting date. The fair values of
interest-bearing loans and borrowings totalled US$406,838 thousand (2018: US$401,089 thousand).
Fair value measurements recognised in the statement of financial position
Except for the provisionally priced trade receivables (Level 2) disclosed in Note 18 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.
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
the comparative year.
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Note 27: Financial instruments continued
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.
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.
Irrespective of the counterparty risk assessment above, the Group only uses subsidiaries of Western banks for transactional purposes unless
required differently by law.
Subsequent to the declaration of insolvency of the Group’s former transactional bank in Ukraine (see Note 30 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 2019, 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, which was fully drawn. As at the end of the comparative year ended 31 December
2018, US$205,000 thousand were available and US$195,000 thousand were drawn by the Group.
Certain Group companies act as guarantors for several finance facilities provided to Ukrainian subsidiaries: Ferrexpo AG amounting to
US$2,301 thousand as at 31 December 2019 (2018: US$15,767 thousand), Ferrexpo Middle East FZE amounting to US$6,595 thousand and
Ferrexpo plc amounting to US$2,661 thousand as at the end of the comparative year ended 31 December 2018.
The total remaining contractual maturities of the guarantees provided under the facilities listed above is US$414,079 thousand (2018:
US$403,268 thousand).
Exposure to credit risk
The carrying amount of financial assets at 31 December 2019 was US$231,286 thousand (2018: US$149,147 thousand) and represents the
maximum credit exposure. See page 159 for further information.
Of the total maximum exposure to credit risk, US$37,404 thousand (2018: US$26,068 thousand) related to Ukraine.
The total receivables balance relating to the Group’s top three customers was US$43,193 thousand (2018: US$40,670 thousand), making up
43.3% of the total amounts receivable (2018: 47.5%). The top three customers are considered to be crisis-resistant top-class steel mills and
sales are made under long-term contracts.
Impairment profile
The Group’s exposure to credit risk relating to trade and other receivables is disclosed in Note 18 Trade and other receivables.
162
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Annual Report & Accounts 2019
Notes to the Consolidated Financial Statements
continued
Note 27: Financial instruments continued
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. The Group also makes use of available trade finance facilities to manage its short-term
liquidity requirements. 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.
For further information see the Group’s Viability Statement on page 61.
The following are the contractual maturities of financial liabilities:
US$000
Interest-bearing
Less than
1 year
Between
1 to 2 years
Between
2 to 5 years
More than
5 years
Total
As at 31.12.19
Floating rate loans and borrowings
134,868
134,100
133,333
–
402,301
Lease liabilities
Total interest-bearing
Non-interest-bearing
Trade and other payables
Accrued liabilities
Future interest payable
Total non-interest-bearing
Total financial liabilities
3,946
3,342
3,937
138,814
137,442
137,270
553
553
11,778
414,079
65,627
29,209
18,321
113,157
–
–
11,438
11,438
–
–
4,366
4,366
–
–
–
–
65,627
29,209
34,125
128,961
251,971
148,880
141,636
553
543,040
The difference of the total of fixed and floating interest-bearing loans and borrowings compared to the balances disclosed in Note 26 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 (excl. lease liabilities)
Floating rate loans and borrowings
Lease liabilities
Total interest-bearing
Non-interest-bearing
Trade and other payables
Accrued liabilities
Future interest payable
Total non-interest-bearing
Total financial liabilities
Less than
1 year
Between
1 to 2 years
Between
2 to 5 years
More than
5 years
Total
As at 31.12.18
179,108
24,785
2,074
–
–
66,534
130,767
–
–
205,967
66,534
130,767
34,292
26,458
23,321
84,071
290,038
–
–
12,380
12,380
78,914
–
–
10,511
10,511
141,278
–
–
–
–
–
–
–
–
–
179,108
222,086
2,074
403,268
34,292
26,458
46,212
106,962
510,230
The presentation of the contractual maturities of the financial liabilities has been changed in the current year following the adoption of the new
standard IFRS 16 Leases. In order to be consistent with the presentation in the current year, the amount of US$2,074 thousand has been
reclassified from fixed rate loans and borrowings to lease liabilities for the comparative year ended 31 December 2018. The total of financial
liabilities remained unchanged. For further information on the impact of the adoption of the new standard IFRS 16 Leases see Note 3 New
accounting policies.
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Note 27: Financial instruments continued
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 the 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 differences 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 the 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.
The Group’s exposure to foreign currency risk was as follows as of 31 December 2019:
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
31.12.19
As at
31.12.18
231,286
149,147
–
7,372
4,603
174
1,521
13,670
–
6,837
49
674
1,898
9,458
(507,200)
(462,608)
–
(5,831)
(1,595)
(333)
(1,598)
(9,357)
–
(12,369)
(1,587)
(4,617)
(1,086)
(19,659)
No other subsidiaries of the Group, apart from the Ukrainian subsidiaries, 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 31 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 years.
164
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Annual Report & Accounts 2019
Notes to the Consolidated Financial Statements
continued
Note 27: Financial instruments continued
Commodity risk
Revenues related to provisionally priced sales are initially recognised at the estimated fair value of the consideration receivable based on the
forward price at each reporting date for the relevant period outlined in the different contracts. As a consequence, the receivable balance may
change in a future period when final invoices can be issued based on final iron ore prices to be applied according to the specific underlying
contract terms. The provisionally priced iron ore exposure as at 31 December 2019 was 701,000 tonnes (2018: nil) and gave rise to a fair value
gain relating to the embedded provisional pricing mechanism of US$4,905 thousand as at 31 December 2019 (2018: nil). Final iron ore prices
based on the relevant index are normally known within 60 days after the reporting period. The difference between the provisionally priced
receivable balance recognised as at 31 December 2019 and the receivable balance taking into account the known final prices is US$464
thousand (2018: nil) and would have decreased 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.
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
31.12.19
Income
statement/equity
Year ended
31.12.18
Income
statement/equity
257
501
(26)
732
(922)
(256)
(657)
(1,835)
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
31.12.19
2,713
Year ended
31.12.18
1,591
A decrease of 100bps would increase equity and profit by US$2,713 thousand for the year ended 31 December 2019 (2018: US$1,126
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 2019 as a result of the strong financial performance. The net debt has decreased from US$338,862
thousand at the beginning of the year to US$281,358 thousand as at 31 December 2019.
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 2019 and are expected to continue in 2020 depending on the market environment and the Group’s
cash generation.
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.
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Note 27: Financial instruments continued
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 2019. 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 26 Interest-bearing loans and borrowings.
Note 28: Share-based payments
Accounting policy
Equity-settled transactions
The cost of equity-settled transactions with employees is measured by reference to the fair value of the award at the grant date using
modelling techniques consistent with the mathematics underlying the Black-Scholes option pricing model extended to allow for the
performance conditions. The fair value is determined by reference to the quoted closing share price on the grant date. The cost is recognised
as an expense over the vesting period, which ends on the date on which the relevant employees become fully entitled to the award. In valuing
equity-settled transactions, no account is taken of any vesting conditions, except for market conditions, such as the relative Total Shareholder
Return (“TSR”).
Where the vesting of awards is subject to the satisfaction of certain market conditions, a vesting charge is recognised irrespective of whether
or not the market condition is satisfied, provided that all other performance conditions are satisfied. Where awards terminate before the
performance period is complete, any unamortised expense is recognised immediately.
At each reporting date, the cumulative expense of outstanding awards is calculated, representing the extent to which the vesting period has
expired and management’s best estimate of the achievement or otherwise of non-market conditions and of the number of equity instruments
that will ultimately vest. The movement in cumulative expense since the previous reporting date is recognised in the income statement, with a
corresponding entry in employee benefit trust reserve in equity.
Long-term incentive plan (“LTIP”)
The LTIP is a share-based scheme whereby certain senior management and executives receive rewards based on the relative TSR. The
LTIP is subject to a performance condition based on the TSR compared to a comparator group, which operates 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 31.12.19
Year ended 31.12.18
Year ended 31.12.17
2019 LTIP
2018 LTIP
2017 LTIP
470
–
–
–
392
–
–
–
803
The following expenses have been recognised in 2019 and 2018 in respect of the LTIP:
Total
470
392
803
Total
1,022
674
2019 LTIP
2018 LTIP
2017 LTIP
2016 LTIP
376
–
243
238
403
389
–
47
Year ended
31.12.19
WAFV (US$)
Year ended
31.12.18
WAFV (US$)
Year ended
31.12.19
No. (000)
Year ended
31.12.18
No. (000)
1.16
2.40
0.23
1.84
1.94
0.86
1.97
0.61
1.13
1.16
1,820
470
(719)
(13)
1,558
2,122
392
(594)
(100)
1,820
US$000
Year ended 31.12.19
Year ended 31.12.18
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 2019 LTIP awards were the share price at date of grant of US$3.51 (2018 LTIP awards: US$3.11), the
volatility of the share price of 56% p.a. (2018 LTIP awards: 71% p.a.) and a risk-free interest rate of 2.3% p.a. (2018 LTIP awards: 2.5% p.a.).
As at 31 December 2019, 68 thousand (2018: nil) of the total vested awards during the financial year 2019 have not been exercised. As at the
date of authorising of the consolidated financial statements for issue, all awards have been exercised.
166
Ferrexpo plc
Annual Report & Accounts 2019
Notes to the Consolidated Financial Statements
continued
Note 29: Employees
Employee benefits expenses for the year ended 31 December 2019 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
22
28
Year ended
31.12.19
85,746
16,828
1,258
4,326
1,022
109,180
Year ended
31.12.18
67,413
13,152
1,234
3,851
674
86,324
The table above includes compensation for Non-executive Directors, Executive Directors and other key management personnel as outlined
below:
Year ended 31.12.19
Year ended 31.12.18
US$000
Wages and salaries
Social security costs
Post-employment benefits
Other employee costs
Share-based payments
Non-executive
and Executive
Directors
Other key
management
2,681
5,327
130
80
197
161
91
98
3
522
6,041
Total
8,008
221
178
200
683
Non-executive
and Executive
Directors
Other key
management
2,757
4,537
166
82
196
93
181
140
4
383
Total
7,294
347
222
200
476
9,290
3,294
5,245
8,539
Total compensation for key management
3,249
The average number of employees during the financial year 2019 is detailed in the table below:
Average number of employees
Production
Marketing and distribution
Administration
Other
Total average number of employees
Year ended
31.12.19
Year ended
31.12.18
7,007
179
1,227
575
8,988
7,178
185
1,079
728
9,170
Note 30: Commitments, contingencies and legal disputes
Accounting policy
Contingencies
Contingent liabilities are not recognised in the consolidated financial statements. They are disclosed unless the possibility of an outflow
of resources embodying economic benefits is remote. A contingent asset is not recognised in the consolidated financial statements but
disclosed when an inflow of economic benefits is probable.
Commitments for the lease of mining land
These commitments relate to the agreements for the use of mining land, which fall out of the scope of IFRS 16 Leases.
Future minimum rental payments
These commitments relate to leases under the scope of IFRS 16 to which the lessee is committed, but not commenced.
Future commitments for contingent rental payments
These commitments include future cash flows dependent on non-fixed rates related to the long-term portion of leases of land not used for the
direct extraction of ore and accounted for under IFRS 16, whereas the short-term portion is recognised as lease liability in the statement of
financial position (Note 14 Leases).
Note 14 Leases provides more detailed information on the accounting policy for leases.
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Note 30: Commitments, contingencies and legal disputes continued
Commitments
Commitments as at 31 December 2019 consisted of the following:
US$000
Total commitments for the lease of mining land (out of the scope of IFRS 16)
Total future contingent rental payments (IFRS 16)
Total capital commitments on purchase of property, plant and equipment
Year ended
31.12.19
29,910
15,068
116,509
Year ended
31.12.18
30,724
5,704
67,529
Commitments before first-time adoption of IFRS 16 Leases as of 1 January 2019
For further information on the impact of the first-time adoption of this new standard see Note 3 New accounting policies.
Operating lease commitments
Operating lease commitments as at the end of the comparative year 31 December 2018 consisted of the following:
US$000
Less than one year
Between one and five years
More than five years
Total operating lease commitments
Year ended
31.12.18
2,807
4,587
1,433
8,827
During the comparative year ended 31 December 2018, US$2,903 thousand was recognised as an expense in the income statement in
respect of operating leases.
Finance lease commitments
Future minimum lease payments under finance leases together with the present value of the net minimum lease payments were as follows as
at the end of the comparative year ended 31 December 2018:
US$000
Less than one year
Total minimum lease payments
Less: amounts representing finance charges
Present value of minimum lease payments
As at 31.12.18
Minimum
payments
Present value of
payments
2,267
2,267
(193)
2,074
2,074
2,074
–
2,074
Contingencies
On 4 February 2019, the Group announced that it had commissioned an independent review (the “Independent Review”) into the Group’s
relationship with third party charity fund Blooming Land (the “Charity”) and the use of the total funds of US$110,000 thousand donated by the
Group to the Charity during the financial years 2013 to 2018, of which US$9,500 thousand during the comparative year ended 31 December 2018.
The Group may be exposed to the risk of civil, criminal or regulatory actions and liabilities in relation to matters considered by the Independent
Review.
Whilst a significant amount of work has been undertaken in connection with the Independent Review by the Independent Review Committee
(“IRC”) and its advisers, it has not been possible to explain some discrepancies outlined in the 2018 Annual Report & Accounts in respect
of the ultimate use of funds donated by the Group to the Charity.
After careful consideration of the report received from its advisers together with the work of the IRC itself, the IRC announced on 30 August
2019 that it is satisfied that none of the Group’s Directors, management or employees have had any involvement in any possible
misappropriation of funds by the Charity. At the same time, the IRC reaffirmed its conclusion that the Charity is not a related party of the
Group, Kostyantin Zhevago (the Group’s previous Chief Executive Officer and a controlling shareholder of Ferrexpo plc) or its executive
management, as defined under applicable accounting standards or Chapter 11 of the UK Listing Rules. For further information see
Independent Review Committee Report on page 75.
If any of the critical judgements outlined in Note 7 Operating expenses and/or Note 34 Related party disclosures and/or the conclusions of
the IRC are incorrect, in whole or in part, including as a result of information not currently known to the Group, or new information becomes
available, which enables the Group to form conclusions, which were not or could not be reached by the IRC, liabilities (including fines and
penalties) may accrue to the Group. 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 2019.
The Board is currently making enquiries into a loan relationship between related parties of the Group involving FC Vorskla. If it transpires that
any of the payments made by the Group to FC Vorskla or the loan provided by FC Vorskla to Collaton Limited were not used for the legitimate
purposes of the football club in Ukraine, or there has been any non-compliance with legal, regulatory or other requirements, liabilities
(including fines and penalties) may accrue to the Group. At the current time, the existence, timing or quantum of potential future liability, if any,
including fines, penalties or damages, which could be material, or other consequences arising from the payments made by the Group to FC
Vorskla, cannot be determined and measured reliably and, as a consequence, no associated liabilities have been recognised in relation to
168
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Annual Report & Accounts 2019
Notes to the Consolidated Financial Statements
continued
Note 30: Commitments, contingencies and legal disputes continued
these matters in the consolidated statement of financial position as of 31 December 2019. See Note 34 Related party disclosures for
further information.
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$179,936 thousand as of 31 December 2019).
On 22 April 2016, the liquidator of BFC issued certificates recognising UAH540 million (US$22,798 thousand as of 31 December 2019) of
these claims and recognised these claims in the ninth rank. The aforementioned Ukrainian subsidiaries are still involved in legal proceedings
in respect of the under-recognition of the claims amounting to UAH3,722 million (US$157,138 thousand as of 31 December 2019) 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. On 19 June 2019, the Northern Commercial Court of Appeal satisfied the claim of FPM and the opposing party filed a
cassation appeal. On 31 October 2019, the Supreme Court cancelled the decision of the Northern Commercial Court of Appeal and directed
the case to this court instance for new consideration. The hearing by the Northern Commercial Court of Appeal was scheduled to take
place on 17 March 2020, but did not take place and was postponed. The new date is currently unknown. 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. On
20 May 2019, the Northern Commercial Court of Appeal dismissed the appellate claim of FYM in full and FYM filed its cassation claim on
18 June 2019. On 20 August 2019, the Supreme Court upheld the appeal of FYM and directed the case to the court of first instance for new
consideration. The hearing by Kyiv Commercial Court is scheduled to take place on 19 March 2020. 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. On
19 June 2019, the Supreme Court of Ukraine dismissed the cassation appeal of FBM.
The outcomes of the aforementioned legal proceedings will not have an adverse impact on the Group’s financial result in future periods as a
full allowance was recorded for the claimed amounts during the financial year 2015.
In relation to the aforementioned insolvency of BFC, an investigating judge of the Pecherskyi District Court of Kyiv City granted in November
2019 an order to arrest (freeze) certain assets in connection with the investigation involving Kostyantin Zhevago and BFC (the “Order”). The
assets subject to the Order include 50.3% of Ferrexpo AG’s (“FAG”) shareholding in FPM. FAG filed an appeal against the Order and the
hearing before the Court of Appeal is scheduled for 2 April 2020.
Based on legal advice received, the Board of Ferrexpo expects that an appeal should be successful as the Order has no proper or reasonable
basis under Ukrainian law. The Order does not affect ownership of the shares in FPM, but prohibits their transfer, and has had no impact on
the operations of the Group. As the possibility of an outflow of economic resources is considered to be remote, the Order does not constitute
a contingent liability.
Note 31: Share capital and reserves
Accounting policy
Ordinary Shares
Ordinary Shares are classified as equity. Incremental costs directly attributable to the issue of Ordinary Shares and share options are
recognised as a deduction from equity, net of any tax effects.
Employee benefit trust reserve
Ferrexpo plc shares held by the Group are recognised at cost and classified in reserves. Consideration received for the sale of such shares is
also recognised in equity, with any difference between the proceeds from the sale and the original cost to be recorded in reserves. No gain or
loss is recognised in the income statement on the purchase, issue or cancellation of equity shares.
Treasury shares
Own equity instruments, which are 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.
Ferrexpo plc
Annual Report & Accounts 2019
169
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Note 31: 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 2019 was 613,967,956 Ordinary Shares (2018: 613,967,956) at a par value of £0.10 paid for in
cash, resulting in share capital of US$121,628 thousand (2018: US$121,628 thousand) per the statement of financial position.
As at 31 December 2019, other reserves attributable to equity shareholders of Ferrexpo plc comprised:
US$000
At 1 January 2018
Foreign currency translation differences
Tax effect
Total comprehensive income for the year
Share-based payments
At 31 December 2018
Foreign currency translation differences
Tax effect
Total comprehensive income for the year
Share-based payments
At 31 December 2019
Uniting of interest
reserve
Treasury
share
reserve
Employee benefit
trust reserve
Translation
reserve
Total other
reserves
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)
–
–
–
–
–
–
–
–
–
–
–
264,737
264,737
(20,487)
(20,487)
244,250
244,250
1,022
–
1,022
31,780
(77,260)
(2,826)
(1,716,502)
(1,764,808)
Uniting of interest reserve
The uniting of interest reserve represents the difference between the initial investment by Ferrexpo AG in FPM to gain control of the subsidiary
in 2005 and the net assets acquired, which under the pooling of interests method of accounting are consolidated at their historic cost, less
non-controlling interests.
Treasury share reserve
In September 2008, Ferrexpo plc completed a buy-back of 25,343,814 shares for a total cost of US$77,260 thousand. These shares are
currently held as treasury shares by the Group. The Companies Act 2006 forbids the exercise of any rights (including voting rights) and the
payment of dividends in respect of treasury shares.
Employee benefit trust reserve
This reserve represents the treasury shares held by Ferrexpo AG setting up an employee benefit trust reserve. The reserve is used to satisfy
future grants for senior management incentive schemes. Information on the Group’s share-based payments is provided in Note 28 Share-
based payments. As at 31 December 2019, the employee benefit trust reserve includes 1,702,056 shares (2018: 2,326,256 shares).
Translation reserve
During the financial year 2019, the Ukrainian Hryvnia appreciated from 27.688 as at the beginning of the year to 23.686 as at 31 December
2019 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 122.
Note 32: Consolidated subsidiaries
Accounting policy
Entities are included in the consolidated financial statements from the date of obtaining control and the inclusion in the consolidated financial
statements is consequently ceased when the control over an entity is lost. Control is obtained when the Group is exposed, or has the rights,
to variable returns from its involvement with an entity and has the ability to affect those returns through its power over the entity that gives the
current ability to direct the relevant activities. Control can be obtained through voting rights, but also through agreements, statutes, contracts,
trust deeds or other schemes.
Non-controlling interests in the net assets of consolidated subsidiaries are shown separately in the Group’s consolidated statement of
financial position and consolidated statement of changes in equity. The share of the profit attributable to non-controlling interests is shown in
the consolidated income statement and the consolidated statement of comprehensive income. The carrying amount of the non-controlling
interests is adjusted for any change in ownership interest to reflect the relative controlling and non-controlling interests in the subsidiary. Any
difference between the amount of the adjustment to non-controlling interests and any consideration paid or received is recognised in the
equity attributable to equity shareholders of Ferrexpo plc.
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. In June 2019, the Group acquired the remaining 0.9% of non-controlling interests in
PJSC Ferrexpo Poltava Mining for a total consideration paid in cash of US$2,189 thousand, increasing its shareholding from 99.1% to 100.0%.
The impact from the acquisition of the non-controlling interests is shown in the consolidated statement of changes in equity on page 125.
After this acquisition, all of the Group’s major subsidiaries are wholly owned. The interest that non-controlling interests have in the Group’s
operations are not material and 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 179.
The Group does not have any other interests of 20% or more in undertakings that are not disclosed on page 179, except for the investment in
the associate mentioned in Note 33 Investments in associates.
170
Ferrexpo plc
Annual Report & Accounts 2019
Notes to the Consolidated Financial Statements
continued
Note 33: Investments in associates
Accounting policy
The Group’s investments in associates are accounted for using the equity method of accounting. An associate is an entity in which the Group
has significant influence and which is neither a subsidiary nor a joint venture.
Under the equity method, the investment in the associate is carried in the statement of financial position at cost plus any post-acquisition
changes in the Group’s share of net assets of the associate. Goodwill relating to an associate is included in the carrying amount of the
investment and is not amortised nor individually tested for impairment. After application of the equity method, the Group determines whether it
is necessary to recognise any additional impairment loss with respect to the Group’s investment in the associate.
The share of profit from an associate is shown on the face of the income statement. This is the profit attributable to the Group and is therefore
the profit after tax and non-controlling interests in the subsidiaries of the associate. The reporting dates of the associates and the Group are
identical and the associates’ accounting policies are generally in conformity with those applied by the Group.
The Group also holds an interest of 49.9% (2018: 49.5%) in TIS Ruda LLC, operating a port on the Black Sea, which the Group uses as part
of its distribution channel. The interest in the associate increased as a result of the increase of the Group’s shareholding in PJSC Ferrexpo
Poltava Mining from 99.1% to 100% in June 2019.
US$000
Opening balance
Share of profit1
Dividends declared
Translation adjustments
Closing balance
Year ended
31.12.19
Year ended
31.12.18
7,037
4,114
(4,311)
1,224
8,064
5,947
5,360
(4,515)
245
7,037
For the year ended 31 December 2019 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
31.12.19
21,025
Year ended
31.12.18
21,686
Year ended
31.12.19
8,244
Year ended
31.12.18
10,741
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 2019, the associate’s total assets were US$18,655 thousand (2018: US$15,531 thousand) and the total liabilities were
US$2,494 thousand (2018: US$1,428 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 34: Related party disclosures
During the years presented, the Group entered into arm’s length transactions with entities under the common control of Kostyantin Zhevago, a
controlling shareholder of Ferrexpo plc, 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 49.9% (2018: 49.5%). This is the only associated company of the Group.
The payments made to the Non-executive Directors and Executive Directors are disclosed in the Remuneration Report on page 95.
Critical judgements
Completeness
In the course of the preparation of the consolidated financial statements of the Group for previous financial years, the Board concluded that
neither Kostyantin Zhevago (the Group’s previous Chief Executive Officer and a controlling shareholder of Ferrexpo plc) 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. During the comparative year ended 31 December 2018, the Group made donations of US$9,500 thousand to the
Charity. The donations were ceased in May 2018 and no donations were made in the year ended 31 December 2019.
After a significant amount of work undertaken by the Independent Review Committee (“IRC”) and its advisers during the financial year 2019,
the IRC reaffirmed its conclusion that the Charity is not a related party of the Group, Kostyantin Zhevago (the Group’s previous Chief Executive
Officer and a controlling shareholder of Ferrexpo plc) or its executive management, as defined under applicable accounting standards or
Chapter 11 of the UK Listing Rules. Nevertheless, the Group may, under certain circumstances, be exposed to regulatory and other actions
resulting in potential legal claims or penalties, fines or other liabilities. See Note 30 Commitments, contingencies and legal disputes on page
166 in respect of the Group’s potential exposures under certain circumstances.
Ferrexpo plc
Annual Report & Accounts 2019
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Note 34: Related party disclosures continued
Related party transactions entered into by the Group during the years presented are summarised in the following tables:
Revenue, expenses, finance income and expense
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
Finance expense
Year ended 31.12.19
Year ended 31.12.18
Entities
under
common
control
1,152
1,152
7,913
4,537
12,450
10,824
1,650
19
Associated
companies
Other
related
parties
–
–
–
–
–
18,477
–
–
14
14
–
–
–
–
393
–
Entities
under
common
control
877
877
8,429
2,959
11,388
10,702
788
119
Associated
companies
–
–
–
–
–
19,138
–
–
Other
related
parties
111
111
3
–
3
702
529
–
Total related party transactions within expenses
24,943
18,477
393
22,997
19,138
1,234
Other income f
Total related party transactions
319
–
26,414
18,477
–
407
–
–
–
23,874
19,138
1,345
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$113 thousand (2018: US$109 thousand) and income from premises leased to Kislorod PCC of US$76 thousand (2018: US$131 thousand);
Sales of diesel to DVD Trans totalling US$322 thousand (2018: US$376 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$239 thousand (2018: US$250 thousand).
b Purchases of compressed air and oxygen and scrap metal from Kislorod PCC for US$3,645 thousand (2018: US$4,536 thousand);
b Purchases of cast iron balls from AutoKraZ Holding Co. for US$274 thousand during the comparative year ended 31 December 2018. No such purchases during the year ended 31 December 2019; and
b Purchases of cast iron balls from OJSC Uzhgorodsky Turbogas for US$4,194 thousand (2018: US$3,536 thousand).
c
c
c
c
Purchases of spare parts from CJSC Kyiv Shipbuilding and Ship Repair Plant (“KSRSSZ”) in the amount of US$963 thousand (2018: US$1,201 thousand);
Purchases of spare parts from OJSC Uzhgorodsky Turbogas in the amount of US$436 thousand (2018: US$533 thousand);
Purchases of spare parts from Valsa GTV of US$1,165 thousand (2018: US$455 thousand); and
Purchases of spare parts from OJSC Berdichev Machine-Building Plant Progress of US$1,931 thousand (2018: US$724 thousand).
d Purchases of advertisement, marketing and general public relations services from FC Vorskla of US$10,824 thousand (2018: US$10,702 thousand). See page 172 in respect of a loan relationship between FC
Vorskla and another related party.
e
e
f
Insurance premiums of US$1,156 thousand (2018: US$535 thousand) paid to ASK Omega for workmen’s insurance and other insurances; and
Purchase of marketing services from TV & Radio Company of US$296 thousand (2018: US$100 thousand).
Other income is related to payments of US$319 thousand received from ASK Omega in respect of a claims made under insurance policies in place (2018: nil).
Associated companies
The Group entered into related party transactions with its associated company, TIS Ruda LLC, which were carried out on an arm’s length basis in the normal course of business for the members of the Group (see
Note 33 Investments in associates).
d Purchases of logistics services in the amount of US$18,477 thousand (2018: US$19,138 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 a controlling shareholder of Ferrexpo plc. 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 in the comparative year ended
31 December 2018. Effective 20 April 2018, this company is no longer a related party.
e
Legal services in the amount of US$362 thousand (2018: US$375 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 also received Directors’ fees of US$100 thousand (2018: US$100 thousand); and
e Consulting service fees and expenses totalling US$31 thousand (2018: US$154 thousand) paid to Nage Capital Management AG, which is controlled by Lucio Genovese, a member of the Board of Directors of
Ferrexpo plc. See the Remuneration Report on page 95 in respect of the Directors’ fees paid to Lucio Genovese.
172
Ferrexpo plc
Annual Report & Accounts 2019
Notes to the Consolidated Financial Statements
continued
Note 34: 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 years presented.
US$000
Purchases in the ordinary course of business
Total purchases of property, plant and equipment
Year ended 31.12.19
Year ended 31.12.18
Entities
under
common
control
8,935
8,935
Associated
companies
–
–
Other
related
parties
–
–
Entities
under
common
control
4,678
4,678
Associated
companies
–
–
Other
related
parties
–
–
During the year ended 31 December 2019, the Group purchased major spare parts and equipment from OJSC Berdichev Machine-Building Plant Progress totalling US$6,910 thousand (2018: US$2,821 thousand)
in respect of the construction of the concentrate stockyard, from CJSC Kyiv Shipbuilding and Ship Repair Plant (“KSRSSZ”) totalling US$816 thousand (2018: US$67 thousand) for several ongoing major projects,
including the construction of the concentrate stockyard, the upgrade of benefication sections and the refurbishment of the pellet loading area. The balance of the comparative year ended 31 December 2018 included
purchases from AutoKraZ Holding Co. totalling US$398 thousand for cranes and lifters installed on truck chassis and from Valsa GTV totalling US$212 thousand 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$861 thousand (2018: US$1,165 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.
The FPM Charity Fund owns 75% of the Sport & Recreation Centre (“SRC”) in Horishni Plavni and made contributions totalling US$129 thousand during the year ended 31 December 2019 (2018: US$199 thousand)
for the construction and maintenance of the building, including costs related to electricity, gas and water consumption. The remaining stake of 25% is owned by JSC F&C Realty, which is under the control of
Kostyantin Zhevago.
Balances with related parties
The outstanding balances, as a result of transactions with related parties, for the years presented are shown in the table below:
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 and contract liabilities
Total current liabilities
As at 31.12.19
As at 31.12.18
Entities
under
common
control
1,093
1,093
104
1,662
1,766
1,001
–
1,001
Associated
companies
Other
related
parties
–
–
2,472
–
2,472
898
–
898
–
–
2
–
2
–
1
1
Entities
under
common
control
6,121
6,121
214
1,181
1,395
465
–
465
Associated
companies
Other
related
parties
–
–
1,302
–
1,302
963
–
963
–
–
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 2019, prepayments for property, plant and equipment totalling US$1,052 thousand (2018: US$5,980 thousand) were made to OJSC Berdichev Machine-Building Plant Progress.
h Prepayments and other current assets totalling US$921 thousand as at 31 December 2019 related to prepayments made to FC Vorskla for advertisement, marketing and general public relations services (2018:
US$858 thousand) and US$605 thousand to ASK Omega for insurance premiums (2018: US$124 thousand).
i
Trade and other payables included US$246 thousand (2018: US$213 thousand) related to the purchase of compressed air, oxygen and scrap metal from Kislorod PCC and US$418 thousand (2018: US$21
thousand) related to the purchase of spare parts from OJSC Berdichev Machine-Building Plant Progress.
Associated companies
g As at 31 December 2019, trade and other receivables included US$2,472 thousand (2018: US$1,302 thousand) related to dividends declared by TIS Ruda LLC.
i
As at 31 December 2019, trade and other payables included US$898 thousand (2018: US$963 thousand) related to purchases of logistics services from TIS Ruda LLC.
Loan relationship between related parties of the Group
The Group has supported FC Vorskla with sponsorship for many years. FC Vorskla is a professional football club in Poltava, Ukraine that competes
in the Ukrainian Premier League. The Group’s sponsorship provides brand recognition for the Group both within Ukraine and internationally, and in
addition given FC Vorskla’s proximity to the Group’s operations, provides benefit to the local community surrounding the mines.
The sponsorship payments are made by Ferrexpo Middle East FZE to two entities: FC Vorskla Cyprus Limited, a company incorporated in the
Republic of Cyprus, and Football Club “Vorskla” LLC, a company incorporated in Ukraine (together, “FC Vorskla”). During the financial year
2019, the Group made total payments to FC Vorskla of US$10,824 thousand (2018: US$10,702 thousand) for advertisement, marketing and
general public relations services. FC Vorskla is considered to be a related party of the Group as Kostyantin Zhevago, the Group’s previous
Chief Executive Officer and a controlling shareholder of Ferrexpo plc, controls FC Vorskla and is the honorary president. The payments made
to FC Vorskla were considered to be in the ordinary course of business.
In January 2020, the Group received the audited financial statements of FC Vorskla for the financial year 2017, which showed that FC Vorskla
had provided a loan in the amount of US$3,990 thousand to another related party, Collaton Limited, which is controlled by Kostyantin Zhevago.
Based on the audited financial statements of FC Vorskla for the financial year 2018, received by the Group in March 2020, the loan to Collaton
Limited had increased to US$10,805 thousand as at 31 December 2018. In absence of the availability of the audited financial statements
of FC Vorskla for the financial year 2019, the Group received unaudited management accounts showing a further increase in the loan to
US$16,978 thousand as at 31 December 2019.
Ferrexpo plc
Annual Report & Accounts 2019
173
Note 34: Related party disclosures continued
Following the identification of the loan provided by FC Vorskla to Collaton Limited, the Board has taken steps to obtain further information in
relation to the arrangements, and has engaged third party advisers to assess the situation.
As of the date of approval of these financial statements, the Board’s enquiries remain ongoing. Based on the responses received to date from
FC Vorskla, the Group understands that the loan to Collaton Limited was made in connection with the construction and renovation of certain
sports facilities of FC Vorskla, including its central stadium and training facilities in Poltava. Collaton Limited has not provided information
requested by the Group to confirm the usage of the funds provided to it by FC Vorskla. Given that the enquiries by the Board and its advisers
remain ongoing, the Board is unable to conclude at this stage whether the payments made to FC Vorskla have been used in their entirety for
the legitimate purposes of the football club in Ukraine. If it transpires that any of the payments made by the Group to FC Vorskla or the loan
provided by FC Vorskla to Collaton Limited were not used for the legitimate purposes of the football club in Ukraine, or there has been any
non-compliance with legal, regulatory or other requirements, liabilities (including fines and penalties) may accrue to the Group. See also Note
30 Commitments, contingencies and legal disputes.
Note 35: Events after the reporting period
No material adjusting or non-adjusting events have occurred subsequent to the year end other than the proposed dividend disclosed in
Note 12 Earnings per share and dividends paid and proposed.
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Ferrexpo plc
Annual Report & Accounts 2019
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 2019 and 2018, 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
31.12.19
As at
31.12.18
4
5
5
6
6
7
7
7
7
147,496
147,496
147,496
147,496
33,626
736,297
89
70,091
763,891
184
770,012
834,166
4,939
765,073
912,569
564
3,428
830,738
978,233
463
912,005
977,771
121,628
185,112
(77,260)
(2,826)
685,351
912,005
121,628
185,112
(77,260)
(3,848)
752,139
977,771
The profit after taxation for the Company, registration number 05432915, was US$88,299 thousand for the financial year ended 31 December
2019 (2018: US$97,790 thousand).
The financial statements were approved by the Board of Directors on 17 March 2020.
Steve Lucas
Chairman
Christopher Mawe
Acting Chief Executive Officer
Ferrexpo plc
Annual Report & Accounts 2019
175
Parent Company Statement of Changes in Equity
US$000
At 1 January 2018
Profit for the year
Total comprehensive income for the year
Equity dividends paid to shareholders
Share-based payments
At 31 December 2018
Profit for the year
Total comprehensive income for the year
Equity dividends paid to shareholders
Share-based payments
At 31 December 2019
Issued
capital
Share
premium
Treasury
share reserve
Employee benefit
trust reserve
Retained
earnings
Total capital
and reserves
121,628
185,112
(77,260)
(4,522)
751,219
976,177
−
−
−
−
−
−
−
−
−
−
−
−
−
−
−
674
97,790
97,790
97,790
97,790
(96,870)
(96,870)
−
674
121,628
185,112
(77,260)
(3,848)
752,139
977,771
−
−
−
−
−
−
−
−
−
−
−
−
−
−
−
88,299
88,299
88,299
88,299
(155,087)
(155,087)
1,022
−
1,022
121,628
185,112
(77,260)
(2,826)
685,351
912,005
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176
Ferrexpo plc
Annual Report & Accounts 2019
Notes to the Parent Company Financial Statements
Note 1: Corporate information
The Company is incorporated and registered in England, which is considered to be the country of domicile, with its registered office at
55 St James’s Street, London SW1A 1LA, UK. The Company’s Ordinary Shares are traded on the London Stock Exchange.
The majority shareholder of the Company is Fevamotinico S.a.r.l. (“Fevamotinico”), a company incorporated in Luxembourg and ultimately
owned by The Minco Trust, of which Kostyantin Zhevago, the Group’s previous Chief Executive Officer, is a beneficiary. At the time this report
was published, Fevamotinico held 50.3% (2018: 50.3%) of the Company’s issued share capital.
Note 2: Basis of preparation
The financial statements are prepared under the historical cost convention and in accordance with Financial Reporting Standard 101
Reduced Disclosure Framework (“FRS 101”).
The financial statements are presented in US Dollars (US$), 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 IFRSs);
– 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 85.
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 28 Share-based payments of the Group’s financial statements.
Employee benefit trust reserve
Ferrexpo plc shares held by the Company are classified in capital and reserves as employee benefit trust reserves and recognised at cost.
Consideration received for the sale of such shares is also recognised in equity, with any difference between the proceeds from sale and the
original cost taken to revenue reserves. No gain or loss is recognised on the purchase, sale issue or cancellation of equity shares.
Ferrexpo plc
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Note 3: Significant accounting policies continued
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 IFRSs and IFRIC interpretations effective as of 1 January 2019. The new and amended IFRSs
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 and 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 2019 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 31.12.19
At 31.12.18
147,496
147,496
147,496
147,496
See Note 32 Consolidated subsidiaries to the consolidated financial statements for further information on subsidiaries indirectly held by
the Company.
Note 5: Debtors
Debtors as at 31 December 2019 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 31.12.19
At 31.12.18
30,277
2,774
575
33,626
736,297
736,297
769,923
67,775
1,979
337
70,091
763,891
763,891
833,982
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 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$404 thousand as of 31 December 2019 (2018: US$200 thousand).
178
Ferrexpo plc
Annual Report & Accounts 2019
Notes to the Parent Company Financial Statements
continued
Note 6: Creditors
Creditors as at 31 December 2019 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 31.12.19
At 31.12.18
789
4,150
4,939
564
564
485
2,943
3,428
463
463
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 2019, the Company was a guarantor to the following major external debt facility of the Group’s subsidiary Ferrexpo
Finance plc:
– a syndicated revolving US$400,000 thousand pre-export finance facility, which is fully drawn. As at the end of the comparative year ended
31 December 2018, US$205,000 thousand were available and US$195,000 thousand were drawn by the Group. 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 was 6 November 2018. Following a one-year grace period, the facility will be
amortised in 12 quarterly instalments, with the first instalment due on 7 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 facility
aforementioned.
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 2019 was 613,967,956 Ordinary Shares (2018: 613,967,956 Ordinary Shares) at a par value of
£0.10 paid for in cash, resulting in share capital of US$121,628 thousand (2018: US$121,628 thousand) per the statement of financial position.
Treasury share reserve
In September 2008, the Company completed a buy-back of 25,343,814 shares for a total cost of US$77,260 thousand (2018: 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 2019,
the employee benefit trust reserve included 1,702,056 shares (2018: 2,326,256 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 2019 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$201,647 thousand as of 31 December 2019 (2018: US$168,370 thousand).
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 dividend disclosed in
Note 12 Earnings per share and dividends paid and proposed to the consolidated financial statements.
Ferrexpo plc
Annual Report & Accounts 2019
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Additional Disclosures
See Note 32 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
31.12.19
%
31.12.18
%
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
Ferrexpo Singapore PTE Ltd.
1 Fullerton Road, One Fullerton #02-01, Singapore 049213, Singapore
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
Finance
Management services and
procurement
Asset holding company
Trade, transportation
services
Holding company
Service company
Marketing services
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
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
51.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
77.6
100.0
100.0
100.0
100.0
100.0
100.0
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
49.9
49.5
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.
180
Ferrexpo plc
Annual Report & Accounts 2019
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
(“IFRSs”).
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 IFRSs.
Ferrexpo makes reference to the following APMs in the 2019 Annual Report.
C1 cash cost of production
Definition: Non-financial measure, which represents the cash cost 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
31.12.19
502,887
48,245
551,132
Year ended
31.12.18
454,560
26,800
481,360
10,518,954
10,506,164
47.8
43.3
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 IFRSs 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 IFRSs 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
31.12.19
Year ended
31.12.18
586,067
502,897
28
7
(417)
(1,022)
(1,241)
(5,701)
(674)
(1,489)
(82,130)
(62,094)
501,257
432,939
Ferrexpo plc
Annual Report & Accounts 2019
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Diluted earnings per share
Definition: Earnings per share calculated using the diluted number of Ordinary Shares outstanding.
Closest equivalent IFRSs measure: Diluted earnings per share.
Rationale for adjustment: Excludes the impact of special items that can mask underlying changes in performance.
Reconciliation to closest IFRSs equivalent:
Earnings for the year attributable to equity shareholders – per share in US cents
Basic
Diluted
Net debt to underlying EBITDA
Definition: Net debt divided by the underlying EBITDA (for the last 12 months):
Net debt (US$000)
Underlying EBITDA (US$000)
Net debt to underlying EBITDA
Year ended
31.12.19
Year ended
31.12.18
68.6
68.4
56.9
56.7
As at
31.12.19
As at
31.12.18
(281,358)
(338,862)
586,067
502,897
0.48x
0.67x
Net debt as at 31 December 2019 included an effect of US$7,108 thousand as a result of the first-time application of the new standard IFRS
16 Leases. For further information on the impact of the adoption of the new standard IFRS 16 Leases see Note 3 New accounting policies.
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
25
26
26
As at
31.12.19
131,020
As at
31.12.18
62,996
(138,367)
(204,600)
(274,011)
(197,258)
(281,358)
(338,862)
For a reconciliation of underlying EBITDA to profit before tax and finance see page 129.
Capital investment
Definition: Capital expenditure for the purchase of property, plant and equipment and intangible assets.
Closest equivalent IFRSs 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 IFRSs equivalent:
US$000
Purchase of property, plant and equipment and intangible assets
(net cash flows used in investing activities)
Notes
As at
31.12.19
As at
31.12.18
13/15
247,478
135,113
182
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Annual Report & Accounts 2019
Alternative Performance Measures
continued
Total liquidity
Definition: Sum of cash and cash equivalents and available facilities.
Closest equivalent IFRSs 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 IFRSs equivalent:
US$000
Cash and cash equivalents
Available committed facilities
Total liquidity
As at
31.12.19
131,020
–
131,020
As at
31.12.18
62,996
205,000
267,996
Ferrexpo plc
Annual Report & Accounts 2019
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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, Czech Republic, Hungary, Serbia and Slovakia
CFR
Charity
CHF
Delivery including cost and freight
Donations made to a charity called Blooming Land which operates through three sub-funds
Swiss Franc, the currency of Switzerland
China & South East Asia
This segmentation for the Group’s sales includes China and Vietnam
CID
CIF
CIS
Code
CODM
Committee of Independent Directors
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
controlling shareholder
50.3% of Ferrexpo plc shares are held by Fevamotinico S.a.r.l., Fevamotinico is wholly owned by The Minco
Trust. The Minco Trust is a discretionary trust that has three beneficiaries, consisting of Mr Zhevago and two
other members of his family. Mr Zhevago is considered a controlling shareholder of Ferrexpo plc
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
Delivery at place
184
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Annual Report & Accounts 2019
Glossary
continued
DFS
Directors
Direct reduction
“DR” pellets
Detailed feasibility study
The Directors of the Company
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
ERPMC
Executive Related Party Matters Committee
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
HSEC
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
The Health, Safety, Environment and Community Committee
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
IRR
JORC
K22
Internal Rate of Return
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)
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KPI
KT
LIBOR
LLC
LSE
LTI
LTIFR
LTIP
m3
mm
MT
mtpa
NBU
Key Performance Indicator
Thousand tonnes
The London Inter Bank Offered Rate
Limited Liability Company (in Ukraine)
London Stock Exchange
Lost time injury
Lost time injury frequency rate
Long-term incentive plan
Cubic metre
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
PPE
PPI
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
Personal protective equipment
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
PXF
rail car
Pre-export finance
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
resources
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
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
186
Ferrexpo plc
Annual Report & Accounts 2019
Glossary
continued
sinter
spot price
sterling/£
STIP
sub-funds
tailings
tolling
ton
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
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
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 steelmaking 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
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Ferrexpo plc
Annual Report & Accounts 2019
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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