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Company Evraz Plc
TIDM EVR
Headline

Publication of 2012 Annual Report on website

Released 07:07 11-Apr-2013
Number 0975C07

RNS Number : 0975C
Evraz Plc
11 April 2013
 



2012 Annual Report of EVRAZ plc ("EVRAZ")

 

EVRAZ has today:

•    posted its Annual Report for the year ended 31 December 2012 ("2012 Annual Report") on its website: http://www.evraz.com/investors/annual_reports/ as required by DTR 6.3.5 R (3); and

•    submitted to the UK National Storage Mechanism a copy of its 2012 Annual Report in accordance with LR 9.6.1 R.

 

The 2012 Annual Report will shortly be available for inspection on the National Storage Mechanism www.hemscott.com/nsm.do.

 

The 2012 Annual Report and the Notice of the Company's Annual General Meeting, which will be held on 13 June 2013 in London, will be posted to shareholders on or around the end of April 2013.

The Appendix to this announcement contains additional information which has been extracted from the 2012 Annual Report for the purposes of compliance with DTR 6.3.5 only. It should be read in conjunction with EVRAZ's Preliminary Results Announcement issued on 11 April 2013. Together these constitute the material required by DTR 6.3.5 and DTR 4.2.3 to be communicated to the media in unedited full text through a Regulatory Information Service. This announcement should be read in conjunction with and is not a substitute for reading the full 2012 Annual Report. Page and note references in the text below refer to page numbers and notes in the 2012 Annual Report and terms defined in that document have the same meanings in these extracts:

•    a description of principal risks and uncertainties;

•    a note on related party transactions; and

•    the Directors' Responsibilities Statement.

 

 

For further information, please contact:

 

Media Relations:

Oleg Kuzmin

VP, Corporate Communications

Tel London: +44 207 832 8998 Tel Moscow: +7 495 937 6871

Email: media@evraz.com

 

Investor Relations:

Sergey Belyakov

Director, Investor Relations

Tel London: +44 207 832 8990 Tel Moscow: +7 495 232 1370

Email: ir@evraz.com

 

Regulatory enquiries:

For information about proxy voting, dividends and to report changes in personal details, shareholders should contact the Company's registrar:

Computershare Investor Services PLC

The Pavilions

Bridgwater Road

Bristol BS13 8AE

United Kingdom

Tel: +44 (0) 870 873 5848

Fax +44 (0)870 703 6101

Email: webqueries@computershare.co.uk

 

APPENDIX

 

PRINCIPAL RISKS AND UNCERTAINTIES

1.   Impact of Global Macroeconomics and Industry Cyclicality

Risk

EVRAZ's sales, profits, balance sheet and potentially the economic viability of projects and investments could be adversely impacted by macroeconomic factors such as:

·    The cyclical nature of the steel, mining and vanadium industries with prices strongly influenced by economic conditions;

·    Potential disparities between global steel and raw material production capacity which could influence pricing; and

·    Adverse fluctuations in RUB/USD exchange rates and other foreign currencies. 

Mitigation

EVRAZ's operations are diversified across a number of geographic markets thereby providing some protection from adverse economic conditions. Production is focused primarily on the infrastructure segment of the steel markets where the Company commands leading market shares and benefits from high barriers to entry.

EVRAZ's vertically integrated business model serves to protect the Company from higher raw material input prices and various pricing formulas are utilised in respect of contracts. In addition, products are sold under a range of contracts, some of which are linked to raw material prices. A proportion of products are supplied on long-term contracts.

EVRAZ's operations are generally low cost in comparison with much of the Company's peer group, a factor which provides some mitigation against economic fluctuations.

EVRAZ's main foreign exchange risk is the potential impact on the asset value of the Group's Russian operations; this risk is mitigated in that all products are priced in US dollars or on a USD related price.

2. Safety

Risk

Safety risks are inherent to the Company's principal business activities of steelmaking and mining.

EVRAZ employees face a range of risks including the potential dangers of fire, explosions and electrocution. Additional risks, specific to individual mines, include methane levels, rock falls caused by geological conditions, and accidents involving equipment and/or vehicles. EVRAZ faces risks including regulatory fines, penalties and adverse impacts on reputation and, in the extreme, the withdrawal of mining or plant environmental licences thereby curtailing operations for an indefinite period.

Mitigation

EVRAZ has instigated a programme to improve the management of safety risks across all business units and embed a new culture at all levels within the Company, supported by operational manuals and detailed procedures. This system is subject to oversight at Group and site level in order to ensure all HSE systems are aligned and that response to safety risks is co-ordinated, consistent and complete.

EVRAZ has reviewed the Group's training activities in order to ensure that all employees can provide strong and professional leadership with regard to safety issues.

EVRAZ reviews the performance of all contractors against Group policies and contractual safety requirements. In the event of non-compliance by contractors the Group takes appropriate action, including contract termination.

An operational safety assessment represents a primary aspect of all new projects, particularly new mines where measures to contain methane levels are a priority.

3. Capital Projects and Expenditures

Risk

The advancement of EVRAZ's strategic objectives is, in large part, dependent upon the completion of a number of important projects designed to enhance the Company's key product delivery, reduce production costs and increase the vertical production of our raw material inputs.

The economic viability of capital projects could be impacted by increases in capital costs due to delays and other factors, unforeseen changes to future metal and metallic coal prices and the acquisition and retention of relevant operating licences. In addition, the profitability of new projects could be impacted by higher than expected operating and Life of Mine (LOM) costs due to variables such as lower than expected coal and iron ore quality, coal seam economics and technical processing and engineering factors. 

In addition, the cost to EVRAZ of maintaining current mines is subject to various factors which are outside the Company's control, including the price of consumables.

Mitigation

EVRAZ reviews all proposed capital projects on a risk return basis. The Group sets expected internal rates of return (IRR) for each project as thresholds for approving the allocation of capital based on the net present value (NPV) of expected cash flows from invested capital. The IRR and NPV are also reviewed based on sensitised cash flows using variables for commodity prices, inputs and sales, and volumes (mines).

Before undertaking the development of a mine, EVRAZ takes into account a range of considerations and utilises independent experts to review various factors such as: resource estimates; studies of ore quality in relation to market demand and value; mine development costs; mining techniques (open pit or underground) and associated investments; logistic options, including transport and power; environmental impacts; and labour availability. Cash costs and full sustainable cash costs over LOM are also reviewed compared to local and open market metrics.

Each project is presented for approval against the Group's risk matrix to assess the downside in respect of each project and any potential mitigating actions.

Project delivery is closely monitored against project plans to ensure that investments are on time and on budget and to assess any changes in project and capital expenditure against the approved NPV.

4. Environmental Incidents

Risk

Mining and steel production carry an inherent risk of environmental impacts and incidents, relating to issues as diverse as water usage and quality of water discharged, air emissions, metallurgical waste recycling, tailings management and community discontent. Consequentially, EVRAZ faces risks including regulatory fines, penalties and adverse impacts on reputation and, in the extreme, the withdrawal of mining or plant environmental licences thereby curtailing operations for an indefinite period.

Mitigation

EVRAZ has put strong environmental systems, procedures and controls into place. Environmental risks are the responsibility of the regional business units with oversight from the Group's HSE team, HSE Committee and, ultimately, the EVRAZ's Board.

The majority of EVRAZ's operations are certified under ISO 14001 and the Company continues to work towards bringing the remaining plants to certification. EVRAZ is currently compliant with REACH requirements.

5. Human Resources

Risk

EVRAZ's employees represent a key resource and are critical to the delivery of the Company's objectives.

Principal risks involve the selection, recruitment, training and retention of employees, together with securing appropriately qualified executives with regard to current and new operations. Succession planning in respect of EVRAZ's senior management is under constant review although this does not preclude issues in relation to key roles.

Whereas the aforementioned issues are applicable throughout the Group's global operations, the on-going expansion of mining operations in Russia has led to a particular shortage of experienced and skilled mining professionals. This risk is exacerbated by the climatic conditions and/or remote locations pertaining to certain of the Company's current and potential mines. Certain regulatory and cultural factors can also prove disincentives in terms of recruitment from outside Russia.

There is a risk of employee union action, as witnessed at the Group's South African operations during 2012, although such action is not indicative of the overall state of labour relations at EVRAZ which are largely favourable. However, this cannot preclude the risk of future industrial disputes.

Mitigation

EVRAZ continually assesses its human resources requirements and seeks to meet its leadership and skills needs through the retention of employees and internal promotion.  EVRAZ maintains structured and professional internal mentoring and external development programmes including

 

EVRAZ's New Leaders programme, focused on high potential employees, and Talent management supervision conducted by the Company's Talent Committee.

The Company has instigated clearly assigned responsibilities and programmes designed to maintain close relationships with employee unions throughout its operations. EVRAZ seeks to be proactive and timely in response to the needs and concerns of trade unions

6. Business Interruption

Risk

Steel making and mining operations are subject to a number of operational risks which have the potential to cause prolonged production delays or shut-downs.

These include equipment failure, regulatory requirements in respect of safety concerns, geological and technical challenges, climatic conditions, interruptions to power supplies and disruptions to transportation services.

Additionally, long-term business interruption may result in loss of customers and damage to the Company's reputation.

Mitigation

EVRAZ has established protocols and procedures across all of its activities to mitigate the effects of business interruption. The Company has initiated planned maintenance programmes at the majority of its plants and records of minor interruptions are reviewed for the purpose of identifying prospective problems of greater magnitude. KPIs are utilised at each of the Group's plants, units and mines, encompassing all significant interruptions.

All of the Company's operations possess disaster recovery plans which are reviewed regularly by Internal Audit. The Group also carries business interruption insurance, excluding mining operations.

7. Potential Actions by Governments

Risk

EVRAZ operates in a number of countries and there is a risk that governments or government agencies could adopt new laws, regulations or other requirements which could have an adverse impact on the Group's operations and business. Such developments could also have the effect of limiting the Group's ability to obtain financing in international markets.

Mitigation

EVRAZ and its executive teams are members of various national industry bodies and, as a result, contribute to the thinking of such bodies and, when appropriate, participate in relevant discussions with political and regulatory authorities.

EVRAZ also has programmes in place across the Group's operations to support the Company's "good corporate citizen" credentials.

8. Treasury Risk

Risk

As with many other large multinational companies, EVRAZ faces various treasury risks including liquidity, credit, and interest rate risks.

Adverse events in global financial markets could affect the Group's ability to raise new debt, refinance existing debt and/or lead to higher debt service costs.

The Group's current debt facilities include certain covenants in relation to equity, net debt and interest expense. A breach of these covenants could result in certain of the Group's borrowing facilities becoming repayable immediately.

 

EVRAZ is subject to significant counter-party risk via receivables from commercial and financial institutions.

Mitigation

EVRAZ manages liquidity risk by maintaining adequate cash and borrowing facilities, as well as through cash management procedures that continually monitor forecast and actual cash flows and by matching funding with the Group's cash needs and re-financing obligations.

Covenant compliance is managed by close monitoring of the overall Group's business performance and, again, with the continual review of forecast and actual cash flow. Free cash flow, net of capital expenditure, total funding, maturity profile and covenants are considered at each EVRAZ Board meeting.

With regard to risk management of funding cost, the majority of the Company's funding has been secured on a fixed interest basis.

The Group manages counter-party risk with commercial customers through a combination of letters of credit and, where creditworthiness is uncertain, by pre-payments. In the event that credit terms are longer than the Group's standard payment terms, collateral is sought.  There is no significant concentration of credit risk within EVRAZ's customer base.

The credit worthiness of all financial institutions with which EVRAZ has cash balances or places deposits is kept under regular review.

The majority of the Group's funding is denominated in US dollars. Major funding in other currencies, primarily the Russian rouble, is substantially dollar hedged with financial institutions.

9. Cost Competiveness

Risk

Most product groups in the steel industry are highly cost competitive and this is particularly relevant to the Groups' key markets in Russia and North America. Although EVRAZ is active in the manufacture and sale of niche products, the Group is able to focus on specific geographic regions and enjoys certain cost advantages linked to customer proximity, volume and quality, the majority of the Group's steel production remains cost and price sensitive.

Steel making is a high capital cost industry and the impact of lower plant utilisation increases the underlying cost per tonne of crude and rolled steel, reducing any profit margin.

At the Group's Russian plants, employees tend to represent the majority of the local community's active workforce. Changing production requirements can, therefore, lead to local political and social challenges.

Mitigation

The majority of the Group's recent investments have been designed to significantly reduce costs, as illustrated by the Company's utilisation of PCI technology within its steelmaking operations in order to reduce energy costs and enable the use of cheaper, lower quality carbon (coal/coke) inputs; the focus on the development of the Group's key cost competitive rail and beam production for both domestic and export markets; investment in the production of high quality slab which can be further processed by the Group's international plants, particularly for the North American market; and the expansion and control of the Company's Russian domestic steel distribution network.

The Group continues to develop a number of new greenfield and brownfield mining operations which will produce higher quality coal and iron ore at a lower cash cost, thereby benefiting the Company's overall steel making cost per tonne.

Note 16

 

Related Party Disclosures

 

Related parties of the Group include associates and joint venture partners, key management personnel and other entities that are under the control or significant influence of the key management personnel, the Group's ultimate parent or its shareholders. In considering each possible related party relationship, attention is directed to the substance of the relationship, not merely the legal form.

 

Amounts owed by/to related parties at 31 December were as follows:

 


Amounts due from
related parties

Amounts due to
related parties

US$ million

2012

2011

2010

2012

2011

2010








Kazankovskaya

$         23

$         21

$         21

$        -

$        -

$           1

Lanebrook Limited

-

-

53

-

-

-

Raspadsky Ugol

2

2

2

42

39

32

Vtorresource-Pererabotka

3

-

-

45

-

-

Yuzhny GOK

4

5

19

163

46

178

Other entities

14

9

9

7

13

6


46

37

104

257

98

217

Less: allowance for doubtful accounts

(34)

(29)

(24)

-

-

-









$         12

$           8

$         80

$     257

$      98

$       217

 

In 2012, 2011 and 2010, the Group recognised an expense for bad and doubtful debts of related parties in the amount of $4 million, $7 million and $15 million, respectively.

 

Transactions with related parties were as follows for the years ended 31 December:

 

 

 

Sales to
related parties

Purchases from

related parties

US$ million

2012

2011

2010

2012

2011

2010








Interlock Security Services

$           1

$           1

$           1

$         48

$         43

$         37

Kazankovskaya

1

1

6

1

5

14

Raspadsky Ugol

8

8

11

127

207

192

Vtorresource-Pererabotka

14

-

-

485

-

-

Yuzhny GOK

66

42

20

124

165

67

Other entities

9

8

8

31

27

20









$         99

$         60

$         46

$       816

$       447

$       330

 

In addition to the disclosures presented in this note, some of the balances and transactions with related parties are disclosed in Notes 11 and 13.

 

Interlock Security Services is a group of entities controlled by a member of the key management personnel, which provide security services to the Russian subsidiaries of the Group.

 

Kazankovskaya is an associate of the Group (Note 11). The Group purchased coal from the entity and sold mining equipment and inventory to Kazankovskaya. In 2012 and 2011, the Group issued short-term loans to Kazankovskaya bearing an interest rate ranging from 8.1% to 8.5% per annum. At the reporting dates, the Group assessed the recoverability of these loans and recognised a loss, which was included in the other non-operating expenses caption of the consolidated statement of operations (2012: $5 million, 2011: $3 million).

 

Lanebrook Limited is a controlling shareholder of the Company. At 31 December 2010, the amounts receivable from Lanebrook Limited included overpayments for the acquired working capital of the Ukrainian subsidiaries and a $46 million loan. The loan bore interest of 7.85% per annum and was due for repayment on 22 June 2012. At 31 December 2010, the loan was included in other non-current assets. In 2011, Lanebrook early settled the loan and fully repaid its debts relating to the acquisition of the Ukrainian businesses.

 

In addition, in 2008 the Group acquired from Lanebrook a 1% ownership interest in Yuzhny GOK for a cash consideration of $38 million (Note 18). As part of the transaction, the Group signed a put option agreement that gives the Group the right to sell these shares back to Lanebrook Limited for the same amount. The put option expires on 31 December 2013.

 

In 2012, the Group sold one of its subsidiaries to Lanebrook (Note 12).

 

OOO Raspadsky Ugol ("Raspadsky Ugol"), a subsidiary of the Group's joint venture Corber (Note 11), sells coal to the Group. Raspadsky Ugol represents approximately 12% of the Group's coal consumption. The coal was sold at prevailing market prices at the dates of transactions. The Group sells steel products and renders services to Raspadsky Ugol.

 

Vtorresource-Pererabotka is a new subsidiary of Streamcore, the Group's joint venture, acquired in February 2012. It sells scrap metal to the Group and provides scrap processing and other services. In 2012, the purchases of scrap metal from Vtorresource-Pererabotka amounted to $399 million (1,366,423 tonnes).

 

Yuzhny GOK, an ore mining and processing plant, is an associate of Lanebrook Limited. The Group sold steel products to Yuzhny GOK and purchased sinter from the entity. In 2012, the volume of purchases achieved 1,432,473 tonnes.

 

In addition to the purchase transactions disclosed above, in July 2011 the Group acquired an office building for its administrative staff in Moscow from OOO Zapadnye Vorota, an entity under the control of the ultimate principal shareholders of the Group. The cash consideration (including VAT) amounted to $102 million.

 

The transactions with related parties were based on market terms.

 

Compensation to Key Management Personnel

 

Key management personnel include the following positions within the Group:

 

§ directors of the Company,

§ vice presidents,

§ top managers of major subsidiaries. 

 

In 2010-2012, key management personnel totalled 55 people. Total compensation to key management personnel were included in general and administrative expenses in the consolidated statement of operations and consisted of the following:

 

US$ million

2012

2011

2010





Salary

   $              21

   $              20

   $              21

Performance bonuses

14

12

14

Social security taxes

3

1

1

Share-based payments (Note 24)

10

13

1

Termination benefits

-

3

4

Other benefits

1

1

3


   $              49

   $              50

   $              44

 

Other disclosures on directors' remuneration required by the Companies Act 2006 and those specified for audit by the Directors' Remuneration Report Regulations 2002 are included in the Directors' Remuneration Report.

 

STATEMENT OF DIRECTORS' RESPONSIBILITIES

Each of the directors listed on pages 70 to 71 of the Annual report confirm that to the best of their knowledge:

·    the consolidated financial statements of EVRAZ plc, prepared in accordance with International Financial Reporting Standards as adopted by the European Union, 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 (the 'Group');

·    the Directors' Report and the Financial Review on pages 92 to 95 and 62 to 67 of the Annual Report include a fair review of the development and performance of the business and the position of the Company and the Group, together with a description of the principal risks and uncertainties that they face.

 

By order of the Board

Alexander Frolov

Chief Executive Officer

EVRAZ plc

 


This information is provided by RNS
The company news service from the London Stock Exchange
 
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Publication of 2012 Annual Report on website - RNS