P h o s A g r o I n t e g r a t e d R e p o r t 2 0 1 6 PHOSAGRO We are a vertically integrated phosphate-based fertilizer producer with mining, processing, logistics and distribution assets in Russia. PhosAgro is one of the largest phosphate-based fertilizer producers by capacity, enjoys a sustainable cash-cost advantage and produces some of the purest phosphate-based fertilizers available worldwide thanks to its high-quality resource base. The phosphate journey begins at our Apatit mine and beneficiation plant on the Kola Peninsula in north-west Russia, where we extract unique apatite-nepheline ore that contains almost no cadmium or other harmful heavy metals. This high- quality raw material is a key input for our downstream production sites, which make some of the world’s purest and safest phosphate-based fertilizers that farmers use to grow the food that ends up on our plates. We sell 35 grades of fertilizers and other end products to agricultural producers from over 100 countries. PhosAgro has flexible, efficient production lines, its own distribution and sales network in Russia, as well as sales offices in priority export markets like Latin America, Europe and Asia. With integrated logistics, including a fleet of railcars and a port terminal in Ust- Luga, we are able to further secure our sustainable low cash-cost advantage. Our vision Our purpose We aim to supply safe and effective crop nutrient solutions to farmers around the world. We seek to help our end customers meet increasing global demand for food by enabling them to grow superior-quality crops, utilising the uniquely safe and pure phosphate-based crop nutrients that PhosAgro produces. We contribute to global food security by producing mineral fertilizers that increase the output, quality and heartiness of crops. Thanks to the exceptionally low content of cadmium and other dangerous heavy metals, our crop nutrients minimise the risk of these elements entering the food supply through fertilization. We have already completed, or are nearing completion of, major investments in upstream, downstream, logistics and sales operations as part of our strategy to 2020, with the goal of expanding our ability to produce the world’s purest and safest mineral fertilizers. By 2050, the global population is expected to reach 9.6 billion people, which implies a 60% increase in demand for soft commodities just to feed the increased population. Changing diets and alternative uses for soft commodities add to this already substantial growth in demand. Our strategy builds value for our shareholders by enabling us to increase our internal use of apatite-nepheline ore for value-added end products and to achieve sustainable cost savings with more efficient technologies or vertical integration of key parts of the value chain. We believe that, by implementing our strategy aimed at strengthening our core sustainable advantages, we will best serve our shareholders, the local communities where we work, farmers all over the world who use our products, as well as the consumers of the food grown with PhosAgro fertilizers. About this report The purpose of this integrated report is to inform the reader about the material issues that have the potential to impact our business, and to help the reader understand how this influences our strategy, our operations, our financial performance, the long-term sustainability of our business and the value we seek to create for our stakeholders. In this report, we answer the eight questions that integrated reporting is meant to address: 1. What does the organisation do and what are the circumstances under which it operates? 2. How does the organisation’s governance structure support its ability to create value for stakeholders in the short, medium and long term? 3. What is the organisation’s business model? 4. What are the specific risks and opportunities that affect the organisation’s ability to create value for stakeholders in the short, medium and long term? 5. What are the Company’s key strategic goals and how does it intend to achieve them? 6. To what extent has the organisation achieved its strategic objectives for the period, and what was the effect on the value of the Company for stakeholders? 7. What are the key challenges and uncertainties that the organisation is likely to encounter in pursuing its strategy, and what are the potential implications for the business model and future performance? 8. How does the organisation determine which matters are worth including in the integrated report, and how are such matters quantified or evaluated? Pure and safe fertilizers In this report, we also discuss how the unique quality of our phosphate raw materials allows us to produce some of the purest and safest fertilizers in the world, enabling farmers and consumers to be confident that PhosAgro fertilizers are not introducing dangerous heavy metals like cadmium into the global food supply. Corporate responsibility In order to secure the long-term sustainability of our business model and our operations in Russia, we take a broader view of our interaction with stakeholders and the material issues that could affect our business. In this report, we discuss our investments in human capital, health and safety, and the local communities in the regions where we operate. We provide details on how our governance systems have been adapted to address business conduct issues, what we are doing to diminish our impact on the environment and how we maintain relationships with our key stakeholders. Determining our material issues The information within this report was compiled after determining and assessing PhosAgro’s material financial and non- financial issues. Matters for inclusion in the report are determined by their scope and relate to the businesses over which the organisation has operational control. Contents S T R AT E G I C R E P O RT Year at a glance Oracle Chairman’s statement Chief executive officer’s statement Our assets Business model Strategy Where we operate Market overview Scientific approach Operational review Financial review CO R P O R AT E R E S P O N S I B I L I T Y R E P O RT Environmental review Health and safety review People review Community investment review Business conduct review Stakeholder engagement Managing our risk 6 8 10 14 18 20 24 28 32 38 44 48 56 64 68 76 82 84 96 CO R P O R AT E G OV E R N A N C E Board of Directors Executive management Corporate governance Management responsibility statement 104 106 108 122 F I N A N C I A L S TAT E M E N T S Independent Auditors’ Report 123 127 IFRS FS and notes A D D I T I O N A L I N FO R M AT I O N Shareholder information Glossary Names of legal entities used in this report Contacts 162 164 167 168 2016 AT A GLANCE Financial highlights PhosAgro continued to deliver outstanding value for investors in 2016: we declared dividends totalling RUB 28 billion, or RUB 216 per share (RUB 72 per GDR) backed by sustainable cash flows, we remain on track to launch new, efficient capacities in 2017 that will support further growth, and we finished the year with net debt/EBITDA of just 1.45x. See additional information on page 50 Revenue, RUB bln EBITDA, RUB bln 187.7 -1.05% 72.4 -12.24% Net profit, RUB bln 59.9 + 64.56% 24.5 18.1* 8.6 59.9 36.4 2012 2013 2014 2015 2016 *Adjusted net profit is calculated as net profit adjusted for unrealised foreign exchange loss Dividend payout ratio, % Dividends accrued for a given year 50% -2 p.p. 189.7 187.7 105.3 104.6 123.1 34.9 23.9 37.6 82.5 72.4 52 52 50 43 43 Operating highlights • While new ammonia and granulated urea capacities are on track to launch in 2017, we increased finished goods output by 8% year-on-year by investing in modernisation and debottlenecking existing capacities • With the lowest cash cost in the industry, PhosAgro was able to maintain near 100% capacity utilisation throughout 2016, even as other global players were forced to shutter ineffective and loss-making production in the face of historically low prices • Increased sales in the domestic Russian market, where agricultural production continues to grow and ongoing investments in the agricultural sector represent a significant opportunity for domestic fertilizer producers with well-developed distribution networks like PhosAgro Corporate responsibility highlights We continue to invest in improving our environmental footprint, as well as in maintaining leading workplace health and safety solutions. See additional information on page 58 See additional information on page 46 Downstream sales volumes, kt 7,319 +8.45% 7,319 6,749 6,056 6,221 5,338 Phosphate-based fertilizers, MCP and STPP sales volumes, kt Emissions into the air per unit of production, kg/t 5,925 +10.05% 1.75 -4.37% 4,794 4,837 4,243 5,384 5,925 1.93 2.00 1.86 1.83 1.75 2012 2013 2014 2015 2016 2012 2013 2014 2015 2016 2012 2013 2014 2015 2016 2012 2013 2014 2015 2016 2012 2013 2014 2015 2016 2012 2013 2014 2015 2016 Cash flow from operating activities, RUB bln 50.4 -20.38% EBITDA margin, % Net debt/EBITDA 39% -4 p.p. 1.45 +0.2% 63.3 50.4 33 31 23 43 39 2.5 1.8 1.5 1.3 0.8 25.5 17.9 27.5 Upstream sales volumes of apatite-nepheline ore products, kt Nitrogen fertilizers sales volumes, kt Lost time injury frequency rate (LTIFR), per 200,000 hours worked 3,418 +17.18% 4,583 3,912 3,329 3,418 2,917 1,394 +2.09% 0.10 -33.33% 1,385 1,365 1,394 0.21 0.20 1,262 1,095 0.18 0.15 0.10 2012 2013 2014 2015 2016 2012 2013 2014 2015 2016 2012 2013 2014 2015 2016 2012 2013 2014 2015 2016 2012 2013 2014 2015 2016 2012 2013 2014 2015 2016 6 7 Chief Executive Officer’s statementWE MADE SIGNIFICANT PROGRESS IN 2016 ACROSS KEY ASPECTS OF OUR BUSINESS AND ONE MORE LINE MAXIMUMPhosAgro Integrated Report 2016www.phosagro.comSTRATEGIC REPORTCORPORATE RESPONSIBILITY REPORTCORPORATE GOVERNANCE REPORTFINANCIAL STATEMENTSADDITIONAL INFORMATION ORACLE In 2016, PhosAgro launched a project to introduce Oracle Enterprise Business Suite (OEBS) R12, an enterprise resource planning (ERP) system that offers integrated and often real-time management of core business processes. PROCUREMENT MANUFACTURING FULFILMENT INVENTORY SALES & ORDER MANAGEMENT BUSINESS INTELLIGENCE E-BUSINESS SUITE FINANCIAL & ASSET MANAGEMENT REPORTING HUMAN CAPITAL MANAGEMENT CUSTOMER RELATIONSHIP MANAGEMENT CUSTOMER SERVICE THE NEW SYSTEM WILL INCLUDE: Oracle Primavera A project management system that will Oracle Demantra A demand forecasting system that gives unify and automate business processes, PhosAgro greater granularity by product including capital investment projects, IT category and by market. projects and organisational restructuring. In testing since December 2016. Oracle Strategic Network Optimisation (SNO) An integrated planning solution that will increase efficiency and reduce costs by consolidating Company data and automating processes that previously Oracle Siebel CRM Will be used by traders to increase transparency and create a single client database. Oracle Hyperion Financial Management Will be used for preparation of had to be done by hand. Planning will be IFRS financial statements, reducing brought into a single central function. preparation time and retaining an audit trail for all data. Integration of OEBS R12 is a key project to increase the efficiency of PhosAgro’s business processes. It is the largest project in Russia, Central and Eastern Europe in 2016–2017, according to Oracle Consulting data Integration of OEBS R12 is a key project to increase the efficiency of PhosAgro’s business processes. Around 3,000 employees will use the system once it is fully deployed. As such, the integration project is a substantial undertaking, involving around 150 members of staff, as well as external consultants. OEBS R12 is being installed from scratch to replace the previous version, R11, which PhosAgro introduced six years ago. Since then, the Company has evolved at a fast pace, and its requirements have outgrown what the previous system could offer in terms of integrated resource planning, project management, forecasting, preparation of financial statements to International Financial Reporting Standards and CRM. These solutions will all be integrated using a corporate database that includes all of the Company’s operational and financial data, as well as staff information. When completed, PhosAgro will have one of the most advanced ERP systems of any Russian corporation, and a significantly higher percentage of automated business processes. This will increase transparency and efficiency and reduce costs across the Company. ~150 MEMBERS OF STAFF INVOLVED, AS WELL AS EXTERNAL CONSULTANTS 8 9 STRATEGIC REPORTCORPORATE RESPONSIBILITY REPORTCORPORATE GOVERNANCE REPORTFINANCIAL STATEMENTSADDITIONAL INFORMATIONPhosAgro Integrated Report 2016www.phosagro.com CHAIRMAN’S STATEMENT “ PhosAgro delivered impressive performance on its strategy to 2020, and the Board is finalising a new set of priorities through 2025 that aim to continue to create value for stakeholders, from the mines of Apatit to food consumers’ plates around the world. “ Sven Ombudstvedt Chairman of the Board of Directors Nearing completion of 2020 strategic goals Since announcing its strategy to 2020 at the end of 2014, PhosAgro has made significant progress towards achieving the goals that the Board of Directors set before the Company. When we approved the current strategy, the Board and I believed that it would create value for stakeholders by making the business more sustainable, more efficient and better able to meet demand from customers around the world. Efficient growth: Since 2012, PhosAgro's fertilizer production has grown at a CAGR of 7.9%, while the Company has invested just USD 95 million into upgrades and modernisation of existing production capacities. The resulting 1.6 million tonnes of production capacity has strengthened our business and brought an EBITDA uplift of roughly USD 180 million per year. PhosAgro’s strategic strengths benefitted stakeholders in 2016 New production capacity and self- sufficiency: At the same time, PhosAgro is nearing completion of larger, ambitious strategic projects that will secure the Company’s position as one of the world’s leading fertilizer producers longer-term: the new 760 ths tonnes/year ammonia unit, and a new 500 ths tonnes/year granulated urea line are both on track to launch in 2017, as planned. Direct access to premium markets: During 2016, in addition to Zug, Warsaw, Sao Paulo and Singapore, PhosAgro opened trading offices in Biarritz and Hamburg. The Company is already benefitting from the ability to work directly with local farmers and distributors in these markets, and this will further strengthen as production capacity ramps up with the launch of new capacities. With the launch of these new capacities, PhosAgro will further secure its position as one of the lowest cash-cost producers of phosphate-based fertilizers in the world, with significant potential to continue to expand production capacity and remain self-sufficient in key inputs. Corporate governance In my role as the Chairman of the Board of Directors, I am directly involved in ensuring that PhosAgro’s corporate governance systems meet the needs of the business and its stakeholders. We have worked hard in recent years to introduce policies KEY MILESTONES 2016 MAJOR INVESTMENT PROJECTS ON TRACK FOR LAUNCH IN 2017: 760 KT/ YEAR AMMONIA AND 500 KT/YEAR GRANULATED UREA NEARING COMPLETION OF KEY TARGETS FOR STRATEGY TO 2020 RUB 28 BILLION IN DIVIDENDS PAID IN 2016 NET DEBT/EBITDA: 1.45X STRATEGY TO 2025 WILL AIM TO DEVELOP PHOSAGRO ASSETS FURTHER AS GLOBAL COST LEADER 10 11 PhosAgro Integrated Report 2016www.phosagro.comSTRATEGIC REPORTCORPORATE RESPONSIBILITY REPORTCORPORATE GOVERNANCE REPORTFINANCIAL STATEMENTSADDITIONAL INFORMATION Chairman’s statement (continued) and systems to ensure proper and efficient monitoring, oversight, communication and accountability across the Company's assets. Being well-informed: Members of the Board have access to up-to-date information on financial and operating performance across the Group and regularly interact with the management team, maintaining dialogue on all material issues facing the Company. Independence: Maintaining representation from independent members of the Board helps to ensure that the interests of all stakeholders in the Company are represented and have a voice at Board meetings. Experience: Our backgrounds range from global chemical and fertilizer companies to soft commodities trading, audit and internal controls. As a large Russian business, our Board also has individuals with significant experience and expertise that is specifically Russia-focused. ESG PRIORITIES WE HAIL FROM ALL OVER THE WORLD, WHICH HELPS US TO BETTER UNDERSTAND OUR MANY INTERNATIONAL STAKEHOLDERS PhosAgro’s growth helps create jobs for highly qualified specialists in the communities where we operate in Russia Diversity: In addition to diverse backgrounds, we hail from all over the world: Russia, Norway, the United Kingdom and the United States. This helps us to better understand our many international stakeholders, which include customers, shareholders, lenders, suppliers and other business partners. Corporate responsibility from mine to plate Corporate responsibility for PhosAgro starts at the mines in Apatit where we extract apatite-nepheline ore and continues all the way through every step of the phosphates’ journey to the food on our plates. Constant focus on improvement: Throughout 2016, the Board oversaw implementation of several important initiatives for PhosAgro’s corporate governance, which are discussed on pages 110–123 of this report. We maintain stringent workplace health and safety practices and constantly aim to ensure that we are providing the people who work at our production facilities with the best available practices in this area. Environmental protection is another high priority: we invest in new capacities and WE MAINTAIN STRINGENT WORKPLACE HEALTH AND SAFETY PRACTICES WE INVEST IN NEW CAPACITIES AND MODERNISATION TO INCREASE EFFICIENCY AND MINIMISE OUR ENVIRONMENTAL FOOTPRINT modernisation to increase efficiency and improve our environmental footprint. PhosAgro’s growth helps create jobs for highly qualified specialists in the communities where we operate in Russia, and we are constantly investing in education, health and other aspects of local communities in a mutually beneficial way. Strategic review – looking ahead to 2025 The Board and I have been impressed by the pace at which the Company has reached key milestones in the strategy to 2020. We launched a strategic review in 2016 and are in the process of finalising the strategy to 2025, which specifies a new set of targets for PhosAgro’s next phase of growth and development. PhosAgro continues to implement and refine business conduct policies and practices to ensure that the Company and its suppliers are doing business in an ethical and honest way. Supported by extensive research and flexible production and sales models, we can supply farmers with the right crop nutrients for specific crops and growing conditions. Finally, food consumers benefit from proper use of PhosAgro fertilizers because of the unique high quality of the ore that is mined at Apatit: this ore is exceptionally pure and enables us to efficiently produce fertilizers that are free of dangerous contaminants like lead, arsenic or cadmium that could eventually find their way into the food we put on our plates. Having already seen impressive execution and the positive impact on financial and operating results of the strategy to 2020, the Board and I have all the confidence that the ambitious goals we set under the strategy to 2025 will continue to create value for PhosAgro’s stakeholders, from the mines of Apatit to the plates of food consumers around the world. Sven Ombudstvedt Chairman of the Board of Directors 12 13 PhosAgro Integrated Report 2016www.phosagro.comSTRATEGIC REPORTCORPORATE RESPONSIBILITY REPORTCORPORATE GOVERNANCE REPORTFINANCIAL STATEMENTSADDITIONAL INFORMATION CHIEF EXECUTIVE OFFICER’S STATEMENT “ PhosAgro proved once again that it is able to deliver value throughout market cycles, with 2016 production output increasing by 8% year-on-year, an EBTIDA margin of 39% and sustainable progress in achieving our strategic goals. “ Andrey A. Guryev Chief Executive Officer and Chairman of the Management Board HIGHLIGHTS 2016 +9.4% TOTAL FERTILIZER PRODUCTION VOLUME GROWTH, YEAR-ON-YEAR From mine to plate Phosphorous is essential to plant and animal life. PhosAgro mines and processes apatite-nepheline ore, which it uses to produce high-quality phosphate-based fertilizers that agricultural producers all over the world may use to produce the food we eat. I am especially proud of the fact that, due to the unique qualities of the apatite- nepheline ore that we mine and use as a key raw material, PhosAgro’s phosphate- based fertilizers are among the purest and safest in the world. Our products are naturally free of dangerous heavy metals and other impurities found in many other phosphate deposits. When our fertilizers are applied to fields, plants receive only helpful and necessary nutrients, while not introducing potentially hazardous elements into the food chain. Proper use of PhosAgro products helps farmers produce food that is safe and healthy for the end consumer. We delivered impressive results in a challenging market in 2016 Strategic performance PhosAgro delivered another strong year in terms of strategic performance. Against the backdrop of challenging market conditions, 2016 demonstrated the advantages of our efforts to further improve our industry-leading low cash- cost position. PhosAgro operated at near 100% capacity utilisation, increasing both production output and sales volumes for the year, while many global producers had to cut back capacities. We continued to generate strong cash flows and maintained solid profitability, enabling PhosAgro to pay dividends to shareholders in line with the dividend policy, while continuing to implement an ambitious investment programme and also reducing debt levels. We continued moving closer to customers, opening new sales offices in Europe, and benefitted from recently completed projects like Smart Bulk Terminal and underground mining at Main Shaft No 2 at Apatit’s Kirovskiy mine. With our key investment projects, the new 760 ths tonnes/year ammonia line and 500 ths tonnes/year granulated urea shop, on track to be commissioned in 2017, we have begun work on a new strategy, which will set ambitious goals for management to 2025. DIRECT ACCESS TO PRIORITY MARKETS: NEW SALES OFFICES IN BIARRITZ (FRANCE) AND HAMBURG (GERMANY) ALMOST 100% CAPACITY UTILISATION DESPITE CHALLENGING MARKET CONDITIONS +9% INCREASE IN FERTILIZER SALES VOLUMES, YEAR-ON-YEAR 14 15 PhosAgro Integrated Report 2016www.phosagro.comSTRATEGIC REPORTCORPORATE RESPONSIBILITY REPORTCORPORATE GOVERNANCE REPORTFINANCIAL STATEMENTSADDITIONAL INFORMATION Chief Executive Officer’s statement (continued) Operating performance On the back of continued investments in debottlenecking and modernisation, we delivered a 9.4% year-on-year increase in fertilizer production volumes in 2016, and total fertilizer sales increased by 8.8% year-on-year. Production of phosphate-based fertilizers and feed phosphates increased by 10.8% year- on-year to 5.9 million tonnes, while production of nitrogen-based fertilizers increased by 4.3% year-on-year to 1.5 million tonnes. Financial performance While 2016 was a challenging year for the fertilizer industry, PhosAgro continued to generate solid operating cash flows, and paid out dividends in line with our dividend policy, despite being in a capex-intensive period. We delivered an EBITDA margin of nearly 40% in 2016, which remains an unachievable target for even our most integrated and largest phosphate-based fertilizer peers. In 2016 the Company entered into the final stage of construction of the new ammonia production line With prices under significant pressure globally, our EBITDA for 2016 decreased by 12% year-on-year to RUB 72.4 billion from RUB 82.5 billion in 2015. Net debt as of 31 December 2016 stood at RUB 105.1 billion, down from RUB 105.2 billion as of 31 December 2015, as a result of rouble appreciation against the USD as of 31 December 2016. Our net debt to EBITDA ratio increased to 1.45 as of 31 December 2016, from 1.28 as of 31 December 2015. Corporate responsibility We continued to work hard on our corporate responsibility activities in 2016, focusing on environmental impact, education in the cities and towns where we work, corporate conduct and a variety of other areas that build value for a wide range of stakeholders. Market environment Market conditions remained challenging throughout 2016, driven by high levels of supply. Several major players that had undertaken large-scale investment programmes increased their phosphoric acid output, which decreased prices for this key input, allowing some non- integrated mineral fertilizer producers to increase production volumes, which decreased import demand. Global prices for phosphate-based fertilizers declined significantly. This had a significant effect on China, which is the world’s largest phosphoric acid producer. Low prices combined with production costs rising for the first time in the last 7-8 years led to a significant contraction of China’s share in export markets. At the same time, global demand for phosphates was healthy in 2016, according to preliminary numbers from the IFA, advancing more than 3% vs 2015. This is a much faster rate of growth than what was seen for either nitrogen or potash fertilizers. Demand growth was supported by a recovery in consumption in Latin America, and stable performance in South Asia. In the domestic market, PhosAgro’s sales increased impressively by 30% year- on-year in 2016 and reached nearly 2.1 million tonnes. The Russian market remained one of the globally fastest- growing last year, up 16% year-on-year according to preliminary data from the Russian Association of Fertilizer Producers, driven by strong development of the domestic agriculture industry (as a result of government policies and support from mineral fertilizer producers). Outlook We started 2017 at prices that represent historical lows for the past 7 years. Unlike 2016, however, I expect price seasonality to be in line with what the market normally sees. The fundamentals driving demand for phosphate-based products remain strong. The combination of a recovery in ammonia prices, greater rationalisation by high-cost, non-integrated Chinese producers and very tight product availability should push prices up as the high season unfolds. As of the end of March, DAP prices have already risen by 16%, with potential to continue growing ahead of the buying season in South Asia and Latin America. At the same time, this is balanced by more new production coming on line in North Africa and Saudi Arabia, which will constrain potential price growth. Both our key investment projects, the construction of new ammonia and urea HIGHLIGHTS 2016 +10.8% YEAR-ON-YEAR INCREASE IN PHOSPHATE-BASED FERTILIZER AND FEED PHOSPHATES PRODUCTION +4.3% YEAR-ON-YEAR INCREASE IN NITROGEN FERTILIZER PRODUCTION +30% YEAR-ON-YEAR INCREASE IN PHOSAGRO’S DOMESTIC MARKET SALES units, on schedule and expected to be fully operational in the second half of 2017. After their completion, PhosAgro will begin to achieve cost savings from using the ammonia we produce instead of purchasing externally, combined with higher sales volumes. This should have a positive impact on free cash flow and potentially on dividend payments. Andrey A. Guryev Chief Executive Officer and Chairman of the Management Board PHOSAGRO WILL BEGIN TO ACHIEVE COST SAVINGS FROM USING AMMONIA WE PRODUCE INSTEAD OF PURCHASING EXTERNALLY, AND WILL BENEFIT FROM HIGHER SALES VOLUMES. 16 17 PhosAgro Integrated Report 2016www.phosagro.comSTRATEGIC REPORTCORPORATE RESPONSIBILITY REPORTCORPORATE GOVERNANCE REPORTFINANCIAL STATEMENTSADDITIONAL INFORMATION OUR ASSETS UPSTREAM CAPACITIES DOWNSTREAM CAPACITIES DISTRIBUTION AND SALES Apatit PhosAgro-Cherepovets Balakovo branch of Apatit Metachem (Volkhov) PhosAgro-Region PhosAgro Trading JSC Apatit 100% JSC PhosAgro-Cherepovets 100% Balakovo branch of JSC Apatit 100% JSC Metachem 100% PhosAgro-Region LLC (storage and distribution) 99.90% Phosint Trading Ltd. (distribution) • Mining of apatite-nepheline ore Production of phosphate-based fertilizers, nitrogen Production of phosphate-based fertilizers, feed Production of PKS, SOP, STPP, sulphuric and Russia’s largest distributor of fertilizers, with 10 PhosAgro Asia Pte. Ltd. (distribution) 100% 100% • Production of phosphate rock fertilizers, sulphuric and phosphoric acids and phosphate, sulphuric and phosphoric acid. phosphoric acid. • Production of nepheline concentrate ammonia. distribution centres and three branches in close proximity to Russia’s major agricultural regions. PhosAgro Trading SA (trading company based in Zug) 98.44% as of 19.04.2017 Phosphate rock 8.5 mln t Nepheline concentrate 1.7 mln t MAP/DAP/NPK/NPS 4.0 mln t Urea 980 kt Ammonia 1,190 kt APP 140 kt AN 450 kt MAP/DAP/NPK 1.5 mln t MCP 360 kt PKS/SOP 100 kt STPP 130 kt Distribution centres in Russia Sales offices in Biarritz (France), Hamburg (Germany), 10 Zug (Switzerland), Warsaw (Poland), Singapore (Asia) and Sao Paulo (Brazil) bring vertical integration Regional representative offices into priority export markets. 4 LOGISTICS International trading offices 6 ENGINEERING AND R&D Investing in the future We have made highly productive investments into existing capacities to improve efficiency and increase production output even as we continue to construct entirely new ammonia and granulated urea plants that are due to launch in 2017. Focus on efficiency from mining to sales and distribution Our new capacities use the latest, most efficient production technologies available, meaning they improve our environmental footprint while also securing PhosAgro’s position as one of the lowest cash-cost producers in the global fertilizer industry. Expanding vertical integration Our vertical integration into logistics, with the launch of the Smart Bulk Terminal, delivered sustainable cost savings in 2016, as we shipped 1.3 million tonnes of fertilizers to export markets through this efficient new facility in Ust-Luga. In a continued effort to move closer to farmers in priority markets, we set up sales offices in Biarritz (France) and Hamburg (Germany) during 2016. PhosAgro-Trans Smart Bulk Terminal PhosAgro-Trans LLC (transportation) 100% Smart Bulk Terminal LLC (loading) 70% OJSC NIUIF (research and development) 94.41% Handles domestic freight rail operations, with 5,559 Modern container and bulk terminal in Ust-Luga railcars (primarily mineral hoppers) in operation. with an export capacity of 2 million tonnes/year. CJSC Mining and Chemical Engineering 100% Railcars 5,559 Own shipment terminal capacity 2 mln t 18 19 PhosAgro Integrated Report 2016www.phosagro.comSTRATEGIC REPORTCORPORATE RESPONSIBILITY REPORTCORPORATE GOVERNANCE REPORTFINANCIAL STATEMENTSADDITIONAL INFORMATION BUSINESS MODEL Ongoing investments in efficiency and business process optimisation, combined with domestic access to all key inputs, support our sustainable low-cost position among global producers of phosphate-based fertilizers As a vertically integrated company, we capture value for shareholders at every step of the process, from mining of phosphate raw materials to distribution and sales of finished products to farmers in Russia or sales to distributors in priority export markets like Europe, Latin America and Asia. At the same time, we aim to create value for other stakeholders at every link in the chain, whether by managing our environmental footprint, implementing leading workplace health and safety practices, investing in flexible production lines and new fertilizer grades that meet farmers’ crop nutrient needs or ensuring a reliable supply of safe and pure fertilizers for our customers. Ultimately, every consumer of food grown with PhosAgro fertilizers benefits from high-quality and plentiful crops that are grown with fertilizers free from harmful elements like cadmium, lead or arsenic. The journey from mine to plate takes place through every step of our vertically integrated business: • At Apatit, we are mining a large, high-quality igneous phosphate resource base that, unlike many other producers’ raw materials, contains almost no harmful impurities and can be processed into premium-quality phosphate rock • Our downstream fertilizer production assets enjoy domestic access to other key inputs like natural gas and sulphur • We are continuously investing in upgrades, modernisation and new production capacities at our downstream facilities, which further secures our position as the world’s lowest cash-cost producer • Further integration in logistics, distribution and sales, including opening trade offices in priority markets, has helped us to achieve sustainable cost savings through the entire value chain HIGHLIGHTS: $ 95 MLN INVESTED IN MODERNISATION AND DEBOTTLENECKING SINCE 2012 HAS RESULTED IN 1.6 MLN T OF NEW PRODUCTION CAPACITY, WHICH GIVES PHOSAGRO UP TO $ 180 MLN ADDITIONAL EBITDA P.A. SINCE 2015 Building value from mine to plate KEY ASPECTS OF PHOSAGRO’S VALUE CHAIN 1 High-quality natural resources Apatit, where we mine apatite-nepheline ore and process it into phosphate rock, is the heart of our business. The phosphate rock we produce at Apatit is high in P2O5 nutrient content, and contains almost none of the dangerous impurities, like cadmium, often associated with other phosphate mineral deposits. 2 Upstream: mining and processing Investments in underground mining and beneficiation capacities, as well as the introduction of leading-edge workplace health and safety practices and technologies, have helped turn Apatit into a world-class phosphate rock production operation. We have achieved a more-than 94% recovery ratio for phosphate rock with high nutrient content. 3 Downstream: fertilizers, feed & industrial phosphates We produce 35 grades of fertilizers, including grades containing secondary (sulphur) and micro nutrients like zinc and boron at our three downstream production sites in Russia. With major investments into new capacities on track for completion in 2017, we plan to increase our flexible fertilizer and end product production capacities by another 20% in the coming years. 4 Sales We have moved closer to customers in our priority markets by opening sales offices in Brazil, Europe and Asia. This has helped us to significantly improve relations with local buyers, enabling us to meet their needs better with the crop nutrients they need. 5 Logistics In-house logistics infrastructure provides sustainable cost advantages and improves the reliability of operations. We manage our own fleet of 5,559 railcars in Russia, and in 2016 we shipped 27% of downstream products export volumes through our Smart Bulk Terminal at the Ust-Luga port. 6 Distribution We are the largest supplier of fertilizers in the domestic Russian market, where we operate a fully integrated distribution and sales network. This has enabled us to significantly increase sales volumes and market share at the time when Russia’s agricultural production industry is growing rapidly. 7 Value created We aim to create value for all of our stakeholders, including the consumers of food grown with the help of PhosAgro crop nutrients, which benefit from very low levels of cadmium and other harmful elements thanks to the exceptionally pure raw materials we use from the very start. 20 21 PhosAgro Integrated Report 2016www.phosagro.comSTRATEGIC REPORTCORPORATE RESPONSIBILITY REPORTCORPORATE GOVERNANCE REPORTFINANCIAL STATEMENTSADDITIONAL INFORMATION Logistics 27 % Sales 80% OF DOWNSTREAM PRODUCTS EXPORT VOLUMES VOLUMES WENT THROUGH SMART BULK TERMINAL IN UST-LUGA OF DOWNSTREAM PRODUCTS EXPORT SALES TO KEY MARKETS MADE VIA OUR OWN SALES OFFICES Downstream fertilizers, feed & industrial phosphates Upstream mining and processing 17.2% Y-O-Y INCREASE IN PRODUCTION OF NPK/NPS FERTILIZERS IN 2016 74% APATITE-NEPHELINE ORE EXTRACTED FROM UNDERGROUND MINES IN 2016 22 23 PhosAgro Integrated Report 2016www.phosagro.comSTRATEGIC REPORTCORPORATE RESPONSIBILITY REPORTCORPORATE GOVERNANCE REPORTFINANCIAL STATEMENTSADDITIONAL INFORMATION STRATEGY We have already delivered a significant portion of our key strategic milestones under the strategy to 2020, which aims to further enhance PhosAgro’s inherent strengths: vertical integration, ownership of unique and high-quality phosphate resources, and domestic access to all key inputs for fertilizer manufacturing. Implementation of our strategy to 2020 will strengthen our position as one of the lowest cash-cost producers in the global industry, and will significantly enhance our ability to provide safe crop nutrient solutions to farmers nearly anywhere in the world. 3 INCREASED OPERATING EFFICIENCY • Upstream: we increased the share of underground mining to 74% of total apatite-nepheline ore extraction at Apatit in 2016, following the launch of Main Shaft No 2 at the Kirovsky mine, which increased extraction capacity to 16 million tonnes of ore per year. • Downstream: new, leading-edge ammonia and granulated urea capacities are at the heart of our downstream efficiency efforts. These new and efficient production facilities will use the latest technologies to strengthen our low cash-cost position and will help to minimise PhosAgro’s environmental impact as we grow our total output. • Logistics: after its first full year of operations, the Smart Bulk Terminal in Ust-Luga near Saint Petersburg has further improved our netback earnings through vertical integration into port logistics. 2016 highlights: OUR KEY STRATEGIC PRIORITIES: We have already started to benefit from implementation of parts of our strategy to 2020, and are on track to deliver on key milestones during the year ahead: 1 DIRECT ACCESS TO PREMIUM MARKETS • Increased fertilizer production output by 9.4% year-on-year through investments in modernisation and debottlenecking of existing capacities. Since 2012, investments in debottlenecking of just USD 95 million have delivered 1.6 million tonnes of additional capacity, which provides up to USD 180 million of EBITDA per annum • Increased sales to priority export markets with the help of our own sales offices in South America, Europe and Asia (for more information, see “Where we operate” on pages 24–25) • Shipped 27% of 2016 downstream products export volumes through Smart Bulk Terminal in Ust-Luga, achieving cost savings vs. non-integrated port terminals • Ramped up Main Shaft No 2 of the Kirovsky mine, significantly expanding the scale of our lower-cost underground mining operations • Increased domestic sales by 30% year-on- year with the help of our market-leading domestic distribution network PhosAgro produces some of the safest phosphate-based fertilizers in the world thanks to the exceptionally low levels of cadmium and other harmful impurities in the raw materials we mine at Apatit on the Kola Peninsula. Our aim is to bring our crop nutrient solutions closer to our customers in priority markets by establishing our own sales offices in these markets. We already have a presence in our three priority export markets of Latin America, Europe and Asia, and this has helped us to speak directly with our customers about what they want, to react faster to changes in demand, to gain a better understanding of the local markets and to promote the unique quality of the phosphate-based fertilizers we produce. 2 PRODUCTION CAPACITY GROWTH AND ENHANCED SELF-SUFFICIENCY We increased our production capacity from 5.0 million tonnes in 2011 to 7.6 million tonnes in 2016, which represents a CAGR of 8.7%. This was achieved primarily through investments in modernisation and debottlenecking of existing capacities to expand our production of value-added fertilizers. With the launch of our new 760 ths tonne/year ammonia line and 500 ths tonne/year granulated urea line on track for 2017, we aim to continue to increase our production capacity, with significantly enhanced self-sufficiency. Reaching strategic targets and delivering results 1. DIRECT ACCESS TO PRIORITY MARKETS Opportunity Why this is our priority We aim to increase our share of export sales to markets with significant demand for premium-quality phosphate- based fertilizers and structural deficits of local phosphate supply. Brazil, Asia and Europe are priority regions with premium markets for exports: • Local P2O5 nutrient deficit is forecasted to increase • PhosAgro can achieve fair netback prices for fertilizers • European and other customers are potentially sensitive to hazardous impurities such as cadmium, giving PhosAgro an advantage over other producers In our domestic market, we aim to continue to expand our market-leading distribution network to provide Russian farmers with our high-quality crop nutrients and support the development of Russia’s agricultural sector. WHAT WE DID IN 2016 WHAT WE AIM TO DO IN 2017 WHERE WE WANT TO BE IN 2020 • Opened sales offices in Biarritz (France) and Hamburg (Germany) • Increased sales to Europe by 20% year- on-year to 1.5 million tonnes • Increased sales to Asia by 20% year-on- year to 1.1 million tonnes • Domestic sales grew by 30% year-on- year to 2.1 million tonnes • Ramp up marketing and other activities aimed at increasing awareness of the advantages of PhosAgro’s phosphate-based fertilizers, which are naturally very low in heavy metals content in particular cadmuim. • Expand the number of grades available to farmers based on input from our international and domestic sales offices Domestic market: expand domestic sales volumes to 2.6 million tonnes through a vertically integrated sales network that includes ten sales centres and 21 цwarehouses Export markets: increase share of direct sales to over 75% through seven sales offices located in priority markets around the world RELATED RISKS Strategic risks Ineffective strategic planning Operational, regulatory, reputational and financial risks For more information on risks please see pages 98–105 24 25 STRATEGIC REPORTCORPORATE RESPONSIBILITY REPORTCORPORATE GOVERNANCE REPORTFINANCIAL STATEMENTSADDITIONAL INFORMATIONPhosAgro Integrated Report 2016www.phosagro.com 2. PRODUCTION CAPACITY GROWTH AND GREATER SELF-SUFFICIENCY 3. INCREASE OPERATING EFFICIENCY Opportunity Why this is our priority Opportunity Why this is our priority Ammonia is a key input that PhosAgro requires to expand its fertilizer output while maintaining self-sufficiency, which is why we are building a 760 ths tonnes/ year ammonia plant. By 2020, we aim to produce 8.7 million tonnes of fertilizers, including through the addition of: • 500 ths tonnes/year of granulated urea capacity (new capacity) • 400 ths tonnes/year of MAP/DAP/ NPK production (modernisation + debottlenecking) Further strengthen our sustainable low cash-cost position by modernising existing facilities and improving vertical integration. The key to our competitive advantage is maintaining industry-leading low production costs. In order to reduce production costs throughout the cycle, we are focusing on reducing costs at all stages of production and logistics. Investments in modernisation and debottlenecking of existing facilities have proven to be a highly efficient way of increasing capacity without major capital expenditure programmes. At the same time, with an eye to our long-term sustainability, we are building new downstream capacities to produce ammonia and granulated urea to improve PhosAgro’s self-sufficiency while increasing fertilizer production volumes and maintaining vertical integration. WHAT WE DID IN 2016 WHAT WE AIM TO DO IN 2017 WHERE WE WANT TO BE IN 2020 • Debottlenecking, which requires relatively low costs compared to new greenfield or brownfield projects, enabled PhosAgro increase overall phosphate-based fertilizer production by 10.8% year-on-year to 5.9 million tonnes • The number of grades reached 35, while NPK and NPS fertilizers contributed to 43% of total phosphate-based fertilizer production • Ramp up marketing and other activities aimed at increasing awareness of the advantages of PhosAgro’s phosphate-based fertilizers, which are naturally free of cadmium and other hazardous elements • Expand the number of grades available to farmers based on input from our international and domestic sales offices Domestic market: expand domestic sales volumes to 2.6 million tonnes through a vertically integrated sales network that includes ten sales centres and 21 warehouses Export markets: increase share of direct sales to over 75% through seven sales offices located in priority markets around the world WHAT WE DID IN 2016 WHAT WE AIM TO DO IN 2017 WHERE WE WANT TO BE IN 2020 • Ramped up operations at Main Shaft No 2 at the Kirovsk mine to full capacity, expanding the share of our lower-cost underground mining operations to 74% for 2016 vs. 71% in 2015 (excluding off- balance ore) • Continue monitoring costs, with the aim of containing fixed costs growth below CPI • Complete modernisation of Beneficiation Plant No 3 at Apatit • Launch of new, efficient 760 ths • Shipped 27% of our total export volumes tonne/year ammonia production line • Launch of new, efficient 500 ths tonne/year granulated urea production line for 2016 through the Smart Bulk Terminal in its first full year of operations reducing fertilizer transportation and transshipment costs • Launched a modernisation programme at Beneficiation Plant No 3, which will help optimise our beneficiation capacities and cut relevant operation and maintenance costs • With the launch of new ammonia and granulated urea units in Cherepovets in 2017, PhosAgro aims to reduce costs by becoming fully self-sufficient in ammonia (purchased ammonia accounted for 7% of 2016 CoGS) • Reduce natural gas consumption ratio by 8% following the comissioning of the new ammonia plant • Continue modernisation of fertilizer production lines with the goal of increasing production capacity by 20% in 2016–2020 • Reduce mining cash costs by increasing share of underground mining up to 80% • Continued construction of: – new 760 ths tonnes/year ammonia plant – new 500 ths tonnes/year granulated urea line RELATED RISKS Strategic risks Ineffective strategic planning Operational, regulatory, reputational and financial risks For more information on risks please see pages 98–105 RELATED RISKS Strategic risks Ineffective strategic planning Operational, regulatory, reputational and financial risks For more information on risks please see pages 98–105 26 27 Strategy (continued)STRATEGIC REPORTCORPORATE RESPONSIBILITY REPORTCORPORATE GOVERNANCE REPORTFINANCIAL STATEMENTSADDITIONAL INFORMATIONPhosAgro Integrated Report 2016www.phosagro.com PhosAgro is Russia’s No 1 fertilizer supplier average of 29.6% in 2011–2015. Russian farmers’ demand for fertilizers has been supported by strong performance thanks to years of investment and advantageous export market conditions. Domestic sales Sales volumes in our domestic market increased 30% year-on-year in 2016, to 2.1 million tonnes. Domestic market The Russian market holds significant potential, and PhosAgro views it as one of the best opportunities globally in terms of agricultural sector growth option. Russian agricultural enterprises have become more competitive thanks to the depreciation of the rouble and state support for the sector, as well as significant investments into modernising agricultural production. PhosAgro’s sales to local farmers grew by 30% year-on-year in 2016, while our share of the overall Russian fertilizer market is nearing 27%. We have become the largest supplier of fertilizers to Russian agricultural producers thanks to continued investments into our market-leading distribution and sales network. Our home market accounted for 33.6% of revenue in 2016, up from an Phosphate-based fertilizer production/ consumption balance in Russia – DAP/MAP/TSP, mln t P2O5 Production 0.44 Consumption 1.47 Distribution Centres and Regional Representative Offices in Russia • PhosAgro-Orel • PhosAgro-Kursk • PhosAgro-Lipetsk • PhosAgro-Belgorod • PhosAgro-Belgorod (Voronezh branch) • PhosAgro-Tambov • PhosAgro-Kuban (Krasnodar) • PhosAgro-Don (Rostov-on-Don) • PhosAgro-Stavropol • PhosAgro-Volga (Nizhny Novgorod) • PhosAgro-Volga (Saransk branch) • PhosAgro-Volga (Kazan branch) • PhosAgro-SeveroZapad • PhosAgro-SeveroZapad (branch in Volgograd) 28 29 WHERE WE OPERATEPhosAgro Integrated Report 2016www.phosagro.comSTRATEGIC REPORTCORPORATE RESPONSIBILITY REPORTCORPORATE GOVERNANCE REPORTFINANCIAL STATEMENTSADDITIONAL INFORMATION Where we operate We think that this approach is paying off: in 2016, PhosAgro’s sales to the European market increased by over 20% year-on- year, sales to Latin America declined by just 10% against a backdrop of challenging economic conditions, while sales in Asia grew by 20% year-on-year. International sales offices • Biarritz • Zug • Hamburg • Warsaw • Sao Paulo • Singapore Export markets Our flexible production and sales models enable us to supply the tailored fertilizers that farmers in over 100 countries on every inhabited continent use to grow better crops. Our strategy to 2020 calls for a particular focus on the priority markets of Europe, Latin America and Asia because of the significant demand in each of these regions, coupled with insufficient local supply of phosphate resources. In order to better reach clients in these priority markets, we have focused on opening sales offices there. In 2016, we established new offices in Hamburg (Germany) and Biarritz (France). These came in addition to existing offices in Zug (Switzerland), Sao Paulo (Brazil), Warsaw (Poland) and Singapore. These offices bring us closer to our end customers, enabling us to better understand their needs and better explain what differentiates PhosAgro fertilizers in terms of safety and purity. Phosphate-based fertilizer production/ consumption balance in Latin America – DAP/MAP/TSP, mln t P2O5 Balance -3.8 Production 1.4 5.2 Consumption *DAP/MAP/TSP Production — Demand Source CRU — January 2017 Phosphate Fertilizer Market Outlook 30 Phosphate-based production/ consumption balance in East, Central and West Europe (not EU-28) – DAP/MAP/TSP, mln t P2O5 Balance -1.0 Production 0.8 1.9 Consumption Phosphate-based fertilizer production/ consumption balance in East Asia, Middle East, South Asia and South East Asia – DAP/MAP/TSP, mln t P2O5 Production Consumption Balance 17.1 0.6 16.5 PhosAgro sales structure by regions in 2016, ths t Russia 2,095 29% Europe 1,512 21% Latin America 1,341 18% Asia CIS India 701 554 450 North America 353 Africa 313 10% 8% 6% 5% 4% 31 Where we operate (continued)PhosAgro Integrated Report 2016www.phosagro.comSTRATEGIC REPORTCORPORATE RESPONSIBILITY REPORTCORPORATE GOVERNANCE REPORTFINANCIAL STATEMENTSADDITIONAL INFORMATION MARKET OVERVIEW AGRICULTURAL MARKET DEVELOPMENTS & IMPLICATIONS ON FERTILIZER DEMAND Crop price index, January 2010 = 100 200 150 100 50 Maize Rice Wheat Soybean N, P and K fertilizer demand developments, mln t 181.6 183.2 182.8 186.7 186.8 MLN T NUTRIENTS N, P, K FERTILIZER DEMAND IN 2016 (ESTIMATED BY IFA) year 2010 2011 2012 2013 2014 2015 2016 109.2 109.7 108.9 111.0 Nitrogen Brazilian barter ratio, 60 kg bags soy/tonne MAP 30 25 20 15 Soybean Around 27 bags of soy bought 1 tonne of MAP in Brazil Lower fertilizer prices together with a devaluation of the real contributed to improved farmer affdorability year 2010 2011 2012 2013 2014 2015 2016 Nutrient demand drivers Global economy In October 2016, the IMF revised its estimate for global GDP growth downwards to 3.1% for 2016, reflecting weaker than expected growth in advanced economies, the United Kingdom’s vote to leave the European Union in June and slower than expected growth in the United States for much of the year. The fortunes of developing and emerging market economies in general were mixed: in China, government support measures provided support to commodity prices, and strong credit growth helped push GDP growth to the 6.5—7.0% range during 1H 2016. Encouragingly, there were signs of a rebalancing of the economy away from industry towards more of a service-based market. While India also enjoyed robust growth in 2016 due to improved trade terms and effective policy actions, Brazilian growth remained under pressure because of ongoing political scandals. Meanwhile, in Russia, prospects improved during 2H as oil prices increased. This was further boosted by an agreement in December with OPEC to limit production. Agricultural markets Following two seasons of strong growth, global cereal production fell in 2015/16 as unfavourable weather conditions (El Niño) came to the fore. This provided temporary support to pricing, but poor demand and large stock levels (China) kept fundamentals under pressure. By year-end, prices were deemed low enough to encourage additional feed usage, but stocks remained plentiful and are set to grow further through the 2016/17 harvest. An important component of this view is that of maize, which, according to the USDA and the IGC, will be 7% higher y/y, driven by good harvests in the USA, the European Union, Ukraine, Brazil, Argentina, India, Russia and South Africa. Two factors have driven growth: first, despite lower prices, returns are still above those for competing crops. Second, global 2016/17 yields are estimated to be up year-on-year, spurred on by favourable conditions. The latter is also relevant when assessing the 2016/17 wheat crop. An assessment taken by AIMS in November 2016 indicated that Northern Hemisphere winter wheat planting had been completed, mostly under favourable conditions, and production estimated to be up year-on-year in Russia, the USA, Canada, India and Kazakhstan. Meanwhile, it also noted that harvests had begun in Argentina and South Africa, under favourable conditions, and under exceptional conditions in Australia due to good rainfall. As such, global wheat yields for the season are estimated at a record 3.4 tonnes/ha in 2016/17, and production between 745— 748 million tonnes. Moving to oilseeds, soybean production expectations are improved in 2016/17, following a 2% contraction in 2015/16. The USDA, IGC and FAO see production growing from 313—315 million tonnes in 2015/16 to above 330 million tonnes in 2016/17, as better growing conditions have supported yields, especially in the USA and Brazil. As is the case with cereals, soya prices enjoyed a modest recovery in early 2016, but have since come under renewed pressure with news of bumper crops. High-level nutrient supply review The IFA estimated global N, P and K production – for both fertilizer and non- fertilizer use – at 250 million tonnes of nutrient in 2016. The production of fertilizers accounted for 75% of the total, or 187 million tonnes of nutrient. Looking at the different nutrients, during 2016 there was a net 2% increase in global urea production, taking the total to 178.4 million tonnes. Capacity increased in 2016 by 1%, to 211.5 million tonnes. Increases seen in Egypt, Nigeria, Iran, Bangladesh and Indonesia were offset by closures in China, where 1.5 million tonnes was permanently curtailed. In the case of concentrated phosphate fertilizers, combined DAP, MAP and TSP production was 2% higher at 32 million tonnes of P2O5. This was due to a greater volume of MAP being produced in the USA, Morocco and Saudi Arabia. Global capacity was estimated at 45.4 million tonnes of P2O5. In contrast, MOP production decreased by 2.8% to 63.3 million tonnes of product in 2016, as producers curtailed capacity temporarily to draw down on existing inventories. This saw operating rates fall to their lowest levels since 2010 despite better sales volumes year-on-year. On the capacity front, total potash capacity was estimated 4.8% higher year-on-year at 55.1 million tonnes of K2O, driven by increases in Canada, Russia, Uzbekistan and China. 187MLN T NUTRIENT EQUIVALENT . r b m o c . k n i l o r g A / U R C / A F I : e c r u o S 41.3 31.1 41.3 32.3 41.3 32.6 42.7 33.1 Phosphate Potash 2013 2014 2015 2016 High-level nutrient demand review for fertilizer in most developing/emerging markets. Demand in South and Central America, Africa, part of Asia and Oceania is expected between 4—6% higher year-on- year. N use is improved, growing by 2.4% year-on-year to 113.0 million tonnes of nutrient, while P and K demand continue growing by 1.6% and 1.8% year-on-year, respectively,. The aforementioned estimates have been converted to calendar year estimates by the IFA. N, P and K demand was assessed at 182.8 million tonnes of nutrient in 2015 and 186.8 million tonnes in 2016. In this instance, N demand was estimated up by 1.9% year-on-year, while K demand was 1.4% higher. The strongest year-on-year growth, however, was reserved for P, which was 3.4% higher at 43.3 million tonnes of nutrient, as consumption in South Asia was 9.8% higher year-on-year. The implications of the above on fertilizer demand have been estimated by the International Fertilizer Industry Association (IFA). The preliminary estimate of nitrogen (N), phosphate (P) and potassium (K) fertilizer demand stands at 183.8 million tonnes of nutrient for the 2015/16 season. This represents a reduction of 0.1% year-on- year and is explained by a lower crop production volume year-on-year, caused by an exceptionally strong El Niño event. Rather unexpectedly, the reduction in the total volume was due to a smaller usage of N. N fertilizer demand fell by -0.9% year-on-year, while both P and K demand increased (1.4% and 0.6%, respectively), driven by better than expected usage in India (P), China (K) and North America (also K). Moving to the 2016/17 crop year, demand for N, P and K is estimated at 187.6 million tonnes of nutrient, as a return to growth in cereal and soybean production has spurred on an additional requirement The IFA has also assessed demand for non- fertilizer uses in 2016 at 64 million tonnes of nutrient. PRODUCTION OF N, P AND K FERTILIZERS IN 2016 32 33 PhosAgro Integrated Report 2016www.phosagro.comSTRATEGIC REPORTCORPORATE RESPONSIBILITY REPORTCORPORATE GOVERNANCE REPORTFINANCIAL STATEMENTSADDITIONAL INFORMATION DEMAND DEVELOPMENTS IN KEY MARKETS P2O5 demand (mln t) Demand index (100 = 2014) Europe & CIS North America South & Central America 100 99.6 101.9 100 99.7 102.1 3.8 3.8 3.9 5.1 5.1 5.3 100 6.7 92.9 6.2 95.9 6.4 Better credit availability & affordability 2014 2015 2016 2014 2015 2016 2014 2015 2016 South Asia 119.5 108.9 100 7.4 8.0 8.8 Better monsoon in 2016/17 supported Kharif and rabi demand East & South East Asia The rest of the world 14.7 14.5 14.6 100 98.8 99.8 100 100.5 102.9 3.6 3.6 3.7 2014 2015 2016 2014 2015 2016 2014 2015 2016 Focus on phosphate fertilizer markets in 2016 Indian imports across the P value chain, % The IFA’s preliminary assessment shows that phosphate fertilizer demand stood at 42.69 million tonnes of P2O5 in 2016. This was the first time in five years that demand grew by more than 2% year-on-year. In South Asia, demand was estimated just short of 8.8 million tonnes of P2O5, 9.8% higher than the previous year. According to the IFA, 2016 marked the second consecutive year of growth in Indian P2O5 demand, this time due to better water availability, contributing to a 1% expansion of planted area during the Kharif and an 8% year-on-year increase in sowings during the rabi. European phosphate fertilizer demand was stable year-on-year in 2016 despite a 5% year-on-year contraction of the cereal harvest, as French wheat yields disappointed due to the wetness of the spring. The maize harvest is estimated up for 2016, and winter wheat sowing occurred under favourable conditions towards the end of the calendar year, which helped support regional NPK and DAP/MAP demand. Moving to the Americas, El Niño played an important role in Brazil and Argentina during the 2015/16 crop, bringing about poor maize and soybean harvests. However, phosphate fertilizer demand improved throughout the 2016 calendar year, supported by an attractive crop-to- fertilizer price ratio, the introduction of a more favourable grain export policy in Argentina and better weather conditions in 2H affecting the 2016/17 crop. For the year, regional phosphate fertilizer demand is estimated at 6.4 million tonnes of P2O5, an increase of 3.3% over 2015, as more DAP/ MAP and NPs was consumed. Meanwhile, imports and consumption of NP/NPSs (mostly into Brazil) were again estimated above 1.0 million tonnes of product in 2016, reflecting the growing preference for phosphates rich in sulphur. In North America, phosphate fertilizer demand was estimated up by 2.3% year-on- year to 5.2 million tonnes of P2O5 in 2016, owing to the exceptionally good growing conditions through much of the year. Preliminary estimates indicated yields and production to be at record levels, especially for maize and soybean. Sulphur-based ammonium phosphates continued to gain market share throughout 2016 due to their lower prices, as well as the agronomic DAP Phosphoric acid Rock 2012 39% 25% 36% 2013 30% 32% 38% 2014 27% 28% 45% 2015 41% 24% 35% 2016 31% 34% 35% More MGA was forthcoming from Tunisia, Jordan & South Africa >2% Y-O-Y INCREASE IN PHOSPHATE FERTILIZER DEMAND IN 2016 k e e W r e z i l i t r e F ; A F I : e c r u o S U R C ; A F I : e c r u o S KEY PRICE DEVELOPMENTS IN 2016 price index (week 1 2016 = 100) DAP versus other commodities DAP, FOB TAMPA high/low commodity price change range Phosphate fertilizer prices were among the weakest-performing commodities in 2016 200 150 100 50 $ 395/t $ 315/t week 1 3 6 9 12 15 18 21 24 27 30 33 36 39 42 45 48 51 DAP’s key price driver developments Phosphate rock, FOB Morocco Phosphoric acid, CFR India Ammonia, FOB Black Sea Sulphur, FOB Middle East 100 75 50 Hydrocarbon- led recovery week 1 3 6 9 12 15 18 21 24 27 30 33 36 39 42 45 48 51 benefits they offer for cereals and soybean growth. On the supply side of the industry, the IFA estimated global phosphoric acid capacity at 58.1 million tonnes of P2O5. This represents a net increase of 0.7 million tonnes of P2O5 year-on-year, as additional capacity was commissioned in Morocco and Kazakhstan, and one unit in Iraq was removed from the assessment. Phosphoric acid production was estimated to be up 0.9% in 2016, reaching 43.7 million tonnes of P2O5, as more was forthcoming from Saudi Arabia, Morocco, Jordan, South Africa and Tunisia. Around 10% of the total was traded internationally, with India accounting for 50%. While that country remains the largest importer, two important shifts occurred in 2016: firstly, its purchases of phosphoric acid were prioritised to maximise local DAP/NPK granulation. Secondly, more of the purchased acid was sourced from Tunisia, Jordan and South Africa, reducing its dependence on Morocco. As a result, its production of phosphate fertilizers expanded by 10% y/y, whereas DAP imports were 20% lower at 2.4 million tonnes of P2O5. These actions had an impact on the world’s largest producer, China, where phosphoric acid volumes were estimated 2% lower year-on-year at 17.5 million tonnes of P2O5. Chinese producers struggled with stagnant domestic demand and unfavourable competitive pressures in trade markets. The lower netbacks offered on international sales rendered much of the Yunnan, Guizhou and Sichuan capacity uncompetitive, and producers were forced to curtail production. In November 2016, news emerged of an agreement between 8—10 companies to curtail their DAP production by 10—30% of their normal rates. Outside of China, production of ammoniated phosphate fertilizer fared better: DAP and MAP output increased by 5% and 13%, respectively. CRU, a consultancy, associates this with lower input costs. Their estimate for DAP costs Global DAP, MAP & TSP production production index (1995 = 100) MAP DAP TSP MTP2O5 (mln t) 300 200 100 Larger NP+S production 11.8 11.7 13.3 16.2 15.1 2.7 16.3 2.4 2.6 year 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 34 35 Market overview (continued)PhosAgro Integrated Report 2016www.phosagro.comSTRATEGIC REPORTCORPORATE RESPONSIBILITY REPORTCORPORATE GOVERNANCE REPORTFINANCIAL STATEMENTSADDITIONAL INFORMATION PHOSPHATE ROCK MARKET DEVELOPMENTS THROUGH 2016 Global phosphate rock capacity & production, mln t 250.4 252.5 254.0 257.7 253.9 Capacity 196.8 193.8 197.1 200.7 200.1 Production 2012 2013 2014 2015 2016 Global phosphate rock rock trade in 2016, mln t 30.3 25.9 29.0 29.6 28.0 2012 2013 2014 2015 2016 was 20% lower year-on-year in 2016 at USD 252/tonne as prices of phosphoric acid (CFR India), sulphur (FOB Middle East) and ammonia (FOB Black Sea) fell by 19%, 27% and 2%, respectively, while ammonia ended the year only slightly lower. At one point, the benchmark was close to 40% lower, but recovered as hydrocarbon prices improved. These trends also had an impact on end- use products, with the DAP FOB Tampa benchmark ending the year 20% lower at USD 315/tonne. Phosphate rock market review In 2016, phosphate rock mining was undertaken in 29 countries, with 13 producing more than 2.5 million tonnes. The IFA estimates 200.1 million tonnes of rock concentrate was produced, a reduction on the 2015 total of 200.7 million tonnes. Although miners in Russia, Kazakhstan, Egypt, Senegal, South Africa, Jordan and Saudi Arabia all increased their y/y output by an excess of 500,000 tonnes in 2016, their total was not sufficient to offset reductions in Syria and China. Output from these two countries fell by a total of 2.5 million tonnes. In Syria, mining was suspended due to the war, while in China production fell to 81 million tonnes as demand weakened. Most phosphate rock concentrate is also consumed within the country it was produced in. In 2016, domestic deliveries were estimated at 171.8 million tonnes, registering an increase of 1.7 million tonnes over 2015. In contrast, trade fell by 1.6 million tonnes, as the industry continues to move towards downstream integration. The IFA’s assessment notes that trade into Europe and Latin America was especially weak. Other fertilizers The IFA estimates that around 148.5 million tonnes of N was consumed for both fertilizer and non-fertilizer uses during the 2016 calendar year. This was 2.1% higher than the 2015 total, yet in general, the market remained oversupplied. Improvement in demand is associated with a recovery in agricultural markets, which account for around 75% of the N total. In 2016, N fertilizer demand was estimated to be up 1.9% year-on- year, as lower prices helped to stimulate consumption following the difficulties caused by El Niño. Urea Domestic urea deliveries were assessed to be up for a third consecutive year in 2016. The bulk of the growth stemmed from locations outside of China, with higher rates recorded in areas where new capacity was commissioned (USA, Nigeria and Iran) or where operating rates improved (Argentina, Egypt, India, Italy and Pakistan). Somewhat unexpectedly, trade was also assessed to be 1.8% higher year- on-year. This occurred despite weak import demand into India, where large stocks and higher domestic production reduced requirements. Instead, it was driven by particularly strong trade into Brazil and Western Europe, where imports were estimated to be 19% and 25% higher year- on-year, respectively. On the supply side, urea capacity and production grew by between 1% and 2% year-on-year in 2016. Significant additions were recorded in Egypt, Nigeria, Iran, Bangladesh and Indonesia. However, the IFA also estimates that 1.5 million tonnes of capacity was permanently curtailed due to a combination of overcapacity, poor economics and the national government’s drive to address negative environmental records. Global production also saw growth in 2016. In this instance, there were two major differences in recent trends: the first being that, in China, production fell by 5% year-on-year to 67.5 million tonnes of product. This was associated with reduced competitiveness brought about by the removal of transportation and energy subsidies, as well as higher feedstock prices. The government’s efforts to stimulate domestic coal markets in 2H saw thermal coal prices doubling to around USD 110/tonne, impacting local coal-based urea production costs. As a result, exporters saw their sales squeezed in international markets (falling by around a third year- on-year). This created a gap, which led to the second key difference: the fact that production and trade from the rest of the world increased sharply year-on-year, growing by 6% and 13% year-on-year, respectively. Notably, production gains were made in Egypt, where natural gas availability improved; Argentina, where maintenance supported better operating rates; Russia and Saudi Arabia, where new capacity was commissioned. 1–2% Y-O-Y UREA CAPACITY AND PRODUCTION INCREASE IN 2016 Ammonia 2016 was a mixed year for ammonia, with prices fluctuating widely across all benchmarks. The Black Sea benchmark started the year at USD 265/tonne, keeping stable above USD 250/tonne for most of 1H, before falling dramatically from June onwards, bottoming out at USD 163/tonne in mid-November. This momentum was driven by a surge in merchant ammonia availability. CRU estimates that a total of 15 new ammonia plants were commissioned (outside of China) during the year, seven of which have merchant ammonia capacity. The USA accounted for the largest portion of new merchant capacity, adding three new plants, followed by Russia and Saudi Arabia, which added one plant each. This put pressure on the market’s higher-cost participants, many of which struggled to compete in the lower price environment. Most affected was capacity in Ukraine, where curtailments followed. With this, Russia’s Black Sea ammonia exporters took over as the market’s swing producer, and when prices fell to below USD 180/tonne in 2H, it was these producers that cut back production to balance supply. This strategy was largely successful, and from mid-November prices rallied. By the end of the year, following a dramatic surge in prices, Black Sea ammonia had recovered almost all of its lost ground and finished the year at USD 260/tonne (only USD 5/atonne below the level at which it started the year). Potash MOP deliveries disappointed throughout much of 1H 2016, with Chinese importers delaying contracts due to the large volume of stocks that had accumulated in local warehouses. While importers typically wait for China to set the floor for contract pricing before committing to their own volumes, in this instance a lack of action prompted direction from India, with an agreement reached at the end of June. Once Indian contracts were agreed at lower prices, trade into the country and elsewhere soared, ensuring that global demand was flat y/y at around 63 million tonnes of product. On the supply side, production was estimated by the IFA to be 1.8 million tonnes lower for the 2016 calendar year, at 62.7 million tonnes of product. This corresponds with even greater efforts to limit supplies in North America, where marginal operations in Canada and the USA were closed and operating rates at other mines were cut. Notably, curtailments were also made in the CIS for the first time since the break-up of BPC in 2013, as producers looked for price stability. The one notable contrast was in East Asia, where production was estimated at close to 9.0 million tonnes of product, showing a 2.5 times expansion since 2010. 2 .8% Y-O-Y DECREASE IN POTASH PRODUCTION IN 2016 36 37 Market overview (continued)PhosAgro Integrated Report 2016www.phosagro.comSTRATEGIC REPORTCORPORATE RESPONSIBILITY REPORTCORPORATE GOVERNANCE REPORTFINANCIAL STATEMENTSADDITIONAL INFORMATION SCIENTIFIC APPROACH World's premium phosphate resource base World phosphate rock reserves: 1.4 bln t 2.05 bln t PHOSAGRO 1 Ore type Igneous AL2O3 content 13.0–14.0% High Minor element ratio (MER)2 0.02–0.04 Level of radioactivity Very low Hazardous metals content Very low Cadmium content3 Less than 0.1 3.7 bln t 0.1 bln t 1.5 bln t 50 bln t 1 USA MOROCCO 1 TUNISIA 1 JORDAN 1 CHINA 1 Ore type Sedimentary Ore type Sedimentary Ore type Sedimentary Ore type Sedimentary Ore type Sedimentary AL2O3 content Very low AL2O3 content Very low AL2O3 content Low to moderate AL2O3 content Very low AL2O3 content Very low Minor element ratio (MER)2 0.05–0.1 Minor element ratio (MER)2 0.02–0.04 Minor element ratio (MER)2 0.05 Minor element ratio (MER)2 0.02–0.03 Minor element ratio (MER)2 >0.05 Level of radioactivity Moderate to high Level of radioactivity Moderate Level of radioactivity Moderate Level of radioactivity Low to moderate Level of radioactivity Low to moderate Hazardous metals content Moderate to high Hazardous metals content Moderate Cadmium content3 9–38 Cadmium content3 15-40 Source: Fertecon, IMC, USGS 2011. 1 Primary global DAP/MAP producing regions. 2 Average Minor Element Ratio (MER) greater than 0.1 not sustainable for production of high-quality DAP. 3 Average cadmium content in ppm. Hazardous metals content Low to moderate Hazardous metals content Low Hazardous metals content Low to moderate Cadmium content3 40 Cadmium content3 5-6 Cadmium content3 2 38 39 PhosAgro Integrated Report 2016www.phosagro.comSTRATEGIC REPORTCORPORATE RESPONSIBILITY REPORTCORPORATE GOVERNANCE REPORTFINANCIAL STATEMENTSADDITIONAL INFORMATION Researching the impact of safer fertilizers PhosAgro is cooperating with leading European research institutions to investigate how the high quality of our products benefits our stakeholders. We have signed agreements with the University of Milan and the Wageningen University in the Netherlands to undertake research to determine the impact of cadmium contained in phosphate-based fertilizers on a variety of crops and soil types in different locations. Our ultimate goal is to demonstrate that reducing the cadmium content in phosphate-based fertilizers could have an important positive impact of the safety of the food that we eat every day. The increasing threat of soil contamination by cadmium and other heavy metals is the subject of ever-greater attention in the context of food safety. The European Commission, for example, is currently considering adopting EU-wide limitations for cadmium content in phosphate-based fertilizers. An analysis of phosphate-based fertilizers used in Europe has shown that around 8% of fertilizers contained more than 60 mg/kg P2O5 of cadmium, while around 31% of fertilizers have over 40 mg/kg P2O5. Phosphate-based fertilizers produced by PhosAgro are some of the safest, and contain just 0.2 mg of cadmium per kg of P2O5 (in PhosAgro’s DAP fertilizers). The formation of phosphate ore deposits Phosphate deposits can be found in several forms on all continents, but the two most common sources of phosphate raw materials are igneous and sedimentary deposits. Igneous deposits like PhosAgro’s form over a period of tens or hundreds of millions of years as a result of the cooling of magma. These deposits usually contain less dangerous impurities such cadmium, lead and radioactive elements. The largest deposits are located in Brazil, Canada, Finland, Russia and South Africa. Sedimentary deposits are formed over thousands of years and are the most common: more than 80% of phosphate minerals currently extracted are of sedimentary origin. The largest reserves of ore of this type are concentrated in North Africa, the Middle East and the USA. The accumulation of dead organisms that inhabited ancient seabeds create the deposits. Since aquatic flora and fauna also accumulate heavy metals, many of which can be dissolved in water, the raw material from sedimentary deposits can contain dangerous impurities such as cadmium, lead, mercury, etc. Phosphate-based fertilizers cadmium content, mg/kg P2O5 >60 >40 31% 8% PhosAgro phosphate- based fertilizers contain >1 MG/KG P2O5 CADMIUM HOW CADMIUM GETS TO YOUR PLATE ORE DEPOSIT FERTILIZER SOIL PLANT FOOD HUMAN Cadmium and heavy metals Extensive study has shown that cadmium can cause kidney failure and has been statistically associated with an increased risk of cancer. The food we eat is the primary source of human exposure to cadmium among the non-smoking population.1 Cadmium and other heavy metals are present in many phosphate deposits, especially those of sedimentary origin. Cadmium (Cd) occurs naturally as an impurity in rock phosphate at concentrations 1—200 mg Cd (kg P2O5), and is present in most commercial phosphate- based fertilizers. The application of these fertilizers is the main source of the cadmium that accumulates every year in Europe’s agricultural soils.2 Higher levels of cadmium in the soil are likely to increase the concentration of the element in crops grown in the soil. Plant roots absorb cadmium contained in water, meaning that the uptake rate increases as cadmium concentration increases. The element then moves from the roots to the above- ground parts of the plants. This increased concentration in crops forms a risk for human health through food intake.2 PhosAgro produces phosphate-based fertilizers from apatite-nepheline ore mined at its own igneous deposit by Apatit, which contains virtually no cadmium or other harmful elements. We therefore believe that application of PhosAgro fertilizers to crops helps farmers to produce safer foods, and that this contributes to improving food security as well as the overall health of consumers of agricultural products. RESEARCH HIGHLIGHTS Wageningen University : 1 2 Determining the difference between Determining the long-term changes actual presence and bioavailability in cadmium and other heavy metals (ability to be absorbed) of cadmium content in soil and plants where from application of fertilizers and phosphate-based fertilizers with high cadmium that has previously and low hazardous elememts content accumulated in the soil. This research are applied by using simulations will test soils and the absorption of and soil and plant measurements heavy metals, cadmium in particular by from the experiments. This will plants in greenhouse conditions using help to understand how the use of suitable crops (vegetables, root crops, phosphate-based fertilizers with low grains) and forage grasses. The goal of cadmium and other heavy metals this study is to understand how heavy content leads to a decrease in heavy metals contained in some fertilizers metals in soil and plants in the medium- affect the quality of plants, whether and long-term (50—100 years). the cadmium content in fertilizers has an immediate effect, and whether the cadmium content in agricultural soils decreases. University of Milan: 1 Conducting field tests in Italy on crops (rice and wheat) to compare soil parameters, as well as biochemical and biological parameters of crops using standard fertilizers and fertilizers with very low heavy metals content.. The research involves three years of field tests on cultivated farm fields. Linear increase of Cd concentration in the crop with the increasing soil Cd concentration 2 mg kg-1 d C p o r C Slope=TF=[Cd]crop/ [Cd]soil Soil Cd 1 European Food Safety Authority. Cadmium dietary exposure in the European population. EFSA Journal 2012;10 (1):2551. [37 pp.] doi:10.2903/j. efsa.2012.2551. 2 Erik Smolders & Laetitia Six. Revisiting and updating the effect of phosphate fertilizers to cadmium accumulation in European agricultural soils. 2013. http://ec.europa.eu/health/scientific_ committees/environmental_risks/docs/ scher_o_168_rd_en.pdf 40 41 Scientific approach (continued)PhosAgro Integrated Report 2016www.phosagro.comSTRATEGIC REPORTCORPORATE RESPONSIBILITY REPORTCORPORATE GOVERNANCE REPORTFINANCIAL STATEMENTSADDITIONAL INFORMATION PhosAgro fertilizers contain a full range of essential elements The Company is in constant dialogue with agricultural producers to adapt its product offering. The Company’s in-house R&D facilities and flexible production lines mean it is able to develop new fertilizer grades with additional secondary nutrients or microelements in response to market demand. Elements currently available Elements currently available in PhosAgro products in PhosAgro products MICRONUTRIENTS PhosAgro products contain almost no heavy metals ESSENTIAL NUTRIENTS N NITROGEN Р PHOSPHORUS K POTASSIUM + increases protein accumulation in plants + part of enzymes, nucleic acids, chlorophyll, vitamins, alkaloids + reduces moisture content in crop yield + determines protein synthesis intensity + accumulates energy in plants + accelerates biosynthesis + facilitates root system growth + increases winter hardiness, improves yield’s quality + increase plant resistance against adverse conditions and diseases + acts in processes of carbohydrates synthesis and their flow in plants + determine cell and fiber ability for water retention deficiency symptoms: deficiency symptoms: deficiency symptoms: • plant growth rate reduction and • slow growth and maturing • leaf edges browning known as • as a result yield dropdown • yield decrease and its quality leaf burn reduction • plants become irresistible against diseases SECONDARY NUTRIENTS Ca CALCIUM + supports plant’s photosynthesis, hydrocarbons transport and nitrogen assimilation + acts in cell walls construction + determines watering and supports cell organelle structure Mg MAGNESIUM + central atom of each chlorophyll molecule + takes part in phosphate metabolism, + acts in plant respiration + activates a number of enzyme systems S SULPHUR + is a part of every living cell ad + is a constituent of two of 21 amino acids which form protein + helps develop enzymes and vitamins + aids in seed production, + promotes nodulation for nitrogen fixation by legumes deficiency symptoms: deficiency symptoms: deficiency symptoms: • root system suppression • yellowish, bronze or reddish color, • small leaves with pale green • chlorosis while leaf veins remain green coloring, stretched stems • foliage yellowing and even death • deteriorated plant growth and maturation B BORON + essential for germination of pollen grains, growth of pollen tubes + provides seed and cell wall IRON Fe + acts as a catalyst to chlorophyll formation and as an oxygen carrier + helps form respiratory enzyme formation systems Mo MOLYBDENUM + facilitates nitrate reductase by plants + vital for symbiotic nitrogen fixation by Mn MANGANESE + is a part of enzyme systems in plant + accelerates germination and Rhizobia bacteria in legume root nodules maturity + aids chlorophyll synthesis + supports ammonium and nitrate deficiency symptoms: • stunts plant growth • degrades growing point • black heart (sugarbeets) • corky core (apples) • potato scab deficiency symptoms: deficiency symptoms: nitrogen uptake • Low respiratory and photosynthesis • yield and protein content decrease in intensity • chlorosis plants deficiency symptoms: • when high doses of nitrogen fertilizers • yellowing between the veins are applied low molybdenum causes • leaves specks and further dieback nitrate accumulation in plants Cu COPPER + acts in chlorophyll formation + increases resistance against lodging + supports drought tolerance, winter hardiness ZINC Zn + is a part of enzyme systems + aids synthesis of auxins (plant growth hormones) Co COBALT Cl CHLORIDE + helps fixing atmospheric nitrogen + accelerates energy reactions in in legumes + is a constituent of B12 vitamin plant + activates several enzyme systems + maintains turgor deficiency symptoms: • small germ • dieback in citrus deficiency symptoms: deficiency symptoms: deficiency symptoms: • growth reduction, chlorosis, “little • external symptoms similar • wilting leaf edges leaf” of fruit trees and ”white bud” to nitrogen deficiency • thick side roots • blasting in vegetable crops of corn • livestock suffers anemia, bad appetite and productivity 42 43 Scientific approach (continued)PhosAgro Integrated Report 2016www.phosagro.comSTRATEGIC REPORTCORPORATE RESPONSIBILITY REPORTCORPORATE GOVERNANCE REPORTFINANCIAL STATEMENTSADDITIONAL INFORMATION PhosAgro fertilizers contain a full range of essential elements The Company is in constant dialogue with agricultural producers to adapt its product offering. The Company’s in-house R&D facilities and flexible production lines mean it is able to develop new fertilizer grades with additional secondary nutrients or microelements in response to market demand. Elements currently available in PhosAgro products MICRONUTRIENTS HARMFUL ELEMENTS N N ESSENTIAL NUTRIENTS Hg MERCURY N NITROGEN Р PHOSPHORUS K POTASSIUM As ARSENIC – Arsenic poisoning can cause nausea, vomiting, abdominal pain and other digestive disorders – Regular exposure can cause cancer, cardiovascular disease, skin hyperpigmentation, keratoses, neurological Pb problems and developmental disorders Cd CADMIUM N Causes – Cancer – Cardiovascular diseases – Kidney disfunction – Lung problems – Osteoporosis Pb – May have toxic effects on the nervous, digestive and immune systems, and on lungs, kidneys, skin and eyes – For unborn and very young children, even small amounts may cause serious health and development problems Pb LEAD – Repeated exposure can cause abdominal and digestive problems, aggressive behaviour, headaches, fatigue, memory loss, anemia and numerous other negative symptoms – Children exposed to lead may suffer from behaviour problems, low IQ, developmental disorders Cr+6 HEXAVALENT CHROMIUM – Carcinogen – Targets the respiratory system, kidneys, liver, skin and eyes – May cause asthma or damage to the nasal epithelia and skin + increases protein accumulation in plants + part of enzymes, nucleic acids, chlorophyll, vitamins, alkaloids + reduces moisture content in crop yield + determines protein synthesis intensity + accumulates energy in plants + accelerates biosynthesis + facilitates root system growth + increases winter hardiness, improves yield’s quality + increase plant resistance against adverse conditions and diseases + acts in processes of carbohydrates synthesis and their flow in plants + determine cell and fiber ability for water retention deficiency symptoms: deficiency symptoms: deficiency symptoms: • plant growth rate reduction and • slow growth and maturing • leaf edges browning known as • as a result yield dropdown • yield decrease and its quality leaf burn reduction • plants become irresistible against diseases SECONDARY NUTRIENTS Ca CALCIUM + supports plant’s photosynthesis, hydrocarbons transport and + acts in cell walls construction + determines watering and supports cell organelle structure Mg MAGNESIUM + central atom of each chlorophyll molecule + takes part in phosphate metabolism, + acts in plant respiration + activates a number of enzyme systems S SULPHUR + is a part of every living cell ad + is a constituent of two of 21 amino acids which form protein + helps develop enzymes and vitamins + aids in seed production, + promotes nodulation for nitrogen fixation by legumes deficiency symptoms: deficiency symptoms: deficiency symptoms: • root system suppression • yellowish, bronze or reddish color, • small leaves with pale green • chlorosis while leaf veins remain green coloring, stretched stems • foliage yellowing and even death • deteriorated plant growth and maturation and learning difficulties nitrogen assimilation B BORON + essential for germination of pollen grains, growth of pollen tubes + provides seed and cell wall IRON Fe + acts as a catalyst to chlorophyll formation and as an oxygen carrier + helps form respiratory enzyme formation systems Mo MOLYBDENUM + facilitates nitrate reductase by plants + vital for symbiotic nitrogen fixation by Mn MANGANESE + is a part of enzyme systems in plant + accelerates germination and Rhizobia bacteria in legume root nodules maturity + aids chlorophyll synthesis + supports ammonium and nitrate deficiency symptoms: • stunts plant growth • degrades growing point • black heart (sugarbeets) • corky core (apples) • potato scab deficiency symptoms: deficiency symptoms: nitrogen uptake • Low respiratory and photosynthesis • yield and protein content decrease in intensity • chlorosis plants deficiency symptoms: • when high doses of nitrogen fertilizers • yellowing between the veins are applied low molybdenum causes • leaves specks and further dieback nitrate accumulation in plants Cu COPPER + acts in chlorophyll formation + increases resistance against lodging + supports drought tolerance, winter hardiness ZINC Zn + is a part of enzyme systems + aids synthesis of auxins (plant growth hormones) Co COBALT Cl CHLORIDE + helps fixing atmospheric nitrogen + accelerates energy reactions in in legumes + is a constituent of B12 vitamin plant + activates several enzyme systems + maintains turgor deficiency symptoms: • small germ • dieback in citrus deficiency symptoms: deficiency symptoms: deficiency symptoms: • growth reduction, chlorosis, “little • external symptoms similar • wilting leaf edges leaf” of fruit trees and ”white bud” to nitrogen deficiency • thick side roots • blasting in vegetable crops of corn • livestock suffers anemia, bad appetite and productivity 42 43 Scientific approach (continued)CaPhosAgro Integrated Report 2016www.phosagro.comSTRATEGIC REPORTCORPORATE RESPONSIBILITY REPORTCORPORATE GOVERNANCE REPORTFINANCIAL STATEMENTSADDITIONAL INFORMATION OPERATIONAL REVIEW Increasing production capacity while maintaining utilisation rates UPSTREAM Capacity by product Phosphate rock sales in 2016, kt PRODUCTION AND SALES VOLUMES – APATIT MINE AND BENEFICIATION PLANT Mikhail Rybnikov Executive Director, COO PhosAgro’s production of phosphate-based fertilizers increased by another 10.8% year-on-year in 2016 on the back of low- cost investments in modernisation and debottlenecking. Looking ahead, we are about to embark on a new phase of self-sufficient growth and greater internal processing of our own phosphate rock with the completion of new ammonia and granulated urea capacities on track for 2017. Phosphate rock 8.5 mln t Nepheline concentrate 1.7 mln t 999 Domestic 1,449 Export External sales Internal sales 2,448 6,110 Total: 8,558 Phosphate segment — upstream The upstream operations in our phosphate segment take place at Apatit, which mines apatite-nepheline ore that is processed into phosphate rock and nepheline concentrate. The downstream operations in our phosphate segment take place at PhosAgro-Cherepovets, the Balakovo branch of Apatit (formerly Balakovo Mineral Fertilizers) and Metachem. PhosAgro- Cherepovets and the Balakovo branch of Apatit produce phosphate-based fertilizers, and the Balakovo branch of Apatit also produces feed phosphate (MCP). Metachem produces PKS, industrial phosphates such as sodium tripolyphosphate (STPP) and the fertilizer sulphate of potash (SOP). Highlights • Phosphate-based fertilizer production up 10.8% year-on-year to 5.9 million tonnes • Phosphate-based fertilizer sales up 10.6% year-on-year to 5.9 million tonnes • Internal use of our own phosphate rock accounted for 71.4% of total production volume Upstream We extracted 33.4 million tonnes of apatite-nepheline ore in 2016, compared to 27.2 million in 2015. We produced 8.5 million tonnes of phosphate rock, up from 7.9 million tonnes in 2015. Intra-Group sales of phospate rock amounted to 71.4% (6,110 kt) of our total phosphate rock sales in 2015, compared to 74.8% (5,808 kt) in 2015. This was primarily due to the 10.8% year-on-year increase in our own phosphate-based fertilizer production in 2016. We sold 11.7% of the phosphate rock we produced to domestic external customers and 16.9% to international customers, compared with 11.2% and 14.0%, respectively, in 2015. Prayon (Belgium) and Yara (Norway) accounted for most of the exports. A decline in domestic sales volumes was primarily due to higher internal use. In 2016, nepheline concentrate production and sales increased by 0.7% and 1.6% year-on-year, respectively. We sell all of our nepheline concentrate to Basel Cement Pikalevo, which slightly increased its nepheline concentrate processing in 2016. Production volumes, kt Sales volume1, kt 2016 2015 Change y-o-y, % 2016 2015 Change y-o-y, % Phosphate rock 8,530.2 7,853.3 8.6% 2,448.3 1,962.4 24.8% Nepheline concentrate 958.1 951.9 0.7% 969.7 954.6 1.6% 1 Not including Intra-Group sales. PHOSAGRO’S ORE RESOURCES AS OF 1 JANUARY 2017 Deposit Kukisvumchorr Yukspor Apatitovy Cirque Rasvumchorr Plateau Koashva Njorkpahk Lyolitovy otrog Plot Plateau TOTAL Resources, 000 t (Categories A+B+C1) Average P2O5 content 401,042 505,273 105,799 321,059 593,393 58,029 1,754 2,058 14.26 14.12 14.24 13.02 16.89 13.31 14.14 16.52 1,988,407 14.78 PhosAgro’s upstream subsidiary Apatit holds five mining licences and two exploration licences, which allow it to conduct exploration and mining activities at six apatite-nepheline ore mines, and to conduct exploration activities at two deposits. MINING LICENCE Kirovsky mine (Kukisvumchorr and Yukspor deposits) 31.12.2025 Vostochny mine (Koashva deposit) 31.12.2017 Resource category classification sufficient detail to ensure the basic reliability of the projected exploitation. Vostochny mine (Njorkpahk deposit) 31.12.2063 Category A: the deposit is known in detail; Category C1: the deposit has been estimated Rasvumchorrsky mine (Apatitovy Cirque boundaries of the deposit have been outlined by a sparse grid of trenches, drill holes by trenching, drilling or underground or underground workings. The quality and Rasvumchorr Plateau deposits) 01.01.2024 workings. The quality and properties of the and properties of the deposit are known ore are known in sufficient detail to ensure the tentatively by analogy with known deposits reliability of the projected exploitation. of the same type, and the general conditions Tsentralny mine (Plateau Rasvumchorr deposit) 31.12.2017 Category B: the deposit has been explored category includes resources peripheral to the for exploitation are tentatively known. This EXPLORATION LICENCE but is only known in fair detail; boundaries of boundaries of Categories A and B and also the deposit have been outlined by trenching, reserves allocated in complex deposits in Illitovy otrog deposit 01.02.2024 drilling or underground workings. The quality which the ore distribution cannot be reliably and properties of the ore are known in determined even by a very dense grid. Plot Plateau 14.12.2040 44 45 PhosAgro Integrated Report 2016www.phosagro.comSTRATEGIC REPORTCORPORATE RESPONSIBILITY REPORTCORPORATE GOVERNANCE REPORTFINANCIAL STATEMENTSADDITIONAL INFORMATION DOWNSTREAM Phosphate segment capacity by product PRODUCTION AND SALES VOLUMES – PHOSPHATE BASED FERTILIZERS AND MCP Nitrogen segment capacity by product PRODUCTION AND SALES VOLUMES – NITROGEN BASED FERTILIZERS MAP/DAP/NPK/NPS Feed phosphate 5.5 mln t 360 kt APP 140 kt Phosphoric acid 2.3 mln t PKS 100 kt STTP 130 kt Phosphate segment: downstream Production volume, kt Sales volume, kt 2016 2015 DAP/MAP 2,768.9 2,643.2 NPK NPS APP MCP PKS SOP 2,060.0 1,922.6 512.4 138.8 338.6 85.1 26.1 272.8 109.6 272.2 95.9 36.7 Change y-o-y, % 4.8% 7.1% 87.8% 26.6% 24.4% (11.3%) (28.9%) 2016 2015 2,696.4 2,639.2 2,043.5 1,878.5 517.3 115.4 338.5 90.1 28.0 265.3 104.5 257.7 89.8 35.8 Change y-o-y, % 2.2% 8.8% 95.0% 10.4% 31.4% 0.3% (21.8%) We increased our production and sales of phosphate-based fertilizers by 10.8% and 10.6% year-on-year, respectively. 12.2% year-on-year to 5.5 million tonnes and MCP production capacity by 6.2% year- on-year to 360 kt. Our ability to quickly switch between production of MAP/DAP and NPK/NPS fertilizers and our competitive position as a low-cost producer (we are positioned at the low end of the cash-cost curve) helped us to increase production and sales of MAP/DAP by 4.8% and 2.2% year-on-year, respectively, in 2016. Outlook • PhosAgro will continue to focus on strategic goals of optimising costs in upstream operations. • We are intensifying production activities at our Cherepovets site. In 2016, we managed to increase production output by 8% year-on-year. DAP/MAP vs NPK/NPS sales, kt DAP/MAP 2016 2015 NPK/NPS 2016 2015 2,696.4 2,639.2 2,560.8 2,143.8 Production of NPK fertilizers increased by 7.1% to 2.1 million tonnes, while sales rose by 8.8% to 2.0 million tonnes in 2016. NPS production and sales increased by 87.8% and 95.0% (to 512 kt and 517 kt, respectively). Our PKS fertilizer production and sales of fertilizers amounted to 85.1 kt and 90.1 kt, respectively. In-house R&D – Playing a Key Role in PhosAgro’s Growth In May 2016,our in-house engineering as well as feed and industrial salts, sulphuric company Mining and Chemical Engineering and extracted phosphoric acids, and the has merged its resources with the Y. mining and beneficiation of ores in the Samoylov Scientific and Research Institute areas of: for Fertilizers and Insectofungicides (NIUIF). Production and sales volumes of SOP in 2016 decreased by 28.9% and 21.8%, respectively, to 26.1 kt and 28.0 kt. As a result, PhosAgro’s in-house capacity • conducting scientific research work includes an extensive design base and is • developing basic data for design and able to implement comprehensive projects planning (including basic designs) in the field of mineral fertilizer production, Due to our production flexibility and cash-cost leadership, we were also able to maintain near-100% capacity utilisation throughout 2016, even as we increased MAP/DAP/NPK/NPS production capacity by Ammonia 1,190 kt Urea 980 kt AN 450 kt Production volume, kt Sales volume, kt 2016 2015 1,036.1 978.1 458.9 455.3 Change y-o-y, % 5.9% 0.8% 2016 2015 Change y-o-y, % 1,018.5 949.4 7.3% 375.5 416.0 (9.7%) Urea AN Nitrogen segment Our nitrogen segment includes the assets of PhosAgro-Cherepovets, which produces ammonia, ammonium nitrate, ammonium nitrate-based fertilizers and urea. Performance Overall sales volumes of nitrogen fertilizers were stable year-on-year in 2016. we produced was consumed within the Group to support higher phosphate-based fertilizers and urea production volumes in 2016. In 2016, production of ammonium nitrate (AN) and ammonium nitrate-based fertilizers (NP) increased by 1%, while sales declined by 9.7%. Outlook • New ammonia plant due to come online in 2017, adding 760 kt of annual capacity and increase self-sufficiency considerably • New 500 kt/year urea plant due to come online in 2017 Highlights • Nitrogen fertilizer production increased 4.3% year-on-year to 1.5 million tonnes • Nitrogen fertilizer sales were stable at 1.4 million tonnes • Construction of new 760 000 tonnes/ year ammonia plant remains on track for commissioning in 2017 • modernising existing production capacities to increase capacity and energy efficiency, using patented technologies • conducting investigations and pilot testing • conducting exploratory work (geological and geodesic surveys) • developing planning, detailed and engineering documentation • supporting the comissioning and ramp-up of production facilities, including designer supervision Urea production increased by 5.9% year-on-year to 1,036.1 kt in 2016, while sales increased by 7.3% year-on-year to 1,018.5 kt. In 2016, 43% of our urea exports were attributed to long-term urea sales contracts with Trammo AG (Switzerland), which we signed for the period from July 2013 to June 2015 (in 2015, this contract was prolonged through September 2016), and with Ameropa AG (Switzerland). The majority of our remaining urea sales were on the spot market or based on short- term quarterly sales contracts. We believe that this balance ensures a significant degree of stability in our urea sales volumes and prices, while at the same time enabling us to benefit from the flexibility that spot sales provide. The ammonia we produce is used internally for the production of phosphate-based and nitrogen fertilizers. In 2016, ammonia production increased by 7.8% compared to 2015 as a result of effectively scheduled maintainance. This brought our self- sufficiency in ammonia from 72.4% in 2015 to 73.1% in 2016. Most of the ammonia 46 47 PhosAgro Integrated Report 2016www.phosagro.comSTRATEGIC REPORTCORPORATE RESPONSIBILITY REPORTCORPORATE GOVERNANCE REPORTFINANCIAL STATEMENTSADDITIONAL INFORMATIONOperational review (continued) FINANCIAL REVIEW Comprehensive income statement Gross profit, operating profit, EBITDA and net income for the period Revenue PhosAgro’s revenue in 2016 amounted to RUB 187.7 billion. Continued implementation of our strategy aimed at improving production flexibility and expanding capacity supported growth in sales volumes, thereby increasing fertilizer production and sales volumes year-on-year by 9.4% and 8.8%, respectively. PhosAgro’s revenue for the period decreased by 1% year-on-year to RUB 187.7 billion. In 2016, gross profit decreased by 5% year- on-year, amounting to RUB 101.4 billion (RUB 106.7 billion in 2015), resulting in a 2 p.p. decrease in gross profit margin (from 56% in 2015 to 54% in 2016). PhosAgro’s operating profit in the reporting period was RUB 61.6 billion, a 16% decrease from RUB 73.3 billion in 2015. The operating profit margin decreased by 6 p.p. from 39% in 2015 to 33% in 2016. In 2016, export sales amounted to 66.4% of the Company’s consolidated revenue compared to 73.2% in 2015. EBITDA for 2016 decreased by 12% year-on-year to RUB 72.4 billion from RUB 82.5 billion for 2015. The EBITDA Production flexibility drives revenue growth margin decreased by 4 p.p. to 39% from 43% in 2015. PhosAgro’s financial performance was supported by the devaluation of the rouble in 2016 compared to 2015 (the exchange rate to the US dollar averaged RUB 67.03 in 2016 compared to RUB 60.96 in 2015), as prices for most of the Company’s export sales are denominated in USD, while costs are primarily RUB-based. At the same time, the appreciation of the rouble as of 31 December 2016 (RUB 60.66 per USD 1) compared to 31 December 2015 (RUB 72.88 per USD 1) resulted in a foreign exchange gain of RUB 16,962 million in 2016; in 2015, the foreign exchange loss was RUB 22,178 million. Basic and diluted earnings per share increased by 64% in 2016 to RUB 462 from RUB 281 in 2015. Statement of financial position Gross debt as of 31 December 2016 decreased to RUB 112.4 billion compared to RUB 134.5 billion as of 31 December 2015. Net debt as of 31 December 2016 stood at RUB 105.1 billion, down from RUB 105.2 billion as of 31 December 2015 as a result of the rouble’s appreciation against the US dollar as of 31 December 2016. Most of the Company’s debt is denominated in US dollars and as a natural hedge against primarily USD-denominated sales. The Company’s net debt to EBITDA ratio increased to 1.45 as of 31 December 2016 from 1.28 as of 31 December 2015. Other 0.4% Nitrogen fertilizers 10% Phosphate-based products 89.6% Revenue structure by products Africa 3% CIS 8% Asia 12% North and Latin America 18% Revenue structure by regions Russia 34% Europe 25% KEY FINANCIAL PERFORMANCE INDICATORS, RUB,mln 2016 2015 Change y-o-y, % Revenue Cost of sales Gross Profit • Gross profit margin Operating profit • Opertaing profit margin Loss/Profit for the year • Loss/Profit margin EBITDA EBITDA margin Net Debt 187,742 189,732 -86,391 -83,064 101,351 54% 61,598 33% 59,886 32% 72,365 106,668 56% 73,331 39% 36,436 19% 82,464 39% 43% 105,115 105,165 Net Debt/EBITDA ratio 1.45 1.28 KEY OPERATIONAL INDICATORS SALES VOLUMES, kt -1% 4% -5% 2 p. p. -16% 6 p. p. 64% -13 p. p. -12% 4 p. p. 0% 13% Phosphate-based products Nitrogen-based fertilizers Apatit mine and beneficiation plant Other products REVENUE STRUCTURE BY REGION, RUB mln North and Latin America Europe Africa Asia CIS Russia TOTAL 2016 5,925 1,394 3,418 94 2015 Change, y-o-y % 5,384 1,365 2,917 103 10% 2% 17% -8% 2016 2015 Change, y-o-y % 32,992 46,738 6,367 22,742 15,883 63,020 44,430 47,303 12,475 23,909 10,740 50,875 187,742 189,732 -26% -1% -49% -5% 48% 24% -1% SEGMENT REVENUE STRUCTURE, RUB mln 2016 2015 Change, y-o-y % Phosphate-based products 168,136 167,430 Nitrogen fertilizers Other operations TOTAL 18,829 21,574 777 728 187,742 189,732 0% -13% 7% -1% 48 49 STRATEGIC REPORTCORPORATE RESPONSIBILITY REPORTCORPORATE GOVERNANCE REPORTFINANCIAL STATEMENTSADDITIONAL INFORMATIONPhosAgro Integrated Report 2016www.phosagro.com Phosphate-based products segment Revenue from the phosphate-based products segment increased slightly to RUB 168.1 billion in 2016. PhosAgro increased both production and sales volumes of phosphate-based fertilizers and MCP by 11% year-on-year in 2016. Sales volumes for phosphate rock and nepheline concentrate in 2016 increased by 17% year- on-year. The phosphate-based products segment’s gross profit for 2016 decreased by 4% to RUB 93.5 billion, resulting in a gross profit margin of 56%, compared to a 58% margin in 2015. The phosphate-based fertilizers market in 2016 • The average prices of DAP (FOB Tampa) and MAP (FOB Baltics/Black Sea) in 2016 were USD 347 per tonne and USD 339 per tonne, respectively, which represent respective year-on-year declines of 24% and 26%. The decrease in global prices for phosphate-based fertilizers was triggered by weak market conditions in the main commodity markets, combined with a higher supply of fertilizers from new capacities in Morocco (2 million tonnes of DAP/MAP/ NPS/NPK in 1Q 2016 and 3Q 2016) and heightened competition. • A significant decrease in major feedstock prices triggered a spike in India’s domestic DAP production, which lowered demand for import volumes. DAP imports to India for 2016 stood at 4.3 million tonnes, which was a 30% year-on-year decline. Imports of NP/NPK to India dropped by 26% year-on-year to 0.5 million tonnes. • Relatively low prices for phosphate- based fertilizers, coupled with Africa 2% CIS 9% Asia 13% North and Latin America 15% Phosphate- based segment revenue by region Russia 34% Europe 27% PHOSPHATE-BASED PRODUCTS SEGMENT, RUB mln Result Revenue Cost of goods sold Gross Profit Gross Profit margin 2016 2015 Change, y-o-y % 168,136 167,430 -74,667 -70,344 93,469 97,086 0% 6% -4% 56% 58% -2 p. p. PHOSPHATE-BASED SEGMENT REVENUE BY REGION, RUB mln REVENUE AND SALES VOLUMES FOR PRINCIPAL PHOSPHATE-BASED PRODUCTS Region 2016 2015 Change, y-o-y % Revenue, RUB mln Sales Volume, kt North and Latin America Europe Africa Asia CIS Russia TOTAL 25,765 44,271 3,912 21,102 15,408 57,678 33,623 43,692 9,057 23,782 10,719 46,557 168,136 167,430 -23% 1% -57% -11% 44% 24% 0% favourable economics in Brazil’s and Argentina’s agriculture industries, spurred a recovery in consumption and import of phosphate-based fertilizers. In 2016, DAP/MAP/TSP/NP/ NPK imports grew by 23% year-on- year and exceeded 6.3 million tonnes, including 2.7 million tonnes of imported MAP. Liberalisation of agricultural export rules in Argentina was an additional driver of growth in fertilizer consumption. Argentina’s DAP/MAP imports in 2016 grew by 74% year-on- year to 1.15 million tonnes. • Exports of phosphate-based fertilizers (DAP/MAP/NP/TSP) from China in 2016 decreased by 19% year-on-year to 10.1 million tonnes. Separately, exports of DAP dropped by 15% year-on-year to 6.8 million tonnes. Production curtailments due to low efficiency and stricter environmental regulations were the key reasons for the decline in exports. The growth in fertilizer sales volumes was primarily due to the Company’s flexible production and sales models, which enabled a substantial increase in sales 2016 2015 Change, y-o-y % 2016 2015 Change, y-o-y % Phosphate rock 26,037 19,155 36% DAP/MAP NPK/NPS MCP 63,906 73,362 -13% 48,373 45,769 9,990 7,749 6% 29% 2,448 2,684 2,561 339 1,962 2,625 2,144 258 25% 2% 19% 31% of MAP and NPK to the domestic market, NPS to export markets and phosphate rock to both markets. • MAP/DAP fertilizers: revenue from DAP/MAP sales was down by 13% year-on-year from RUB 73.4 billion (USD 1,203 million) in 2015 to RUB 63.9 billion (USD 953 million) in 2016, reflecting a 15% year-on-year decrease in DAP/MAP average revenue per tonne denominated in RUB and 2% year-on- year growth in sales volumes. • NPK fertilizers: revenue from NPK sales increased by 1% year-on-year from RUB 38.9 billion (USD 638 million) in 2015 to RUB 39.2 billion (USD 585 million) in 2016, reflecting a 9% year-on-year increase in sales volumes and an overall 7% year-on-year decrease in NPK average revenue per tonne denominated in RUB. • Phosphate rock: revenue from phosphate rock sales rose by 36% year-on-year to RUB 26.0 billion (USD 388 million) in 2016. Revenue per tonne in RUB terms increased by 9% year-on-year. Sales volumes increased by 25% year-on-year as a result of increased supplies to both export and domestic markets. Phosphate based fertilizers market, USD Average DAP price FOB Tampa 2016 2015 347 459 Average phosphate rock price FOB Morocco 2016 2015 106 125 50 51 Financial review (continued)STRATEGIC REPORTCORPORATE RESPONSIBILITY REPORTCORPORATE GOVERNANCE REPORTFINANCIAL STATEMENTSADDITIONAL INFORMATIONPhosAgro Integrated Report 2016www.phosagro.com Nitrogen segment Nitrogen segment revenue decreased from RUB 21.6 billion in 2015 to RUB 18.8 billion in 2016. PhosAgro increased production and sales volumes of nitrogen-based fertilizers by 4% and 2%, respectively, year-on-year in 2016. Nitrogen segment gross profit for 2016 decreased by 18% year-on-year to RUB 7.8 billion. The gross margin for 2016 was 41%, compared with 44% in 2015, which was mainly due to price decreases: in 2016, average revenue per tonne for the Company’s nitrogen-based fertilizers decreased by 15% year-on-year. The nitrogen market in 2016 The average urea price (FOB Baltic) in 2016 stood at USD 194 per tonne vs USD 267 per tonne in 2015. This was driven by stronger competition in key markets related to the launch of new capacities in the Middle East and the USA, as well as a nearly 3.0 million tonne year-on-year decline in urea exports to India due to growth in domestic production. Export revenue from urea declined from RUB 15.7 billion (USD 258 million) in 2015 to RUB 13.3 billion in 2016. The decrease in revenue per tonne of 18% year-on-year was partially balanced by a 3% year-on-year increase in sales volumes. Total revenue from ammonium nitrate (AN) decreased by 13% year-on-year from RUB 5.4 billion in 2015 to RUB 4.6 billion in 2016 due to a 10% year-on-year decrease in sales volumes and a 4% year-on-year decrease in revenue per tonne. CIS 3% Asia 9% Africa 13% Europe 13% Russia 24% North and Latin America 38% Nitrogen segment revenue by region Cost of sales PhosAgro’s cost of sales increased by 4% year-on-year in 2016 to RUB 86.4 billion, while overall fertilizer sales volumes increased by 9% year-on-year. This cost of sales performance was primarily due to the following factors: • An increase of RUB 2.8 billion, or 12%, year-on-year in the cost of materials and services primarily due to an increase in repair expenses, a 23% increase in apatite-nepheline ore mining, 9% growth in fertilizer production volumes and 5% year-on- year inflation. REVENUE AND SALES VOLUMES FOR NITROGEN FERTILIZERS Revenue, RUB mln Sales Volume, kt 2016 2015 Change, y-o-y % 2016 2015 Change, y-o-y % Urea 14,119 16,101 AN 4,635 5,358 -12% -13% 1,019 376 949 416 7% -10% NITROGEN PRODUCTS SEGMENT, RUB mln Results 2016 2015 Change, y-o-y % NITROGEN SEGMENT REVENUE BY REGION, RUB mln • A year-on-year increase in personnel Revenue Region 2016 2015 Change, y-o-y % North and Latin America Russia Europe Africa Asia CIS TOTAL 7,227 4,565 2,467 2,455 1,640 475 10,807 3,590 3,611 3,418 126 22 -33% 27% -32% -28% 1,202% 2,059% 18,829 21,574 -13% Average urea price FOB Baltic, USD 2016 2015 194 267 costs of RUB 629 million, or 6%, primarily due to payroll indexation and PhosAgro’s 15th-anniversary bonuses. • A decrease in expenditures on sulphur and sulphuric acid of RUB 2.3 billion, or 28%, year-on-year from RUB 8.4 billion in 2015 to RUB 6.1 billion in 2016. This was driven by a 34% decline in sulphur and sulphuric acid purchase prices denominated in RUB, which was partially offset by a 9% year-on-year increase in volumes consumed due to higher production of phosphate- based fertilizers, mainly MAP/DAP and NPS. • A year-on-year decrease in expenditures on ammonia purchases of RUB 2.4 billion, or 29%, from RUB 8.2 billion in 2015 to RUB 5.8 billion in 2016. This was mainly due to a 30% decline in RUB-denominated prices, which was slightly offset by a 1% year-on-year decrease in consumption volumes. • A year-on-year decrease of 6% in expenditures on potash from RUB 7.6 billion in 2015 to RUB 7.1 billion in 2016. This was due to a 16% decrease in RUB-denominated prices and 11% growth in purchase volumes as a result Cost of goods sold Gross Profit Gross Profit margin 18,829 21,574 -13% –11,025 -12,063 -9% 7,804 41% 9,511 44% -18% -3 p.p. of a 7% increase in NPK production during the period. • A year-on-year increase in expenditures on natural gas of RUB 600 million, or 8%, to RUB 8.1 billion in 2016. This was mainly due to an 8% increase in ammonia production volumes. • A year-on-year increase in expenditures on electricity of RUB 535 million, or 14%, to RUB 4.5 billion in 2016. This was due to a 7.5% indexation in tariffs from 1 July 2016 and an increase in phosphate rock production volumes (Apatit is the Group’s main consumer of electricity from third parties). • A year-on-year increase in expenditures on ammonium sulphate of RUB 371 million, or 17%. This was due to 32% year-on-year growth in ammonium sulphate purchase volumes as a result of higher production volumes of NPS. Purchase prices decreased by 11% year-on-year in 2016. • A decrease in expenditures on fuel by 20% from RUB 2.9 billion in 2015 to RUB 2.3 billion in 2016. This was driven by a 14% decline in overall fuel purchase prices denominated in RUB. Lower fuel consumption volumes resulted from an increase in extraction of apatite-nepheline ore from underground mining, where electricity is primarily consumed. • A year-on-year decrease in heating energy expenses of RUB 42 million, or by 6%, from RUB 718 million in 2015 to RUB 676 million in 2016. This was mainly due to a 5% decline in RUB- denominated prices. 52 53 Financial review (continued)STRATEGIC REPORTCORPORATE RESPONSIBILITY REPORTCORPORATE GOVERNANCE REPORTFINANCIAL STATEMENTSADDITIONAL INFORMATIONPhosAgro Integrated Report 2016www.phosagro.com Heating energy 1% Cost of sales Fuel 3% Ammonium sulphate 3% Chemical fertilizers and other products for resale 5% Electricity 5% Ammonia 7% Sulphur and sulphuric acid 7% Potash 8% Natural gas 9% Materials and services 30% Salaries and social contributions 12% Depreciation 11% COST OF SALES Item RUB mln % of cost of sales RUB mln % of cost of sales y-o-y, % 2016 2015 Change Materials and services Salaries and social contributions Depreciation Natural gas Potash Sulphur and sulphuric acid Ammonia Chemical fertilizers and other products for resale Electricity Fuel Ammonium sulphate Heating energy Other items Change in stocks of works in progress and finished goods 25,746 10,784 9,377 8,084 7,104 6,065 5,801 4,254 4,462 2,299 2,547 676 42 -850 30% 12% 11% 9% 8% 7% 7% 5% 5% 3% 3% 1% – -1% 22,905 10,155 8,057 7,484 7,559 8,385 8,190 4,091 3,927 2,865 2,176 718 23 27% 12% 10% 9% 9% 10% 10% 5% 5% 3% 3% 1% – -3,471 -4% TOTAL 86,391 100% 83,064 100% 12% 6% 16% 8%, -6% -28% -29% 4% 14% -20% 17% -6% 83% -76% 4% Selling, general and administrative expenses Administrative expenses rose by 14% year-on-year to RUB 13.9 billion in 2016, primarily due to an increase in personnel costs of RUB 1.1 billion, or 16%, year-on- year. The increase was mainly due to the indexation of salaries, PhosAgro’s 15th- anniversary bonuses, and the relocation of a significant proportion of operational management to Cherepovets. Selling expenses rose by 19% year- on-year from RUB 17.8 billion in 2015 to RUB 21.1 billion in 2016. This was primarily due to the following changes: • Russian Railways infrastructure tariff and operators’ fees increased by 34% from RUB 6.1 billion in 2015 to RUB 8.2 billion in 2016. This was mainly due to an increase in railway tariffs of 9% in 2016, as well as growth in fertilizer sales (primarily to the domestic market, where predominantly CPT shipments increased by 31% year-on-year). Statement of cash flows Capital expenditure CASH FLOW STATEMENT, RUB mln • Growth of 54% in materials and services from RUB 1.6 billion in 2015 to RUB 2.5 billion in 2016. This was mainly driven by an increase in multimode shipment volumes to export markets. • Growth in freight, port and stevedoring expenses by 2% from RUB 9.2 billion in 2015 to RUB 9.4 billion in 2016 mainly due to an increase in export shipment volumes of 7%. After the commissioning of the Smart Bulk Terminal in June 2015, the Company transferred its export shipping activity from Baltic ports to Ust-Luga. This helped PhosAgro to achieve sustainable savings in port fees, which was balanced by an increase in export shipment volumes. Cash flow from operating activities Cash flow from operating activities decreased by 20% year-on-year in 2016 to RUB 50.4 billion compared to RUB 63.3 billion in 2015 due to lower operating cash flow and higher income tax payments, which was partially offset by favourable changes in working capital. Cash used in investing activities Net cash used in investment activities increased by 21% in 2016 to RUB 38.0 billion. Cash used in financing activities In 2016, net cash used for financing activities amounted to RUB 29.9 billion. Cash spent on capital expenditure in 2016 amounted to RUB 40.2 billion, a decrease of 6% in comparison with RUB 42.7 billion in 2015. PhosAgro’s capital expenditure, which consists of additions to property, plant and equipment, amounted to RUB 45.3 billion for 2016, compared to RUB 44.2 billion in 2015. Capital expenditure focused on the construction of the new 760 ths tonnes/year ammonia plant and the new 500 ths tonnes/year urea plant at PhosAgro-Cherepovets. Results Cash flow from operating activities Cash flow from investing activities Cash flow used in/from financing activities (net of dividends paid) Dividends paid to shareholders Net change in cash and cash equivalents CAPITAL EXPENDITURE*, RUB mln 2016 2015 50,361 63,261 -38,014 -31,463 -1,872 -27,974 -17,499 -19,243 -18,130 -5,575 2016 2015 Change, y-o-y % Phosphate-based products/mining and beneficiation 13,342 10,471 27% Phosphate-based products/fertilizers production 10,448 7,442 Nitrogen fertilizers Other TOTAL 20,968 25,025 533 1,255 45 291 44,193 40% -16% -58% 2% * capital expenditure, which consists of additions to property, plant and equipment 54 55 Financial review (continued)STRATEGIC REPORTCORPORATE RESPONSIBILITY REPORTCORPORATE GOVERNANCE REPORTFINANCIAL STATEMENTSADDITIONAL INFORMATIONPhosAgro Integrated Report 2016www.phosagro.com ENVIRONMENTAL REVIEW We introduced new KPIs for the Company’s Environmental Service in 2016, aimed at helping to ensure regulatory compliance and to minimise payments for over- limit environmental impact Environmental strategy Policy highlights PhosAgro maintains a policy framework and related management systems procedures to address business conduct matters. Here are some of the highlights of the organisation’s policy framework: • We continually monitor and analyse the impact that our production sites have on the environment and implement corrective measures with the goal of limiting that impact. • We aim to comply with all applicable Russian and international legislation and standards. • We continually invest in new technologies and processes that reduce our use of energy and finite resources. • We look to reduce, process or recycle the waste we produce wherever possible. • We embed a culture of respect for the environment and the indigenous natural communities where we operate. Effective management of the Company’s environmental footprint is a key factor in PhosAgro’s ability to meet its goal of being a long-term sustainable business and in balancing its obligations to all stakeholders. In addition to internal guidelines, PhosAgro adheres to Russian regulatory requirements, and is guided by EU environmental protection directives and international agreements, including the Basel Convention and the Helsinki Convention. We have in place environmental management practices that ensure our compliance with applicable regulations, and that help to reduce the impact of our operations on the environment. We also invest in advanced technologies and high- quality production processes to make the most efficient use possible of finite natural resources. Our environmental strategy focuses on the following key areas: • Reducing our waste production, emissions and discharges of pollutants and resource usage on a per-unit basis by investing in new, more efficient technologies • Ensuring that we act as a conscientious neighbour and maintain a constructive dialogue with local stakeholders about our environmental impact • Implementing energy-efficiency and energy-saving programmes at all our enterprises 56 57 PhosAgro Integrated Report 2016www.phosagro.comSTRATEGIC REPORTCORPORATE RESPONSIBILITY REPORTCORPORATE GOVERNANCE REPORTFINANCIAL STATEMENTSADDITIONAL INFORMATION 2016 Highlights System highlights The main KPIs of the Company’s environmental function are: • possession of all necessary environmental permits for the key production assets and subsidiaries • the size of payments for environmental impact, including over-limit payments, which is a key indicator of the Company’s overall environmental impact We introduced new KPIs for the Environmental Service in 2016: • obtain all necessary permits at the key production assets to ensure their compliance with environmental legislation • reduce over-limit payments for environmental impact in year-on-year terms Over-limit payments equalled 48% of total payments in 2014, 35.3% in 2015 and just 5.6% in the first three quarters of 2016. A KPI was set in 2016 for a maximum over- limit payment of 15.4% of the total in 2015. The result for the first three quarters of 2016 was around 10% of the 2015 level. Apatit: • switching to new, more effective chemicals for hardening dusty surfaces at tailing facilities • selecting chemicals for cleaning wastewater as part of the programme to reduce discharge of pollutants that is being implemented over 2015-2019 • acquiring two waste disposal and recycling units PhosAgro-Cherepovets: Signing a four-party agreement with the Russian Ministry of Natural Resources and Environment, Federal Service for the Supervision of Natural Resources, and the administration of Vologda region, which includes the following plans: • finishing construction of wastewater treatment facilities at the Rybinsk reservoir, which will provide regulatory sewage treatment for 10,000 cubic metres per day of ammonia production, as well as sanitary sewage containing phosphorous and nitrogen complexes at the village of Novye Ugli Over-limit payments, % 48 35 Over-limit payments Total payments, 100% 58 • upgrading the aluminium fluoride plant to increase waste recycling 5.6 volumes, and as part of an import substitution programme • continuing PhosAgro’s “2 Thousand Trees” programme Metachem: • developing construction design for a wastewater treatment facility on the Volkhov river, which will provide Metachem’s required regulatory sewage 2014 2015 2016 treatment Management and reporting PhosAgro’s environmental affairs are overseen by the chief ecologist based at PhosAgro-Cherepovets, who is supported by environmental control and resource use divisions at each of our production sites. These divisions are responsible for undertaking activities related to environmental protection, ensuring compliance with regulatory requirements and reporting on these issues. Employees of these divisions provide support to production site management when they engage with local stakeholders. PhosAgro management receives weekly updates on all ongoing environmental issues, and monthly reports are produced for the Chairman of the Health, Safety and Environment Committee of the Board of Directors. On a quarterly basis, Management and the Board receive regular updates on any expenses or payments the Company has made for its environmental impact. On an annual and semi-annual basis, the Board of Directors receives updates on PhosAgro’s environmental protection initiatives and current environmental performance. KEY EVENTS AT PRODUCTION SITES IN 2016 ISO AND OHSAS CERTIFICATES HELD BY PHOSAGRO ENTERPRISES: • payment of a fine and potential liability in the event of a violation up to and including criminal prosecution • penalties are calculated in material terms for damage caused to the environment None of PhosAgro’s enterprises use ozone- depleting substances in the production process. A small amount of carbon tetrachloride (not more than 250 kg/year) is used for some laboratory testing processes. We do not undertake cross- border hazardous waste transportation, and our production sites are not situated in protected areas. Hence, there are no significant restrictions on our operations. Permits and certificates The Company’s production sites hold all necessary licences and permits related to environmental protection. In addition to observing Russian environmental law, we adhere to international standards relevant to our business to guide our approach, for example, the Balakovo branch of Apatit is the first Russian enterprise to be certified as compliant with the European GMP+ quality control standard for feed materials. We also undertake regular internal and external audits to assess our compliance and obtain certification, together with exposure assessments, international format safety data sheets and recommendations for safe handling that are developed in compliance with the requirements of European Regulation No 1272/2008 on classification, labelling and packaging, and No 1907/2006 concerning the Registration, Evaluation, Authorisation and Restriction of Chemicals (REACH) in the development of exposure scenarios. 59 ISO 9001 OHSAS 18001 ISO 14001 Apatit Since 2011 - - PhosAgro-Cherepovets Since 2004 Since 2008 Since 2006 Balakovo branch of Apatit Since 2005 - Since 2009 Legislative and administrative framework In general, Russian environmental law meets international standards, utilising the following main pieces of legislation: the Environmental Protection Law, the Russian Federation Water Code, the Law on Industrial Waste and Consumption, the Law on Protection of Atmospheric Air and the Environmental Expert Review Law. These pieces of legislation require environmental impact assessments prior to the implementation of a project that may have an impact on natural resources. No construction or operation is permitted until the Company is in receipt of a positive report from the State Environmental Expert Review (an essential precondition for financing and implementation). Russia is also a signatory to most of the major international environmental conventions and treaties, which, in the event of a conflict with Russian law, take precedence, as dictated by the Constitution of the Russian Federation and the Federal Law on Environmental Protection. In general, any activity in Russia that may have an adverse impact on the environment is subject to: • issuance of permits or licences (including for water use; subsoil use, for example, in mining; forest use; air emissions; disposal and recycling of waste; operation of hazardous industrial facilities) • establishment of limits with respect to the amount of environmental impact Regional legislation supports and expands on these federal laws and regulations. • payment for negative environmental impact (emissions and waste disposal) PhosAgro Integrated Report 2016www.phosagro.comSTRATEGIC REPORTCORPORATE RESPONSIBILITY REPORTCORPORATE GOVERNANCE REPORTFINANCIAL STATEMENTSADDITIONAL INFORMATIONEnvironment review (continued) ENVIRONMENTAL IMPACT OF THE COMPANY’S PRODUCTION SITES IN 2016 Emissions and air quality In 2016, consolidated atmospheric emissions by PhosAgro’s production subsidiaries increased by 1 kt to 29.9 kt, up 3% year-on-year. The increase in emissions was primarily due to higher production volumes, with total fertilizer output growing at a faster pace of 9.4% year-on- year. This brought atmospheric emissions per unit of production down by 4.4% year- on-year to 1,749 kg/t in 2016. Emissions into the atmosphere, kt 29.8 27.4 28.9 29.9 26.5 11.5 Apatit Total volume Per unit (kg/t) 60 2012 2013 2014 2015 2016 1,836 1,830 1,748 5.4 1.3 Balakovo branch of Apatit Metachem 11.9 PhosAgro-Cherepovets 4.4% DECREASE IN ATMOSPHERIC EMISSIONS PER UNIT OF PRODUCTION IN 2016 Waste disposal As PhosAgro continually modernises its production facilities, one goal is to reduce the volume of waste produced, including through recycling. We also aim to reduce the danger that produced waste poses for the environment. At production facilities, some types of waste are used as raw materials in the production process. One key area where we are working on recycling solid waste is in the development of new technologies for reprocessing of phosphogypsum. Apatit used 22.8 million tonnes of overburden from surface mining for road construction. In 2016, the total volume of waste produced was 94.1 million tonnes. Approximately 90% of this volume was produced by Apatit. The 8% year-on-year increase in phopsphate rock production volumes was the primary driver behind this increase in waste. The majority of solid waste (up to 70%) consists of rocks and overburden from Apatit. Solid waste, mln t Reuse/recycling mln t 116.3 101.4 85.9 78.2 94.1 Total volume Volume excluding overburden Per unit volume excluding overburden, t/t of production output 25.4 26.5 27.7 26.5 31.1 5.6 2.2 2.2 22.8 37.3 2012 2013 2014 2015 2016 8.3 7.9 5.1 5.4 5.5 84.5 34.5 4.3 5.3 0.0024 0.15 2.7 0.0020 61 PhosAgro Integrated Report 2016www.phosagro.comSTRATEGIC REPORTCORPORATE RESPONSIBILITY REPORTCORPORATE GOVERNANCE REPORTFINANCIAL STATEMENTSADDITIONAL INFORMATIONEnvironment review (continued) ENVIRONMENTAL IMPACT OF THE COMPANY’S PRODUCTION SITES IN 2016 Water use PhosAgro’s subsidiaries try to implement the latest available technologies when using water in the production process, maximising use in cycles to reduce waste- water volumes. The Balakovo branch of Apatit, for example, uses a process that produces no waste-water. Apatit and PhosAgro-Cherepovets are responsible for the majority of PhosAgro’s water withdrawal, accounting for 60% and 28% of the total, respectively. In addition, Apatit provides drinking water for Kirovsk and Apatity. The largest volume of waste- water discharges, 95%, comes from Apatit. Water discharges by PhosAgro’s production sites increased slightly, amounting to 200.0 million m3. In 2016, PhosAgro’s total consumption from surface water sources increased by 1.7% year-on-year to 86.6 million cubic metres. Water consumption per unit of production declined by 5.5% year-on-year in 2016 to 5.1 cubic metres per tonne. Electricity PhosAgro used a total of 3,334 million kWh of electricity in 2016. PhosAgro- Cherepovets and Apatit’s Balakovo branch generated 1,272 million kWh of electricity (79.6% self-sufficiency) using on-site facilities, which have a total rated generation capacity of 183 MW. Energy efficiency PhosAgro’s subsidiaries were 39.91% self- sufficient in electricity in 2016, including from thermal energy generated by heat recapture units installed on sulphuric acid production lines. The Company also continues to implement programmes aimed at improving energy efficiency. 39.91% 4.2% SELF-SUFICIENCY IN ELECTRICITY AT PHOSAGRO PRODUCTION SUBSIDIARIES YEAR-ON-YEAR DECREASE IN PER- UNIT ELECTRICITY CONSUMPTION Electricity consumption, million kWh Natural gas and fuel oil In 2016, PhosAgro’s natural gas consumption increased by 5.2% year-on- year to 1,914 million m3, while fuel oil consumption grew by 3.7% year-on-year to 141 kt. Apatit is our only consumer of fuel oil. The increase in fuel oil consumption was a result of higher production volumes at Apatit’s beneficiation facilities. In 2016, we completed work on a new facility for the capture, storage and regasification of natural gas, which is part of the ventilation and heating system at the Rasvumchorrsky underground mine. This new system will enable Apatit to decrease its consumption of fuel oil and diversify its sources of energy. Water discharges, mln m3 75.2 78.5 80.5 85.1 86.6 52.5 Apatit Water withdrawal, mln m3 200.0 Total volume Per unit (m3/t) 62 2012 2013 2014 2015 2016 4.6 5.4 5.4 5.4 5.1 24.3 7.2 2.6 PhosAgro- Cherepovets 2016 Balakovo branch of Apatit Metachem 189.0 (95%) 9.9 (4.5%) 1.1 (0.5%) 3.089 3.158 3.126 3.260 3.334 1.63 Total volume Per unit (kWh/t) 2012 2013 2014 2015 2016 211 211 210 206 197 1.16 0.43 0.11 63 PhosAgro Integrated Report 2016www.phosagro.comSTRATEGIC REPORTCORPORATE RESPONSIBILITY REPORTCORPORATE GOVERNANCE REPORTFINANCIAL STATEMENTSADDITIONAL INFORMATIONEnvironment review (continued) HEALTH AND SAFETY REVIEW We have established unified policies and governance systems across our production facilities, which aim to maintain high safety levels for production processes and employees of PhosAgro and our subcontractors. Health and safety strategy Workplace health and safety are of critical importance for PhosAgro’s efficient and uninterrupted operations, which include large-scale mining and processing enterprises. PhosAgro’s workplace health and safety strategy aims to achieve three key goals: 1. Zero fatal incidents involving employees of PhosAgro or its subcontractors 2. Zero accidents involving production equipment 3. Sustainable performance achieved by creating a culture of safety at production sites PhosAgro management understands that creating a culture of safety requires commitment and leadership by supervisors at every level, as well as involvement in the work done by employees of the Company and its subcontractors. Our strategic and operational goals and tasks in the area of workplace health and safety are based on the analysis of large volumes of data from internal and external audits and inspections, incident investigations, and recommendations from representatives of the workforce. Policy highlights • We have established and maintain the required level of workplace health and safety, whereby the risk of injuries or death, or accidents at production sites is minimised and reflects the latest scientific, industrial and community standards • We seek to constantly develop and update our workplace health and safety practices based on international standards and the experience of other companies that are leaders in the field of production site safety • We are promoting a unified corporate culture concerning workplace health and safety among the employees at each of our production sites • We provide for adherence to all legal and regulatory requirements in the area of workplace health and safety by all employees, regardless of their position in the Company • We aim to improve the monitoring of compliance with workplace health and safety requirements at our production sites with the help of modern information technologies System highlights We create a clear culture that embraces personal, team and company-wide responsibility for health, safety and care for fellow employees. In addition to adherence to federal legal requirements for workplace safety, PhosAgro’s management has introduced additional measures to improve our workplace health and safety practices based on international standards and best practices. We are also constantly learning – we use our own experience and that of others to ensure PhosAgro is implementing leading-edge practices in workplace health and safety across its enterprises. Starting from the second half of 2016, we have introduced the development and implementation of comprehensive programmes to address the most problematic areas of workplace health and safety in order to focus on type of activity, job or specific worksite where workplace health and safety risks are considered to be heightened.. Governance and oversight • Oversight begins at the Board of Directors, with the Environmental, Health and Safety Committee chaired by Igor Antoshin 2016 PERFORMANCE HIGHLIGHTS • Management receives weekly reports on workplace health and safety performance across the Company; if and when incidents do happen, management is immediately informed about the situation, and then receives detailed information as it becomes available • At the executive management level, we aim to create a culture of safety whereby each manager embraces responsibility for his or her own safety, as well as that of others in his or her unit • Each of our subsidiaries has a workplace health and safety service, or dedicated specialists. Their responsibilities include advising management, monitoring adherence to safety requirements, helping to identify and mitigate hazardous activities or conditions, ensuring employees evaluate risks prior to starting work, investigating the root cause of incidents and serious deviations, assisting management with developing and implementing activities to prevent incidents, and to mitigate any identified risks • The Company conducts regular audits and inspections of workplace safety conditions, including internal Safety Behaviour Audits. Our production sites also regularly undergo government regulatory inspections • We operate a whistle-blower hotline, and we strongly encourage employees to report to management any concerns regarding possible violations or potentially dangerous situations at our production sites, as well as any issues related to health and safety Unified standards • As part of the integration and streamlining of PhosAgro’s production assets, we have introduced new, unified safety standards and practices across all of our subsidiaries. These new standards are based on internationally recognised best practices, and are being implemented together with some of the best external experts available • Currently, our PhosAgro-Cherepovets production site has OHSAS 18001:2007 certification for its occupational health and safety management systems Training Every single manager, specialist and production line employee at PhosAgro receives workplace health and safety instruction and training, and undergoes testing on the subject in accordance with Russian legal requirements. In addition, we conduct a number of additional internal trainings. Specific training highlights in 2016 included the following sessions: • 89 employees participated in an eight- hour course on worlplace safety and safe production operations • Training on basics of safe behaviour was attended by 4,481 employees • Safe behaviour audit classes, organised in cooperation with DuPont Science and Technology, were taught to 575 employees • Root Cause Analysis workshop was attended by 102 employees Implementing best practices in workplace health and safety 20% 75% 28% DECLINE YEAR-ON-YEAR IN MINOR INJURIES (8 MINOR INJURIES) YEAR-ON-YEAR DECLINE IN SERIOUS INJURIES (1 SERIOUS INJURY) YEAR-ON-YEAR LTIFR DECLINE (0.52 PER 1 MILLION HOURS) 64 65 PhosAgro Integrated Report 2016www.phosagro.comSTRATEGIC REPORTCORPORATE RESPONSIBILITY REPORTCORPORATE GOVERNANCE REPORTFINANCIAL STATEMENTSADDITIONAL INFORMATION WORKPLACE INJURIES AND FATALITIES CASE STUDY 2013 2014 2015 2016 29 5 2 15 3 5 10 4 0 8 1 1 1.03 0.92 0.73 0.52 2013 2014 2015 2016 Minor injuries Serious injuries Fatalities LTIFR (per 1 million hours) 1. Three steps to safety 2. Improving transportation safety 3. Improving safety of mining work PhosAgro regularly participates in the All-Russian Week of Workplace Health and Safety, which is organised by the Russian Government, in order to learn more about the latest developments at other companies. At the 2016 forum, a number of companies shared their experience implementing practices to identify hazards and evaluate risks before starting any job. This idea was quickly adopted by PhosAgro’s workplace health and safety team, and approved by management. New procedures to improve safety before starting work were developed and entitled “Three steps to safety”. This new methodology was introduced at all of our production sites during the second half of 2016 .Step 1: Stop! Think and Step 2: Take measures Step 3: Decide whether it identify hazards! to eliminate any is safe to proceed During 2016, PhosAgro launched a programme to improve the The Apatit mine is the heart of PhosAgro, providing us with the safety of automobile, rail, and mine vehicle transportation. exceptionally pure and high-quality phosphate raw materials we use to produce phosphate-based fertilizers. We undertook several measures during 2016 to improve the safety at Apatit, including: 1. Improved techniques and tools for installing and maintaining containment walls for mining excavation sites 2. Organised new training and testing for employees responsible for maintaining excavation sites and roadways in mines 3. Purchased new equipment for installation and maintenance of containment walls hazard! with work! Measures taken to improve safety included: Our performance We have achieved good results in 2016: zero incidents resulting in loss of the ability to work at PhosAgro’s chemical processing sites, and a 28% year-on-year decline in LTIFR. However, we deeply regret that one fatality occurred at the Apatit mine in 2016 due to a landslide. Following an investigation into the causes of this incident and an analysis of safety procedures, we took measures to improve the safety of our mining work (described below). Days without injuries (as of 31 December 2016) Balakovo branch of Apatit PhosAgro-Cherepovets 446 Metachem Apatit 77 706 650 1. Introducing new requirements for drivers responsible for transporting passengers and operating large mining vehicles 2. Providing additional training for personnel responsible for rail transport on the territory of PhosAgro production sites 3. Installing monitoring devices and equipment in certain vehicles to monitor and control the driving style 4. Granted access to automated monitoring of the location of all 4. Professional training for drivers of mining equipment, including reviewing reasons for past accidents and learning 5. accident-avoidance driving techniques 5. Renovating to certain road- and railways mining equipment and personnel is for dispatchers Installed new equipment to monitor levels of CO, NO2, CH4 and O2 at mining sites 6. Distributed new leaflets on workplace health and safety for employees of the Apatit mine 66 67 Health and safety review (continued)PhosAgro Integrated Report 2016www.phosagro.comSTRATEGIC REPORTCORPORATE RESPONSIBILITY REPORTCORPORATE GOVERNANCE REPORTFINANCIAL STATEMENTSADDITIONAL INFORMATION PEOPLE REVIEW We create value for our employees and other stakeholders by investing in our people: PhosAgro aims to provide stable employment, safe working conditions and fulfilling job opportunities. We start at the primary school level and continue to invest in our people throughout their careers with PhosAgro. Our people are our most important asset Strategy highlights Policy highlights Our people are our most important asset: without their hard work, we would not be able to achieve our strategic goal of creating shareholder value. Our recruitment and retention efforts help ensure that we have the right people for the job. • We aim to maintain our reputation as an employer of choice in the regions where we work • We use a KPI system to link executive remuneration to priorities like health and safety, as well as financial performance • We strive to motivate our staff by providing competitive wages, paying close attention to the conditions at our work sites and offering generous non- monetary benefits • We rely on a talent pipeline of staff with the potential to take on leadership and/ or more technically challenging roles to ensure our viability in the long term • We help prepare future generations of PhosAgro employees by supporting school and university programmes that encourage students to pursue STEM studies • We train our staff to prepare them to better navigate our ever-changing working environment Our policy focuses on ensuring that our staff remain healthy and properly motivated. In the coming year, we plan to reassess social benefits for the overall PhosAgro Group, as well as analyse the collective agreements of PhosAgro Group’s main production facilities. Overall, our policy priorities are as follows. • We place an increased priority on preventive health care for our young and middle-aged employees who have been with us for two or more years. • We have begun moving toward a standardised collective agreement with our workers • We aim to maximise the number of our staff who participate in exercise and sports programmes to improve both their personal health and work productivity • We have analysed our accident and health insurance policies to develop a single approach and unified criteria for selecting providers • We have revamped our recreational offerings for employees and their children • We have worked to standardise the social policies of our subsidiaries HIGHLIGHTS 2.8% OF OUR STAFF PARTICIPATED IN PERIODIC PERFORMANCE AND CAREER DEVELOPMENT ASSESSMENTS UNDER THE KPI SYSTEM 107 HOURS OF TRAINING PER EMPLOYEE 822 EMPLOYEES TOOK PART IN PROFESSIONAL TRAINING PROGRAMMES IN 2016 (DOWN FROM 908 IN 2015) ~700,000 TOTAL HOURS OF TRAINING ATTENDED BY PHOSAGRO EMPLOYEES IN 2016 (COMPARED TO >1 MILLION HOURS IN 2015) 7, 599 TRAINING COURSES ATTENDED BY PHOSAGRO EMPLOYEES IN 2016 (DOWN FROM 8,342 IN 2015 DUE TO HEADCOUNT REDUCTIONS) THE DRIVER BEHIND THE YEAR-ON-YEAR REDUCTION IN TOTAL TRAINING HOURS ATTENDED WAS A 2% DECREASE IN HEADCOUNT 68 69 STRATEGIC REPORTCORPORATE RESPONSIBILITY REPORTCORPORATE GOVERNANCE REPORTFINANCIAL STATEMENTSADDITIONAL INFORMATIONPhosAgro Integrated Report 2016www.phosagro.com OUR EMPLOYEE Headcount, average per year Upstream & processing division 2014 8,708 2015 7,375 2016 6,993 2.8% Downstream division 8,904 Storage and distribution Logistics Engineering units Other 532 75 425 989 19,633 8,136 8,420 89 346 611 963 17,520 86 342 671 633 17,145 Share of staff participating in periodic performance and career development assessments Managers 140 122 229 Male Specialists 114 Workers 51 62 45 52 18 76 Female 6 share of men participating in periodic performance and career development assessments 3.3% share of women participating in periodic performance and career development assessments 1.8% EMPLOYEE PRODUCTIVITY Upstream & processing division, tonnes/person Downstream division, tonnes/person 1,350 1,189 969 850 893 705 System highlights Executive remuneration We introduced a KPI system in 2014, which began by linking top executive remuneration via a set of uniform standards to priorities like health and safety performance at the management company and subsidiary levels. In 2016, we expanded the KPI system to encompass all PhosAgro subsidiaries, as well as additional categories of staff. HOURS OF TRAINING ATTENDED Employee benefits We strive to motivate our staff by providing competitive wages, paying close attention to the conditions at our worksites and the quality of our employee dining facilities, as well as by offering generous non-monetary benefits like corporate medical, rest and recreation programmes for employees and their family members. Additionally, our staff enjoy private pension plans, housing programmes, corporate sport facilities and numerous sporting and cultural events. Communication and feedback We have a multichannel communication and feedback programme that allows employees to address employment-related or other issues. The formats include Q&As in the corporate newspaper, town hall meetings for staff and management and an anonymous whistle-blower hotline, allowing staff to choose from various degrees of anonymity when deciding how to raise an issue. Total 1,306,647 Apatit 677,260 PhosAgro-Cherepovets 1,057,205 Per employee 535 427 406 699,065 326,662 264,301 Group average 174,766 477,568 272 233 157 280,796 437,640 459,086 141 142 304,238 61 2014 2015 2016 2014 2015 2016 Balakovo branch of Apatit Metachem 75 152,101 61 62 47 67 50 89,267 95,069 39,646 31,284 18,962 2014 2015 2016 2014 2015 2016 2014 2015 2016 2014 2015 2016 2014 2015 2016 70 71 People review (continued)STRATEGIC REPORTCORPORATE RESPONSIBILITY REPORTCORPORATE GOVERNANCE REPORTFINANCIAL STATEMENTSADDITIONAL INFORMATIONPhosAgro Integrated Report 2016www.phosagro.com External fraud Internal fraud 6 Tenders Working conditions 21 Other 31 39 Every complaint received via telephone, email or regular mail is recorded in a unified register, which also contains any instructions from the Economic Security Service and the results of investigations conducted following a complaint. In 2016, the Company adopted a new standard governing the work of the hotline, and placed information about the hotline in relevant media. This led to an increase in use of the hotline to submit complaints: from just six complaints in 2014 to 41 in 2015 and 149 in 2016. The table to the right contains information about the types of complaints received in 2016. Our employees also use the corporate intranet for internal messaging, receiving announcements, planning and accessing informational resources. Training and development We rely on a talent pipeline of staff with the potential to take on leadership and/ or more technically challenging roles to ensure our viability in the long term. Our focus on training and developing our people also helps us hedge against a potential shortage of talent in the future, especially in areas where it can be difficult to find candidates with the skill sets that we need. One aspect of this that we prioritise is including schools, universities and our own staff programmes in our recruitment and training initiatives. 62 PhosAgro Classes Our PhosAgro Classes initiative encourages school students to pursue STEM (science, technology, engineering and mathematics) studies. The programme’s annual budget totals RUB 19 million. High-Potential Graduates We build upon the foundation laid by PhosAgro Classes by partnering with universities through our High-Potential Graduates programme as an avenue to better reach university students interested in working at PhosAgro. We offer programme recruits a competitive salary, as well as relocation and housing support, and assign them a mentor upon their arrival at PhosAgro. Workplace training We use our Professional Training and Development Centre to help our staff prepare for changes, both external (legislative/regulatory) and internal (related to optimisation, changes to production or business processes). The Centre helps run our long-term HR initiatives, like PhosAgro Classes, High-Potential Graduates and the Staff Reserve programme, and holds competitions for professional skills and young managers. Management development This programme includes trainings and development courses on the following topics: • Leadership • Management skills • Setting goals and objectives • Organising and monitoring mentoring programmes • Time management • Results-oriented work styles • Situation analysis and decision-making • Effective communications and relationship management Staff Reserve PhosAgro relies on the Staff Reserve initiative as a means of identifying talented staff with the potential to expand their roles and step into more senior positions, and by providing additional training to help them achieve these goals. The programme includes management training courses on personal and business skills like decision- making, leadership and delegation, conflict management, project management, communication skills and staff mentoring. Equal opportunity We pride ourselves on being an employer of choice in the regions where we operate, and having an equal opportunity programme as the cornerstone of our reputation. We take a straightforward approach to equal opportunity: we strive to select the best person for each role without regard to gender, sexual orientation, religion, ethnicity or race. We take seriously our obligations under Russian federal and regional laws that stipulate a business’s social responsibilities and obligations to its employees. This includes not using child or forced labour and ensuring that our staff have the right to exercise freedom of association and collective bargaining. How we measure success To further develop our employees’ personal and professional skills in 2017, we plan to hold workshops on cross-functional training, proactive thinking, change management and time management. We also plan to focus on our staff’s professional development via the following initiatives: • A repair safety course for employees of PhosAgro facilities, subsidiaries and contractors • A group training programme for key users of the new Oracle system • A training course for HSE staff NUMBER OF WORKERS PARTICIPATING IN PROFESSIONAL TRAINING PROGRAMMES NUMBER OF TRAINING COURSES ATTENDED Total 2,156 Apatit 912 PhosAgro-Cherepovets 539 396 330 908 822 115 115 539 Group average 227 206 2014 2015 2016 2014 2015 2016 Balakovo branch of Apatit Metachem 378 143 164 327 254 213 Total 9,178 8,342 7,599 Group average 2,295 2,086 1,900 Apatit PhosAgro-Cherepovets 4,560 3,415 3,037 3,126 3,233 1,260 2014 2015 2016 2014 2015 2016 Balakovo branch of Apatit Metachem 1,798 1,602 1,622 839 470 2014 2015 2016 2014 2015 2016 2014 2015 2016 2014 2015 2016 2014 2015 2016 2014 2015 72 157 2016 73 People review (continued)STRATEGIC REPORTCORPORATE RESPONSIBILITY REPORTCORPORATE GOVERNANCE REPORTFINANCIAL STATEMENTSADDITIONAL INFORMATIONPhosAgro Integrated Report 2016www.phosagro.com TRAINING AND DEVELOPMENT PhosAgro Classes High-Potential Graduates Oracle 12 Cross-functional training Management streamlining Other programmes A total of 254 students took part in the PhosAgro recruited 38 young specialists under We prepared a training course for the Oracle In an effort to build upon the managerial In order to streamline our management Other key training and development events in PhosAgro Classes programme in 2016, all the High-Potential Graduates programme 12 project group with the help of consultants. skills of our project management staff, in functions, we moderated a discussion among 2016 included: of whom excel at, and are interested in, in 2016. This brought to he total of 200 The programme included cross-functional June 2016 we held the first session of our our economic affairs staff and managers of • A corporate seminar was held in February studying chemistry, physics, mathematics and graduates who have joined the Company training and situational management. In cross-functional training programme for subsidiaries about new interaction models. and March for about 40 employees from computer science. The programme graduated under this programme since its inception in between each stage of training, participants 51 members of our staff. The courses were As a result, new communications schemes all business units with workshops on 132 students from five schools in 2016, 52% 2012. A total of 169 of these employees are joined a moderated discussion to share developed with the support of business trainer were developed and a number of problems implementing professional standards of whom went on to join technical degree still with PhosAgro today, pursuing careers in lessons learned and plans for the upcoming Maxim Dolgov of Sales Training International regarding communication between • Staff from the corporate training centre programmes with a potential career track mineralogy, geology, hydraulic engineering, session. Members of the management team Russia. In mid-September, we conducted the subsidiaries and the management company. launched a continuous production with PhosAgro. Another 17% were accepted chemistry, thermal energy and electricity joined the sessions as well. second session, which covered management More than 70 people took part in the improvement training project. The first into universities on sponsored placement production, rail transport, open-pit and programmes. underground mining, and mine surveying. Our annual goal remains to have 125 Of the programme participants still employed participants join PhosAgro Classes in the five with PhosAgro, a total of 27% had received schools in five Russian cities where we run promotions and/or been included in the Staff the programme. We hope that 50% of these Reserve as of December 2016, and many of students will join PhosAgro by 2021. them had successfully completed the projects that they were entrusted with when they joined the Company. skills, and in December we held the final discussion, which was facilitated by business classes were held over the summer in session on relationship management. trainers. Balakovo, after which it was expanded to Cherepovets in December. In 2017, the programme will be introduced at other facilities, including Kirovsk and Volkhov • Several groups of employees took part in the Business Engineer training programme throughout the year 74 75 People review (continued)STRATEGIC REPORTCORPORATE RESPONSIBILITY REPORTCORPORATE GOVERNANCE REPORTFINANCIAL STATEMENTSADDITIONAL INFORMATIONPhosAgro Integrated Report 2016www.phosagro.com COMMUNITY INVESTMENT REVIEW PhosAgro implements social programs to promote sustainable socio-economic development in regions where the Company operates. We devise our community investment initiatives to maximise our positive impact Strategy highlights System highlights PhosAgro implements social programs to promote sustainable socio-economic development in regions where the Company operates.The main principles for external social investment are a targeted approach, control over how funds are spent, transparency and information disclosure, cooperation and accountability. Our strategic goals for 2016 and 2017 include: • Support for education, science, culture, art, education and spiritual development • Support for healthcare, as well as the promotion of a healthy lifestyle and improvements in the moral and psychological wellbeing of citizens • Promote a patriotic, spiritual and moral upbringing of children and youth • Promote physical education and sports (excluding professional sports) • Social support and the protection of citizens, including financial aid for the poor, social rehabilitation of the unemployed, disabled and other individuals • Promote volunteer activities • Protect and maintain buildings, objects and territories of historical, religious, cultural or environmental significance, including burial sites PhosAgro actively cooperates with representatives of the local communities in which it operates, as well as with representatives of federal, regional and municipal authorities. Our programmes are the result of joint efforts to meet the needs of all stakeholders and ensure compliance with regulatory requirements. We strive to conduct our activities in the interest of future generations. This includes upgrading and replacing old equipment to minimise any harmful impact on the environment.equipment to minimise our impact on the surrounding environment. Education Support Program PhosAgro successfully implements a unique multi-level educational support program. It is distinctive in its integration of social projects within a single programme that covers all levels of education, from pre- school to higher professional education, with the possibility of subsequent employment in the company. For children and young people, projects include Educated and Healthy Children of Russia (“DROZD”), PhosAgro Classes and a project supporting vocational education. Educated and Healthy Children of Russia aims to combine quality education, vocational guidance and physical training for full-fledged spiritual and moral development, as well as improving the health of the younger generation. In 2013, the DROZD initiative was expanded into the PhosAgro Classes programme which runs in the areas where we operate. Unlike ordinary comprehensive schools, the programme provides for more in-depth study of physics, mathematics, chemistry, biology along with additional lectures in career planning, economics, management, ethics, and social responsibility. PhosAgro Classes also cover the basics of corporate culture, as well as laboratory research in physics and chemistry in the facilities of leading universities. The PhosAgro Classes programme acts as a stepping stone to Russia’s leading science and technical universities, after which most participants find work at either PhosAgro or other leading Russian companies. DROZD also helps promote sports, fitness and tourism. PhosAgro supports the idea of a healthy lifestyle by financing sports events, clubs and facilities in the regions where we are present. Our programmes range from children’s activities to competitive sports and includes outreach to children from underserved villages. The sports initiatives help serve as a pipeline to funnel young athletes into the regional competitive sports programmes, where many have gone on to participate in Russian and European championships. 76 77 STRATEGIC REPORTCORPORATE RESPONSIBILITY REPORTCORPORATE GOVERNANCE REPORTFINANCIAL STATEMENTSADDITIONAL INFORMATIONPhosAgro Integrated Report 2016www.phosagro.com PhosAgro’s Educated and Healthy Children of Russia (DROZD) initiative provides thousands of children with opportunities in education, sport, and vocational training, helping prepare our future generations for success CASE STUDY Our Favourite Cities initiative Our Favourite Cities is PhosAgro’s award-winning initiative aimed at creating a quality environment for growth. We have partnered with regional and municipal governments, NGOs, charities, community organisations, and even founded our own NGOs to reach our programme goals. Our target audience includes: local government organisations; civil society; the Company stakeholders, employees, and their families; and the more vulnerable members of our society. The programme covers Russia’s Murmansk, Vologda, Saratov and Leningrad regions. We determine cities’ needs, including any partnership or funding requirements, by conducting sociological surveys, questionnaires, and interviews, as well as by meeting with legislators and representatives of local and regional governments. We then create a project or event to address the issue or request, and add it to the programme and funding plans. The programme managers monitor and report on implementation. Where necessary for project implementation, we may select an NGO to partner with or create an NGO specific to the project. PHOSAGRO COMMUNITY INVESTMENT PROGRAMMES AND INITIATIVES Programme phases Programme goals 1. Research pressing social problems 1. Create modern social infrastructure in the 2. Establish necessary partnerships and NGOs cities where we live and work, including 3. Monitor project implementation and take sports and recreation facilities, roads, corrective action health care centres, etc. 4. Perform annual summary and new project search, periodic project reviews, interim project results 5. Report programme results to stakeholders and expand geography of successful projects CHILDREN’S EDUCATION AND HEALTHY LIFESTYLES CULTURAL ENRICHMENT CARING FOR ELDERLY AND NEEDY OUR FAVOURITE CITIES INITIATIVE SPIRITUAL ENLIGHTENMENT SPORTS • Educated and Healthy Children of Russia • Apatit corporate museum • Volunteer centres in the Murmansk region • Partnering with cities and government • Providing ongoing charitable support for the • Russian Olympians Foundation (DROZD) NGO • PhosAgro-Cherepovets corporate museum • Harmony recreation centre in Cherepovets organisations renovation and construction of Orthodox holy • Russian Federation of Rhythmic Gymnastics • PhosAgro Classes programme • Apatit’s Balakovo branch corporate museum • Volleyball Without Borders project in • Supporting medical institutions places in Russia and abroad • Russian Chess Federation • Supporting colleges and universities • Metachem corporate museum Cherepovets • Building and renovating sports centres • Organising Patriarchal charter flights for • Champion Foundation • Apatit CEO’s grant for youth education, cultural • Landscaping and caring for monuments • Providing financial assistance to World War II • Repairing and renovating educational and pilgrimages to the Italian city of Bari for • Saint Petersburg Judo Federation enrichment and sport • Supporting the Spasskaya Tower festival, veterans training institutes St. Nicholas the Miracle-Maker’s Saint’s day • Severyanka women’s volleyball team, • Installing children’s playgrounds and sports including the participation of employees and • In the Name of Good charity foundation • Putting on citywide concerts celebrations Cherepovets areas in residential neighbourhoods their children • Renovating and landscaping city parks, squares • Restoring the tradition of factory chapels: • Proton-BAES volleyball club, Saratov KHIBINSK START INITIATIVE HEALTH CARE • Khibinsk initiative movement • Supporting the Bakulev Cardiology Research • Khibinsk business incubator NGO and Cardiovascular Surgery Centre and pedestrian areas • Repairing roads began construction of four churches on the • Avtodor basketball club, Saratov premises of the Company’s sites in Kirovsk and • Turbine speedway club, Balakovo Cherepovets • Russian Cross-Country Skiing Federation 78 79 Community investment review (continued)STRATEGIC REPORTCORPORATE RESPONSIBILITY REPORTCORPORATE GOVERNANCE REPORTFINANCIAL STATEMENTSADDITIONAL INFORMATIONPhosAgro Integrated Report 2016www.phosagro.com CASE STUDY Murmansk Region Vologda Region Saratov Region Leningrad Region • Within the framework of a public-private partnership with • PhosAgro is one of Vologda Region’s largest One of the priorities of the Balakovo branch of Apatit is investment • PhosAgro finances reonvations in the orphanage, palace of the Government of the Murmansk region, a project is being taxpayers and invested RUB 63 billion in the region into the region’s social infrastructure, including: culture, schools and pre-schools in Volkhov. The Company implemented to develop a tourist cluster in the city of Kirovsk. by modernising its production facilities and repairing • Investing in the region’s social infrastructure, including repairing has allocated funds to renovate public spaces around Volkhov, The programme aims to support the social and economic local infrastructure. PhosAgro is also involved in the local health resort. and to restore the World War II memorial at the mass grave in development of the Kirov-Apatity region, to create a comfortable repairing schools, pre-schools and sports facilities, • At the request of legislators from the Bykov Ostrog region, the Novooktyabrsk. living environment and to reduce Kirovsk’s mono-industry as well as the local cultural centre, college and Company is helping repair roads using gypsum, a production dependence. university. Within the framework of the project, the modern ski resort Big • Over the past eight years, the Company has built Woodyavr has been established and has been recognised as the housing for more than 1,700 of its employees in one best resort in Russia as well as being named the best snowboard of the suburbs of Cherepovets. At the request of the park twice. The airport of Apatity has been modernised. Modern local community, it has also funded the construction tourist infrastructure is also being created, including hotel and of the new Church of St Athanasius and Theodosius by-product. • The DROZD-Balakovo club has launched the “DROZD-village” programme, and has organised lessons for conscription-age men in hand-to-hand combat and firearms training. • Apatit’s Balakovo branch has helped restore several of the city’s World War II memorials, as well as the open-air military recreation complexes, a children’s belt lift and a new training of Cherepovets, which is the city’s first new religious equipment museum. slope, as well as a ski piste at the Tirvas sanatorium. centre since the fall of the Soviet Union. This is the highest-altitude resort in the North-West of Russia. • PhosAgro has helped sponsor various municipal The wide, European-quality ski tracks are FIS certified and meet events, including an annual religious festival as well as the requirements of both professional and beginner alpine skiers. an annual rock music festival. The Russian freestyle team trains here. • In honour of the 70th anniversary of the end of The total length of the trails exceeds 35 kilometres, and the World War II, the Company helped the Perspectiva Khibiny Start project number of ski routes of various complexity has increased to 28. Foundation repair a tank that fought in the war In 2015, the Khibiny Initiative was established as a community movement. The project focuses on two key areas of activity: • Kirovsk’s infrastructure was also updated under the ski resort and place it as a monument to the victory in a project, including the airport, regional hospital, museum and Cherepovets park. Active citizens, deputies of the city council of Kirovsk and the youth organisation of Apatit participated in its creation. exposition hall, city parks, and heating and water distribution networks. • Thanks to the development of the Bolshoy Woodyavr ski resort, tourism and business activity in the tourism and related sectors has been growing for two years in a row. With the goal of decreasing its “mono-industry” dependence, the city was given TOR status (territory for advanced development). This will attract around RUB 300 million of investments into the economy of Kirovsk, and create more than 500 new jobs. Tourist traffic to the city is expected almost double. >3.2 BLN RUB PHOSAGRO SPENT TO HELP THE REGIONAL GOVERNMENT BUILD A SKI RESORT AS AN ANCHOR FOR TOURISM IN MURMANSK REGION 63 BLN RUB PHOSAGRO INVESTED IN THE REGION BY MODERNISING ITS PRODUCTION FACILITIES AND REPAIRING LOCAL INFRASTRUCTURE 1. Teaching the basics of entrepreneurial activity; consulting on issues like The main task of the Khibiny Initiative is the formation of the economic marketing, personnel management, planning, organisation and control, basis of the city through combining efforts and opportunities of the city, management of financial and economic activities, accounting, tax regional and federal authorities with the initiative of citizens and support systems, business-related legal issues; further consulting services to assist of Apatit. Through such cooperation, key issues facing the city’s residents in the development of business plans, business models, investment can be solved. projects.. To reduce the city’s unemployment rate, the Khibiny Initiative proposed the Khibiny Start project. Its main objective is the formation of 2. The Khibiny Start grant contest focuses on supporting young a comfortable environment for the development of self-employment entrepreneurs. The “Do Business” business plan contest is conducted out and small business. to support existing entrepreneurs. One of the most important criteria for obtaining a grant is the creation of at least one workplace. The Khibiny Business Development Centre (HCRB), an autonomous non-profit organisation, was established to manage the project. It acts In 2016: as an operator for the development and support of small business. The project is carried out within the framework of a public-private partnership with local government and regional authorities. • • • 27 business projects were implemented 45 jobs were created SMEs paid a total of RUB 400,000 in taxes 80 81 Community investment review (continued)STRATEGIC REPORTCORPORATE RESPONSIBILITY REPORTCORPORATE GOVERNANCE REPORTFINANCIAL STATEMENTSADDITIONAL INFORMATIONPhosAgro Integrated Report 2016www.phosagro.com BUSINESS CONDUCT REVIEW PhosAgro’s business conduct framework is based on global best practice CORPORATE POLICIES FINANCIAL & ASSET MANAGEMENT CODE OF ETHICS POLITICAL NEUTRALITY CHARITY POLICY ANTI-CORRUPTION POLICY CONFLICTS OF INTEREST STAKEHOLDERS INVESTMENT AND FINANCE COMMUNITY REGIONAL GOVERNMENTS & LOCAL COMMUNITIES EMPLOYEES & TRADE UNIONS THE GENERAL PUBLIC AND MEDIA BUSINESS PARTNERS Policy highlights PhosAgro’s business conduct policy framework and management procedures are based on best practice standards. Highlights of this framework include: • Our Government Relations Policy dictates that PhosAgro’s relationships with local, regional and federal governments must be legal and ethical, and based on principles of fairness and partnership. In accordance with this policy, interactions involving government bodies should only relate to PhosAgro’s strategic or operational matters. • Our Conflicts of Interest Policy establishes rules for identifying and addressing potential conflicts of interest. • Our Anti-corruption Policy states that our directors and senior management must adhere to high standards and set an example for the entire business. It commits all employees to a zero- tolerance approach to corruption. • Our Code of Ethics specifies the rules for relationships with stakeholders ranging from employees, shareholders, government officials and NGOs to customers, suppliers and other business partners. It commits PhosAgro to engaging with stakeholders in a fair and proper manner. • PhosAgro’s Charity Policy commits us to supporting sustainable development in the regions where we operate. PhosAgro’s charitable giving is based on the following principles: it must address a clear need and be used for clear purposes, the use of funds is closely monitored, and transparency and disclosure of information must be ensured. We do not engage in charitable giving to representatives of the Government, to political parties All employees receive regular training and undergo testing on preventing corruption or movements, or to commercial organisations. This policy sets priority areas for charitable giving, including education, sport, health and well-being, and vulnerable members of society such as veterans and the elderly. • PhosAgro does not participate in political activities or provide financial support to political organisations. System highlights • PhosAgro has in place a whistle-blowing procedure that includes a telephone hotline. All employees are provided with information about the purpose of the hotline and when it should be used (for example, to confidentially report matters such as theft, corruption, reputational risks, conflicts of interest, legal violations and environmental, health and safety incidents). PhosAgro’s Chief Executive Officer is responsible for the allocation of internal resources to document and investigate issues reported via the hotline. • All employees receive regular training and undergo testing on preventing corruption as part of a company-wide process. This exercise aims to build an understanding of the importance of preventing corruption and of maintaining a culture of corruption avoidance throughout the business. • PhosAgro maintains a Commission for Adherence to the Code of Ethics and Regulating Conflicts of Interest. Commission members are appointed by the Chief Executive Officer and are responsible for identifying potential conflicts of interest and assisting with resolution, implementing behaviour standards and creating an environment that supports adherence to the Code of Ethics and the Conflicts of Interest Policy. Activities in 2016 In 2016, the Internal Audit service conducted 14 audits including consultations for management & risk management efficiency evaluation. The audits looked at areas like capital investments, domestic sales, energy consumption, environmental compliance, industrial safety, as well as audits of risk management activities involving external consultants. INTERNAL AUDIT SERVICE ACTIVITIES IN 2016 INCLUDED: 14 AUDIT PROJECTS INCLUDING CONSULTATIONS FOR MANAGEMENT & RISK MANAGEMENT EFFICIENCY EVALUATION 82 83 PhosAgro Integrated Report 2016www.phosagro.comSTRATEGIC REPORTCORPORATE RESPONSIBILITY REPORTCORPORATE GOVERNANCE REPORTFINANCIAL STATEMENTSADDITIONAL INFORMATION STAKEHOLDER ENGAGEMENT We create long-term value by building solid and sustainable relationships with our stakeholders. PhosAgro aims to engage in a strategic way with the groups that are affected by our business or may impact it. Our ability to understand and respond to stakeholders’ evolving expectations helps us to create a sustainable and strong company. INVESTMENT AND FINANCE COMMUNITY Why we engage EXPLAIN PHOSAGRO’S STRATEGY AND PROGRESS WE HAVE MADE TOWARDS ACHIEVING OUR GOALS How we engage • Roadshows • One-on-one meetings with investors • Capital Markets Day • Investor conferences • Conference calls on financial results • Ongoing engagement with analysts • Regulatory press releases • AGM and formal reporting • Corporate website • Provision of a dedicated in-house investor relations team and the support of knowledgeable professional advisory services • Three independent non-executive directors on the Board of Directors ensure that the interests of public shareholders are represented SUPPORT LIQUIDITY AND SHARE PRICE BY ATTRACTING NEW INVESTORS TO THE COMPANY SUPPORT A POSITIVE PERCEPTION OF OUR CORPORATE GOVERNANCE SYSTEMS PROMOTE KNOWLEDGE OF THE LONG- TERM POTENTIAL AND VALUE OF THE COMPANY MAINTAIN ACCESS TO A WIDE ARRAY OF CAPITAL MARKET INSTRUMENTS USE DIALOGUE AS AN OPPORTUNITY TO OBTAIN NEW IDEAS AND IDENTIFY BEST PRACTICES 2016 ENGAGEMENT ACTIVITIES • Conducted four non-deal roadshows with Company management in key financial market centres like London, Paris, Zurich, Geneva, Stockholm, Copenhagen, Helsinki, New York, Boston, etc. • Organised 30 investment conferences and forums • Organised four conference calls and webcasts for analysts and investors to discuss the Company’s financial results • Disclosed 40 press releases via UK regulatory news service • Disclosed 181 Russian Federation mandatory information press releases via the corporate information disclosure centre and Interfax How we create our value We continue to implement a generous dividend policy, and paid RUB 28 billion or RUB 72/GDR in dividends in 2016 We were included in MSCI Russia index from May 2016, and significantly increased the GDRs’ liquidity while ADTV (average daily trading volumes) grew by more than 75% YoY and reached almost USD 6mn per day in 2016 We have maintained an investment-grade credit rating from Standard & Poor’s thanks to our conservative financing policy and solid cash flow generation capacity 84 85 4 30 NON-DEAL ROADSHOWS TO GLOBAL FINANCIAL CENTRES INVESTMENT CONFERENCES AND FORUMS 11 INDUSTRY CONFERENCES PhosAgro Integrated Report 2016www.phosagro.comSTRATEGIC REPORTCORPORATE RESPONSIBILITY REPORTCORPORATE GOVERNANCE REPORTFINANCIAL STATEMENTSADDITIONAL INFORMATION REGIONAL GOVERNMENTS & LOCAL COMMUNITIES Why we engage TO PROMOTE SOCIO-ECONOMIC DEVELOPMENT IN REGIONS WHERE WE WORK TO ADDRESS COMMUNITY NEEDS AND SOCIAL OR ENVIRONMENTAL CONCERNS TO SUPPORT THE HEALTH AND WELL-BEING OF THE COMMUNITIES WHERE WE OPERATE TO MAINTAIN A DIALOGUE AROUND GOVERNMENT POLICIES OR POTENTIAL REGULATORY CHANGES THAT MAY AFFECT OUR BUSINESS TO ENSURE THAT WE ARE A GOOD NEIGHBOUR How we engage • Implementing environmental programmes • Funding medical treatment for employees and residents in the regions where we operate • Developing cooperation agreements with regional governments based on what is most appropriate for the region • Meetings with government and community representatives • Supporting local social and sporting organisations • Sponsoring PhosAgro Classes to support chemistry education for school-aged children • Investing in universities and technical colleges that grant degrees that could lead to careers in PhosAgro • Introducing university scholarship and recruitment programmes aimed at encouraging the study of chemistry 2016 ENGAGEMENT ACTIVITIES • Organised visits of specialists from the Bakuleva Cardiological Centre to regions where PhosAgro operates to conduct medical examinations and provide treatment for PhosAgro employees and local residents • Signed and implemented agreements with regional governments where PhosAgro has operations • Signed agreement with the Russian Federation Ministry of Economic Development and the Vologda region to support a programme for projects in the areas of industrial and agricultural biotechnology • PhosAgro-Cherepovets signed an agreement on cooperation with the Ministry of Natural Resources, the Federal Service for Environmental Monitoring and the government of Vologda region as part of the Year of the Environment • Signed plan for renovation of roads near Bykov Ostrog using phosphogypsum from PhosAgro production sites • Signed agreements with the Proton volleyball club, Avtodor basketball club and the Turbina speedway racing club • Started construction of a rehabilitation centre in Cherepovets as part of the development programme for the Cherepovets Chemical and Technical College • Signed agreement with the Vologda region regarding modernisation of the vocational education system and the supply of professional personnel for the chemicals sector How we create our value We help ensure that the local communities that supply the workforce for our production sites are healthy and well- educated We pay taxes into local and federal budgets We help improve comfort and quality of life of community residents by cooperating with local and regional governments in priority areas of development 418 MLN RUB 14.5 BLN RUB INVESTED IN LOCAL EDUCATION INITIATIVES TAXES PAID INTO LOCAL, REGIONAL AND FEDERAL BUDGETS 86 87 Stakeholder engagement (continued)PhosAgro Integrated Report 2016www.phosagro.comSTRATEGIC REPORTCORPORATE RESPONSIBILITY REPORTCORPORATE GOVERNANCE REPORTFINANCIAL STATEMENTSADDITIONAL INFORMATION EMPLOYEES & TRADE UNIONS Why we engage ESTABLISH A CORPORATE CULTURE THAT IS ALIGNED WITH PHOSAGRO’S STRATEGIC GOALS ENSURE EMPLOYEE MOTIVATION IS APPROPRIATE AND EFFECTIVE PROVIDE MEANINGFUL SOCIAL GUARANTEES FOR CURRENT AND RETIRED EMPLOYEES MAINTAIN CONSTRUCTIVE RELATIONSHIPS WITH TRADE UNIONS AND EMPLOYEES RESPONSIBLE AND EFFECTIVE USE OF HUMAN RESOURCES PROVIDE RELEVANT PROFESSIONAL DEVELOPMENT OPPORTUNITIES FOR OUR EMPLOYEES How we engage 2016 ENGAGEMENT ACTIVITIES • Trade unions engaged in development of PhosAgro’s • The Ruskhimprofsoyuz trade union held a meeting of its workplace health and safety programmes Presidium in Kirovsk, hosted by the PhosAgro-Apatit trade union • Collective agreements negotiated with trade unions and the Minudobreniya Association of Trade Unions incorporating conditions and compensation for employees (usually for three-year terms, entered into with each of our production entities) • Collaboration with trade unions including sporting and cultural events, joint participation in workplace health and safety committees, nomination of workplace health and safety representatives and participation in health and safety workshops • Employee development programmes, including our Staff Reserve Programme • Employee surveys, presentations, bulletin boards, intranet and corporate newspapers • Meetings with general directors of production sites and management responsible for social and HR issues together with trade union representatives • Whistle-blower hotline: dedicated email addresses for complaints, telephone hotlines for inquiries about social issues, reporting violations • Signed collective agreements negotiated with trade unions at PhosAgro-Cherepovets (June 2016), Apatit (March 2016), the Balakovo branch of Apatit (December 2016) and Metachem (December 2015) • Trade unions, with the support of PhosAgro, arrange the following events annually: – PhosAgro Stars Festival – Company-wide sporting competitions – Professional skills competitions (including welding, lathe turning and electrical work) – Professional development workshops on topics like workplace health and safety, and management skills • General directors and HR personnel at production facilities, together with trade unions, regularly meet with employees; every corporate newspaper provides contact information for feedback, and in the event of a violation of Company rules, employees are encouraged to call dedicated hotline numbers How we create our value By providing fulfilling careers that reward, recognise, motivate and develop our people, we create a sustainable business that is a global leader in its sector We aim to deliver training programmes to help employees meet their personal career goals and benefit the Company. For more information, see the People review section of this report 11 .4 THS 72.8% > 1,000 EMPLOYEES ARE UNION MEMBERS AVERAGE UNION MEMBERSHIP PER TEAM INSPECTIONS CONDUCTED BY AUTHORISED WORKPLACE SAFETY MONITORS 88 89 Stakeholder engagement (continued)PhosAgro Integrated Report 2016www.phosagro.comSTRATEGIC REPORTCORPORATE RESPONSIBILITY REPORTCORPORATE GOVERNANCE REPORTFINANCIAL STATEMENTSADDITIONAL INFORMATION THE GENERAL PUBLIC AND MEDIA Why we engage TO ENHANCE PUBLIC PERCEPTION AND UNDERSTANDING OF THE COMPANY INFORM STAKEHOLDERS ABOUT THE COMPANY’S PLANS, PERFORMANCE AND PRIORITIES PROMOTE UNDERSTANDING OF THE ROLE OF MINERAL FERTILIZERS IN SUPPORTING GLOBAL FOOD SECURITY How we engage 2016 ENGAGEMENT ACTIVITIES • Interaction with experts and public • Published four weekly newspapers at production sites and monthly corporate How we create our value We protect the reputation of our Company and make sure the public is informed about our activities organisations • Media engagement, including regular meetings and briefings with journalists, access to senior management, site tours for press and press releases • Attendance at public hearings • Company plant tours, exhibitions and congresses • Corporate website, social media newspaper • PhosAgro and its subsidiaries published over 230 press releases • Domestic and international media mentioned PhosAgro over 20,000 times • PhosAgro’s CEO conducted regular meetings and interviews with Russian and foreign journalists, providing expert comments on important Company and industry events to leading publications including the Financial Times, Bloomberg, Reuters, The Wall Street Journal, Forbes, CNBC, Business FM, Vedomosti, Kommersant, Interfax, RBC, RIA Novosti, TASS, Rossiskaya Gazeta and Izvestia The CEO: • Held press conferences as part of various domestic and international events, including the Saint Petersburg International Economic Forum, the World Economic Forum in Davos, the International Fertilizer Association conference, the Sochi International Economic Forum, the Russo-German Natural Resources Forum, VTB’s Russia Calling! Investor Conference and other industry and investment conferences • Protected the Company’s reputation and informed the public about its ongoing activities • Participated in international and regional industry conferences • Maintained membership in Russian and international professional associations (A. Guryev was elected President of the Russian Association of Fertilizer Producers and was reappointed as the Vice President for Eastern Europe and Central Asia of the International Fertilizer Association) • Organised grant ceremony for talented young scientists as part of the PhosAgro/ UNESCO/IUPAC Green Chemistry for Life programme • Organised PR support for a variety of corporate events, awards and investments during the year 90 91 230 PRESS RELEASES PUBLISHED 71 MEDIA EVENTS ORGANISED >20THS PUBLICATIONS IN RUSSIAN AND INTERNATIONAL PRESS Stakeholder engagement (continued)PhosAgro Integrated Report 2016www.phosagro.comSTRATEGIC REPORTCORPORATE RESPONSIBILITY REPORTCORPORATE GOVERNANCE REPORTFINANCIAL STATEMENTSADDITIONAL INFORMATION BUSINESS PARTNERS Why we engage CONSUMER HEALTH How we engage • Contracts and agreements • Conferences • Joint submissions on issues affecting our industry • Support for international applied research and sustainability projects • Negotiations with consumers, publications and distribution of advertising materials • Membership in industry associations UNDERSTANDING AND CONTRIBUTION TO MAJOR ISSUES AFFECTING THE FERTILIZER AND MINING INDUSTRIES 2016 ENGAGEMENT ACTIVITIES • Attended 15 international and local industry conferences (4 IFA, 3 CRU, 4 FMB Argus, 2 IPNI, 2 other) • Hosted a conference to award the first grants given out under the PhosAgro/UNESCO/IUPAC Green Chemistry for Life programme sponsored by PhosAgro to support promising projects by young chemists • Participated in domestic and international professional associations CREATING A BUSINESS RELATIONSHIP BUILT ON TRUST AND RESPECT MUTUAL UNDERSTANDING OF OBLIGATIONS AND EXPECTATIONS OF THE RELATIONSHIP How we create our value We are a reliable partner and a sought- after client within our industry We work with our peers to ensure that the industry’s voice is properly represented around the world We support scientific research to help develop “green chemistry” technologies, including in the field of crop nutrients 92 93 Stakeholder engagement (continued)PhosAgro Integrated Report 2016www.phosagro.comSTRATEGIC REPORTCORPORATE RESPONSIBILITY REPORTCORPORATE GOVERNANCE REPORTFINANCIAL STATEMENTSADDITIONAL INFORMATION FARMERS Why we engage TO MAINTAIN A DIALOGUE WITH OUR CUSTOMERS AND ENSURE WE OFFER THE PRODUCTS THEY NEED EDUCATE FARMERS ABOUT THE BENEFITS OF PHOSAGRO’S CONTAMINANT-FREE PHOSPHATE-BASED FERTILIZERS PROMOTE RESPONSIBLE AND SUSTAINABLE USE OF FERTILIZERS IN ORDER TO ENCOURAGE FARMERS NOT TO INTRODUCE HARMFUL ELEMENTS INTO THE FOOD CHAIN WITH LOW-QUALITY PHOSPHATE-BASED FERTILIZERS How we engage • In our domestic market: — through feedback from our distribution network, which works directly with Russian farmers and agricultural holdings • International markets: — establishment of our own trading operations in priority markets, bringing us closer to farmers — membership in industry organisations like the International Plant Nutrient Institute and the International Fertilizer Association • Agreements signed with leading scientific research institutes in Europe (Wageningen in the Netherlands and the University of Milan) to conduct extensive research that will assess the impact on the quality of crops and soil of using almost entirely cadmium-free fertilizers produced by PhosAgro. The tests will be run in different geographical locations, as well as for different types of crops, and will include a direct comparison with the traditional types of fertilizers used in each selected location 2016 ENGAGEMENT ACTIVITIES • Participated in 55 domestic and international meetings, seminars, exhibitions, conferences and forums dedicated to agriculture and/or fertilizers • Began conducting «Field Day» seminars for agricultural cooperatives, famers and agronomists • Introduced customised recommendations for fertilizer application based on region, crop, soil and other conditions • Gave out sample products to introduce farmers to new grades of fertilizers • Promotion of responsible application of mineral fertilizers for sustainable farming that minimises environmental impact. • Launched new grades of PKS, as well as NPK and NPS fertilizers containing micro-elements (boron and zinc) • Opened new sales offices in Biarritz (France) and Hamburg (Germany), to enhance our ability to work directly with farmers in our priority export markets • Cooperating with IPNI to develop recommendations for application of phosphate-based and complex fertilizers for soy, wheat, corn and sugar beets in order to provide farmers with recommendations in accordance with 4R Nutrient Stewardship principles How we create our value Our strategy to 2020 aimed at bringing us closer to farmers We offer customers 35 fertilizer grades after introducing two new PKS grades and one new NPS grade in 2015. We continue investing in further enhancing our product offering Our fertilizers have one of the lowest levels of impurities due to the exceptionally high quality of our phosphate rock, meaning it is more effective We provide information about the positive effects of phosphate-based fertilizers on crop output and their important role in global food security 55 2 6 FERTILIZER AND/OR AGRICULTURE SECTOR EVENTS ATTENDED NEW SALES OFFICES OPENED IN EUROPE TOTAL NUMBER OF TRADING OFFICES OUTSIDE OF RUSSIA IN PRIORITY EXPORT MARKETS 94 95 Stakeholder engagement (continued)PhosAgro Integrated Report 2016www.phosagro.comSTRATEGIC REPORTCORPORATE RESPONSIBILITY REPORTCORPORATE GOVERNANCE REPORTFINANCIAL STATEMENTSADDITIONAL INFORMATION MANAGING OUR RISKS RISK MANAGEMENT SYSTEM Board of Directors • Has overall responsibility for management of financial and non-financial risks • Establishes and monitors performance of risk management systems • Holds management accountable for implementation of risk management system Risk Management Committee • Carries out regular assessment of the risk Audit Committee • Has oversight responsibility for the finance Risk Commission • Reviews the status of risk management function • Evaluates the effectiveness of risk management system and principles • Provides recommendations to the Board on management measures • Provides recommendations to the Board changes and improvements to the financial on changes and improvements to the risk management system financial risk management system Internal Audit Department • Carries out regular assessment of the Risk Management Department • Facilitates work across the Company’s Company’s internal control and risk divisions to identify and assess risks, as well management systems as develop programmes to manage and • Oversees compliance of PhosAgro’s financial address risks Executive management (CEO and Management Board) • Oversees implementation of, and adherence to, risk management policies and economic operations with Russian • Provides PhosAgro employees with • Monitors and manages of risks relevant legislation and the Company’s Charter methodological and consultative support on to job function • Develops recommendations for the Audit issues related to risk management • Carries out risk identification and Committee and the Board of Directors on • Organises risk management training reporting strategic changes to the risk management • Performs operational risk management Impact high RISK MAP Strategic risks • Risk of inadequate strategic planning 1 2 • Social and human resources Production risks • Risks in the production process 4 • Risks related to occupational health and 3 industrial safety 5 • Environmental risks Operational risks 6 • 7.1 • Risks of inefficiency and infringement of Project risks business processes (key risk) 7.2 • Taxation risks (key risk) • Risks in the field of information security 8 medium • Risks in the area of economic security 9 Regulatory risks 10 • Compliance with legal and regulatory requirements 11 • Corruption Reputational risks 12 • Reputational risks Financial risks 13 • Credit risks 14 • Currency risks 15 • Marketable goods low Probability 4 6 15 1 2 7.1 7.2 3 8 5 10 13 14 9 11 12 Please see the full description of each risk in the table on pages 100–105 low medium high In 2016, PhosAgro ensured the effective functioning of its risk management system by identifying and assessing risks in a timely manner and developing and implementing measures to manage those risks. Senior management devoted significant attention to managing key risks that have a high impact and a high probability. The Board of Directors reviewed information on managing the Company’s key risks on a quarterly basis. In 2016, the Company continued to develop its risk management system: • At the management level, a Risk Commission was formed that is responsible for the regular review of the status of risk management and the effectiveness of risk management measures. The Commission includes managers responsible for key functions within the Company. The Commission is headed by PhosAgro’s Chief Operating Officer. • A declaration and provision on PhosAgro’s risk appetite were approved by the Board of Directors. Risk appetite establishes the level of risk that is acceptable in terms of achieving the Company’s goals and facilitates effective decision-making while taking risks into account. • The Company’s bylaws establishing a unified methodology and procedure for cooperation and responsibility regarding risk management were updated. No significant changes were made to the Company’s corporate governance system in 2016 overall as a result of changes to the risk management system. The Risk Management Committee coordinates issues related to risk management on behalf of the Board of Directors, and both the Risk Commission and the Risk Management Department coordinate risk management on behalf of Company management. The Director of the Risk Management Department reports operationally to the CEO and functionally to the chair of the Board’s Risk Management Committee. At the end of 2016, an independent external evaluation of PhosAgro’s risk management system was carried out, which confirmed that it was at the level of other leading Russian companies. In 2017, the Company plans to maintain the effective functioning of its risk management system. The risks outlined in this report that may impact the Company do not constitute an exhaustive list. The report aims only to identify the key risks. 96 97 PhosAgro Integrated Report 2016www.phosagro.comSTRATEGIC REPORTCORPORATE RESPONSIBILITY REPORTCORPORATE GOVERNANCE REPORTFINANCIAL STATEMENTSADDITIONAL INFORMATION STRATEGIC RISKS PRODUCTION RISKS Risk of inadequate strategic planning (key risk) Risk of inadequate strategic planning associated Social and human resources (key risk) Social and human resources risks are those Production risks (key risk) Risks in the production process are negative Workplace health and safety risks (key risk) Workplace health and safety risks are related Environmental risks (key risk) Environmental risks cover the occurrence of with the adoption of an incorrect strategic decision associated with the hiring, development and events of a technical/industrial nature or naturally to injury, occupational illnesses, accidents and potential damage to the environment as a result of and associated management decisions, resulting retention of employees, as well as risks in relations occurring events that lead to disruptions in the incidents at hazardous production facilities, as well the Company’s activities. from an erroneous assessment of internal and with local communities and the risk of adverse production process: downtime of production external factors that have an impact on the social situations in regions of operation. equipment, outages, incidents and accidents at Company’s prospects for development and its ability to achieve its strategic objectives. Risk level Impact • Failure to reach the target values of key strategic indicators (assessment adjusted in connection with the updated strategy until 2020) • Loss of competitive advantages associated with the level of technological development of production and the constraints of external infrastructure Measures for minimising risk In 2016, an updated version of the Company's strategy until 2020 was approved by PhosAgro's Board of Directors, while preparation of the Company's strategy until 2025 continues. There is a system in place that monitors both internal and external factors that could have an impact on implementation of the strategy. PhosAgro also carries out analysis comparing best industry practices to the practices it employs, or plans to employ, to assess costs and benefits in order to facilitate optimal decision-making. production sites and production infrastructure facilities, failure to meet planned production volumes. • Discrepancies between the number of staff members and their qualifications and the Company’s needs • Unscheduled downtime, accidents and incidents at production facilities, the loss of production output, setbacks in economic indicators, damage to, or loss of, equipment • Unscheduled downtime, accidents and incidents at facilities related to energy infrastructure PhosAgro carries out independent and joint programmes aimed at attracting talented young specialists, including from other regions, developing employees’ professional competencies and increasing employee motivation to ensure long-term retention. PhosAgro aims to operate all types of equipment without breakdowns or unplanned stoppages, and to take steps to limit the length of unplanned stoppages when they do occur. With this aim in mind, the Company invests in the construction of new equipment and the upgrading of existing equipment, schedules preventative maintenance of equipment and major overhauls, while using back-up equipment and creating a reserve of components, accessories and spare parts. A programme to boost the quality and reliability of repair work carried out by suppliers is in place. Insurance covers the Company’s dangerous production facilities and property. as risks associated with discrepancies between the workplace health and safety elements of the risk management system and legal requirements. • Occupational injuries, complete or partial loss • Non-compliance with established regulations of the capacity to work (assessment adjusted to reflect risk statistics for 2016) regarding the impact on various components of the environment PhosAgro ensures workplace health and safety in compliance with relevant legislation and global best practices in this area. To this end, the Company carries out training for staff and checks their knowledge related to workplace health and safety, promotes a culture of safety, ensures that all contractors adhere to workplace health and safety standards, carries out safety audits and inspections to ensure compliance with guidelines both for Company divisions and for suppliers for which the Company has put the OHSAS 18001 system in place. Additional measures to reduce workplace injuries when performing work underground have also been developed and are being implemented. PhosAgro regularly assesses and analyses its impact on the environment. In an effort to limit its environmental impact, the Company is modernising its clean-up and storage system and is putting energyefficiency programmes in place. The Company partners with UNESCO and the International Union of Pure and Applied Chemistry (IUPAC) to provide grants for research in the field of green chemistry with the aim of protecting the environment and human health, creating energyefficient processes and implementing ecological safety technologies on the basis of innovative ideas. Facilities being launched by PhosAgro in 2017, in particular its ammonia and granulated urea plants, as well as its biochemical treatment facilities, have been included as environmentally safe production facilities by the Russian Ministry of Natural Resources and the Environment in its plan of activities for the Year of the Environment. These facilities utilise best available technologies, and after being commissioned, they will make it possible to reduce specific consumption of raw materials and energy, as well as specific emissions of regulated substances. 98 99 PhosAgro Integrated Report 2016www.phosagro.comSTRATEGIC REPORTCORPORATE RESPONSIBILITY REPORTCORPORATE GOVERNANCE REPORTFINANCIAL STATEMENTSADDITIONAL INFORMATIONManaging our risks (continued) OPERATIONAL RISKS Project risks (key risk) Project risks are related to exceeding planned Risks of inefficiency and infringement of business (key risk) Risks associated with inefficiency or the intentional Taxation risks (key risk) Information security risks (key risk) Risks to economic security Taxation risks are related to potential claims by tax Risks in the field of information security are risks Economic security risks are related to losses caused budgets and timelines for the completion of new or unintentional infringement of the Company’s authorities that the Company has not correctly filed associated with losses caused to the Company’s to the Company’s property and assets as a result of construction and modernisation projects, as well business processes, including counterparty risk its tax return or made payment on time. property and assets by means of unauthorised legal violations in the economic sphere committed as the failure to achieve efficiency targets related related to supply chain. to projects. Risk level Impact access to its information systems or by the by employees or third parties, including fraud and disclosure of confidential information. theft. • Exceeding the planned budgets and timelines for • Late deliveries of feedstock, raw materials, • Financial (penalties), administrative and criminal • Disclosure of confidential information • Loss of an enterprise’s property as a result of illegal the implementation of key projects • Poor implementation or work tasks equipment and spare parts from third parties • Interruption of production lines and lower production volumes Measures for minimising risk PhosAgro aims to carry out its projects (the key projects are the construction of new ammonia and granulated urea plants) in line with planned budgets and timelines. Uniform approaches to project implementation and management are employed. Projects undergo a multi-step review and approval process. Project offices are established for particularly large and important projects. Contracts can be made with a fixed (hard) price. Regular monitoring to ensure compliance with project timelines and budgets is carried out. PhosAgro aims to support the efficient functioning of all of the Company’s business processes. To achieve this, the efficiency of business processes is regularly evaluated, bottlenecks are identified, and measures to improve efficiency or eliminate bottlenecks are developed and implemented. We also aim to minimise risk in our supply chain by choosing suppliers through competitive tender processes. PhosAgro aims to establish long-term relationships with reliable suppliers by signing long-term supply contracts. consequences as a result of violations uncovered by the tax authorities (assessment adjusted on account of risk management measures undertaken in 2016) PhosAgro complies with tax legislation in the countries where it operates. Tax legislation, including planned changes, is monitored; law enforcement practices are analysed; clarifications are sought from government bodies regarding tax assessments; law firms, accountancies and tax authorities are consulted on questions related to double taxation and various tax-related laws. actions, including fraud and theft The Company carries out various measures aimed at preventing unauthorised access to information systems as well as disclosure of confidential information. Different technical and software solutions are used to control access to information resources and systems; access rights to information are regulated according to different user groups; there is a clear definition of what constitutes confidential information and how it should be handled; periodic audits are carried out to ensure strict compliance with the Company’s confidentiality policy. The Company takes measures aimed at preventing potential damage to its property and assets as a result of legal violations in the economic sphere. A system controlling access to the Company’s administrative and production facilities is in place; a clear division of responsibility is established when it comes to concluding contracts or transactions; checks are carried out on all counterparties before contracts are executed; a hotline has been created to enable the Company to receive feedback from employees.Besides, additional oversight checks are carried out by various departments within the Company. 100 101 PhosAgro Integrated Report 2016www.phosagro.comSTRATEGIC REPORTCORPORATE RESPONSIBILITY REPORTCORPORATE GOVERNANCE REPORTFINANCIAL STATEMENTSADDITIONAL INFORMATIONManaging our risks (continued) REGULATORY RISKS Compliance with legal and regulatory requirements (key risk) Corruption risks REPUTATIONAL RISKS Reputational risks FINANCIAL RISKS Credit risks (key risk) Currency risks (key risk) Marketable goods risks (key risk) Compliance with legal and regulatory requirements Corruption risks associated with losses resulting Reputational risks cover damage to the Company’s Credit risks resulting in potential financial losses Currency risks resulting in potential financial losses Marketable goods risks cover possible losses cover the risk of timely receipt / extension of licences from penalties levied against the Company by business reputation as a result of unauthorised caused by the failure of buyers, commercial caused by unfavourable changes in exchange rates associated with unfavourable changes in the and risks from changes in legislation that could state authorities as a result of non-compliance disclosure in the media of information about the contractors, suppliers, banks, insurance companies, with respect to the Company’s base currency. market prices for mineral fertilizers and other lead to an increase in the cost of doing business, the or inadequate compliance on the part of the Company’s operations, financial results, upper implementation of restrictive measures by regulatory Company or its employees with the requirements of management, etc. bodies, a reduction in investment appeal and/or applicable anti-corruption legislation. changes in the competitive environment. clearing centres or other financial contractors to fulfil their financial obligations to the Company completely and on time. products, as well as increases in the price of the main raw materials and equipment that the Company purchases. Risk level Impact • Non-compliance on the part of the Company with the requirements for licensed activities • Publication by federal and regional authorities of the Russian Federation, foreign states, associations of states and international organisations of legal acts that result in new burdens and restrictions for the Company Measures for minimising risk The Company ensures full compliance of its activities with applicable legislation. In order to ensure that it receives information about potential legislative changes in a timely manner, the Company closely tracks initiatives at a government and regulatory level, and takes part in discussions of legislative initiatives and preparation of recommendations through professional associations. The Company acts in a timely manner in preparing and submitting documents to receive or prolong the necessary licences needed to carry out its business. • The performance of corrupt acts by the employees or contractors of the Company’s enterprises The Company ensures compliance of its activities with the requirements of relevant anti-corruption legislation. It conducts training focused on combatting corruption and on how to apply anti- corruption legislation in practice, and a principle of zero tolerance is communicated to all employees and counterparties with respect to corruption, and they are warned that they will be held accountable for any violation of anti-corruption legislation. JSC PhosAgro-Cherepovets is a member of the Anti- Corruption Charter of Russian Business. • The unauthorised disclosure of information to the media about the Company’s operations by unauthorised and/or unidentified representatives of the Company (leaks) • Public statements and actions on the part of third parties (individuals or organisations) concerning the Company that denigrate the Company’s business reputation in order to have a negative impact on its operations The Company is transparent and discloses all material facts and developments, while also having adopted an information policy and media engagement policy. The Company publishes information about its business on its website and in the media, provides comments in response to media enquiries and regularly monitors all relevant coverage in both Russian and international media. • Failure by clients to pay for delivered goods • Late payments by clients for delivered goods • Inability to repay debt upon maturity The Company has adopted policies on managing credit risk that employ different methods of managing and reducing credit risk, including by completing deliveries after full or partial pre- payments, with full or partial insurance of credit risk and by using letters of credit. Delivery without pre- payment and insurance is only permitted for long- established clients. Providing advance payments to suppliers and contractors is only considered after the counterparties have been tested for reliability, and also after the provision of bank guarantees in the event that the sum of the advance payment exceeds established internal limits. The Company works with banks and insurance companies with a high level of financial stability and that meet the criteria set out by the Company’s treasury policy. To mitigate credit default risks, the Company runs three internal policies that provide enough flexibility in cash management: a) the total amount of capital spending should not exceed 50% of forecast EBITDA (earnings before taxes, interest, depreciation and amortisation) b) the Company aims to keep leverage at the appropriate level with Net Debt/EBITDA below 1 c) a flexible dividends policy that keeps the dividend payout in the range of 30—50% The Company monitors all covenants applicable to existing loans on a regular basis. • Debt levels as reported in our main operating currency could increase as a result of unfavourable fx rate changes • Losses from derivative financial instruments • Realised and unrealised losses from revaluation of FX-denominated debt • Decrease in cash flow in our main operating currency In the current environment of volatility with respect to the oil price and the fluctuations in the rouble exchange rate against major currencies, the Company aims to align the currency structure of its debt financing with the currency structure of its main sales. Most of the Company’s debt is denominated in US dollars as a natural hedge against primarily USD-denominated sales. The Company carefully tracks analyst forecasts and factors that can influence the rouble exchange rate against major currencies. Where needed, the Company is able to use full or partial hedging instruments against its currency positions. • Critical impact on the cost of production of one or more raw materials, cost increases and worsening financial results • Loss of revenue as a result of the poor choice of a product with low marginality In the current environment of reduced prices for its core products, the Company is continually optimising its sales structure according to fertilizer brands and regional sales focus in order to maximise margins, while also increasing the share of fertilizer sales to end users, increasing production efficiency and providing add-on services to customers such as packaging, blending and storage. In 2016, PhosAgro opened trade offices in Hamburg, Germany, and Biarritz, France, in addition to its existing offices in Zug, Switzerland; Warsaw, Poland; Sao Paulo, Brazil; and Singapore. With a presence in priority export markets, the Company will be able to respond more quickly to changes in market demand and customer needs. The anti-dumping duty on imports of urea produced by the PhosAgro Group into the United States, one of the world’s largest importers of this type of fertilizer, was abolished in 2016. In order to reduce the cost of raw materials and equipment, the Company conducts tenders among multiple suppliers, conducts long-term supply contracts and develops lasting relationships with its suppliers. 102 103 PhosAgro Integrated Report 2016www.phosagro.comSTRATEGIC REPORTCORPORATE RESPONSIBILITY REPORTCORPORATE GOVERNANCE REPORTFINANCIAL STATEMENTSADDITIONAL INFORMATIONManaging our risks (continued) BOARD OF DIRECTORS Audit Committee Executive Director Strategy Committee Remuneration and Human Resources Committee Environmental, Health and Safety Committee Risk Management Committee Board of Directors structure, % We have the right mix of knowledge of Russia and international business to help PhosAgro succeed in all of its priority areas. 25% 37.5% 37.5% Executive directors Independent directors Non-executive directors Board of Directors professional experience, % The Board of Directors consists of a diverse group of professionals with experience in audit, chemicals, investing and financial markets. 50% Chemical industry 25% 12.5% 12.5% Finance and audit Capital markets Sales ANDREY A. GURYEV Executive Director CEO of PhosAgro Year appointed to Board: SVEN OMBUDSTVEDT Independent Director ANDREY G. GURYEV Non-executive Director MARCUS RHODES Independent Director JAMES ROGERS Independent Director MIKHAIL RYBNIKOV Executive Director IGOR ANTOSHIN Non-executive Director IVAN RODIONOV Non-executive Director Year appointed to Board: 2013 2006 2013 2011 2014 2016 2004 2004 Committee appointments: (Head of the committee) Recent roles 2013-present: CEO of PhosAgro 2011-2013: Deputy CEO for Sales and Logistics of PhosAgro AG 2011-2013: Deputy CEO of PhosAgro Education 2010-present: Chief Executive Officer, Norske Skogindustrier ASA 2008-2009: Senior Vice President, SCD SAS 2006-2008: Chief Financial Officer and Head of Strategy, Yara International ASA 2006-present: Vice President of the Russian Union of Chemical Sector Businesses and Organisations, a non-profit organisation 2001-2013: Member of the Federation Council • Bachelor’s degree in Economics • Master of Science degree in from the University of Greenwich (UK) • Graduated from the Russian Academy of National Economy under the Government of the Russian Federation. PhD in Economics International Management from the Thunderbird School of Global Management (USA) • Bachelor of Science degree in Business Administration from Pacific Lutheran University (USA) Graduated from • the G.V. Plekhanov St Petersburg State Mining Institute • the Lenin State Central Institute of Physical Culture Shares in PhosAgro Mr Andrey A. Guryev owns no shares in PhosAgro. According to information available to the Company, the ownership of companies holding 43.66% (45.46% as of 31/12/2016) of PhosAgro’s authorised capital, namely Private Company Limited by shares Chlodwig Enterprises Limited and Private Company Limited by shares Adorabella Limited, is held in trusts, the economic beneficiaries of which are Andrey A. Guryev and members of his family. Mr Ombudstvedt owns 4,000 Global Depositary Receipts (GDRs – 3 GDRs = 1 ordinary share) for PhosAgro shares, which represents 0.001% of the Company’s authorised capital. Mr Andrey A. Guryev owns no shares in PhosAgro. According to information available to the Company, the ownership of companies holding 43.66% (45.46% as of 31/12/2016) of PhosAgro’s authorised capital, namely Private Company Limited by shares Chlodwig Enterprises Limited and Private Company Limited by shares Adorabella Limited, is held in trusts, the economic beneficiaries of which are Andrey A. Guryev and members of his family. Andrey A. Guryev’s wife owns shares representing 4.82% of PhosAgro’s authorised capital. (Head of the committee) 2002-2008: Audit Partner, Ernst & Young 1998-2002: Audit Partner, Arthur Andersen • Graduate degree in Economics from the University of Loughborough (UK). Qualified Chartered Accountant, member of the Institute of Chartered Accountants in England & Wales (ICAEW) and member of the Non- Executive Director Group of the ICAEW Mr Rhodes owns 2,500 Global Depositary Receipts (GDRs – 3 GDRs = 1 ordinary share), which represents 0.0006% of the Company’s authorised capital. Membership of the Board of Directors in other organisations Member of the Boards of Directors, QIWI PLC, and Zoltav Resources Inc. Committee appointments: (Head of the committee) Recent roles Jim Rogers is currently the president of Beeland Interests, Inc. He is a legendary investor and co-founder of the Quantum Fund, a global investment partnership. He is an author, financial commentator, adventurer and successful international investor, and currently holds directorships and advisory positions at a dozen companies and investment funds around the world. 2013-present: Chief Operating Officer, PJSC PhosAgro 2012-present: Chief Executive Officer, JSC PhosAgro AG 2008-2012: Chief Operating Officer, CJSC PhosAgro AG 2006-2008: Chief Financial Officer, CJSC PhosAgro AG 2004-2006: Chief Financial Officer, OJSC Apatit 2001-2004: Chief Financial Officer, OJSC Ammophos (Head of the committee) (Head of the committee) 2013-2016: Adviser to the CEO of PhosAgro 2009-2013: CEO of PhosAgro Engineering Centre 2006-2009: CEO of PhosAgro 2003-present: Professor, Higher School of Economics 2006-2014: Professor, Russian State University for the Humanities 2004-2006: Managing Director, AIG-Interros RCF Adviser 1997-2006: Managing Director, AIG Brunswick Capital Management Education • BA from Yale University, BA/ MA from Balliol College, Oxford University • Bachelors/masters degree in PPE from Balliol College at Oxford University (UK) Shares in PhosAgro Mr Rogers owns 25,000 Global Depositary Receipts (GDRs – 3 GDRs = 1 ordinary share) for PhosAgro shares, which represents 0.0064% of the Company’s authorised capital. Membership of the Board of Directors in other organisations Member of the Boards of Directors, First China Financial Network Holdings Limited; Geo Energy Resources Limited; Spanish Mountain Gold Limited; Virtus Global Dividend & Income Fund Inc. (The Zweig Total Return Fund, Inc.), The Zweig Fund, Inc.; Crusader Resources Limited • Graduate degree in Economics from the Lomonosov Moscow State University • Graduate degree in Economics from the G.V. Plekhanov St. Petersburg State Mining University • Graduate degree in Economics from the Lomonosov Moscow State University (Russia) Mr Rybnikov owns shares equal to 0.0258% of PhosAgro’s authorised capital. Based on information available to the Company, Mr Antoshin holds the right to indirectly control 100% of the voting shares of Vindemiatrix Trading Limited, Carranita Holdings Limited and Dubberson Holdings Limited, which together hold shares equivalent to 11.88% (12.66% as of 31/12/2016) of PhosAgro’s authorised capital. Igor Antoshin’s stake in PhosAgro includes 2,489,540 ordinary shares in the Company (1.92% of the share capital) that were transferred by him under a REPO deal on 21/12/2016. Mr Rodionov owns shares and GDRs equivalent to 0.0064% of PhosAgro’s authorised capital. Membership of the Board of Directors in other organisations Member of the Board of Directors, RUSS-INVEST Investment Company, Interdepartmental Analytical Centre, AgroGard-Finance. 104 105 PhosAgro Integrated Report 2016www.phosagro.comSTRATEGIC REPORTCORPORATE RESPONSIBILITY REPORTCORPORATE GOVERNANCE REPORTFINANCIAL STATEMENTSADDITIONAL INFORMATION EXECUTIVE MANAGEMENT SERGEY SEREDA First Deputy CEO, ALEXANDER SHARABAIKO Chief Financial Officer, ALEKSEY SIROTENKO Deputy CEO for Corporate and SIROJ LOIKOV Human Resources and Social SERGEY PRONIN Deputy CEO for Sales and IRINA EVSTIGNEEVA Director for Marketing and ROMAN OSIPOV Director of Business JSC PhosAgro-Cherepovets PJSC PhosAgro Legal Affairs, PJSC PhosAgro Policy Director, PJSC PhosAgro Marketing, PJSC PhosAgro Development, PJSC PhosAgro Development, PJSC PhosAgro Deputy CEO for International and Adviser to the CEO, Head of Legal, JSC PhosAgro- Human Resources and Social Special Projects, PJSC PhosAgro JSC PhosAgro-Cherepovets Cherepovets representative office Policy Director, JSC PhosAgro- representative office in Moscow in Moscow Cherepovets representative office in Moscow Deputy CEO for Sales, JSC PhosAgro-Cherepovets representative office in Moscow Advisor to the CEO, LLC PhosAgro- Region Recent roles Recent roles 2016-present: First Deputy CEO, JSC PhosAgro-Cherepovets; Deputy CEO for International and Special Projects, PJSC PhosAgro 2014-2016: First deputy CEO, OJSC PhosAgro 2013-2015: Deputy CEO for Sales and Logistics, CJSC PhosAgro AG 2013: Sales Director, CJSC PhosAgro AG 2013-2014: Deputy CEO for Government Relations, OJSC PhosAgro 2012-2013: Deputy CEO for Government Relations and Control, OJSC PhosAgro 2007-2012: Chief Executive Officer, CJSC Hydrostroy Burgas 2007: Chief Executive Officer, CJSC AgroGard 2005-2007: Chief Executive Officer, Chairman of OJSC AgroGard- Finance 2003-2005: Adviser to the Chairman of the Board of Directors, Head of Internal Control and Audit Division, Director of the Voskresensk branch of CJSC PhosAgro AG, CEO of Voskresensk Mineral Fertilizers, First Deputy CEO of CJSC PhosAgro AG Education • Graduated from the Moscow State Institute of International Affairs with a degree in International Economic Relations 2014-present: Adviser to the CEO, JSC PhosAgro-Cherepovets (CJSC PhosAgro AG) 2011-present: Head of Legal, JSC PhosAgro-Cherepovets (CJSC PhosAgro AG) 2013-present: Human Resources and Social Policy Director, PJSC PhosAgro 2017-present: Deputy CEO for Sales and Marketing, PJSC PhosAgro 2017-present: Director for Marketing and Development, PJSC PhosAgro 2013-present: Director of Business Development, PJSC PhosAgro 2013-present: Chief Financial Officer, PJSC PhosAgro 2012-2014: Chief Financial Officer, CJSC PhosAgro AG 2011-2012: Head of Corporate Finance, OJSC Uralkali 2010-2011: Financial Adviser to Chief Executive Officer, OJSC Silvinit 2005-2010: held various positions from Chief Specialist to Chief Financial Officer at LLC Mineral Group 2003-2005: 1st Class Analyst at Securities and Investments Department, OJSC Silvinit 1998-2003: held various positions at Belaruskali Production Association 2010-present: Deputy Chief Executive Officer for Corporate and Legal Matters, PJSC PhosAgro 2006-2011: Head of Legal Department, CJSC PhosAgro AG 2005-2006: Deputy Chief Executive Officer for Legal Affairs, CJSC Lukoil-Neftekhim 2000-2005: Head of Legal Department, Interkhimprom Group 2013-present: Human Resources and Social Policy Director, JSC PhosAgro-Cherepovets (CJSC PhosAgro AG) 2011-2013: Human Resources Director, CJSC PhosAgro AG 2009-2011: Human Resources Director, CJSC Russian Standard 2008-2009: Personnel Development Director, Metinvest Ukraine 2005-2008: Human Resources Director, Leman Commodities S.A. 1996-2005: held various positions at British American Tobacco (UK, Uzbekistan and Russia offices) 2011-2016: Director of Corporate Finance and Investor Relations, PJSC PhosAgro 2008-2011: Head of Corporate Finance Division, OJSC PhosAgro 2003-2008: held various posts in the finance block of OJSC PhosAgro 2012-present: Member of the Board of Directors, PJSC PhosAgro 2012-2013: Adviser to the CEO, OJSC PhosAgro 2012: Deputy CEO for Business Development, CJSC PhosAgro AG 2009-2012: Chief Financial Officer, CJSC PhosAgro AG 2008-2009: Deputy Chief Financial Officer, CJSC PhosAgro AG 2003-2008: held various financial management positions, GAZ Group 2002-2003: Auditor, Ernst & Young 1998-2002: Senior Consultant, Arthur Andersen 2016-present: Deputy CEO for Sales of the JSC PhosAgro-Cherepovets representative office in Moscow 2016: Advisor to the CEO of the JSC PhosAgro-Cherepovets representative office in Moscow 2012-2016: CEO, LLC PhosAgro-Region 2013-2015: Adviser to the Division for Mineral Fertilizer Sales in Eastern Europe and the CIS, CJSC PhosAgro AG 2012: Deputy CEO for Human Resources and Social Affairs, CJSC PhosAgro AG 2011-2012: Deputy CEO for External Communications and Information Policy, CJSC PhosAgro AG 2010-2011: Director for External Communications and Corporate Relations, CJSC PhosAgro AG 2010: Director for organisational and social issues, CJSC PhosAgro AG 2010: First Deputy CEO, CJSC PhosAgro AG Education • Bachelor’s degree in Economics with Honours from Belarus State Economic University (Belarus) • MBA in Finance from Nottingham University Business School (UK) • Graduate degree in Law from the Lomonosov Moscow State University (Russia) • Bachelor of Science degree in Business Management from Nottingham Trent University (UK) • Graduate degree in International Economic Relations from the Tashkent State University of Economics (Uzbekistan) • Graduated from the V. V. • Graduated from the Moscow • Graduated from the Moscow Kuibyshev Moscow Engineering and Construction Institute with a degree Industrial and Civil Construction. PhD in Economics State Financial Academy under the Russian Government with a degree in Finance and Credit State Financial Academy under the Russian Government with a degree in Finance and Credit 106 107 PhosAgro Integrated Report 2016www.phosagro.comSTRATEGIC REPORTCORPORATE RESPONSIBILITY REPORTCORPORATE GOVERNANCE REPORTFINANCIAL STATEMENTSADDITIONAL INFORMATION CORPORATE GOVERNANCE Sven Ombudstvedt Chairman of the Board of Directors Guiding PhosAgro’s strategic performance “ The Board of Directors worked with management during 2016 to update PhosAgro’s strategy through 2020, while also monitoring progress against the strategy and implementation of updated corporate governance standards. “ OUR CORPORATE GOVERNANCE PRINCIPLES PhosAgro has successfully advanced key strategic projects like increasing benefication capacity at Apatit, as well as construction of new ammonia and granulated urea lines at PhosAgro- Cherepovets. The Company’s sales strategy has also moved forwards, with the opening of sales offices in key export markets and expansion of domestic market share. On the regulatory side, we continue to develop our internal systems for health, safety and environment, and are achieving good results. This is an important issue for the Board, as the legal and regulatory environment where we operate is developing. Outside of Russia, PhosAgro is actively engaged in discussions at the European Union level regarding cadmium regulations that are aimed at making phosphate- based fertilizers safer, and the Company successfully got anti-dumping duties against urea from PhosAgro-Cherepovets removed in the US. The Board also engaged in a strategic review, looking at PhosAgro’s development through 2020 with a continued focus on cost competitiveness, which will be helped by higher volumes and more efficient logistics and production. I would like to thank the Board and PhosAgro’s management for the hard work that was put into building a responsible, sustainable business in 2016, and all of PhosAgro’s stakeholders for your continued engagement with the Company. Accountability Equality Responsibility The Board of Directors is accountable to PhosAgro’s General Meeting of Shareholders, and is responsible for: PhosAgro’s corporate governance system is designed to protect shareholders’ rights and ensure equal treatment of all shareholders. • Formulating the Company’s strategy • Establishing and maintaining systems that enable it to monitor PhosAgro’s performance • Holding management accountable for successful implementation of the Company’s strategy PhosAgro values the rights of all stakeholders and aims to cooperate with a wide range of individuals and institutions to find ways to ensure the Company’s financial stability and its successful, sustainable development. Transparency We strive to ensure the appropriate disclosure of reliable information on all significant issues related to our operations, including financial status, social and environmental performance, operating results and ownership. How governance works at PhosAgro Our Shareholders’ Meeting is the principal forum through which the Company’s shareholders take decisions on the most significant issues affecting our business. These include approving financial statements and amending the Company’s Charter and other internal documents. The Board of Directors provides overall guidance to the Company except in areas that are the remit of the Shareholders’ Meeting. It sets targets and oversees their implementation by the Management Board and the Chief Executive Officer. The Management Board and the Chief Executive Officer manage the Company’s day-to-day operations and implement the strategy approved by the Board of Directors. The General Shareholders’ Meeting The General Shareholders’ Meeting is the Company’s highest governing body and is convened by the Board of Directors at least once a year. The Annual General Meeting is held between 1 March and 30 June each year. Extraordinary General Meetings may be convened by the Board of Directors on its own initiative or at the request of the Review Committee, the external auditor or a shareholder owning individually or together with other shareholders at least 10% of the issued voting shares. The General Shareholders’ Meeting has the exclusive authority to take decisions on a number of matters, including: • implementation of amendments and additions to the Company’s Charter, or adoption of a new version of the Charter as of the date established by the Board of Directors. General Shareholders’ Meetings are usually held in Russia (Moscow). Our Board of Directors has been chaired by an independent director since 2011. It operates in accordance with the Law on Joint Stock Companies, the Company’s Charter, the Central Bank of Russia’s recommended Corporate Governance Code, guidelines of the UK Corporate Governance Code and generally accepted good practice in corporate governance. • reorganisation or liquidation of the Company • election and removal of members of the Board of Directors • increases or reductions in the Company’s authorised capital • approval of the Company’s external auditor • approval of the Company’s annual reports and financial statements Key activities undertaken by the Board of Directors in 2016 included: • reviewing the Company’s operational • distribution of profits, including payment priorities for 2016 • using the KPI system to determine the size of bonus payments for executives and management in 2015 • monitoring risk management performance • approving PhosAgro’s updated Corporate Secretary Policy • approving PhosAgro’s Internal Audit Policy • ensuring compliance with the Company’s Information Policy and determining the Information Policy priorities for 2017 • approving PhosAgro’s Risk Management Policy • approving PhosAgro’s updated Corporate Governance Code • approving PhosAgro’s updated Insider Information Policy • updating the Company’s strategy to 2020 • determining the Company’s operational priorities for 2017 • reviewing the Company’s budget for 2017 of dividends • payment of remuneration to the members of the Board of Directors and the Review Committee Voting at a General Shareholders’ Meeting is generally based on the principle of one vote per ordinary share, with the exception of the election of the Board of Directors, which is done by cumulative voting. According to the Law on Joint Stock Companies, the quorum requirement for a General Shareholders’ Meeting is that shareholders (or their representatives) accounting for more than 50% of the issued voting shares must be present. A General Shareholders’ Meeting may be held in the form of a meeting or by absentee ballot. All shareholders entitled to participate in a General Shareholders’ Meeting are notified of the Meeting by a notice sent by post or in person in most cases no less than 20 days prior to a Meeting. The list of persons entitled to participate in a General Shareholders’ Meeting is compiled on the basis of data in the Company’s register of shareholders 108 109 PhosAgro Integrated Report 2016www.phosagro.comSTRATEGIC REPORTCORPORATE RESPONSIBILITY REPORTCORPORATE GOVERNANCE REPORTFINANCIAL STATEMENTSADDITIONAL INFORMATION As of 31 December 2016, the Board of Directors consisted of eight members, three of whom were independent non- executive directors (INEDs). The number of directors and the membership of the Board of Directors are determined by the General Shareholders’ Meeting, with the term of appointment being until the next Annual General Shareholders’ Meeting is held. When choosing Board members, it is of paramount importance that the Company find the right balance between professional skills and experience, independence and industry knowledge. An independent director (candidate to serve as an independent director) is a person unrelated to: • the Company • a material shareholder of the Company • a material counterparty of the Company • a competitor of the Company • the government (Russian Federation, constituent entity of the Russian Federation) or a municipality The Board of Directors constantly aims to improve its effectiveness and to comply with the recommendations of the Bank of Russia regarding corporate governance, as well as internationally recognised good practice in corporate governance. The members of the Board of Directors are elected at the Annual General Shareholders’ Meeting by cumulative voting. In 2016, the Board of Directors held 10 meetings covering a total of 87 issues. Significant attention was paid to matters of corporate governance. Since 2012, systemic changes have been and continue to be made to the legislation governing shareholders. Amendments have been made to Russia’s Civil Code, the Law on Joint Stock Companies and the Law on Securities Markets, as well as many other pieces of legislation and related regulations. Several new regulations entered force in April 2014, including a new Corporate Governance Code introduced by the Central Bank of Russia. Some of the requirements of the latter were also included in the listing rules, which must be followed for stocks to be included in the quotation list, as well as to maintain a given listing level. Board Audit Committee Strategy Committee Remuneration and Human Resources Committee Risk Management Committee Environment Health and Safety Committee Year of Birth Held Attended Held Attended Held Attended Held Attended Held Attended Held Attended 1982 10 1963 1960 1966 1961 1953 1971 1942 1975 10 10 10 10 10 4 10 6 10 9 10 10 10 10 4 10 6 2 2 2 2 4 4 4 4 4 4 4 4 4 4 4 4 2 2 3 3 3 3 3 3 4 4 4 2 2 4 2 2 Name Andrey A. Guryev Igor Antoshin Andrey G. Guryev Sven Ombudstvedt Marcus Rhodes Ivan Rodionov Roman Osipov James Rogers Mikhail Rybnikov Issuers whose shares are included in organised trading were given a period of two years to bring their internal documentation and corporate governance structure into compliance with the listing rules. The Central Bank of Russia also requires issuers to include an annex to their annual report certifying compliance with the principles of the Central Bank of Russia Code. During 2015–2016, the Company reviewed the internal documentation regulating its operations, including the Company’s Charter, the Shareholder Meeting Policy, the Board of Directors’ Policy, four committee policies, the Corporate Secretary Policy and the Audit Policy. The corporate governance structure was also updated, including the structure of the Audit Department and of the Risk Management Department, among other changes. The final step in this process was the Company’s Corporate Governance Code, which the Board of Directors approved in November 2016. that took effect on 1 January 2017, primarily concerning the regulation of transactions. members of the Board of Directors who have relevant experience and expertise in the area of each Committee’s focus. Based on committee recommendations, the Board of Directors also reviewed and approved other important corporate governance documents in 2016, including: the Risk Appetite Policy, the internal audit and Internal Control Policy, the updated Corporate Secretary Policy and the Insider Information Policy. The Board of Directors decided to engage a third party, PricewaterhouseCoopers Consulting, to conduct an independent review of its activity to ensure absolute compliance with the Corporate Governance Code. At its meeting in December, the Board of Directors reviewed and approved the updated strategy until 2020, the Company’s consolidated budget for 2017 and the operational priorities for 2017. The Committees can also involve external experts and consultants in their work. The primary role of the Committees is the preliminary consideration of the key issues reserved for the Company’s Board of Directors. The Committees are responsible for ensuring that issues brought before the Board have been subject to sufficient review in order to ensure that the Directors are able to cast their votes based on full and accurate information. To achieve this, Committee members maintain a regular dialogue with management, the Company’s external auditor and other advisers on the issues that fall within their remit. The Board of Directors reviewed the updated Charter and recommended it for approval by the General Shareholders’ Meeting to account for legislative changes Board Committees The Committees of the Board of Directors are advisory and consultative bodies. The Board Committees consist of current List of transactions by members of the Board of Directors and the Management Board to purchase or sell PhosAgro shares in 2016 IVAN RODIONOV Type of transaction Type of security Number of securities Date of transaction Purchase Global Depositary Receipts 14,500 12 July 2016 IGOR ANTOSHIN Type of transaction Type of security Number of securities Date of transaction REPO PJSC PhosAgro shares 2,489,540 21 December 2016 110 111 PhosAgro Integrated Report 2016www.phosagro.comCorporate governance (continued)STRATEGIC REPORTCORPORATE RESPONSIBILITY REPORTCORPORATE GOVERNANCE REPORTFINANCIAL STATEMENTSADDITIONAL INFORMATION Marcus Rhodes Committee Chairman “ PhosAgro continues to introduce and upgrade automated systems to improve the speed and quality of its financial reporting. “ AUDIT COMMITTEE Сommittee members As of 31 December 2016, the Audit Committee comprised: The Committee’s remit includes: • reviewing the IFRS financials for integrity and transparency Marcus Rhodes Committee Chairman, Independent Non-executive Director of the Board of Directors • analysing financial reporting processes, including carrying out regular reviews and making recommendations • recommending the Company’s external auditor to the Board of Directors and maintaining an ongoing relationship with the external auditor • analysing and supporting the internal audit system and risk management procedures, including drafting of recommendations for their improvement Sven Ombudstvedt Committee Member, Independent Non-executive Director of the Board of Directors James Rogers Committee Member, Independent Non-executive Director of the Board of Directors Key areas The Audit Committee supervises the Company’s financial and accounting activities. It reviews and evaluates the Company’s financial statements, which are prepared by the Company and audited by the Company’s external auditor. According to the Statute of PhosAgro’s Audit Committee, the Audit Committee shall consist of not fewer than three current members of the Board of Directors, and shall be chaired by an independent director. Andrey A. Guryev Committee Chairman “ During 2016, we undertook a strategic review of PhosAgro’s development plan through 2020. “ STRATEGY COMMITTEE Сommittee members As of 31 December 2016, the Audit Committee comprised: Andrey A. Guryev Committee Chairman, Executive Director of the Board of Directors Andrey G. Guryev Committee Member, Non-executive Director of the Board of Directors Mikhail Rybnikov Committee Member, Executive Director of the Board of Directors. Key areas Directs the development of the Company’s strategy and related processes, including management of the Company’s assets and the review of major innovation and investment programmes and projects. The Committee’s remit includes: • Monitoring and updating the Company’s mid-term and long-term strategy, and drafting policy as required • Evaluating the development of the Company’s subsidiaries, including reviewing their strategies • Making recommendations regarding the Company’s M&A projects • Analysing and making recommendations regarding potential strategic partnerships The Audit Committee and the Company continue to focus on optimising the internal business processes involved in preparation of PhosAgro’s financial reporting. We aim to ensure accuracy and completeness, while also speeding up the process of collecting and verifying data. Looking ahead to 2017, our aim is to continue moving PhosAgro’s reporting dates closer to those of global leaders in transparency and disclosure. Activities in 2016 During the reporting period, the Audit Committee held four meetings, in which matters covering priority areas of the Company’s activity were considered. Considerable focus was placed on improving internal audit procedures. In 2016, the Audit Committee focused on: • making recommendations for, and • futher improving the quality of the financial monitoring the implementation of, OeBS accounting and reporting preparation Oracle v. 12.0 process, as confirmed by the Company’s • establishing targets and monitoring the auditors implementation of the IFRS 2017 budget • monitoring the implementation of the Hyperion consolidated financial reporting automation system The Committee was pleased to note successful implementation of all of PhosAgro’s strategic goals for 2016, and that the Company is on track to complete key investment projects on schedule. We are currently in the process of finalising PhosAgro’s development strategy through 2025, which is aimed at further strengthening the Company’s leading position in the global phosphate-based fertilizer industry. Activities in 2016 In 2016, the Strategy Committee held two meetings, where it focused on: • identifying key strategic activities for 2016 • updating the Company’s strategy through • reviewing the Committee’s work in 2015 2020 • reviewing implementation of strategy in 2016 and plans for 2017 • making investment and borrowing plans for 2017 and 2018 112 113 PhosAgro Integrated Report 2016www.phosagro.comCorporate governance (continued)STRATEGIC REPORTCORPORATE RESPONSIBILITY REPORTCORPORATE GOVERNANCE REPORTFINANCIAL STATEMENTSADDITIONAL INFORMATION REMUNERATION AND HUMAN RESOURCES COMMITTEE ENVIRONMENTAL, HEALTH AND SAFETY COMMITEE Сommittee members As of 31 December 2016, the Remuneration and Human Resources Committee comprised: James Rogers Committee Chairman, Independent Non-executive Director of the Board of Directors Sven Ombudstvedt Committee Member, Independent Non-executive Director of the Board of Directors Marcus Rhodes Committee Member, Independent Non-executive Director of the Board of Directors Key areas The Remuneration and Human Resources Committee’s Statute requires that the Committee’s Chairman be an Independent Non-executive Director on the Company’s Board of Directors, and that the Chief Executive Officer cannot be a member of the Committee. The Committee’s remit includes: • developing of the Company’s policy in relation to organising the activities and motivation of the Board of Directors • developing of the Human Resources Policy in relation to the Company’s senior management, and supervising its implementation “ Jim Rogers Committee Chairman “ We continue to focus on ensuring management KPIs and remuneration are aligned with key stakeholder interests. “ Сommittee members As of 31 December 2016, the Environmental, Health and Safety Committee comprised: Igor Antoshin Committee Chairman, Non-executive Director of the Board of Directors Andrey A. Guryev Committee Member, Executive Director of the Board of Directors Sven Ombudstvedt Committee Member, Independent Non-executive Director of the Board of Directors Key areas The Environmental, Health and Safety Committee was formed to oversee the Company’s activities in the areas of environmental protection, efficient use of natural resources and energy, and occupational health and safety for employees, including the avoidance of industrial accidents, and to advise the Board of Directors on such issues. The Committee’s remit includes: • ensuring the Company’s compliance with legal and regulatory requirements relating to environmental and health and safety issues • ensuring the Company’s development and enforcement of policies, procedures and practices beneficial to the protection of the environment and the health and safety of employees, contractors, customers and the public • evaluating the Company’s efficient use of natural resources and energy, enforcement of energy-saving and resource-conservation activities within the Company, and providing recommendations for further implementation and improvement of these activities • preventing industrial accidents, including plans, programmes and processes established by the Company to evaluate, manage and decrease risks of industrial accidents • Improving conditions related to the health and safety of the Company’s employees, and enforcing policies for decreasing and eliminating occupational injuries “ Igor Antoshin Committee Chairman We have implemented best practice HSE policies across PhosAgro and have improved performance in this area. In 2016, the Committee reviewed the Company’s HSE reports every quarter. Special attention was paid to targeted programmes and work schedules, as well as to monitoring implementation. Investments and target projects aimed at reducing our environmental impact were reviewed and evaluated. Changes to environmental legislation were reviewed for potential impacts on the Company’s operations. The Committee surveyed and evaluated management’s performance with regards to environmental permits and measures undertaken to address issues identified during inspections. In 2016, the Committee reviewed management KPI and bonus policies to ensure that they continued to align management interests with those of key stakeholders. The Committee also finalised the headcount optimisation, which has significantly streamlined PhosAgro’s operations. Activities in 2016 During the reporting period, the Remuneration and Human Resources Committee held four meetings. The main issues considered by the Committee during 2016 were: • analysis of implementation of the • evaluation of the independence of Company’s social programmes in 2015 and candidates for the Board of Directors priority areas of social policy in 2016 • evaluation of the work of the Board of • evaluation of the performance of the Chief Directors in 2016 Executive Officer and the Management Board, recommendations for the Board of Directors regarding their reappointment • assessment of the headcount optimisation programme at PhosAgro and its subsidiaries; • review of the Human Resources Policy for PhosAgro and its subsidiaries In 2016, Committee members received monthly reports containing up-to-date information about: industrial injuries, accidents and incidents; ongoing audits by government agencies, results of such audits, and corrective actions recommended during the audits; implementation of such measures as internal audits, incident investigations, special evaluations of labour conditions, and the investigation and reporting of occupational diseases; performance of industrial analyses. The Committee’s input has helped to improve the quality and the scope of reporting. This ensures a deeper and more efficient review of HSE issues by both the Committee and the Board of Directors. Activities in 2016 During the reporting period, the Environmental, Health and Safety Committee held three meetings, at which the following issues were covered: • proposed changes to the Committee • evaluation of the results of subsidiaries’ regulations in connection with new work on compliance with environmental requirements issued by the Moscow regulations in 2015 and for the first nine Exchange and the Russian Corporate months of 2016 Governance Code • evaluation of subsidiaries’ comprehensive • review of PhosAgro’s integrated report safety systems for handling hazardous for 2015 cargoes (storage, loading and • evaluation of the results of subsidiaries’ transportation) work on compliance with workplace • review of proposed changes to Russian health and safety regulations for Federation environmental protection hazardous production sites in 2015 and for legislation and analysis of possible effects the first nine months of 2016 for the Company 114 115 PhosAgro Integrated Report 2016www.phosagro.comCorporate governance (continued)STRATEGIC REPORTCORPORATE RESPONSIBILITY REPORTCORPORATE GOVERNANCE REPORTFINANCIAL STATEMENTSADDITIONAL INFORMATION RISK MANAGEMENT COMMITTEE EXECUTIVE BODY The Committee’s remit includes: • evaluating the effectiveness of the Company’s risk management system and making recommendations regarding improvements • preparing recommendations for the Company’s Board of Directors regarding: – risk management methodology, determining the Company’s most material risks that require constant monitoring and management, and recommendations regarding improvements to the unified risk management system – determining the Company’s risk appetite and its risk tolerance – changes and additions to PhosAgro’s risk management policy Сommittee members As of 31 December 2016, the Risk Management Committee comprised: Ivan Rodionov Committee Chairman, Non-executive Director of the Board of Directors Andrey A. Guryev Committee Member, Executive Director of the Board of Directors Mikhail Rybnikov Committee Member, Executive Director of the Board of Directors Key areas The Risk Management Committee was created in 2014 with the goal of developing recommendations and proposals for the Board of Directors and other management bodies with regard to identification and management of material risks for the Company, as well as improvements to, and further development of, the Company’s risk management systems. Ivan Rodionov Committee Chairman “ The Committee monitored the implementation of risk management systems across the enterprise, and met several times to analyse emerging risks related to events that took place during the year. “ In 2016, the Committee continued to develop and further improve its Risk Management Policy, and to review our risk analysis and risk tolerance in line with the current market situation. Throughout the year, the Board of Directors received regular risk management updates. Activities in 2016 • monitoring how PhosAgro’s key risks are • providing recommendations managed to management on risk management • considering PhosAgro’s risk appetite policies and procedures • review of PhosAgro’s key risks and updates to its risk map During the reporting period, the Management Board held seven meetings, at which it reviewed the Company’s quarterly financial and operational performance. It approved the 2016 budget in March and the 2017 budget in December. The Management Board also made decisions to approve and amend the charity budget. Senior management The Management Board effectively represents PhosAgro’s senior management. It oversees the day-to-day operations of the Company and implements the Company’s strategy. The Chief Executive Officer According to the Company’s Charter, the Chief Executive Officer is appointed by the Company’s Board of Directors for a period of one year and may be dismissed by a decision of the Board of Directors at any time. The Company’s Corporate Governance Code provides that the Chief Executive Officer shall act in good faith and with due diligence to further the interests of the Company and its shareholders. All issues related to the Company’s day-to-day operations are within the authority and responsibility of the Chief Executive Officer except for those matters that are subject to ratification by the General Shareholders’ Meeting, the Company’s Board of Directors and/or the Management Board. The Chief Executive Officer, together with the Management Board, is responsible for ensuring that the Company’s strategy and the decisions of the General Shareholders’ Meeting and the Board of Directors are implemented. In order to ensure efficient corporate communications between the Company’s Board of Directors and the Chief Executive Officer, the Chief Executive Officer submits regular quarterly reports to the Board. Some of the matters for which the Chief Executive Officer is responsible are: • deciding on all issues related to the Company that do not fall within the competence of the General Shareholders’ Meeting, the Board of Directors or the Management Board • representing the Company before all federal and local authorities and in meetings with organisations and entities in Russia and abroad • hiring and dismissing the Company’s personnel • carrying out all other activities and legal steps required to be conducted on behalf of the Company in accordance with the Company’s Charter, decisions of the Board of Directors and the General Shareholders’ Meeting and/or in accordance with current legislation Andrey A. Guryev was the Company’s Chief Executive Officer throughout 2016. For Mr Guryev’s biographical details, please see the “Board of Directors” section of this report. Management Board As of 31 December 2016, the Management Board consisted of: Andrey A. Guryev Chairman of the Management Board Mikhail Rybnikov Member of the Management Board Siroj Loikov Member of the Management Board Alexander Sharabaiko Member of the Management Board Alexei Sirotenko Member of the Management Board The matters that are within the competence of the Management Board are set out in the Charter, and include: • reviewing, revising and approving of PhosAgro’s quarterly and annual budgets • developing PhosAgro’s capital expenditure plans and strategy with respect to any new business activities • deciding to enter into, change or terminate certain transactions related to the disposal of securities and stakes in other companies • arranging the preparation and provision of reports to the Board of Directors on PhosAgro’s financial and operating performance • approving incentivisation and similar documents that determine the compensation and benefit policies for PhosAgro employees • electing and removing of the secretary of the Management Board and his/her powers 116 117 PhosAgro Integrated Report 2016www.phosagro.comCorporate governance (continued)STRATEGIC REPORTCORPORATE RESPONSIBILITY REPORTCORPORATE GOVERNANCE REPORTFINANCIAL STATEMENTSADDITIONAL INFORMATION Board and senior management remuneration Members of PhosAgro’s Board of Directors may receive remuneration and be compensated for expenses incurred in the course of their duties in accordance with decisions of the General Shareholders’ Meeting. According to the Company’s Corporate Governance Code, the remuneration of the Board of Directors shall be in line with current market conditions and shall be at a level that enables the Company to attract, motivate and retain highly skilled professionals to help drive the future growth and performance of the business. At the same time, the remuneration shall not exceed the amount needed to achieve this. In 2016, the total remuneration paid to the Board of Directors of PhosAgro was USD 800.0 thousand and RUB 9,247.1 thousand. The amount of remuneration and additional compensation paid to the Chief Executive Officer of PhosAgro is regulated by a contract between the Chief Executive Officer and the Company, which is signed by the Company’s Board of Directors. The total remuneration reflects the Chief Executive Officer’s qualifications and takes into account the particular contribution of the Chief Executive Officer to the Company’s financial results. The remuneration paid by the Company to the Chief Executive Officer and the four other members of the Management Board (who represent the Senior Management Team) for their services to the Company during the year ended 31 December 2016 was RUB 234.6 million in salary and additional compensation. The remuneration of the Company’s senior managers consists of base salary, which is paid monthly, plus additional compensation, paid quarterly and annually. Payment of additional compensation is based on achieving the Company’s key performance indicators and accomplishing additional tasks and goals, as set by the Board of Directors and Chief Executive Officer for the reporting quarter or year. The key performance indicators for each individual senior manager are set by period and mainly consist of indicators for sustaining operational efficiency as well as contributing to the achievement of corporate growth and strategy. Annual additional compensation is calculated by adding percentages (as set by the Board of Directors) of the Company’s EBITDA for the reporting period. Insider Information Policy PhosAgro has instituted a well-defined policy on insider information that is one of the most important factors in ensuring that the rights and interests of its shareholders and investors are respected. The Company’s principles are outlined in the Regulation on Insider Information, which is available on the website. An insider is a person who has the right to access insider information as part of his or her job description or in line with an internal Company document, a contract with the Company or a law or regulatory requirement. PhosAgro’s Internal Audit Department, which reports to the Board of Directors, is responsible for ensuring compliance with current laws and regulations on insider information. In 2016, the Board of Directors approved a revised version of the policy to account for changes in Russian legislation, as well as the requirements of the European Union’s newly enacted regulation aimed at combating market manipulation. PhosAgro controls insider activity by placing restrictions on the use and circulation of insider information. For example, insiders may not pass on information available to them to other individuals except in cases expressly provided for in current legislation and the Company’s documents. The Corporate Secretary’s office maintains lists of insiders and notifies insiders of their inclusion on these lists. The office gathers data on possible or actual disclosures of insider information and brings them to the attention of the Company’s Board of Directors. In the event that the Company suffers a loss due to a breach of the Insider Information Policy, the insider is required to compensate the Company for any damages. Dividend Policy PhosAgro’s Dividend Policy is based on the following principles: • shareholders’ interests are to be balanced between the payment of dividends and reinvestment of profit into further development • there is to be a transparent and predictable dividend policy that is attractive to investors • the majority of profit is to be used for reinvestment to support the Company’s growth A decision on the payment of a dividend, its timing and the exact amount of such a payment is subject to approval of the General Shareholders’ Meeting, based on recommendations provided by PhosAgro’s Board of Directors. The Board of Directors’ recommendations depend primarily on PhosAgro’s net profit under IFRS, while other factors such as cash requirements and financial position are also considered. While formally the amount of dividend payments is based on the Company’s net profits for the first quarter, six months, nine months and/or full year calculated under Russian Accounting Standards (RAS), and payments are made in relation to these specific periods, the Board of Directors bases its dividend decisions on the Company’s IFRS results. A decision on the payment of an interim dividend is made at the General Shareholders’ Meeting within three months of the end of the relevant period. If the dividends are approved by the General Shareholders’ Meeting, decisions regarding ex-dividend dates are made based on the recommendations of the Board of Directors. The ex-dividend date must be set between 10 and 20 days from the date of the decision to pay dividends. Dividends must be paid to registered shareholders who are nominee shareholders that are professional securities traders or fund managers within 10 working days from the ex-dividend date. Other registered shareholders must be paid within 25 working days after the ex-dividend date. Holders of PhosAgro GDRs are also entitled to receive dividends in respect of shares underlying the GDRs, subject to the terms of their depositary agreements. In determining the size of dividends to be paid out, the Board of Directors will always try to recommend dividend payments of between 30% and 50% of the consolidated profit for the year, calculated in accordance with IFRS. Dividend payments in 2016 totalled nearly 50% of the Company’s net profit for the period. The Review Committee The Review Committee may undertake internal audit procedures either on its own initiative, pursuant to a decision of the General Shareholders’ Meeting or the Board of Directors or at the request of shareholders owning at least 10% of the shares in the Company. The General Shareholders’ Meeting elects the members of the Review Committee for the period until the next Annual General Shareholders’ Meeting. The Review Committee comprises three members and is led by the Chairman of the Review Committee. Members of the Committee cannot be on the Company’s Board of Directors at the same time, nor can they hold positions in the Company’s executive bodies. Internal Audit Department The responsibility for performing internal audits of PhosAgro falls on the Internal Audit Department. It is an independent department within PhosAgro that functionally reports to the Audit Committee of the Board of Directors and administratively reports to the CEO. The Internal Audit Department is tasked with improving the efficiency of business- process management, internal control and risk management systems of PhosAgro and its subsidiaries by conducting an independent and objective assessment of their risk management, corporate governance, information systems and internal control, as well as other projects that fall within the department’s scope as required by the international internal audit standards established by the Institute of Internal Auditors. In 2016, the Board of Directors approved a new Internal Audit Policy that was developed in compliance with the corporate governance code, the recommendations of the Central Bank of Russia and the Moscow Exchange’s listing rules. The policy outlines the Internal Audit Department’s goals and tasks, the rights and responsibilities of its staff, as well as the conditions that guarantee its operational independence. The department has also been reorganised into two functional units to comply with the new policy: • the internal audit function audits the efficiency of business processes, including the risk management and internal control systems; • the special projects function implements bespoke projects, including research and forensics. New documents regulating the Internal Audit Department have been confirmed to reflect the reorganisation, including staff job descriptions that have been developed to comply with the internal auditor professional standard. In 2016, the department audited the following business processes: capital construction, domestic sales, energy management, environmental compliance and industrial safety. It also brought on external consultants to help audit the risk management system. The Internal Audit Department’s plans for 2017 include auditing the following business processes: mining and refining, fertilizer production, transportation logistics, insider information and export sales. 118 119 PhosAgro Integrated Report 2016www.phosagro.comCorporate governance (continued)STRATEGIC REPORTCORPORATE RESPONSIBILITY REPORTCORPORATE GOVERNANCE REPORTFINANCIAL STATEMENTSADDITIONAL INFORMATION INTERNAL CONTROL AND AUDIT Internal control body REVIEW COMMITTEE Appointed by General Shareholders’ Meeting Reports to General Shareholders’ Meeting Functions AUDIT COMMITTEE OF THE BOARD OF DIRECTORS BOARD OF DIRECTORS Board of Directors Board of Directors General Shareholders’ Meeting Shareholders Prepares a report on the results of the Company’s operations for the prior year ahead of the Annual General Shareholders’ Meeting and gives its opinion on whether the Company’s financial statements are true and accurate. Conducts internal audit procedures and ensures compliance with Russian Accounting Standards (RAS). Monitors compliance with current legislation, the Company Charter and internal regulations. Improves the efficiency and quality of the work of the Board of Directors in the area of internal control. Considers issues and provides recommendations to the Board of Directors in areas like: • internal and external audits • the accuracy and efficiency of internal control procedures • management accounting and financial reporting • risk management procedures and systems • how risks are reflected in the Company’s reporting Supervises the Internal Audit Department. Determines how the internal control system operates and approves various actions and policies relating to it. Reports annually to the General Shareholders’ Meeting on the reliability and efficiency of PhosAgro’s internal control system. Approves the appointment and dismissal of the Director of Internal Audit. Internal control body CHIEF EXECUTIVE OFFICER Appointed by Board of Directors Reports to Board of Directors Functions INTERNAL AUDIT DEPARTMENT EXTERNAL AUDITOR Board of Directors General Shareholders’ Meeting Functional: Audit Committee Audit Committee Functioning of PhosAgro’s internal control system. Implements internal control procedures and ensures that they are put into practice. Promptly informs the Board of Directors of any significant risks faced by the Company or any major weaknesses in the Company’s internal control system. Tells the Board what measures have been or will be taken to address issues and results of these actions. Provides an independent and objective assessment of the Company’s internal control and risk management systems. Verifies the compliance, in terms of accuracy and completeness, of the Company’s annual financial statements with IFRS. Assists top management in developing and monitoring the implementation of procedures and measures to improve the risk management, internal control and corporate governance systems. Coordinates with the Company’s external auditors and other third parties. Conducts internal audits of subsidiaries in line with established procedures. Prepares and presents information about the internal audit function’s operations for the Board of Directors, Audit Committee and General Shareholders’ Meeting. Verifies compliance of management and employees with legislation and internal regulations on insider information. Inspects the Company’s financial and commercial operations and its internal control systems. Prepares a report that is submitted to the Audit Committee at least once a year. In case of a disagreement between the Company’s management and the independent auditor, the Audit Committee oversees the resolution of the disagreement. KPMG is currently PhosAgro’s external auditor. 120 121 PhosAgro Integrated Report 2016www.phosagro.comCorporate governance (continued)STRATEGIC REPORTCORPORATE RESPONSIBILITY REPORTCORPORATE GOVERNANCE REPORTFINANCIAL STATEMENTSADDITIONAL INFORMATION MANAGEMENT RESPONSIBILITY STATEMENT The Company’s management hereby confirms that, to the best of its knowledge: a. The financial statements prepared in accordance with International Financial Reporting Standards as issued by the International Accounting Standards Board give a true and fair view of the assets, liabilities, financial position and profit or loss of the Company and the undertakings included in the consolidation taken as a whole; b. The management report includes a fair review of the development and performance of the business and the position of the Company and the undertakings included in the consolidation taken as a whole, together with a description of the principal risks and uncertainties that they face. The consolidated financial statements for the year ended 31 December 2016 were approved by the Company’s management on 21 March 2017. Pre-approved by the Board of Directors March 21, 2017 Approved by the Annual General Meeting of Shareholders May 30, 2017. Andrey A. Guryev Chairman of the Management Board and Chief Executive Officer of PJSC PhosAgro Andrey A. Guryev Chairman of the Management Board and Chief Executive Officer of PJSC PhosAgro 122 PhosAgro Integrated Report 2016 CONSOLIDATED FINANCIAL STATEMENTS Contents Auditors’ Report Consolidated Statement of Profit or Loss and Other Comprehensive Income Consolidated Statement of Financial Position Consolidated Statement of Cash Flows Consolidated Statement of Changes in Equity Notes to the Consolidated Financial Statements 1. 2. 3. Background Basis of preparation Significant accounting policies 4. Determination of fair values 5. 6. 7. Segment information Revenues Personnel costs 8. Cost of sales 9. Administrative expenses 10. Selling expenses 11. Other expenses, net 12. Finance income and finance costs 13. Income tax expense 14. Property, plant and equipment 15. Investments in associates 16. Deferred tax assets and liabilities 17. Other non-current assets 18. Other current investments 19. Inventories 20. Trade and other receivables 21. Cash and cash equivalents 22. Equity 23. Earnings per share 24. Loans and borrowings 25. Defined benefit obligations 26. Leases 27. Trade and other payables 28. Financial risk management 29. Commitments 30. Contingencies 31. Related party transactions 32. Significant subsidiaries 33. Events subsequent to the reporting date 124 127 128 129 130 131 131 131 132 137 138 139 139 140 140 140 140 140 141 142 143 144 146 146 147 147 148 148 149 150 152 153 153 154 159 159 160 161 161 123 STRATEGIC REPORTCORPORATE RESPONSIBILITY REPORTCORPORATE GOVERNANCE REPORTFINANCIAL STATEMENTSADDITIONAL INFORMATIONwww.phosagro.com JSC “KPMG” 10 Presnenskaya Naberezhnaya Moscow, Russia 123112 Telephone Fax Internet +7 (495) 937 4477 +7 (495) 937 4400/99 www.kpmg.ru Independent Auditors’ Report To the Shareholders and Board of Directors PJSC “PhosAgro” Opinion We have audited the consolidated financial statements of PJSC “PhosAgro” (the “Company”) and its subsidiaries (the “Group”), which comprise the consolidated statement of financial position as at 31 December 2016, the consolidated statements of profit or loss and other comprehensive income, changes in equity and cash flows for the year then ended, and notes, comprising significant accounting policies and other explanatory information. In our opinion, the accompanying consolidated financial statements present fairly, in all material respects, the consolidated financial position of the Group as at 31 December 2016, and its consolidated financial performance and its consolidated cash flows for the year then ended in accordance with International Financial Reporting Standards (IFRS). Basis for Opinion We conducted our audit in accordance with International Standards on Auditing (ISAs). Our responsibilities under those standards are further described in the Auditors’ Responsibilities for the Audit of the Consolidated Financial Statements section of our report. We are independent of the VALUATION OF DEFERRED TAX ASSETS Please refer to the Note 16 in the consolidated financial statements. Group in accordance with the independence requirements that are relevant to our audit of the consolidated financial statements in the Russian Federation and with the International Ethics Standards Board for Accountants’ Code of Ethics for Professional Accountants (IESBA Code), and we have fulfilled our other ethical responsibilities in accordance with the requirements in the Russian Federation and the IESBA Code. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion. Key Audit Matters Key audit matters are those matters that, in our professional judgment, were of most significance in our audit of the consolidated financial statements of the current period. These matters were addressed in the context of our audit of the consolidated financial statements as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters. The key audit matter The Group has recognised significant deferred tax assets in respect of tax losses. The recovery of the deferred tax assets depends on achieving sufficient taxable profits in the future. Future taxable profits to be used for utilisation of tax losses accumulated by the Company mainly represent interest income to be received by the Company on the loans issued to the Group subsidiaries less interest expense of the Company from financing. The assessment of the potential to utilise the tax losses is dependent on the forecast profitability of the Group subsidiaries, the amount of dividends to be distributed to the Company, expected foreign currency exchange and interest rates for loans to be issued by the Company to Group subsidiaries and financing to be received by the Company. There is inherent uncertainty involved in forecasting timing and quantum of future taxable profits, which support the extent to which tax assets are recognised. Therefore, this is the key judgmental area our audit is concentrated on. Audited entity: PJSC “PhosAgro” Registration No. in the Unified State Register of Legal Entities 1027700190572. Moscow, Russia Independent auditor: JSC “KPMG”, a company incorporated under the Laws of the Russian Federation, a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. Registration No. in the Unified State Register of Legal Entities 1027700125628. Member of the Self-regulated organization of auditors “Russian Union of auditors” (Association). The Principal Registration Number of the Entry in the Register of Auditors and Audit Organisations: No. 11603053203. PJSC “PhosAgro” Independent Auditors’ Report Page 2 How the matter was addressed in our audit Our audit procedures included the following: We analysed the underlying methodology and tested the mathematical accuracy of the taxable profits forecast model used to estimate the likelihood of the recovery of deferred tax assets. We evaluated the appropriateness of management’s key assumptions and estimates, in particular the likelihood of generating sufficient future taxable profits to support the recognition of deferred tax assets, in reference to performance trends and dividend capacity of the Group subsidiaries. We corroborated expected interest rates for loans to be issued and financing to be received by the Company to publicly available market benchmarks. Using KPMG tax specialist, we considered the appropriateness of the application of relevant tax legislation by the Group, in relation to the utilisation of tax losses. Other Information Management is responsible for the other information. The other information comprises the information included in the Annual Report but does not include the consolidated financial statements and our auditors’ report thereon. The Annual Report is expected to be made available to us after the date of this auditors’ report. Our opinion on the consolidated financial statements does not cover the other information and we will not express any form of assurance conclusion thereon. In connection with our audit of the consolidated financial statements, our responsibility is to read the other information identified above when it becomes available and, in doing so, consider whether the other information is materially inconsistent with the consolidated financial statements or our knowledge obtained in the audit, or otherwise appears to be materially misstated. Responsibilities of Management and Those Charged with Governance for the Consolidated Financial Statements Management is responsible for the preparation and fair presentation of the consolidated financial statements in accordance with IFRS, and for such internal control as management determines is necessary to enable the preparation of consolidated financial statements that are free from material misstatement, whether due to fraud or error. In preparing the consolidated financial statements, management is responsible for assessing the Group’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 management either intends to liquidate the Group or to cease operations, or has no realistic alternative but to do so. Those charged with governance are responsible for overseeing the Group’s financial reporting process. Auditors’ Responsibilities for the Audit of the Consolidated Financial Statements Our objectives are to obtain reasonable assurance about whether the consolidated financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditors’ 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 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 consolidated financial statements. As part of an audit in accordance with ISAs, we exercise professional judgment and maintain professional skepticism throughout the audit. We also: • Identify and assess the risks of material misstatement of the consolidated financial statements, whether due to fraud or error, design and perform 124 125 Financial Statements (continued)STRATEGIC REPORTCORPORATE RESPONSIBILITY REPORTCORPORATE GOVERNANCE REPORTFINANCIAL STATEMENTSADDITIONAL INFORMATIONPhosAgro Integrated Report 2016www.phosagro.com be expected to outweigh the public interest benefits of such communication. The engagement partner on the audit resul- ting in this independent auditors’ report is: I.A. Yagnov JSC “KPMG” Moscow, Russia 24 March 2017 PJSC “PhosAgro” Independent Auditors’ Report Page 3 audit procedures responsive to those risks, and obtain audit evidence that is sufficient and appropriate to provide a basis for our opinion. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control; • Obtain an understanding of internal control relevant to the audit in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Group’s internal control; • Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made by management; • Conclude on the appropriateness of management’s use of the going concern basis of accounting and, based on the audit evidence obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on the Group’s ability to continue as a going concern. If we conclude that a material uncertainty exists, we are required to draw attention in our auditors’ report to the related disclosures in the consolidated financial statements or, if such disclosures are inadequate, to modify our opinion. Our conclusions are based on the audit evidence obtained up to the date of our auditors’ report. However, future events or conditions may cause the Group to cease to continue as a going concern; • Evaluate the overall presentation, structure and content of the consolidated financial statements, including the disclosures, and whether the consolidated financial statements represent the underlying transactions and events in a manner that achieves fair presentation; • Obtain sufficient appropriate audit evidence regarding the financial information of the entities or business activities within the Group to express an opinion on the consolidated financial statements. We are responsible for the direction, supervision and performance of the Group audit. We remain solely responsible for our audit opinion. We communicate with those charged with governance regarding, among other matters, the planned scope and timing of the audit and significant audit findings, including any significant deficiencies in internal control that we identify during our audit. We also provide those charged with governance with a statement that we have complied with relevant ethical requirements regarding independence, and communicate with them all relationships and other matters that may reasonably be thought to bear on our independence, and where applicable, related safeguards. From the matters communicated with those charged with governance, we determine those matters that were of most significance in the audit of the consolidated financial statements of the current period and are therefore the key audit matters. We describe these matters in our auditors’ report unless law or regulation precludes public disclosure about the matter or when, in extremely rare circumstances, we determine that a matter should not be communicated in our report because the adverse consequences of doing so would reasonably CONSOLIDATED STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE INCOME FOR 2016 RUB million Revenues Cost of sales GROSS PROFIT Administrative expenses Selling expenses Taxes, other than income tax Other expenses, net OPERATING PROFIT Finance income Finance costs Foreign exchange gain/(loss), net Share of profit/(loss) of associates PROFIT BEFORE TAX Income tax expense PROFIT FOR THE YEAR Attributable to: • Non-controlling interests* • Shareholders of the Parent OTHER COMPREHENSIVE INCOME Actuarial gains and losses, net of tax Foreign currency translation difference OTHER COMPREHENSIVE (LOSS)/INCOME FOR THE YEAR Note 6 8 9 10 11 12 12 28(b) 15 13 25 2016 187,742 (86,391) 101,351 (13,891) (21,129) (2,261) (2,472) 61,598 909 (4,682) 16,962 140 74,927 (15,041) 59,886 2 59,884 (68) (3,105) (3,173) 2015 189,732 (83,064) 106,668 (12,184) (17,751) (1,994) (1,408) 73,331 1,222 (6,093) (22,178) (59) 46,223 (9,787) 36,436 (6) 36,442 (4) 3,405 3,401 TOTAL COMPREHENSIVE INCOME FOR THE YEAR 56,713 39,837 Attributable to: • Non-controlling interests* • Shareholders of the Parent Basic and diluted earnings per share (in RUB) 23 * non-controlling interests are the minority shareholders of the subsidiaries of PJSC “PhosAgro” The consolidated financial statements were approved on 24 March 2017: 2 56,711 462 (6) 39,843 281 A.A. Guryev Chief executive officer A.F. Sharabaiko Chief financial officer 126 The consolidated statement of profit or loss and other comprehensive income is to be read in conjunction with the notes to, and forming part of, the consolidated financial statements set out on pages 133 to 163. 127 Financial Statements (continued)STRATEGIC REPORTCORPORATE RESPONSIBILITY REPORTCORPORATE GOVERNANCE REPORTFINANCIAL STATEMENTSADDITIONAL INFORMATIONPhosAgro Integrated Report 2016www.phosagro.com CONSOLIDATED STATEMENT OF FINANCIAL POSITION AS AT 31 DECEMBER 2016 CONSOLIDATED STATEMENT OF CASH FLOWS FOR 2016 31 December 2016 31 December 2015 CASH FLOWS FROM OPERATING ACTIVITIES Note RUB million RUB million ASSETS Property, plant and equipment Advances issued for property, plant and equipment Intangible assets Investments in associates Deferred tax assets Other non-current assets Non-current assets Other current investments Inventories Current income tax receivable Trade and other receivables Cash and cash equivalents Current assets TOTAL ASSETS EQUITY Share capital Share premium Retained earnings Other reserves Equity attributable to shareholders of the Parent Equity attributable to non-controlling interests TOTAL EQUITY LIABILITIES Loans and borrowings Defined benefit obligations Deferred tax liabilities Non-current liabilities Trade and other payables Current income tax payable Loans and borrowings Derivative financial liabilities Current liabilities Note 14 15 16 17 18 19 20 21 22 24 25 16 27 24 154,713 120,952 4,684 1,165 816 5,110 2,226 7,424 566 810 5,901 2,822 168,714 138,475 3,282 19,934 339 29,674 7,261 60,490 229,204 372 7,494 74,932 5,486 88,284 137 88,421 98,239 767 4,600 103,606 22,803 237 14,137 - 37,177 4,902 17,814 453 25,511 29,347 78,027 216,502 372 7,494 43,460 8,659 59,985 213 60,198 105,565 424 3,677 109,666 17,011 491 28,947 189 46,638 Profit before tax Adjustments for: Depreciation and amortisation Loss on disposal of property, plant and equipment and intangible assets Finance income Finance costs Share of (profit)/loss of associates Foreign exchange (gain)/loss, net Operating profit before changes in working capital and provisions Increase in inventories Increase in trade and other receivables Increase in trade and other payables Cash flows from operations before income taxes and interest paid Income tax paid Finance costs paid CASH FLOWS FROM OPERATING ACTIVITIES CASH FLOWS FROM INVESTING ACTIVITIES Loans repaid/(issued), net Acquisition of property, plant and equipment and intangible assets Proceeds from disposal of property, plant and equipment Proceeds from disposal of investments Finance income received Cash of Phosint Group at the date of acquisition 2016 74,927 8, 9, 10 10,767 11 12 12 15 614 (909) 4,682 (140) (18,040) 71,901 (2,120) (4,023) 3,019 68,777 (13,451) (4,965) 50,361 253 (40,246) 270 1,277 432 - 2015 46,223 9,133 915 (1,222) 6,093 59 23,663 84,864 (5,287) (6,116) 2,741 76,202 (7,488) (5,453) 63,261 (151) (42,668) 170 - 1,008 10,178 CASH FLOWS USED IN INVESTING ACTIVITIES (38,014) (31,463) CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from borrowings Repayment of borrowings Dividends paid to shareholders of the Parent Dividends paid to non-controlling interests Payment of finance lease liabilities Proceeds from/(payments for) settlement of derivatives, net Acquisition of non-controlling interests Other payments Proceeds from contribution to charter capital of subsidiaries by non-controlling interests 22 34,149 (33,727) (27,974) (9) (1,951) 127 (218) (243) - 46,376 (62,041) (18,130) - (1,905) (1,590) - (154) 71 TOTAL EQUITY AND LIABILITIES 229,204 216,502 CASH FLOWS USED IN FINANCING ACTIVITIES (29,846) (37,373) NET DECREASE IN CASH AND CASH EQUIVALENTS Cash and cash equivalents at 1 January Effect of exchange rates fluctuations CASH AND CASH EQUIVALENTS AT 31 DECEMBER 21 (17,499) 29,347 (4,587) 7,261 (5,575) 30,687 4,235 29,347 128 The consolidated statement of financial position is to be read in conjunction with the notes to, and forming part of, the consolidated financial statements set out on pages 133 to 163. The consolidated statement of cash flows is to be read in conjunction with the notes to, and forming part of, the consolidated financial statements set out on pages 133 to 163. 129 Financial Statements (continued)STRATEGIC REPORTCORPORATE RESPONSIBILITY REPORTCORPORATE GOVERNANCE REPORTFINANCIAL STATEMENTSADDITIONAL INFORMATIONPhosAgro Integrated Report 2016www.phosagro.com CONSOLIDATED STATEMENT OF CHANGES IN EQUITY FOR 2016 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR 2016 RUB million Attributable to shareholders of the Parent Share capital Share premium Retained earnings Actuarial gains and losses Foreign currency translation reserve Attributable to non- controlling interests Total BALANCE AT 1 JANUARY 2015 372 7,494 22,708 (312) 5,570 149 35,981 Total comprehensive income for the year Profit for the year Actuarial gains and losses, net of tax Foreign currency translation difference - - - - Transactions with owners recognised directly in equity Dividends to shareholders of the Parent Additional contribution to charter capital of subsidiaries Other - - - - - - - - - - - - 36,442 - - 36,442 (15,540) - (150) (15,690) - (4) - (4) - - - - - - 3,405 3,405 - - - - (6) - - (6) (1) 71 - 70 36,436 (4) 3,405 39,837 (15,541) 71 (150) (15,620) BALANCE AT 31 DECEMBER 2015 372 7,494 43,460 (316) 8,975 213 60,198 BALANCE AT 1 JANUARY 2016 372 7,494 43,460 (316) 8,975 213 60,198 Total comprehensive income for the year Profit for the year Actuarial gains and losses, net of tax Foreign currency translation difference - - - - Transactions with owners recognised directly in equity Dividends to shareholders of the Parent, note 22 Acquisition of non-controlling interests without a change in control Other - - - - - - - - - - - - 59,884 - - 59,884 (27,974) (149) (289) (28,412) - (68) - (68) - - - - - - (3,105) (3,105) - - - - 2 - - 2 (9) (69) - (78) 59,886 (68) (3,105) 56,713 (27,983) (218) (289) (28,490) BALANCE AT 31 DECEMBER 2016 372 7,494 74,932 (384) 5,870 137 88,421 1. Background 2. Basis of preparation (a)Organisation and operations PJSC “PhosAgro” (the “Company” or the “Parent”) and its subsidiaries (together referred to as the “Group”) comprise Russian legal entities and foreign trading subsidiaries. The Company was registered in October 2001. The Company’s location is Leninsky prospekt 55/1 building 1, Moscow, Russian Federation, 119333. The Group’s principal activity is production of apatite concentrate and mineral fertilisers at plants located in the cities of Kirovsk (Murmansk region), Cherepovets (Vologda region), Balakovo (Saratov region) and Volkhov (Leningrad region), and their distribution across the Russian Federation and abroad. The Company’s key shareholders are several Cyprus entities holding approximately 20% of the Company’s ordinary shares each. The majority of the shares of the Company are ultimately owned by trusts, where the economic beneficiary is Mr. Andrey G. Guryev and his family members. (b) Russian business environment The Group’s operations are primarily located in the Russian Federation. Consequently, the Group is exposed to the economic and financial conditions of the Russian Federation which display characteristics of an emerging market. The legal, tax and regulatory frameworks continue development, but are subject to varying interpretations and frequent changes which together with other legal and fiscal impediments contribute to the challenges faced by entities operating in the Russian Federation. The consolidated financial statements reflect management’s assessment of the impact of the Russian business environment on the operations and the financial position of the Group. The future business environment may differ from management’s assessment. (a) Statement of compliance These consolidated financial statements have been prepared in accordance with International Financial Reporting Standards (“IFRS”) as issued by the International Accounting Standards Board. The Group additionally prepares IFRS consolidated financial statements in the Russian language in accordance with the Federal Law No. 208-FZ On consolidated financial reporting (b) Basis of measurement The consolidated financial statements are prepared on the historical cost basis except that investments available-for-sale and derivative financial instruments are stated at fair value rate of RUB 27.7487 for USD 1. Equity items arising during the year are recognised at the exchange rate ruling at the date of transaction; • The resulting foreign exchange difference is recognised in other comprehensive income. The translation from EUR into RUB, where applicable, was performed as follows: • Assets and liabilities as at 31 December 2016 were translated at the closing exchange rate of RUB 63.8111 for EUR 1 (31 December 2015: RUB 79.6972 for EUR 1); • Profit and loss items were translated at the average exchange rate for 2016 of RUB 74.2310 for EUR 1. (for 2015: RUB 67.7767 for EUR 1); (c) Functional currency The national currency of the Russian Federation is the Russian Rouble (“RUB”), which is the functional currency of the Parent and its subsidiaries, except for foreign trading subsidiaries, where the functional currency is USD. • Equity items, which were recognised at the date of adoption of IFRS, 1 January 2005, were translated at the exchange rate of RUB 37.8409 for EUR 1. Equity items arising during the year are recognised at the exchange rate ruling at the date of transaction; (d) Presentation currency These consolidated financial statements are presented in RUB. All financial information presented in RUB has been rounded to the nearest million, except per share amounts. The translation from USD into RUB, where applicable, was performed as follows: • Assets and liabilities as at 31 December 2016 were translated at the closing exchange rate of RUB 60.6569 for USD 1 (31 December 2015: RUB 72.8827 for USD 1); • Profit and loss items were translated at the average exchange rate for 2016 of RUB 67.0349 for USD 1. (for 2015: RUB 60.9579 for USD 1); • Equity items, which were recognised at the date of adoption of IFRS, 1 January 2005, were translated at the exchange • The resulting foreign exchange difference is recognised in other comprehensive income. (e) Use of estimates and judgments The preparation of consolidated financial statements in conformity with IFRS requires management to make judgments, estimates and assumptions that affect the application of accounting policies and the reported amounts of assets, liabilities, income and expenses. Actual results may differ from those estimates. Estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the period in which the estimates are revised and in any future periods affected. Information about critical assumptions and estimation uncertainties that have the most significant effect on the amounts recognised 130 The consolidated statement of changes in equity is to be read in conjunction with the notes to, and forming part of, the consolidated financial statements set out on pages 133 to 163. 131 Financial Statements (continued)STRATEGIC REPORTCORPORATE RESPONSIBILITY REPORTCORPORATE GOVERNANCE REPORTFINANCIAL STATEMENTSADDITIONAL INFORMATIONPhosAgro Integrated Report 2016www.phosagro.com in the consolidated financial statements is included in the following notes: • note 3(c)(iv) – estimated useful lives of fixed assets; • note 16 – recognition of deferred tax assets: availability of future taxable profit against which carry-forward tax losses can be used; • note 18 – recognition of bad debt provision on promissory notes: uncertainties associated with the mutual court claims filed by the Group and the bank. 3. Significant accounting policies The accounting policies set out below have been applied consistently to all periods presented in these consolidated financial statements (a) Basis of consolidation (I) Subsidiaries Subsidiaries are entities controlled by the Group. The Group controls an entity when it is exposed to, or has rights to, variable returns from its involvement with the entity and has the ability to affect those returns through its power over the entity. The financial statements of subsidiaries are included in the consolidated financial statements from the date that control commences until the date that control ceases. The accounting policies of subsidiaries have been changed when necessary to align them with the policies adopted by the Group. (II) Loss of control Upon the loss of control, the Group derecognises the assets and liabilities of the subsidiary, any non-controlling interests and the other components of equity related to the subsidiary. Any surplus or deficit arising on the loss of control is recognised in profit or loss. If the Group retains any interest in the previous subsidiary, then such interest is measured at fair value at the date that control is lost. Subsequently it is accounted for as an equity-accounted investee or as an available-for-sale financial asset depending on the level of influence retained (III) Acquisitions and disposals of non- controlling interests Any difference between the consideration paid to acquire a non-controlling interest, and the carrying amount of that non- controlling interest, is recognised in equity. Any difference between the consideration received from disposal of a portion of a Group’s interest in the subsidiary and the carrying amount of that portion, including attributable goodwill, is recognised in equity. (IV) Associates Associates are those enterprises in which the Group has significant influence, but not control, over the financial and operating policies. The consolidated financial statements include the Group’s share of the total recognised gains and losses of associates on an equity accounted basis, from the date that significant influence effectively commences until the date that significant influence effectively ceases. When the Group’s share of losses exceeds the Group’s interest in the associate, that interest is reduced to nil and recognition of further losses is discontinued except to the extent that the Group has incurred obligations in respect of the associate. (V) Transactions eliminated on consolidation Intra-group balances and transactions, and any unrealised gains arising from intra-group transactions, are eliminated in preparing the consolidated financial statements. Unrealised gains arising from transactions with associates and jointly controlled enterprises are eliminated to the extent of the Group’s interest in the enterprise. Unrealised gains resulting from transactions with associates are eliminated against the investment in the associate. Unrealised losses are eliminated in the same way as unrealised gains except that they are only eliminated to the extent that there is no evidence of impairment. (b) Foreign currencies Transactions in foreign currencies are translated to RUB at the foreign exchange rate ruling at the date of the transaction. Monetary assets and liabilities denominated in foreign currencies at the reporting date are translated to RUB at the foreign exchange rate ruling at that date. Non- monetary assets and liabilities denominated in foreign currencies that are stated at historical cost are translated to RUB at the foreign exchange rate ruling at the date of the transaction. Non-monetary assets and liabilities denominated in foreign currencies that are stated at fair value are translated to RUB at the foreign exchange rate ruling at the dates the fair values were determined. Foreign exchange differences arising on translation are recognised in the profit or loss. (c) Property, plant and equipment (I) Owned assets Property, plant and equipment is stated at cost less accumulated depreciation and impairment losses. The cost of property, plant and equipment at the date of transition to IFRS was determined by reference to its fair value at that date (“deemed cost”) as determined by an independent appraiser. Cost includes expenditure that is directly attributable to the acquisition of the asset. The cost of self-constructed assets includes the cost of materials and direct labour, any other costs directly attributable to bringing the asset to a working condition for their intended use, the costs of dismantling and removing the items and restoring the site on which they are located, and capitalised borrowing costs. Purchased software that is integral to the functionality of the related equipment is capitalised as part of that equipment. Where an item of property, plant and equipment comprises major components having different useful lives, they are accounted for as separate items of property, plant and equipment. Buildings Plant and equipment 12-17 years 4-15 years Fixtures and fittings 3-6 years (II) Leased assets Leases under which the Group assumes substantially all the risks and rewards of ownership are classified as finance leases. Plant and equipment acquired by way of finance lease is stated at an amount equal to the lower of its fair value and the present value of the minimum lease payments at inception of the lease, less accumulated depreciation and impairment losses. (III) Subsequent expenditure Expenses in connection with ordinary maintenance and repairs are recognised in the statement of profit or loss as they are incurred. Expenses in connection with periodic maintenance on property, plant and equipment are recognised as assets and depreciated on a straight-line basis over the period until the next periodic maintenance, provided the criteria for capitalizing such items have been met. Expenses incurred in connection with major replacements and renewals that materially extend the life of property, plant and equipment are capitalised and depreciated on a systematic basis. (IV) Depreciation Depreciation is charged to the profit and loss on a straight-line basis over the estimated useful lives of the individual assets. Depreciation commences on the month following the month of acquisition or, in respect of internally constructed assets, from the month following the month an asset is completed and ready for use. Land is not depreciated. The estimated useful lives as determined when adopting IFRS (1 January 2005) are as follows: Tangible fixed assets acquired after the date of adoption of IFRS, are depreciated over the following useful lives: Buildings Plant and equipment 10-60 лет 5-35 лет Fixtures and fittings 2-25 лет (d) Intangible assets (I) Research and development Expenditure on research activities, undertaken with the prospect of gaining new scientific or technical knowledge and understanding, is recognised in the profit and loss as an expense as incurred. Expenditure on development activities, whereby research findings are applied to a plan or design for the production of new or substantially improved products and processes, is capitalised if the product or process is technically and commercially feasible and the Group has sufficient resources to complete development. The expenditure capitalised includes the cost of materials, direct labour and an appropriate proportion of overheads. Other development expenditure is recognised in the profit and loss as an expense as incurred. Capitalised development expenditure is stated at cost less accumulated amortisation and impairment losses. (II) Other intangible assets Other intangible assets acquired by the Group are represented by Oracle software, which has finite useful life and is stated at cost less accumulated amortisation and impairment losses (III) Amortisation Intangible assets, other than goodwill, are amortised on a straight-line basis over their estimated useful lives from the date the asset is available for use. The estimated useful lives are 3 – 10 years. (e) Investments Non-derivative financial instruments Non-derivative financial instruments comprise investments in equity and debt securities, trade and other receivables, cash and cash equivalents, loans and borrowings, and trade and other payables. Non-derivative financial instruments are recognised initially at fair value plus, for instruments not at fair value through profit or loss, any directly attributable transaction costs. Subsequent to initial recognition non-derivative financial instruments are measured as described below. Held-to-maturity investments: If the Group has the positive intent and ability to hold debt instruments to maturity, then they are classified as held-to-maturity. Held- to-maturity investments are measured at amortised cost using the effective interest method, less any impairment losses. Available-for-sale financial assets: The Group’s investments in equity securities and certain debt securities are classified as available-for-sale financial assets. Subsequent to initial recognition, they are measured at fair value and changes therein, other than impairment losses (see note 3(i)), and foreign exchange gains and losses on available-for-sale monetary items, are recognised directly in other comprehensive income. When an investment is derecognised, the cumulative gain or loss in other comprehensive income is transferred to the profit or loss. Other: Other non-derivative financial instruments are measured at amortised cost using the effective interest method, less any impairment losses. Investments in equity securities that are not quoted on a stock 132 133 Financial Statements (continued)STRATEGIC REPORTCORPORATE RESPONSIBILITY REPORTCORPORATE GOVERNANCE REPORTFINANCIAL STATEMENTSADDITIONAL INFORMATIONPhosAgro Integrated Report 2016www.phosagro.com exchange and where fair value cannot be estimated on a reasonable basis by other means are stated at cost less impairment losses Derivative financial instruments The Group from time to time buys derivative financial instruments to manage its exposure to foreign currency risk. All derivatives are recognised on the balance sheet at fair value. Derivatives are not designated as hedging instruments. Derivatives are initially recognised at fair value on the date a derivative contract is entered into and are subsequently remeasured at their fair value with the changes in fair value recognised in profit and loss. (f) Inventories Inventories are stated at the lower of cost and net realisable value. Net realisable value is the estimated selling price in the ordinary course of business, less the estimated costs of completion and selling expenses. The cost of inventories is based on the weighted average principle and includes expenditure incurred in acquiring the inventories and bringing them to their existing location and condition. In the case of manufactured inventories and work in progress, cost includes an appropriate share of overheads based on normal operating capacity (g) Trade and other receivables Trade and other receivables are stated at cost less impairment losses. (h)Cash and cash equivalents Cash and cash equivalents comprise cash balances and call deposits. Bank overdrafts that are repayable on demand and form an integral part of the Group’s cash management are included as a component of cash and cash equivalents for the purpose of the consolidated statement of cash flows. (I) Impairment Financial assets A financial asset not carried at fair value through profit or loss is assessed at each reporting date to determine whether there is any objective evidence that it is impaired. A financial asset is impaired if objective evidence indicates that a loss event has occurred after the initial recognition of the asset, and that the loss event had a negative effect on the estimated future cash flows of that asset that can be estimated reliably. Objective evidence that financial assets (including equity securities) are impaired can include default or delinquency by a debtor, restructuring of an amount due to the Group on terms that the Group would not consider otherwise, indications that a debtor or issuer will enter bankruptcy, the disappearance of an active market for a security. In addition, for an investment in an equity security, a significant or prolonged decline in its fair value below its cost is objective evidence of impairment. The Group considers all individually significant receivables and held-to- maturity investment securities for specific impairment. An impairment loss in respect of a financial asset measured at amortised cost is calculated as the difference between its carrying amount, and the present value of the estimated future cash flows discounted at the asset’s original effective interest rate. Losses are recognised in profit or loss and reflected in an allowance account against receivables. Interest on the impaired asset continues to be recognised through the unwinding of the discount. When a subsequent event causes the amount of impairment loss to decrease, the decrease in impairment loss is reversed through profit or loss. Impairment losses on available-for-sale investment securities are recognised by transferring the cumulative loss that has been recognised in other comprehensive income, and presented in the fair value reserve in equity, to profit or loss. The cumulative loss that is removed from other comprehensive income and recognised in profit or loss is the difference between the acquisition cost, net of any principal repayment and amortisation, and the current fair value, less any impairment loss previously recognised in profit or loss. Changes in impairment provisions attributable to time value are reflected as a component of interest income. If, in a subsequent period, the fair value of an impaired available-for-sale debt security increases and the increase can be related objectively to an event occurring after the impairment loss was recognised in profit or loss, then the impairment loss is reversed, with the amount of the reversal recognised in profit or loss. However, any subsequent recovery in the fair value of an impaired available-for-sale equity security is recognised in other comprehensive income. Non-financial assets The carrying amounts of the Group’s non- financial assets, other than inventories and deferred tax assets, are reviewed at each reporting date to determine whether there is any indication of impairment. If any such indication exists, then the asset’s recoverable amount is estimated. The recoverable amount of an asset or cash- generating unit is the greater of its value in use and its fair value less costs to sell. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset. For the purpose of impairment testing, assets are grouped together into the smallest group of assets that generates cash inflows from continuing use that are largely independent of the cash inflows of other assets or groups of assets (the “cash- generating unit”). An impairment loss is recognised if the carrying amount of an asset or its cash- generating unit exceeds its recoverable amount. Impairment losses are recognised in the profit and loss. Impairment losses recognised in respect of cash-generating units are allocated first to reduce the carrying amount of any goodwill allocated to the units, if any, and then to reduce the carrying amount of the other assets in the unit (group of units) on a pro rata basis. An impairment loss in respect of goodwill is not reversed. In respect of other assets, impairment losses recognised in prior periods are assessed at each reporting date for any indications that the loss has decreased or no longer exists. An impairment loss is reversed if there has been a change in the estimates used to determine the recoverable amount. An impairment loss is reversed only to the extent that the asset’s carrying amount does not exceed the carrying amount that would have been determined, net of depreciation or amortisation, if no impairment loss had been recognised. (j) Share capital (I) Repurchase of share capital When share capital recognised as equity is repurchased, the amount of the consideration paid, including directly attributable costs, is deducted from equity. (II) Dividends Dividends are recognised as a liability in the period in which they are declared (k) Loans and borrowings Loans and borrowings are recognised initially at fair value less any directly attributable transaction costs. Subsequent to initial recognition, loans and borrowings are stated at amortised cost with any difference between initial value and redemption value being recognised in the profit and loss over the period of the borrowings on an effective interest basis. (l) Employee benefits (I) Pension plans The Group’s net obligation in respect of defined benefit post-employment plans, including pension plans, is calculated separately for each plan by estimating the amount of future benefit that employees have earned in return for their service in the current and prior periods. That benefit is discounted to determine its present value, and the fair value of any plan assets, if any, is deducted. The discount rate is the yield at the reporting date on government bonds that have maturity dates approximating the terms of the Group’s obligations. The calculation is performed using the projected unit credit method. When the benefits of a plan are improved, the portion of the increased benefit relating to past service by employees is recognised immediately as an expense in the profit and loss. To the extent the benefits vest immediately, the expense is recognised immediately in the profit and loss. All actuarial gains and losses are recognised in full as they arise in other comprehensive income. (II) Long-term service benefits other than pensions The Group’s net obligation in respect of long-term service benefits, other than pension plans, is the amount of future benefits that employees have earned in return for their service in the current and prior periods. The obligation is calculated using the projected unit credit method and is discounted to its present value and the fair value of any related assets is deducted. The discount rate is the yield at the reporting date on government bonds that have maturity dates approximating the terms of the Group’s obligations. All actuarial gains and losses are recognised in full as they arise in other comprehensive income. (III) State pension fund The Group makes contributions for the benefit of employees to Russia’s State pension fund. The contributions are expensed as incurred. (m) Provisions A provision is recognised when the Group has a legal or constructive obligation as a result of a past event, and it is probable that an outflow of economic benefits will be required to settle the obligation. If the effect is material, provisions are determined by discounting the expected future cash flows at a pre-tax rate that reflects current market assessments of the time value of money and, where appropriate, the risks specific to the liability. (n) Trade and other payables Trade and other payables are stated at amortised cost. (o) Income tax Income tax expense comprises current and deferred tax. Income tax expense is recognised in profit and loss except to the extent that it relates to items recognised in other comprehensive income, in which case it is recognised in other comprehensive income. Current tax is the expected tax payable on the taxable income for the year, using tax rates enacted or substantively enacted at the reporting date, and any adjustment to tax payable in respect of previous years. Deferred tax is recognised using the balance sheet method, providing for temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for taxation purposes. Deferred tax is not recognised for the following temporary differences: the initial recognition of assets or liabilities in a transaction that is not a business combination and that affects neither accounting nor taxable profit, and differences relating to investments in subsidiaries to the extent that it is probable that they will not reverse in the foreseeable future. In addition, deferred tax is not recognised for taxable temporary differences arising on the initial recognition of goodwill. Deferred tax is measured at the tax rates that are expected to be applied to the temporary differences when they reverse, based on the laws that have been enacted or substantively enacted by the reporting date. Deferred tax assets and liabilities are offset if there is a legally enforceable right to offset current tax assets and liabilities, and they relate to income taxes levied by the same tax authority on the same taxable entity, or on different tax entities, but they intend to settle current tax liabilities and assets on a net basis or their tax assets and liabilities will be realised simultaneously. A deferred tax asset is recognised to the extent that it is probable that future taxable profits will be available against which temporary difference can be utilised. Deferred tax assets are reviewed at each reporting date and are reduced to the extent 134 135 Financial Statements (continued)STRATEGIC REPORTCORPORATE RESPONSIBILITY REPORTCORPORATE GOVERNANCE REPORTFINANCIAL STATEMENTSADDITIONAL INFORMATIONPhosAgro Integrated Report 2016www.phosagro.com that it is no longer probable that the related tax benefit will be realised. (p) Revenues Revenue from the sale of goods is measured at the fair value of the consideration received or receivable, net of returns and allowances, trade discounts and volume rebates. Revenue is recognised when the significant risks and rewards of ownership have been transferred to the buyer, recovery of the consideration is probable, the associated costs and possible return of goods can be estimated reliably, and there is no continuing management involvement with the goods. Transfers of risks and rewards vary depending on the individual terms of the contract of sale. Transfer may occur when the product is dispatched from the Group companies’ warehouses (mainly for domestic dispatches) or upon loading the goods onto the relevant carrier or upon the delivery to the destination point defined by the customer. Where the Group acts in the capacity of an agent rather than as the principal in a transaction, the revenue recognised is the net amount of commission earned by the Group. Revenue from services rendered is recognised in the profit or loss in proportion to the stage of completion of the transaction at the reporting date. The stage of completion is assessed by reference to surveys of work performed. (q) Finance income and costs Finance income comprises interest income on funds invested (including available- for-sale financial assets), dividend income, gains on the disposal of available-for- sale financial assets and changes in the fair value of financial assets at fair value through profit or loss, and foreign currency gains. Interest income is recognised as it accrues in profit or loss, using the effective interest method. Dividend income is recognised in profit or loss on the date that the Group’s right to receive payment is established. Finance costs comprise interest expense on borrowings, foreign currency losses, changes in the fair value of financial assets at fair value through profit or loss and impairment losses recognised on financial assets. Borrowing costs that are not directly attributable to the acquisition, construction or production of a qualifying asset are recognised in profit or loss using the effective interest method. Foreign currency gains and losses are reported on a net basis. (r) Overburden removal expenditure In open pit apatite rock mining operations, it is necessary to remove the overburden and other waste in order to access the economically recoverable resources. Stripping costs incurred during the pre- production phase of the open pit mine are capitalised as the cost of the development of the mining property and amortised over the life of the mine. According to the Group’s approach to stripping, the ore, which becomes accessible after the overburden removal, is extracted within three months. Therefore, the stripping ratio (volume of overburden removed over the volume of resources extracted) is expected to stay relatively constant over the future periods and stripping costs incurred during the production phase of the open pit mine are recognised in the profit or loss as incurred. (s) Other expenses (I) Operating leases Payments made under operating leases are recognised in the profit and loss on a straight-line basis over the term of the lease. Lease incentives received are recognised in the profit or loss as an integral part of the total lease payments made. (II) Social expenditure To the extent that the Group’s contributions to social programs benefit the community at large and are not restricted to the Group’s employees, they are recognised in the profit or loss as incurred. (t) Earnings per share The Group presents basic and diluted earnings per share (“EPS”) data for its ordinary shares. Basic EPS is calculated by dividing the profit or loss attributable to ordinary shareholders of the Company by the weighted average number of ordinary shares outstanding during the period, adjusted for own shares held. If the number of ordinary shares outstanding increases/(decreases) as a result of a share split/(reverse share split), the calculation of the EPS for all periods presented is adjusted retrospectively. Diluted EPS is determined by adjusting the profit or loss attributable to ordinary shareholders and the weighted average number of ordinary shares outstanding, adjusted for own shares held, for the effects of all dilutive potential ordinary shares, which comprise convertible notes and share options granted to employees (u) Segment reporting An operating segment is a component of the Group that engages in business activities from which it may earn revenues and incur expenses, including revenues and expenses that relate to transactions with any of the Group’s other components. All operating segments’ operating results are reviewed regularly by the CEO to make decisions about resources to be allocated to the segment and assess its performance, and for which discrete financial information is available. Segment results that are reported to the CEO include items directly attributable to a segment as well as those that can be allocated on a reasonable basis. Unallocated items comprise mainly corporate assets, related head office expenses and Group’s associates. Segment capital expenditure is the total cost incurred during the year to acquire property, plant and equipment, and intangible assets other than goodwill. (v) Adoption of new and revised standards and interpretations No new standards and amendments became effective for the Group from 1 January 2016. 1 January 2017 with early adoption permitted. (w) New standards and interpretations not yet adopted A number of new standards, amendments to standards and interpretations are not yet effective as at 31 December 2016, and have not been applied in preparing these consolidated financial statements: • IFRS 9 Financial Instruments is intended to replace IAS 39 Financial Instruments: Recognition and Measurement. The standard introduces new classification and measurement requirements, a single forward-looking “expected loss” impairment model and a substantially-reformed approach to hedge accounting. Effective for annual periods beginning on or after 1 January 2018 with early adoption permitted; • IFRS 15 Revenue from contracts with customers outlines a single comprehensive model for entities to use in accounting for revenue from contracts with customers. Effective for annual periods beginning on or after 1 January 2018 with early adoption permitted; • IFRS 16 Leases outlines a single lessee accounting model and requires to bring most leases on-balance sheet. Effective for annual periods beginning on or after 1 January 2019 with early adoption permitted if IFRS 15 is also applied at or before the date of initial application of IFRS 16; • Amendments to IAS 12 Income Taxes clarify the accounting for deferred tax assets for unrealised losses on debt instruments measured at fair value. Effective for annual periods beginning on or after 1 January 2017 with early adoption permitted; • Amendments to IAS 7 Statement of Cash Flows requires entities to provide disclosures that enable investors to evaluate changes in liabilities arising from financing activities, including changes arising from cash flows and non-cash changes. Effective for annual periods beginning on or after The Group is currently assessing the impact of these new and amended standards on the consolidated financial statements and plans to adopt these pronouncements when they become effective. 4. Determination of fair values A number of the Group’s accounting policies and disclosures require the determination of fair value, for both financial and non- financial assets and liabilities. Fair values have been determined for measurement and / or disclosure purposes based on the methods described in 4(a) to 4(с). When applicable, further information about the assumptions made in determining fair values is disclosed in the notes specific to that asset or liability. (a) Investments in equity and debt securities The fair value of held-to-maturity investments and available-for-sale financial assets is determined by reference to their quoted bid price at the reporting date. The fair value of held-to-maturity investments is determined for disclosure purposes only. For non-quoted investments the fair value, if reliably measurable, is determined using valuation models. (b) Trade and other receivables The fair value of trade and other receivables is estimated as the present value of future cash flows, discounted at the market rate of interest at the reporting date. (c) Non-derivative financial liabilities Fair value, which is determined for disclosure purposes, is calculated based on the present value of future principal and interest cash flows, discounted at the market rate of interest at the reporting date. For finance leases the market rate of interest is determined by reference to similar lease agreements. 136 137 Financial Statements (continued)STRATEGIC REPORTCORPORATE RESPONSIBILITY REPORTCORPORATE GOVERNANCE REPORTFINANCIAL STATEMENTSADDITIONAL INFORMATIONPhosAgro Integrated Report 2016www.phosagro.com 5. Segment information The Group has two reportable segments, as described below, which are the Group’s strategic business units. The strategic business units offer different products, and are managed separately because they require different technology and marketing strategies. The following summary describes the operations in each of the Group’s reportable segments: • Phosphate-based products segment includes mainly production and distribution of ammophos, diammoniumphosphate, sodium tripolyphosphate and other phosphate based and complex (NPK) fertilisers on the factories located in Cherepovets, Balakovo and Volkhov, and production and distribution of apatite concentrate extracted from the apatite-nepheline ore, which is mined and processed in Kirovsk; • Nitrogen-based products segment includes mainly production and distribution of ammonia, ammonium nitrate and urea on the factory located in Cherepovets. Certain assets, revenue and expenses are not allocated to any particular segment and are, therefore, included in the “other operations” column. None of these operations meet any of the quantitative thresholds for determining reportable segments. Information regarding the results of each reportable segment is included below. Performance is measured based on gross profit, as included in internal management reports that are reviewed by the Group’s CEO. Segment information as at 31 December 2016 and for the year then ended is as follows: RUB million PHOSPHATE- BASED PRODUCTS NITROGEN- BASED PRODUCTS OTHER OPERATIONS Segment revenue and profitability 168,136 18,829 777 Segment external revenues, thereof: Export Domestic Cost of goods sold Gross segment profit Certain items of profit or loss Amortisation and depreciation Total non-current segment assets Additions to non-current assets 110,458 57,678 (74,667) 93,469 (8,095) 91,880 23,791 14,264 4,565 (11,025) 7,804 (2,328) 60,240 20,967 - 777 (699) 78 (344) 3,758 533 TOTAL 187,742 124,722 63,020 (86,391) 101,351 (10,767) 155,878 45,291 Segment information of the Group as at 31 December 2015 and for the year then ended is as follows: RUB million PHOSPHATE- BASED PRODUCTS NITROGEN- BASED PRODUCTS OTHER OPERATIONS Segment revenue and profitability 167,430 21,574 728 Segment external revenues, thereof: Export Domestic Cost of goods sold Gross segment profit Certain items of profit or loss Amortisation and depreciation Total non-current segment assets Additions to non-current assets 120,873 46,557 (70,344) 97,086 (7,022) 76,090 17,913 17,984 3,590 (12,063) 9,511 (1,890) 41,992 25,025 - 728 (657) 71 (221) 3,436 1,255 TOTAL 189,732 138,857 50,875 (83,064) 106,668 (9,133) 121,518 44,193 The analysis of export revenue by regions is as follows: RUB million 6. Revenues RUB million Europe North and South America CIS Asia India Africa 2016 46,738 32,992 15,883 12,462 10,280 6,367 2015 47,303 44,430 10,740 5,724 18,185 12,475 Sales of chemical fertilisers Sales of apatite concentrate Sales of sodium tripolyphosphate Sales of nepheline concentrate Sales of ammonium Other sales 2016 146,369 26,037 4,839 825 75 9,597 2015 154,312 19,155 5,803 737 115 9,610 124,722 138,857 187,742 189,732 7. Personnel costs RUB million 2016 2015 Cost of sales (10,784) (10,155) Administrative expenses Selling expenses (7,882) (511) (6,784) (373) (19,177) (17,312) 138 139 Financial Statements (continued)STRATEGIC REPORTCORPORATE RESPONSIBILITY REPORTCORPORATE GOVERNANCE REPORTFINANCIAL STATEMENTSADDITIONAL INFORMATIONPhosAgro Integrated Report 2016www.phosagro.com 8. Cost of sales RUB million 11. Other expenses, net RUB million Materials and services (25,746) (22,905) Social expenditures 2016 2015 Salaries and social contributions (10,784) (10,155) Depreciation Natural gas Potash Sulphur and sulphuric acid Ammonia Electricity Chemical fertilisers and other products for resale Ammonium sulphate Fuel Heating energy Other items Change in stock of WIP and finished goods (9,377) (8,084) (7,104) (6,065) (5,801) (4,462) (4,254) (2,547) (2,299) (676) (42) 850 (8,057) (7,484) (7,559) (8,385) (8,190) (3,927) (4,091) (2,176) (2,865) (718) (23) 3,471 9. Administrative expenses RUB million 2016 Salaries and social contributions Professional services Depreciation and amortisation Other (7,882) (1,555) (798) (3,656) 2015 (6,784) (2,003) (606) (2,791) Loss on disposal of property, plant and equipment and intangible assets (Increase)/decrease in provision for inventory obsolescence Increase in provision for bad debt Fines and penalties received Other income, net 2016 (2,081) (614) (151) (85) 268 191 2015 (1,821) (915) 161 (41) 956 252 (2,472) (1,408) 12. Finance income and finance costs RUB million 2016 2015 Interest income Gain from operations with derivative financial instruments Unwind of discount of financial assets Finance income Interest expense Loss from operations with derivative financial instruments Bank fees Other finance costs 479 210 95 125 909 (4,365) - (315) (2) 933 - 128 161 1,222 (5,198) (310) (277) (308) Finance costs (4,682) (6,093) (86,391) (83,064) Other finance income 13. Income tax expense RUB million The Company’s applicable corporate income tax rate is 20% (2015: 20%) Current tax expense Origination and reversal of temporary differences, including change in unrecognised assets 2016 (13,311) 2015 (9,879) (1,730) 92 (15,041) (9,787) Reconciliation of effective tax rate: Profit before tax 2016 74,927 Income tax at applicable tax rate (14,985) Reversal of income tax on intra- group dividends Under provided in respect of prior years Unrecognised tax liability/(asset) on profit/(loss) from associates Non-deductible items Change in unrecognised deferred tax assets Effect of tax rates in foreign jurisdictions Reduction in tax rate - 76 28 (697) (15) 28 524 % 100 (20) - - - (1) - - 1 2015 46,223 (9,245) 399 (250) (12) (638) - (41) - % 100 (20) 1 (1) - (1) - - - (13,891) (12,184) NET FINANCE COSTS (3,773) (4,871) (15,041) (20) (9,787) (21) 10. Selling expenses RUB million Freight, port and stevedoring expenses Russian Railways infrastructure tariff and operators’ fees Materials and services Depreciation Salaries and social contributions 2016 (9,358) (8,169) (2,499) (592) (511) 2015 (9,185) (6,099) (1,624) (470) (373) (21,129) (17,751) 140 141 Financial Statements (continued)STRATEGIC REPORTCORPORATE RESPONSIBILITY REPORTCORPORATE GOVERNANCE REPORTFINANCIAL STATEMENTSADDITIONAL INFORMATIONPhosAgro Integrated Report 2016www.phosagro.com 14. Property, plant and equipment RUB million COST Land and buildings Plant and equipment Fixtures and fittings Construction in progress Total At 1 January 2015 Additions Consolidation of Phosint Group Transfers Disposals At 1 January 2016 Additions Transfers Disposals At 31 December 2016 ACCUMULATED DEPRECIATION 25,663 10 - 5,392 (244) 30,821 - 14,674 (616) 44,879 67,061 741 747 8,574 (2,411) 74,712 248 10,441 (1,232) 84,169 5,373 1,544 - - (168) 6,749 1,696 - (148) 8,297 31,212 41,898 - (13,966) (644) 58,500 43,347 (25,115) (409) 76,323 129,309 44,193 747 - (3,467) 170,782 45,291 - (2,405) 213,668 Land and buildings Plant and equipment Fixtures and fittings Construction in progress Total At 1 January 2015 Depreciation charge Disposals At 1 January 2016 Depreciation charge Disposals (6,564) (1,434) 75 (7,923) (1,983) 269 (33,044) (3,615) - (6,778) 2,162 (37,660) (7,669) 1,157 (777) 145 (4,247) (1,027) 128 At 31 December 2016 (9,637) (44,172) (5,146) Net book value at 1 January 2015 Net book value at 1 January 2016 19,099 22,898 Net book value at 31 December 2016 35,242 34,017 37,052 39,997 1,758 2,502 3,151 - - - - - - 31,212 58,500 76,323 (43,223) (8,989) 2,382 (49,830) (10,679) 1,554 (58,955) 86,086 120,952 154,713 15. Investments in associates RUB million The movement in the balance of investments in associates is as follows: Carrying values of the Group’s investments in associates are as follows: 2016 2015 31 DECEMBER 2016 31 DECEMBER 2015 Balance at 1 January Share in profit/(loss) for the year Dividends accrued Foreign currency translation difference Consolidation of Phosint Limited Balance at 31 December 810 140 (47) (87) - 816 12,975 (59) - 1,941 (14,047) 810 Summary financial information for associates is as follows: JSC Khibinskaya Teplovaya Kompaniya LLC PHOSAGRO-UKRAINE JSC Giproruda OJSC Soligalichskiy izvestkovyi kombinat 386 312 69 49 816 400 245 116 49 810 2016 Total assets Total liabilities Net assets Revenue JSC Khibinskaya Teplovaya Kompaniya LLC PHOSAGRO-UKRAINE JSC Giproruda OJSC Soligalichskiy izvestkovyi kombinat 2,376 2,247 326 299 5,248 (1,655) (1,465) (201) (81) 721 782 125 218 699 9,496 102 483 (3,402) 1,846 10,780 2015 Total assets Total liabilities Net assets Revenue JSC Khibinskaya Teplovaya Kompaniya LLC PHOSAGRO-UKRAINE JSC Giproruda OJSC Soligalichskiy izvestkovyi kombinat 2,550 1,398 884 242 (1,800) (780) (407) (49) 750 618 477 193 5,074 (3,036) 2,038 545 5,959 130 555 7,189 (Loss)/profit for the year (29) 386 (16) 43 384 (Loss)/profit for the year (77) 416 103 10 452 As at 31 December 2016, the balance of the construction in progress account includes the accumulated costs related to the construction of ammonia plant in the amount of RUB 34,222 million and urea plant in the amount of RUB 11,925 million in Cherepovets, as well as underground mine extension in the amount RUB of 6,113 million, the development of Rasvumchorrskiy mine in the amount of RUB 4,163 million and the construction apatit-nepheline beneficiation plant in the amount of RUB 3,853 million in Kirovsk. (a) Leasing Plant and equipment with the carrying value of RUB 5,778 million (31 December 2015: RUB 6,008 million) is leased under various finance lease agreements, see note 26(a). 142 143 Financial Statements (continued)STRATEGIC REPORTCORPORATE RESPONSIBILITY REPORTCORPORATE GOVERNANCE REPORTFINANCIAL STATEMENTSADDITIONAL INFORMATIONPhosAgro Integrated Report 2016www.phosagro.com 16. Deferred tax assets and liabilities (a) Recognised deferred tax assets and liabilities Deferred tax assets and liabilities are attributable to the following items: RUB million 2016 Assets Liabilities Net Property, plant and equipment Other long-term assets Current assets Liabilities Tax loss carry-forwards Unrecognised deferred tax assets Tax assets/(liabilities) Set off of tax Net tax assets/(liabilities) 27 17 822 1,238 4,682 (36) 6,750 (1,640) 5,110 (5,688) (5,661) (31) (488) (33) - - (6,240) 1,640 (4,600) (14) 334 1,205 4,682 (36) 510 - 510 2015 Assets 7 85 958 1,566 5,298 (21) 7,893 (1,992) 5,901 Liabilities Net (5,235) (5,228) (19) (405) (10) - - (5,669) 1,992 (3,677) 66 553 1,556 5,298 (21) 2,224 - 2,224 for loans to be issued or obtained by the Company and expected foreign currency rates. As at 31 December 2016, no deferred tax liability for taxable temporary differences of RUB 29,869 million has been recognised (31 December 2015: no deferred tax liability for deductible taxable temporary differences of RUB 29,090 million), either because the Parent can control the timing of reversal of the temporary differences and it is probable that the temporary differences will not reverse in the foreseeable future, or because the applicable tax rate is expected to be 0%. The deferred tax assets on tax loss carry- forwards relate to the Russian entities. Due to recent amendments to the Russian tax legislation, starting from 1 January 2017, tax losses for Russian tax purposes carried forward existing as at 31 December 2016 do not expire. Management has developed a tax strategy to utilise the tax losses above. In assessing the recoverability of the tax losses, management considers a forecast of future taxable profits of the Company (the “forecast”) and the Group’s tax position. The forecast is reviewed at each reporting date to ensure that the related tax benefit will be realised. Future taxable profits are expected to be generated from an excess of interest income on loans, to be issued by the Company to the Group subsidiaries, over interest expense on loans and borrowings, currently held or to be obtained by the Company. When developing the forecast, management has evaluated profitability and dividend capacity of the Group subsidiaries, and considered expected rates of interest (b) Movement in temporary differences during the year RUB million 2016 Property, plant and equipment Other long-term assets Current assets Liabilities Tax loss carry-forwards Unrecognised deferred tax assets NET TAX ASSETS/(LIABILITIES) 2015 Property, plant and equipment Other long-term assets Current assets Liabilities Tax loss carry-forwards Unrecognised deferred tax assets NET TAX ASSETS 31 December Recognised in profit or loss Recognised in other comprehensive income 1 January (5,661) (14) 334 1,205 4,682 (36) 510 (433) (80) (219) (367) (616) (15) (1,730) - - - 16 - - 16 (5,228) 66 553 1,556 5,298 (21) 2,224 31 December Recognised in profit or loss Recognised in other comprehensive income 1 January (5,228) 66 553 1,556 5,298 (21) 2,224 25 151 26 (63) (51) 4 92 - - - 1 - - 1 (5,253) (85) 527 1,618 5,349 (25) 2,131 144 145 Financial Statements (continued)STRATEGIC REPORTCORPORATE RESPONSIBILITY REPORTCORPORATE GOVERNANCE REPORTFINANCIAL STATEMENTSADDITIONAL INFORMATIONPhosAgro Integrated Report 2016www.phosagro.com 17. Other non-current assets RUB million 31 DECEMBER 2016 31 DECEMBER 2015 Financial assets available-for-sale, at cost Loans issued to related parties, at amortised cost Loans issued to third parties, at amortised cost Financial assets available-for-sale, at fair value Loans issued to employees, at amortised cost Loans issued to associates, at amortised cost Finance lease receivable Other long-term receivables 595 330 266 138 103 40 - 754 596 862 248 81 133 - 13 889 19. Inventories RUB million Raw materials and spare parts 7,586 6,561 31 DECEMBER 2016 31 DECEMBER 2015 Finished goods: Chemical fertilisers Apatite concentrate Work-in-progress: Apatite-nepheline ore Chemical fertilisers and other products Other goods for resale Chemical fertilisers for resale, purchased from the third parties Provision for obsolescence 8,274 219 1,329 1,296 173 1,238 (181) 7,664 299 790 1,643 45 842 (30) 2,226 2,822 19,934 17,814 18. Other current investments RUB million 31 DECEMBER 2016 31 DECEMBER 2015 Investments in debt securities, at amortised cost 4,656 Financial assets available-for-sale, at fair value Loans issued to related parties, at amortised cost Loans issued to third parties, at amortised cost Loans issued to employees, at amortised cost Interest receivable Loans issued to associates, at amortised cost Provision for doubtful accounts 424 218 162 115 35 - (2,328) 3,282 5,671 1,636 - 183 114 27 68 (2,797) 4,902 As at 31 December 2016 and 31 December 2015 the Group held debt securities issued by entities affiliated to a bank, which at the end of 2014 went into a financial recovery procedure, monitored by the Russian Deposit Insurance Agency, finalised in June 2015. Taking into account the uncertainties associated with the mutual court claims filed by the Group and the bank, the Group recognised a provision of 50% of the nominal value of the debt securities in the amount of RUB 2,328 million (31 December 2015: RUB 2,797 million). 20. Trade and other receivables RUB million 31 DECEMBER 2016 31 DECEMBER 2015 Trade accounts receivable Taxes receivable Advances issued Other receivables Deferred expenses Receivables from employees Finance lease receivable Provision for doubtful accounts 12,770 11,932 4,693 513 229 36 - (499) 29,674 The movements in provision for doubtful accounts are as follows: Balance at 1 January Foreign currency translation difference Disposal of provision through trade receivables Increase in provision for bad debt Balance at 31 December 2016 (527) 67 46 (85) (499) 11,368 9,429 4,462 582 164 21 12 (527) 25,511 2015 (534) (91) 139 (41) (527) See note 28(c) for the analysis of overdue trade accounts receivable. 146 147 Financial Statements (continued)STRATEGIC REPORTCORPORATE RESPONSIBILITY REPORTCORPORATE GOVERNANCE REPORTFINANCIAL STATEMENTSADDITIONAL INFORMATIONPhosAgro Integrated Report 2016www.phosagro.com 21. Cash and cash equivalents RUB million 31 DECEMBER 2016 31 DECEMBER 2015 4,860 2,395 6 7,261 18,900 10,441 6 29,347 Cash in bank Call deposits Petty cash 22. Equity (a) Share capital TOTAL DIVIDENDS APPROVED DURING THE REPORTING PERIOD Proposed by the Board of Directors in Approved by shareholders in Amount per share RUB Amount of dividends RUB million November 2015 January 2016 March 2016 May 2016 May 2016 July 2016 August 2016 October 2016 63 57 63 33 8,159 7,382 8,159 4,274 27,974 (c) Dividends In accordance with Russian legislation the Company’s distributable reserves are limited to the balance of accumulated retained earnings as recorded in the Company’s statutory financial statements prepared in accordance with Russian Accounting Principles. As at 31 December 2016, the Company had cumulative retained earnings of RUB 37,046 million (31 December 2015: RUB 31,857 million). NUMBER OF SHARES UNLESS OTHERWISE STATED ORDINARY SHARES TOTAL DIVIDENDS APPROVED SUBSEQUENT TO THE REPORTING DATE Shares on issue at 31 December 2016, RUB 2.5 par value 129,500,000 Shares authorised for additional issue at 31 December 2016, RUB 2.5 par value 994,977,080 Shares on issue at 31 December 2015, RUB 2.5 par value 129,500,000 Shares authorised for additional issue at 31 December 2015, RUB 2.5 par value 994,977,080 (b) Dividend policy The Company expects to distribute cash dividends in the future and expects the amount of such dividends to be between 30 and 50 per cent of the Group’s consolidated profit calculated in accordance with IFRS attributable to shareholders of PJSC “PhosAgro”, adjusted by unrealised foreign exchange gain/(loss). Whether the Company will pay dividends and the timing and exact amount of such dividends will be subject to the approval of the recommendation made by the Board of Directors at the General Shareholders’ Meeting and will depend on a variety of factors, including the Company’s earnings, cash requirements, financial condition and other factors deemed relevant by the Board of Directors in making their recommendation to the General Shareholders’ Meeting. Proposed by the Board of Directors in Approved by shareholders in Amount per share RUB Amount of dividends RUB million November 2016 January 2017 March 2017 To be approved in May 2017 39 30 5,051 3,885 8,936 2016 2015 23. Earnings per share Weighted average number of ordinary shares in issue 129,500,000 129,500,000 Profit for the year attributable to shareholders of the Parent, RUB million 59,884 36,442 Basic and diluted earnings per share, RUB 462 281 Basic earnings per share are calculated based on the weighted average number of ordinary shares outstanding during the year. Basic and diluted earnings per share are the same, as there is no effect of dilution. 148 149 Financial Statements (continued)STRATEGIC REPORTCORPORATE RESPONSIBILITY REPORTCORPORATE GOVERNANCE REPORTFINANCIAL STATEMENTSADDITIONAL INFORMATIONPhosAgro Integrated Report 2016www.phosagro.com Contractual interest rate Year of maturity 31 December 2016 31 December 2015 Contractual interest rate Year of maturity 31 December 2016 31 December 2015 NON-CURRENT LOANS AND BORROWINGS RUB million 24. Loans and borrowings This note provides information about the contractual terms of the Group’s loans and borrowings. For more information about the finance leases, see note 26(a). For more information about the Group’s exposure to foreign currency risk, interest rate risk and liquidity risk, see note 28. CURRENT LOANS AND BORROWINGS Unsecured bank loans: RUB-denominated EUR-denominated USD-denominated USD-denominated USD-denominated Unsecured letters of credit issued by banks: EUR-denominated EUR-denominated EUR-denominated 5.75%-12.95% 0.21% LIBOR(1M)+1.18%-3.35% LIBOR(3M)+3% LIBOR(6M)+1.05% EURIBOR(3M)+1.10% EURIBOR(6M)+1.10%-1.15% EURIBOR(12M)+1.10%-1.1 5% Unsecured loans from related parties: RUB-denominated 9%-17% Unsecured loans from other companies: RUB-denominated EUR-denominated Finance lease liabilities: 12% LIBOR(1M)+1.50% 3,000 1,861 4,221 - 1,336 952 - 326 - 9 - 6,500 - 11,783 3,644 - - 317 2,982 29 - 438 EUR-denominated 1.17%-14.77% 1 1,680 2,351 Interest payable: RUB-denominated EUR-denominated 9 743 14,137 3 900 28,947 Unsecured bank loans: RUB-denominated EUR-denominated USD-denominated USD-denominated USD-denominated USD-denominated 11.50%-12.65% 2020-2021 EURIBOR(6M)+2.15% 2027 LIBOR(1M)+1.18%-3.35% 2018-2020 LIBOR(3M)+2.85% LIBOR(6M)+1.05% 4.17% 2020 2021 2027 2019 2017 2019 Unsecured letters of credit issued by banks: EUR-denominated EUR-denominated EUR-denominated EURIBOR(6M)+1.1%-1.18% EURIBOR(12M)+1.1%-1.15% 1.79% Unsecured loans from other companies: USD-denominated LIBOR(12M)+1.25% 2018 4,000 3,031 21,028 15,021 7,967 13,955 485 - - 614 3,000 - 38,506 - 8,700 13,051 185 1,329 104 742 Loan participation notes: USD-denominated Finance lease liabilities: USD-denominated 4.204% 2 2018 30,308 36,400 3.8%-12.55% 1 2018-2021 1,830 98,239 3,548 105,565 112,376 134,512 1 Contractual interest rate on financial 2 In February 2013, the Company’s lease agreements consists of: SPV issued a USD 500 million -interest rate and fees to a lessor; 5-year Eurobond with a coupon rate -insurance of property; of 4.204%, which is listed on the -property tax (for lease agreements Irish Stock Exchange, with the fair concluded since 2013 property tax is value at the reporting date of RUB excluded from the interest rate). 31,337 million (31 December 2015: RUB 36,405 million). 150 151 Financial Statements (continued)STRATEGIC REPORTCORPORATE RESPONSIBILITY REPORTCORPORATE GOVERNANCE REPORTFINANCIAL STATEMENTSADDITIONAL INFORMATIONPhosAgro Integrated Report 2016www.phosagro.com 25. Defined benefit obligations RUB million 31 DECEMBER 2016 31 DECEMBER 2015 Pension obligations, long-term 535 Post-retirement obligations other than pensions 232 767 345 79 424 Defined benefit pension plans relate to three subsidiaries of the Group: JSC “Apatit”, JSC “PhosAgro-Cherepovets” and JSC “Metachem”. The plans stipulate payment of a fixed amount of monthly pension to all retired employees, who have a specified period of service in the entities. The pension increases with the increase of the service period. The pension is paid over the remaining life of the pensioners. In addition, there is a defined benefit plan other than the pension plan in JSC “Apatit”. This defined benefit plan stipulates payment of a lump sum to employees who have a specified period of service in JSC “Apatit” upon their retirement. All defined benefit plans are unfunded. The movement in the present value of the defined benefit obligations is as follows: Defined benefit obligations at 1 January 2015 Benefits paid Current service costs and interest Past service credit Actuarial gain in other comprehensive income 3 Defined benefit obligations at 1 January 2016 Benefits paid Current service costs and interest Past service credit Actuarial loss in other comprehensive income 1 DEFINED BENEFIT OBLIGATIONS AT 31 DECEMBER 2016 RUB MILLION 453 (99) 72 (7) 5 424 (73) 57 275 84 767 The key actuarial assumptions used in measurement of the defined benefit obligations are as follows: 31 DECEMBER 2016 31 DECEMBER 2015 Discount rate Future pension increases 8.5% 4.5% 9.6% 5.4% 3 The related deferred tax benefit of RUB 16 million (2015: deferred tax expense of RUB 1 million) is recognised in other comprehensive income, see note 16(b) 152 26. Leases (a) Finance leases LLC “PhosAgro-Trans”, a Group subsidiary, has entered into several agreements to lease 2,750 railway wagons. Other Group subsidiaries also have entered into lease agreements in 2014 and 2015. At the end of the lease term, the ownership for the leased assets will be transferred to the lessee. 2016 RUB million Less than one year Between one and five years 2015 RUB million Minimum lease payments 1,900 1,994 3,894 Interest Principal 220 164 384 1,680 1,830 3,510 Minimum lease payments Interest Principal Less than one year Between one and five years 2,760 3,857 More than five years 135 6,752 409 441 3 853 2,351 3,416 132 5,899 RUB million Less than one year Between one and five years 31 DECEMBER 2016 31 DECEMBER 2015 208 244 452 62 168 230 31 DECEMBER 2016 31 DECEMBER 2015 6,060 5,574 5,203 3,409 1,231 1,167 159 3,282 4,763 3,901 2,617 1,394 873 181 22,803 17,011 (b) Operating leases During 2015-2016, LLC “PhosAgro-Trans”, a group subsidiary, entered into several operating lease agreements to rent railway wagons. The rent payments for 2016, which are recorded in the cost of sales, amounted to RUB 240 million (2015: RUB 278 million). The non-cancellable operating lease rentals are payable as follows: 27. Trade and other payables RUB million Payable for property, plant and equipment Trade accounts payable Advances received Taxes payable Accruals Payables to employees Other payables 153 Financial Statements (continued)STRATEGIC REPORTCORPORATE RESPONSIBILITY REPORTCORPORATE GOVERNANCE REPORTFINANCIAL STATEMENTSADDITIONAL INFORMATIONPhosAgro Integrated Report 2016www.phosagro.com The Group uses from time to time derivative financial instruments in order to manage its exposure to currency risk. The Group implemented a natural hedge approach (policy) aiming at reducing its exposure to foreign currency risk by means of borrowing in the same currencies in which sales agreements are denominated. The Group has the following foreign- currency-denominated financial assets and liabilities: 28. Financial risk management (a) Overview In the normal course of its operations, the Group has exposure to market, credit and liquidity risks. This note presents information about the Group’s exposure to each of the above risks, the Group’s objectives, policies and processes for measuring and managing risk, and the Group’s management of capital. Further quantitative disclosures are included throughout these consolidated financial statements. The Board of Directors has overall responsibility for the establishment and oversight of the Group’s risk management framework. 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. (b) Market risk Market risk is the risk that changes in market prices, such as foreign exchange rates, interest rates and equity prices will affect the Group’s income or the value of its holdings of financial instruments. The objective of market risk management is to manage and control market risk exposures within acceptable parameters, while optimising the return Foreign currency risk The Group is exposed to currency risk on sales, purchases and borrowings that are denominated in a currency other than the respective functional currencies of Group entities. The currencies giving rise to this risk are primarily USD and EUR. In respect of monetary assets and liabilities denominated in foreign currencies, the Group ensures that its net exposure is kept to an acceptable level by buying or selling foreign currencies at spot rates when necessary to address short-term imbalances. 31 DECEMBER 2016 RUB million 31 DECEMBER 2015 RUB million USD denominated EUR denominated USD denominated EUR denominated Non-current assets Non-current investments 330 Current assets Receivables Current investments Cash and cash equivalents Non-current liabilities Loans and borrowings Current liabilities Payables Loans and borrowings - 4 - 2 862 1,403 5 7,538 - 1 - 298 1,517 218 2,033 (90,108) (3,516) (100,205) (1,618) (1,227) (7,944) (95,181) (719) (3,139) (7,370) (1,951) (18,588) (110,936) (358) (3,299) (4,976) whether it believes that a fixed or variable rate would be more favourable to the Group over the expected period until maturity. The interest rate profile of the Group’s interest-bearing financial instruments is as follows: Management estimate that a 10% strengthening/(weakening) of RUB against USD and EUR, based on the Group’s exposure as at the reporting date would have increased/(decreased) the Group’s profit for the year by RUB 10,255 million, before any tax effect (2015: would have increased/(decreased) the Group’s profit for the year by RUB 11,591 million). This analysis assumes that all other variables, in particular interest rates, remain constant. The analysis is performed on the same basis for 2015. The foreign exchange gain recognised in profit or loss of RUB 16,962 million and the foreign exchange loss of RUB 22,178 million for the comparative period resulted from the appreciation of the Russian Rouble against major currencies during the reporting period and its devaluation during the comparative period. In addition, the net assets of the Group’s foreign subsidiaries denominated in USD amount to RUB 12,454 million as at the reporting date (31 December 2015: RUB 14,655 million). Interest rate risk Interest rate risk is the risk that changes in interest rates will adversely impact the financial results of the Group. Management does not have a formal policy of determining how much of the Group’s exposure should be to fixed or variable rates. However, at the time of raising new loans or borrowings management uses its judgment to decide RUB million Fixed rate instruments Long-term loans issued, at amortised cost Long-term loans issued to related parties, at amortised cost Investments in debt securities, at amortised cost, net of provision Finance lease receivable Short-term deposits Financial assets available-for-sale, at fair value Short-term loans issued to related parties, at amortised cost Short-term loans issued to associates, at amortised cost Short-term loans issued, at amortised cost Long-term borrowings Short-term borrowings Variable rate instruments Long-term borrowings Short-term borrowings At 31 December 2016, a 1% increase/ (decrease) in LIBOR/EURIBOR would have decreased/(increased) the Group’s profit or loss and equity by RUB 550 million (31 December 2015: RUB 686 million). 31 DECEMBER 2016 31 DECEMBER 2015 369 330 2,328 - 2,395 424 218 - 277 (50,093) (6,550) (50,302) (48,146) (6,835) (54,981) 381 862 2,874 25 10,441 1,636 - 68 297 (56,103) (8,880) (48,399) (49,462) (19,164) (68,626) 154 155 Financial Statements (continued)STRATEGIC REPORTCORPORATE RESPONSIBILITY REPORTCORPORATE GOVERNANCE REPORTFINANCIAL STATEMENTSADDITIONAL INFORMATIONPhosAgro Integrated Report 2016www.phosagro.com (c) Credit risk Credit risk is the risk of financial loss to the Group if a customer or counterparty to a financial instrument fails to meet its contractual obligations, and arises from the Group’s receivables from customers, loans issued to related parties, current and non- current financial assets and cash and cash equivalents. Trade and other receivables The Group’s exposure to credit risk is influenced mainly by the individual specific characteristics of each customer. The general characteristics of the Group’s customer base, including the default risk of the industry and country, in which customers operate, has less of an influence on credit risk. Management has established a credit policy under which each new customer is analysed individually for creditworthiness before the Group’s standard payment and delivery terms and conditions are offered. The Group’s review includes external ratings, when available, and in some cases bank references. Purchase limits are established for each customer, which represent the maximum amount of outstanding receivables; these limits are reviewed quarterly. Customers that fail to meet the Group’s benchmark creditworthiness may transact with the Group only on a prepayment basis. The majority of the Group’s customers have been transacting with the Group for several years, and losses have occurred infrequently. In monitoring customer credit risk, customers are grouped according to their credit characteristics. Trade and other receivables relate mainly to the Group’s wholesale customers. The Group does not require collateral in respect of trade and other receivables, except for new customers who are required to work on a prepayment basis or present an acceptable bank guarantee or set up letter of credit with an acceptable bank. The Group establishes an allowance for impairment that represents its estimate of incurred losses in respect of trade and other receivables and investments. The main components of this allowance are a specific loss component that relates to individually significant exposures, and a collective loss component established for groups of similar assets in respect of losses that have been incurred but not yet identified. The collective loss allowance is determined based on historical data of payment statistics for similar financial assets. The analysis of overdue trade accounts receivable is as follows: Not past due Past due 0-90 days Past due 91-180 days Past due 181-365 days More than one year 31 DECEMBER 2016 31 DECEMBER 2015 RUB million RUB million 10,695 795 452 302 526 8,624 1,789 215 205 535 12,770 11,368 Current and non-current financial assets The Group lends money to related parties, who have good credit standing. Based on the prior experience, management believes that there is no significant credit risk in respect of related party loans. As at 31 December 2016 and 31 December 2015 the Group held promissory notes issued by an entity affiliated to a bank, which at the end of 2014 went into a financial recovery procedure, monitored by the Russian Deposit Insurance Agency, finalised in June 2015. Taking into account the uncertainties associated with the outcome of this procedure and mutual court claims filed by the Group and the bank, the Group recognised a provision of 50% of the nominal value of the promissory notes in the amount of RUB 2,328 million (31 December 2015: RUB 2,797 million) 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. Typically the Group ensures that it has sufficient cash on demand to meet expected operational expenses for a period of 30 days, including the servicing of financial obligations; this excludes the potential impact of extreme circumstances that cannot reasonably be predicted, such as natural disasters. In addition, the Group maintains several lines of credit in various Russian and international banks. The table below illustrates the contractual maturities of financial liabilities, including interest payments, which are converted at the closing exchange rates, where applicable: Guarantees The Group considers that financial guarantee contracts entered into by the Group to guarantee the indebtedness of other parties are insurance arrangements, and accounts for them as such. In this respect, the Group treats the guarantee contract as a contingent liability until such time as it becomes probable that the Group will be required to make a payment under the guarantee. The Group’s policy is to provide financial guarantees only to the subsidiaries or related parties. (d) 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 to managing liquidity is to ensure, as far as possible, that it will always have sufficient 156 157 Financial Statements (continued)STRATEGIC REPORTCORPORATE RESPONSIBILITY REPORTCORPORATE GOVERNANCE REPORTFINANCIAL STATEMENTSADDITIONAL INFORMATIONPhosAgro Integrated Report 2016www.phosagro.com 31 DECEMBER 2016 RUB million Unsecured bank loans Unsecured loans from other companies Secured finance leases Loan participation notes Trade and other payables Financial guarantees issued for associates and related parties Carrying value Contractual cash flows 0-1 year 1-2 years 2-3 years 3-4 years 4-5 years > 5 years 75,420 84,790 12,975 18,682 21,433 13,690 2,915 15,095 623 668 43 625 - Unsecured letters of credit 1,763 1,782 1,288 Interest payable 752 752 752 5 - 3,510 3,894 1,900 1,032 30,308 31,787 1,263 30,524 13,024 13,024 13,024 - - - - - - - 226 112 - - - - - - - - - - 489 - 624 - - 1,667 2,291 344 380 485 458 528 96 127,067 138,988 31,589 51,248 23,031 14,374 3,555 15,191 31 DECEMBER 2015 RUB million Carrying value Contractual cash flows 0-1 year 1-2 years 2-3 years 3-4 years 4-5 years > 5 years Unsecured bank loans 85,184 95,401 25,480 24,053 16,459 10,333 4,601 14,475 Unsecured loans from other companies 1,180 Unsecured loans from related parties 29 1,221 34 460 34 14 - Unsecured letters of credit 4,917 4,980 3,351 1,522 Interest payable 903 903 903 - 747 - 2 - Secured finance leases 5,899 6,752 2,760 1,574 1,259 Loan participation notes Trade and other payables Financial guarantees issued for associates and related parties 36,400 39,758 1,523 1,518 36,717 9,620 9,620 9,620 - 1,795 2,637 301 345 - 393 - - 105 - 754 - - - - - - - - - - 270 135 - - - - 516 458 624 145,927 161,306 44,432 29,026 55,577 11,708 5,329 15,234 30. Contingencies (e) Capital management The Board’s policy is to maintain a strong capital base so as to maintain investor, creditor and market confidence and to sustain future development of the business. The Board of Directors monitors the return on capital invested and the level of dividends to shareholders. (a) Litigation The Group has a number of small claims and litigations relating to regular business activities and small fiscal claims. Management believes that none of these claims, individually or in aggregate, will have a material adverse impact on the Group. (c) Environmental contingencies The environmental legislation, currently effective in the Russian Federation, is relatively new and characterised by frequent changes, official pronouncements and court decisions, which are often unclear, contradictory and subject to varying interpretation by different authorities. The Group is involved in chemical production, which is inherently exposed to significant environmental risks. The Group companies record environmental obligations as they become probable and reliably measurable. The Group companies are parties to different litigations with the Russian environmental authorities. The management believes that based on its interpretations of applicable Russian legislation, official pronouncements and court decisions no provision is required for environmental obligations. However, the interpretations of the relevant authorities could differ from management’s position and the effect on these consolidated financial statements, if the authorities were successful in enforcing their interpretations, could be significant. There were no changes in the Board’s approach to capital management during the year. The Company and its subsidiaries are subject to externally imposed capital requirements including the statutory requirements of the country of their domicile and the bank covenants (f) Fair values Unless stated otherwise, management believes that the fair value of the Group’s financial assets and liabilities approximates their carrying amounts. 29. Commitments The Group has entered into contracts to purchase plant and equipment for RUB 16,609 million (31 December 2015: RUB 35,854 million). (b) Taxation contingencies The taxation system in the Russian Federation continues to evolve and is characterised by frequent changes in legislation, official pronouncements and court decisions, which are sometimes contradictory and subject to varying interpretation by different tax authorities. Taxes are subject to review and investigation by a number of authorities, which have the authority to impose severe fines, penalties and interest charges. A tax year generally remains open for review by the tax authorities during the three subsequent calendar years; however, under certain circumstances a tax year may remain open longer. Recent events within the Russian Federation suggest that the tax authorities are taking a more assertive and substance- based position in their interpretation and enforcement of tax legislation. These circumstances may create tax risks in the Russian Federation that are substantially more significant than in other countries. Management believes that it has provided adequately for tax liabilities based on its interpretations of applicable Russian tax legislation, official pronouncements and court decisions. However, the interpretations of the relevant authorities could differ and the effect on these consolidated financial statements, if the authorities were successful in enforcing their interpretations, could be significant. 158 159 Financial Statements (continued)STRATEGIC REPORTCORPORATE RESPONSIBILITY REPORTCORPORATE GOVERNANCE REPORTFINANCIAL STATEMENTSADDITIONAL INFORMATIONPhosAgro Integrated Report 2016www.phosagro.com 31. Related party transactions (a) Transactions and balances with associates (I) Transactions with associates (b) Transactions and balances with other related parties (I) Transactions with other related parties 2016 2015 RUB million RUB million 2016 2015 RUB million RUB million Sales of goods and services Interest income Dividends income Purchases of goods and services 7,849 11 47 (467) 5,382 114 - (492) Sales of goods and services Interest income Purchases of goods and services 1,238 48 (1,359) 965 36 (919) (II) Balances with associates (II) Balances with other related parties 31 DECEMBER 2016 31 DECEMBER 2015 31 DECEMBER 2016 31 DECEMBER 2015 RUB million RUB million RUB million RUB million Trade and other receivables 968 Long-term loans issued, at amortised cost 40 Short-term loans issued, at amortised cost - Trade and other payables (30) 595 - 68 (22) Long-term loans issued, at amortised cost Short-term loans issued, at amortised cost 330 218 Trade and other receivables 2 Trade and other payables (115) Short-term loans received - 862 - 5 (358) (29) (III) Financial guarantees The Group issued financial guarantees to banks on behalf of associates amounting to RUB 1,580 million (31 December 2015 RUB 1,661 million). (III) Financial guarantees The Group issued financial guarantees to banks on behalf of related parties amounting to RUB 87 million (31 December 2015: RUB 134 million). The balances and transactions with related parties are usually unsecured and denominated in RUB (c) Key management remuneration The remuneration of the Board of Directors and 13 members of key management personnel amounted to RUB 892 million (2015: RUB 535 million). 32. Significant subsidiaries Subsidiary Country of incorporation 31 December 2016 Effective ownership (rounded) 31 December 2015 Effective ownership (rounded) Apatit, JSC (including Balakovo branch) PhosAgro-Cherepovets, JSC Metachem, JSC NIUIF, OJSC PhosAgro-Trans, LLC PhosAgro-Region, LLC PhosAgro-Belgorod, LLC PhosAgro-Don, LLC PhosAgro-Kuban, LLC PhosAgro-Kursk, LLC PhosAgro-Lipetsk, LLC PhosAgro-Oryol, LLC PhosAgro-Stavropol, LLC PhosAgro-Volga, LLC PhosAgro-SeveroZapad, LLC PhosAgro-Tambov, LLC Trading house PhosAgro, LLC Phosint Trading Limited Phosagro Asia Pte Ltd PhosAgro Trading SA Phosint Limited PhosAgro Chartering SA PhosAgro Baltic Sp.z o.o. PhosAgro Deutschland GmbH PhosAgro France SAS Russia Russia Russia Russia Russia Russia Russia Russia Russia Russia Russia Russia Russia Russia Russia Russia Russia Cyprus Singapore Switzerland Cyprus Switzerland Poland Germany France 100% 100% 100% 94% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 97.6% 95% 95% 95% 95% 95% 100% 100% 100% 94% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 97.6% 95% 95% - - - 33. Events subsequent to the reporting date In March 2017, the Board of Directors proposed paying a dividend of RUB 30 per ordinary share. The total amount of proposed dividends was RUB 3,885 million, see note 22. 160 161 Financial Statements (continued)STRATEGIC REPORTCORPORATE RESPONSIBILITY REPORTCORPORATE GOVERNANCE REPORTFINANCIAL STATEMENTSADDITIONAL INFORMATIONPhosAgro Integrated Report 2016www.phosagro.com SHAREHOLDER INFORMATION Share capital PhosAgro’s authorised capital as of 31 December 2016 is RUB 323,750,000, consisting of 129,500,000 ordinary shares with a par value of RUB 2.5 per share. Stock exchanges PhosAgro’s shares are traded on the A1 quotation list of the Moscow Exchange under the symbol PHOR (ISIN: RU000A0JRKT8). Global Depositary Receipts (three GDRs represent one share) are traded in the Main Market of the London Stock Exchange under the symbol PHOR. SHAREHOLDER STRUCTURE OF PHOSAGRO AS OF 31 DECEMBER 2016 Name Number of shares Share, % ADORABELLA LIMITED DUBBERSON HOLDINGS LIMITED CHLODWIG ENTERPRISES LIMITED CARRANITA HOLDINGS LIMITED VINDEMIATRIX TRADING LIMITED Vladimir Litvinenko Evgeniya Guryeva Other shareholders *** TOTAL 29,716,162 8,639,705 29,151,400 4,028,519 3,726,814 18,823,850 6,235,960 29 ,177,590 22.95 6.67 22.51 3.11 2.88 14.54 4.82 22.53 129,500,000 100.00 *** Other shareholders includes shares held as part of a REPO transaction undertaken by Igor Antoshin on 21.12.2016 involving 2,489,540 shares, or 1.92% of the Company’s total issued shares. Other ownership information as of 31 December 2016 According to the information available to the Company, the shares of Chlodwig Enterprises Limited and Adorabella Limited are ultimately held on trust where the economic beneficiaries are Mr Andrey Guryev and members of his family. Based on information available to the Company Mr Igor Antoshin has the right to indirectly control 100% of the votes on the voting shares of Dubberson Holdings Limited, Carranita Holdings Limited, and Vindemiatrix Trading Limited. Up to date information about PhosAgro’s ownership structure is available on the Company’s website: www.phosagro.com/ investors/capital. Regulation S GDRS CUSIP number: 71922G209 ISIN: US71922G2093 Common code: 065008939 SEDOL: 0B62QPJ1 RIC: PHOSq.L Rule 144A GDRS CUSIP number: 71922G100 ISIN: US71922G1004 Common code: 065008939 SEDOL: 0B5N6Z48 RIC: GBB5N6Z48.L Citigroup Global Markets Deutschland AG acts as the depositary for the Company’s GDR Programme. SHARE PERFORMANCE IN 2016: PhosAgro GDR Traded volume, GDR mln High 15.55 10.7 Low 12 9 6 3 0 162 Price, USD/GDR 15.25 20 15 10 5 0 Year-end price Trading volume: 108.25 MILLION GDRS PhosAgro Local Shares Traded Volume in Local Shares, RUB, thousand 40 30 20 10 0 High 2,945 Low 2,225 Price, RUB/ local share 3,500 3,000 2,599 2,500 2,000 Source: Bloomberg Year-end price Trading volume: 2.05 1,500 MILLION GDRS 163 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec DIVIDENDS SOURCE: UNALLOCATED NET INCOME AS OF 31 DECEMBER 2015 AND 31 MARCH 2016 Dividends accrued AGM/EGM date Dividend cut-off date Amount of dividend per ordinary share/ GDR (RUB) Amount of accrued dividends (RUB bln) 4Q 2015 1Q 2016 2Q 2016 3Q 2016 31/05/2016 29/07/2016 03/10/2016 16/01/2017 11/06/2016 10/08/2016 14/10/2016 27/01/2017 57/19 63/21 33/11 39/13 7.4 8.2 4.3 5.1 Dividends Dividends accrued in 2016 were paid in full. On 21 March 2017, PhosAgro’s Board of Directors recommended a final 2016 dividend of RUB 30 per share (RUB 10 per depositary receipt), or RUB 3.9 billion in total. If approved by the Annual General Meeting of Shareholders (the “AGM”) on 30 May 2017, this will bring PhosAgro’s payout ratio to 50% of net profit, demonstrating our commitment to the Company’s dividend policy and to upholding the promises made to shareholders during the IPO and SPO. In 2016, PhosAgro acted as a tax agent when it paid out dividends to the accounts of organisations that own shares as listed in the Russian share register. The Company calculated and withheld tax on those dividends and remitted the amount of tax to the relevant authorities. Dividends paid out to shareholders were net of the amount of the tax deducted. The withholding tax rate depends on the status of the shareholder, in accordance with the information that the shareholder provides. PhosAgro also took into account any double taxation treaties and, where appropriate, made tax payments in accordance with the provisions of the relevant treaty. Due to changes in Russian Federation law related to the payment of dividends that came into effect on 1 January 2015, existing or potential PhosAgro shareholders and holders of the Company’s GDRs are advised to consult their tax advisers for tax implications with regards to dividend payments. The refund of a previously withheld tax on income paid to foreign organisations in respect of which the Russian Federation’s international treaties regulating taxation matters or for which a specific article provides for a special taxation regime, shall be performed by the tax authority at the place of registration of the tax agent within three years from the end of the tax period in which the income was paid. Information disclosure PhosAgro strictly follows the requirements imposed by Russian securities regulations, as well as rules for the companies traded on the LSE, in its information disclosure and filings. The Company publicly discloses all required information to shareholders and investors in a timely manner through authorised newswires, the corporate website www.phosagro.com, and via PhosAgro’s official disclosure page on the Interfax portal http://www.e-disclosure.ru/ portal/company.aspx?id=573 PhosAgro Integrated Report 2016www.phosagro.comSTRATEGIC REPORTCORPORATE RESPONSIBILITY REPORTCORPORATE GOVERNANCE REPORTFINANCIAL STATEMENTSADDITIONAL INFORMATION GLOSSARY Abbrevations Industry terms GDR or depositary receipt Global Depositary Receipt bln Billion km Kilometres kt Thousand metric tonnes mln Million mln t Million tonnes MW Megawatt RUB Russian rouble t Metric tonne = 1,000 kg ths Thousand CFR Cost and Freight — an Incoterms rule. CFR means that the seller must pay the costs and freight to bring goods to the port of destination, including customs costs for exporting the goods. The buyer pays to insure the goods. Risk is transferred to the buyer once the goods are loaded on the vessel. Maritime transport only. FOB Free on Board — an Incoterms rule. The seller must load goods on board the vessel nominated by the buyer; costs for delivery of the goods on board of the vessel are the responsibility of the seller. USD United States dollars Ammonia A colourless combustible gas with the chemical formula NH3. Ammonia is a compound of nitrogen and hydrogen, and is primarily used in the production of mineral fertilizers and a wide variety of nitrogen- containing organic and inorganic chemicals. Ammonium nitrate or AN A nitrogen fertilizer with a nitrogen content of approximately 34%, produced by reacting nitric acid (an intermediate chemical feedstock produced from ammonia) with ammonia (AN). NP (Ammonium nitrate-based fertilizers) Complex ammonium nitrate-based fertilizer with phosphorus content. Liquid complex fertilizers or APP liquid phosphate- and nitrogen-based fertilizer. Apatite A group of phosphate minerals (phosphate ore), usually referring to hydroxylapatite, fluorapatite and chlorapatite with the chemical formula Ca5(PO4)3(OH, F, Cl). Apatite is the world’s major source of phosphorus, found as variously coloured, glassy crystals, masses or nodules. The phosphorus content of apatite is traditionally expressed as phosphorus pentoxide (P2O5). Apatite-nepheline ore Ore containing minerals of apatite and nepheline. By-product Material, other than the principal product, that is generated as a consequence of an industrial process. Concentrate Material that is the result of beneficiation of an ore and which has a higher concentration of mineral values than the mineral values originally contained in the ore. Concentrates are produced in beneficiation plants. Crushing A mechanical method of reducing the size of rock. Deposit An area of reserves identified by surface mapping, drilling or development. Diammonium phosphate or DAP A type of multi-nutrient fertilizer containing nitrogen and phosphorous. Production of DAP is based on the neutralisation of phosphoric acid by ammonia with subsequent drying and granulating. Downstream The processing of apatite concentrate, natural gas, sulphur and potash into usable products such as mineral fertilizer, industrial and feed phosphates. Drillhole A circular hole made in rock, often in conjunction with a core barrel, in order to obtain a core sample. EBITDA Calculated as operating profit adjusted for depreciation and amortisation. Emission Pollution discharged into the atmosphere from smokestacks, other vents at commercial or industrial facilities and from transportation exhaust systems. End product Commercial product other than those used internally to produce other types of commercial products. For PhosAgro, end products are phosphate-based fertilizers, nitrogen fertilizers, feed and industrial phosphates, and sulphate of potash. Exploration The search for minerals. Prospecting, sampling, mapping, diamond drilling and other work involved in the search for mineralisation. Monocalcium phosphate or MCP A type of feed phosphate with the highest phosphorus digestibility and content. P2O5 (phosphoric pentoxide) A term used to express the content of phosphorus in a substance. Feed phosphates Inorganic feed phosphates are a high- quality phosphorus source for animal feed. Most inorganic feed phosphates are derived from phosphate rock, which is chemically treated to make phosphorus available for animals in the form of quality feed phosphates. The main inorganic feed phosphates are calcium, magnesium, calcium-magnesium, ammonium and sodium phosphates. These phosphates are constant in composition, low in impurities and considered to be the best available sources of phosphorus for animals. An adequate supply of inorganic feed phosphates in animal feed is essential for animals’ well- being. Grade of mineral fertilizer The relative quality or percentage content of useful components. Key performance indicator (KPI) Performance indicators of a division (company) that help the Company to evaluate the implementation of plans and make decisions regarding management remuneration. K2O Universal means of storage of potassium (potash) in potassium-containing products. MER or ‘minor element ratio’ The sum of the iron, aluminium and magnesium content divided by the P2O5 content. Monoammonium phosphate or MAP A type of multi-nutrient fertilizer containing nitrogen and phosphorous. Production of MAP is based on the neutralisation of phosphoric acid by ammonia with subsequent drying and granulating. Monoammonium phosphate is often used in the blending of dry agricultural fertilizers. Nepheline A mineral containing aluminium oxide (Al2O3). Phosphorous or P One of the primary plant nutrients essential for plant growth. Netback price Revenue net of costs associated with shipping goods from the production site to the buyer. PKS A multi-nutrient fertilizer containing phosphorous, potassium and sulphur. Nitrogen or N One of the primary plant nutrients essential for plant growth and a universal way of storing nitrogen in nitrogen-containing products. NPK A multi-nutrient fertilizer containing nitrogen, phosphorus and potassium. NPS A multi-nutrient fertilizer containing nitrogen, phosphorous and sulphur. Open-pit mine A mine working or excavation that is open to the surface and where material is not put back into the mined-out areas. Phosphate rock Phosphate rock (apatite concentrate or phosphorus concentrate) is an imprecise term that includes both unprocessed phosphorus-containing ore and beneficiated concentrates. Practically all production of phosphate fertilizers is based on phosphate rocks containing some form of the mineral apatite. Potash or K One of the primary plant nutrients essential for plant growth. Rare earth elements/resources A group of 15 elements with atomic numbers ranging from 57 to 71: lanthanum, cerium, praseodymium, neodymium, promethium, samarium, europium, gadolinium, terbium, dysprosium, holmium, erbium, thulium, ytterbium and lutetium. Sedimentary Formed by the deposition of solid fragmental material that originates from the weathering of rocks and is transported from a source to a site of deposition. Shaft A mine working (usually vertical) used to transport miners, supplies, ore or capping. Sulphate of potash or SOP A non-chloride potash fertilizer. Sulphuric acid A strong sulphur-based inorganic mineral acid with the chemical formula H2SO4. Phosphates A salt or ester of phosphoric acid or a fertilizer containing phosphorus compounds. Tailing The fluid slurry that is left after treatment and extraction of an economically extracted mineral. Phosphoric acid Mineral (inorganic) acid having the chemical formula H3PO4. Trenches Lines excavated to a predetermined depth to establish the geological structure of a deposit. 164 165 PhosAgro Integrated Report 2016www.phosagro.comSTRATEGIC REPORTCORPORATE RESPONSIBILITY REPORTCORPORATE GOVERNANCE REPORTFINANCIAL STATEMENTSADDITIONAL INFORMATION Urea An organic compound of carbon, nitrogen, oxygen and hydrogen. It is the most widely used and highest-concentration nitrogen-based fertilizer formed by reacting ammonia with carbon dioxide at a high pressure. Waste Rock lacking sufficient grade and/or other characteristics of ore to be economical. Upstream Extraction of solid, liquid and gaseous resources from the earth using specialised equipment. The International Plant Nutrition Institute (IPNI) The IPNI is a global organisation with initiatives addressing the world’s growing need for food, fuel, fibre and feed. Environmental assessment (EA) A process where the breadth, depth and type of analysis depend on the proposed project. An EA evaluates a project’s potential environmental risks and impacts in its area of influence and identifies ways to improve project design and implementation by preventing, minimising, mitigating or compensating for adverse environmental impacts and by enhancing positive impacts. Waste water Spent or used water from individual homes, communities, farms or industries that contains dissolved or suspended matter. FAO Food and Agriculture Organization of the United Nations. Other terms Basel Convention The Basel Convention on the Control of Transboundary Movements of Hazardous Wastes and their Disposal was adopted on 22 March 1989 by the Conference of Plenipotentiaries in Basel, Switzerland. The overarching objective of the Basel Convention is to protect human health and the environment against the adverse effects of hazardous wastes. Its scope of application covers a wide range of wastes defined as “hazardous wastes” based on their origin and/or composition and their characteristics, as well as two types of wastes defined as “other wastes” — household waste and incinerator ash. The Department for Environment, Food and Rural Affairs (Defra) Defra is the government department responsible for environmental protection, food production and standards, agriculture, fisheries and rural communities in the United Kingdom. Feasibility study A comprehensive engineering estimate of all costs, revenues, equipment requirements and production levels likely to be achieved if a mine is developed. The study is used to determine the technical and economic viability of a project and to support the search for project financing. Fertecon/Argus—FMB/CRU Fertilizer Economic Market Analysis and Consultancy, UK. Group/Company/PhosAgro Refers collectively to PJSC PhosAgro and its subsidiaries. Helsinki Convention The Helsinki Convention was signed in 1974 by the then-seven Baltic coastal states, and made all the sources of pollution around the entire sea subject to a single convention. The 1974 Convention entered into force on 3 May 1980. A new convention was signed in 1992 by all the states bordering on the Baltic Sea and the European Community in light of political changes and developments in international environmental and maritime law. After ratification, the Convention entered into force on 17 January 2000. The Convention covers the whole of the Baltic Sea area, including inland waters as well as the water of the sea itself and the seabed. Measures are also taken in the whole catchment area of the Baltic Sea to reduce land-based pollution. IFA International Fertilizer Association, France. ISO International Organization for Standardization, the world’s largest standards development organisation. Between 1947 and the present day, the ISO has published more than 19,000 international standards, ranging from standards for activities such as agriculture and construction through mechanical engineering and medical devices to the newest information technology developments. LSE London Stock Exchange. Moscow Exchange Russia’s MICEX and RTS stock exchanges were merged into one entity, MICEX—RTS, in December 2011 and rebranded as the Moscow Exchange in May 2012. Risk assessment Qualitative and quantitative evaluation carried out in an effort to determine the risk posed to human health or the environment by the presence or potential presence and use of specific pollutants. Names of legal entities used in this report PJSC PhosAgro PhosAgro JSC PhosAgro-Cherepovets PhosAgro-Cherepovets JSC Apatit Apatit Balakovo branch of JSC Apatit Balakovo branch of Apatit or BMF JSC Metachem Metachem OJSC NIUIF NIUIF PhosAgro-Trans LLC PhosAgro-Trans PhosAgro-Region LLC PhosAgro-Region Mining and Chemical Engineering LLC Mining and Chemical Engineering or MCE Smart Bulk Terminal LLC Smart Bulk Terminal Phosagro Asia Pte Ltd Phosagro Asia Phosint Trading Limited Phosint Trading Data on ore reserves presented in this report are prepared on the basis of: • Data from the approved state register as of 01.01.2016; • Data from Form 70-TP “Information on Mineral Extraction During Production”, which contains data on mined volumes (extracted from the subsoil) and losses during mining (regulatory, actual, excess); • Information on changes in reserves for the 2016reporting period: mining, losses during mining, reserves remaining at year end (as of 01/01/2017), reflected in the statistical reporting form 5-GR “Information on the state of and changes to solid mineral reserves”; • Approved Rosnedra protocols for deposits. Calculations and recalculations for approved reserves are compliant with normative documents: • Order No. 40 of the Ministry of Natural Resources of the Russian Federation dated 7 March 1997 “On Approval of Classifications of Mineral Reserves” (together with “Classification of Reserves of Deposits and Potential Resources of Solid Minerals”, “Classification of Currently Mined Reserves and Forecast Groundwater Resources”); • Order of the Ministry of Natural Resources of the Russian Federation of 5 June 2007 No. 37-R “On Approval of Methodological Recommendations for Application of Classification of Reserves of Deposits and Potential Resources of Solid Minerals”. Ensuring the completeness of geological exploration, rational use and preservation of subsoil is carried out in accordance with the law Russian Federation law No. 2395-1 “On Subsoils” dated 21 February 1992. The information in this Report related to mineral resources as of 1 January 2017 is based on information compiled by the Geology Service Department of Apatit and authorised by Mr Sergey Glubokiy, Chief Geologist of Apatit. 166 167 PhosAgro Integrated Report 2016www.phosagro.comSTRATEGIC REPORTCORPORATE RESPONSIBILITY REPORTCORPORATE GOVERNANCE REPORTFINANCIAL STATEMENTSADDITIONAL INFORMATIONGlossary (continued) CONTACTS Investor Relations PhosAgro Legal Address Contacts for employees and potential employees Alexander Seleznev Head of Investor Relations 55/1 Leninsky Prospekt, bld. 1, Moscow 119333, Russia Tel.: +7 495 231–3115 Email: ir@phosagro.ru Tel.: +7 495 232–9689 Fax: +7 495 956–1902 Diana Sidelnikova Head of Personnel Evaluation and Development Tel.: +7 820 259–3113 Email: dsidelnikova@phosagro.ru Depositary Citigroup Global Markets Deutschland AG Frankfurter Welle Reuterweg 16 60323 Frankfurt, Germany Contacts for media Andrey Podkopalov Director of Information Policy Auditor JSC KPMG Naberezhnaya Tower Complex, 10 Presnenskaya Naberezhnaya Moscow 123112, Russia Tel.: +7 495 937 4477 Fax: +7 495 937 4400/99 Web: www.kpmg.ru Registrar OJSC Reestr 3, bldg. 2, Zubovskaya Ploschad, Moscow 119021, Russia Tel.: +7 495 617 0101 Fax: +7 495 680 8001 Email: reestr@aoreestr.ru Web: www.aoreestr.ru Tel.: +7 495 232–9689, ext. 26–51 Timur Belov Head of Information Policy Division Press Secretary Tel.: +7 495 232–9689, ext. 26–52 Email: pr@phosagro.ru Sam VanDerlip International PR Adviser Mobile (UK): +44-75-54-993-032 Tel. (Russia): +7 499 918–3134 Email: vanderlip@em-comms.com Sustainability contacts Anatoly Kutyrev Chief Ecologist Tel.: +7 495 231–2747 Email: akutyrev@phosagro.ru 168 PhosAgro Integrated Report 2016 Designed by Infografika. Effective communications agency
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