2016 2016 ANNUAL AND SUSTAINABILITY REPORT ANNUAL AND SUSTAINABILITY REPORT LKAB IN BRIEF

EUROPE EST. 1890 LKAB is the EU’s largest LKAB is one of ’s oldest ore producer and mines industrial companies and has around 78 percent of all iron customer relationships dating ore within the EU. back more than a century.

84% LKAB is the world’s SEK BILLION second-largest2 supplier 16.3 of LKAB’s revenue comes Net sales 2016. from pellet sales. of pellets.

100% LKAB is wholly owned by the Swedish state. 4,224 Average number of employees.

LKAB’s mines and processing plants are located in the Swedish orefi elds – in , and . Our upgraded iron ore products are transported along the Malmbanan and ore railways to the ports of and Luleå for shipment to customers around the world.

Narvik Svappavaara Kiruna

Malmberget

ARCTIC CIRCLE

Malmbanan ore railway

Luleå

Cover: The Leveäniemi open-pit mine in Svappavaara. Large trucks with a total weight of 400 tonnes haul ore from the bottom of the mine to the crusher bin, a di erence in elevation of 120 metres. CONTENTS 2016

Increased demand for better The year in brief 2–3 grades of iron ore for more President’s report 4–6

competitive steel processes. 8 MARKET TRENDS AND DEVELOPMENT 8 Market trends and development, page 8 OBJECTIVES AND STRATEGY 12 Objectives for sustainable development 12–13 Commercial and sustainability strategy 14–15 LKAB aims to be one of How we create value 16–17 the most innovative, resource- PRODUCTS AND MARKETS 18 efficient and responsible 12 Iron ore products 19–20 companies in the world. Objectives and strategy, page 12 Special products 21 OPERATIONS AND IMPACT 22 Highly upgraded iron ore products for Exploration 24–25 the steel industry are supplemented Mining 26–29 with other industrial minerals and techno- Processing 30–33 logy developed within the company. 18 Transport 34–35 Products and markets, page 18 Suppliers 36–37 Employees 38–41 Focus on continual improvement Social responsibility 42–45 and improved efficiency Environmental responsibility 46–49 throughout the value chain. 22 RISKS AND RISK MANAGEMENT 50–54 Operations and impact, page 22 GOVERNANCE AND CONTROL 55 Corporate Governance Report 56–63 64–65 Group management 66 Auditor’s statement on the Corporate Governance Report 67 ABOUT LKAB’S ANNUAL AND SUSTAINABILITY REPORT 2016 Auditor’s limited assurance report on The Board of Directors and the President hereby submit the Annual and Sustainability the Sustainability Report 68 Report for Luossavaara- AB (publ), corporate identity number 556001-5835. LKAB is a limited liability company that is wholly owned by the Swedish state. Materiality analysis 69 GRI Index 70–71 The Annual Report is integrated – meaning that our sustainability work, which forms an integral part of LKAB’s operations, is reported together with the administration report and Group overview 72–74 financial statements that make up the statutory part of the Annual Report. In accordance FINANCIAL RESULTS 75 with the state’s ownership policy and guidelines for state-owned companies, LKAB’s Sustainability Report has been prepared as per the Global Reporting Initiative (GRI) Financial statements 76–84 guidelines. Notes 85–117 The administration report comprises pages 2–3, 20–21, 38–40, 44–47, 50–54 and 72–74 Affirmation by the Board 118 of the Annual Report, while pages 76–117 contain the financial statements and associated Auditor’s report 119–121 notes. The auditor’s report on the Annual Report can be found on pages 119–121. Sustainability information covered by the auditor’s limited assurance report is identified Mineral reserves and mineral resources 122–125 by the page references in the GRI Index on pages 70–71, and the auditor’s report is on Ten year overview 126 page 68.

APPENDICES 127 On pages 56–63 LKAB presents a Corporate Governance Report in accordance with the Terms and definitions 127 state’s ownership policy. In accordance with Chapter 6 Section 8 of the Swedish Annual Accounts Act, the report is a separate document to the statutory Annual Report. The audi- Annual General Meeting and financial information 128 tor’s statement on LKAB’s Corporate Governance Report can be found on page 67. Addresses .com The Annual Report and the GRI appendix for 2016 are available on the website lkab.com GRI appendix lkab.com as of 31 March 2017, with a translation into English available subsequently. A printed copy of the report can also be requested by emailing [email protected].

LKAB ANNUAL AND SUSTAINABILITY REPORT 2016 CONTENTS | 1 THE YEAR IN BRIEF

PROFIT/LOSS FOR THE YEAR

During the year increased delivery volumes, NET SALES AND OPERATING PROFIT/LOSS improved prices and the effects of the cost-cutting MSEK programme made a positive contribution to the 30 000 improved result. Cost efficiency measures cut costs by around MSEK 700. However, impairment of 25 000 property, plant and equipment and increased 20 000 MSEK 16,343 Net sales provisions for urban transformation had a negative 15 000 impact on operating profit of MSEK 1,192 and MSEK 1,621 MSEK 2,106, respectively. In addition, the result was 10 000 Underlying operating profit also brought down by hedging transacted at the 5 000 MSEK -1,677 lower price levels that prevailed during the fourth Operating loss 0 quarter of 2015 and the first quarter of 2016, which Net sales 2016 meant that LKAB was not able to take full advantage -5 000 Net sales of the price increase in 2016. Underlying operating -10 000 Operating profit/loss profit increased to MSEK 1,621 (1,548). 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

EVENTS DURING THE YEAR

The spot price of iron ore is listed at Uncertainty concerning the financing of the USD 39.25/tonne in January, close to new section of road E10 in Kiruna risks Q1 the lowest price level since spot market Q3 delaying the necessary detailed plans for trading of the commodity began in 2009. continued mining. In November, however, an agreement is reached on financing. Agreement on outsourcing of tugboat operations in Narvik brings major 300,000 tonnes of new pellet product for the savings while also improving safety European market is produced in Malmberget. and readiness. Tests are conducted in LKAB’s experimental blast furnace in October. Presentation of new compensation prin- ciples for property owners, residents Following extensive renovation, the mine hoist and businesses affected by the mining. wrecked in the in 2015 is taken back into operation in July 2016.

LKAB, SSAB and Vattenfall present a In its 2017 ranking Sveriges Karriärföretag joint project for carbon dioxide-free names LKAB as one of Sweden’s best places Q2 steelmaking using hydrogen as reduc- Q4 to work for the fifth consecutive year. ing agent. The structural review and staffing reductions Negotiations with the Municipality of announced by LKAB have been able to be Gällivare on levels of compensation achieved without layoffs in the Parent Company. move slowly on. The agreement in Iron ore deliveries increase by 11.5 percent in October allows continued mining in total over the year, compared with 2015. This Malmberget. is LKAB’s best delivery result since the 1970s. At the end of April the first delivery of LKAB announces that the open-pit mine in 40,000 tonnes of pellets is made from will not be taken into operation as the new ore Quay 7 in Narvik. planned, due to the prevailing market situation.

2 | THE YEAR IN BRIEF LKAB ANNUAL AND SUSTAINABILITY REPORT 2016 PRODUCED DELIVERED SALES BY PRODUCT AREA 26.9Mt 27.0Mt Iron ore products produced by Iron ore products delivered by LKAB in 2016, compared with LKAB in 2016, compared with % 24.5 million tonnes in 2015. 24.2 million tonnes in 2015.

PERCENTAGE OF SALES (MSEK) DELIVERIES % Blast furnace pellets...... 66 The highest volume of iron ore pellets, DR pellets...... 24 as a share of total deliveries, that LKAB Fines...... 8 has delivered. 84% Special products...... 2

KEY RATIOS

From and including the fourth quarter 2016, the business is being managed and followed up according to a new Group structure in which the operations are split into the Northern Division, the Southern Division and the Special Products Division. Figures for full-year 2016 and 2015 have been restated according to the new structure.

PRODUCTION OF IRON ORE PRODUCTS, Mt FINANCIAL OVERVIEW, GROUP 2016 2015 2014 2013 2012 2016 2015 Northern Division1 15.2 13.8 - - - Net sales, MSEK 16,343 16,200 Southern Division1 11.7 10.7 - - - Underlying operating profit3, MSEK 1,621 1,548 Total 26.9 24.5 25.7 25.3 26.2 Operating profit/loss, MSEK -1,677 -7,156 Of which pellets 24.0 22.2 23.2 23.1 23.8 Operating margin, % neg neg Of which fines 2.9 2.3 2.5 2.2 2.4 Loss for the year -978 -5,686 Operating cash flow, MSEK -2,762 -2,370

DELIVERIES OF IRON ORE PRODUCTS, Mt Return on equity, % neg neg Net debt/equity ratio, % 20.7 10 2016 2015 2014 2013 2012 Capital expenditure on property, plant and equipment, MSEK 3,341 6,354 Northern Division1 15.5 14.2 - - - Provisions for urban transformation at end of reporting period, MSEK 13,062 12,234 Southern Division1 11.5 10.1 - - - Total 27.0 24.2 26.0 25.5 26.3 FINANCIAL OVERVIEW, DIVISIONS Of which pellets 22.7 20.3 21.7 21.1 22.0 NORTHERN SOUTHERN SPECIAL PRODUCTS Of which fines 4.3 3.9 4.3 4.4 4.3 DIVISION2 DIVISION2 DIVISION2 2016 2015 2016 2015 2016 2015 PRODUCTION AND PRODUCTIVITY Net sales, MSEK 10,376 8,606 7,162 5,998 1,598 1,619 Production Production 2016 Underlying operating profit3, MSEK 2,891 1,002 1,293 479 n/a n/a Productivity, tonnes/average number of employees Operating profit/loss, MSEK 1,164 -3,947 -278 -3,276 95 137 Mt/year Tonnes/average number of employees 30 8 000 SUSTAINABILITY OVERVIEW 7 000 25 2016 2015 6 000 Average number of employees 4,224 4,463 20 5 000 Of whom women, % 20.6 20 15 4 000 Of whom female managers, % 19.5 17.7 3 000 10 Accidents with absence per million hours worked (accident rate) 6.9 6.9 2 000 1From and including the fourth quarter 2016 the business is being managed and followed up according to a new Group structure in which the oper- 5 1 000 ations are split into a Northern Division, Southern Division and Special Products Division. Figures for full-year 2016 and 2015 have been restated according to the new divisions. Production volumes as per financial reporting. 0 0 2 The Group’s earnings, the composition of the Group and the breakdown of earnings between operating segments are shown in Note 3 on page 93. 2012 2013 2014 2015 2016 3 Underlying operating profit is reported in Note 43 on page 117.

LKAB ANNUAL AND SUSTAINABILITY REPORT 2016 THE YEAR IN BRIEF | 3 We’ve increased the focus on our core business.

4 | PRESIDENT’S REPORT LKAB ANNUAL AND SUSTAINABILITY REPORT 2016 IMPORTANT STEPS IN IMPROVING LKAB’S COMPETITIVENESS AND LONG-TERM PROFITABILITY

During the year LKAB streamlined its operations, introduced a new organization and formulated new Group goals. These measures contributed to increased volumes and a record level of pellet production, but profits were brought down by non-recurring items and disadvantageous price hedging. President Jan Moström comments on the past year.

How would you sum up 2016? In the past two years we have also imple- year. Hedging was carried out in order to Our goal is sustainable, profitable and mented two cost efficiency programmes, alleviate the effects of price and exchange cost-effective growth. Through joint efforts, which together will have reduced our cost rate changes in the market. In this case during the year we brought down our costs base by MSEK 1,600 by the end of the first it had a negative impact on profits. In and increased volumes. We have also taken quarter 2017. We have done this with the February 2017 a revised finance policy was major steps to create a more flexible and greatest possible consideration for our em- adopted, which makes changes as regards effective organization that is better able to ployees. Through an active Employer Policy, hedging activities. The main thrust of the fend off fluctuations in the market. At the we have succeeded in streamlining the revised policy means that LKAB will not same time, the market developed better operations as planned with very few layoffs. normally hedge price risk in the Group’s than expected during the year. Various chal- The programmes were necessary in order forecast iron ore sales. LKAB has been lenges remain in order for us to strengthen to rapidly improve our competitiveness and applying this updated finance policy with our competitiveness, but overall we have profitability. I do not see this as part of our effect from the first quarter of 2017. moved a good way in the right direction. continued path going forward, however. From now on, we will instead develop our Can you describe LKAB’s strategy and What has been done to make LKAB more capacity to work on continuous improve- what you have worked on during the year? competitive? ment and ensure that we are better able to LKAB aims to be one of the most sustainable We’ve increased the focus on our core respond to the economic fluctuations that mining companies in the world. To maintain business and on operational matters. In are an unavoidable part of our industry. that position we need to have highly produc- January 2016 we introduced a new Group tive mining operations, highly upgraded structure with three operating divisions – the What results has the work achieved this products and climate- and energy-efficient Northern Division, the Southern Division and year? processes. the Special Products Division. This means We have taken many steps in the right Highly productive mining operations are that the producing divisions have clearer direction. Thanks to stable production with dependent on access to mineral reserves responsibility and a clearer mandate, from few stoppages we increased volumes by 7 and mineral resources, and good knowledge management level right out to individual percent during the year, and our clear focus of these. We have therefore focused our employees. on highly upgraded products meant that we exploration work on existing open-pit and We want those who are closest to the set a new record for pellet production. At the underground mines, so that we can improve operations to be able to make decisions same time we have succeeded in lowering the basis for production planning. This is an themselves and take responsibility for our costs. important step in producing long-term plans how the operations are run. By delegating Despite these improvements, LKAB is for the operations – life-of-mine plans – in operational responsibility we are putting a reporting a loss in 2016. Profits were mainly order to have greater freedom to implement focus on continual improvement and cost brought down by non-recurring items in the our operational strategy and reduce risk. efficiency. form of impairment losses for the Mertainen During the year we also developed and In order to be more flexible we have also open-pit mine and increased costs for urban began implementing a new strategy with changed our investment strategy. In future, transformation. Underlying operating profit three focus areas – operational excellence, our investments will track the general econ- increased to MSEK 1,621 (1,548). growth, and employeeship and leadership. omy more closely – so that we invest during However, hedging transacted at the lower This is all about streamlining and optimiz- good times and have the capacity to slow price levels that prevailed during the fourth ing our processes, being at the forefront of things down and safeguard our cash flow quarter of 2015 and the first quarter of 2016 technological and product development, and and earnings when there is a downturn. meant that LKAB was not able to take full delegating responsibility and authority in the advantage of the price increase during the organization more clearly.

LKAB ANNUAL AND SUSTAINABILITY REPORT 2016 PRESIDENT’S REPORT | 5 How do you view LKAB’s competitiveness Sustainability is clearly integrated into es located in the area will be affected when today? LKAB’s strategy. What do you see as the around 700,000 square metres of residential LKAB has a strong niche position as a key events during the year in terms of and other properties are demolished and leading supplier of highly upgraded iron environmental and social sustainability? replaced with new buildings elsewhere. ore products. We have close relationships Right from our beginnings over 125 years In 2016 new compensation principles with our customers and during the year we ago, LKAB’s existence has depended on our were decided on for the urban transforma- deepened our cooperation with our custom- ability to add value for, and grow together tion and with these as a basis, the process of ers further. Today we have development with, our operating locations. signing agreements with the nearly 10,000 projects with all our customers. Demand is It is vital that we take responsibility for our land and property owners affected is now good and we are still in a situation where impact and that we have a close dialogue in progress. Where public infrastructure is our customers are calling for larger volumes with the community around us. affected, the challenges are all the greater. than contracted. In the area of the environment, we need Our hope is, however, that together with the In other words, we are in a strong to reduce our energy consumption and our municipalities we can plan and implement position. However, there are two powerful climate impact in the form of emissions to urban transformation in both Kiruna and parameters in competitiveness: costs and air and discharges to water. The new objec- Malmberget in a way that combines LKAB’s volume. A high proportion of LKAB’s costs tives are related to our production and to the social and environmental responsibilities are fixed – so the volumes have a huge effect challenges we face as regards permit issues with reasonable costs and a fixed timetable. on the unit cost. Our focus is therefore on and increased requirements from the world We have a strong common interest in secur- developing production and productivity. around us. ing LKAB’s future in the Swedish orefields. Within social sustainability, LKAB has a clear ambition to set an example interna- What is the outlook for 2017 – how do you tionally. Ethics, equality, diversity and the see things developing? In 2016 we laid work environment are key issues. This is I am cautiously optimistic. Compared with the foundations for reflected in our Code of Conduct, as well as the market situation at the start of the year, in the demands we make of our suppliers. the global iron ore price has developed well a stronger and more Among other things, during the year we and we expect prices to be at a stable level sustainable LKAB. conducted audits on a number of suppliers in 2017. The focus on maximizing pellet in which together we identified areas that production remains and demand for LKAB’s can be developed. We also adopted a policy pellets, which provides a premium over the What kind of growth plans do you have? on human rights and started working on spot price, is strong. Growth in the coming years will come charting such things as the impact of urban During the year we incurred various major primarily from optimizing existing produc- transformation and our exploration activities costs and implemented a number of changes tion units through increased production and on human rights. that improved our operational capacity. The efficiency. We will expand mainly in our Despite progress in a number of sustain- measures taken, including impairment losses existing underground mines. We are still in ability areas, unfortunately, I have to state and provisions, combined with the volume a situation where our customers are that this year accidents resulting in absence increases should contribute to provides demanding more than we can produce, so total 6.9 per million hours worked. In other developing positively in 2017. we will increase our production with a focus words, the same level as in 2015 and thus Thus in 2016 we laid the foundations for on profitable products. In the current market above our target of no more than 3.5. Every a stronger and more sustainable LKAB. I situation this means that we will continue accident is a failure and the safety culture is would like to take this opportunity to thank to focus on maximizing pellet production a priority area in our work on a shared man- all our employees, each and every one of where we have a price premium. At the agement philosophy that will be adopted in whom contributed to this. I am convinced same time, it means that we will not be 2017. Among other things, this will involve that leadership and employeeship are the taking the open-pit mine in Mertainen into all operations implementing targeted action foundation of strong companies. It is now a operation until market conditions allow plans. matter of continuing along this path together, profitable production. to achieve cost-effective growth that is What are the greatest challenges for sustainable in the long term. That is how we You reviewed LKAB’s objectives during the LKAB? will add value for customers, communities, year – why? Our operations are highly dependent on employees and our owner. As part of the work on strategy during the two factors – the community’s acceptance year we shifted our positions up somewhat. of mining operations and the authorities’ Among other things, we have set more permits for these. My feeling is that people Luleå, March 2017 stringent objectives for the work environ- trust us and accept us, that we have a “social ment and for equality. On the environmental licence to operate”. However, the permit pro- side, we have linked the objectives more cesses are complex and slow-moving. That closely with production. Previously we had affects our opportunities to maintain and environmental objectives in absolute figures, expand production at rate we would like to. whereas we are now introducing objectives In Kiruna and Malmberget, continued per tonne produced. That is more in line production is dependent on large parts of the Jan Moström, President and CEO with our aim of increasing production in a communities being moved as the mining ex- sustainable way. pands. Around 10,000 people and business-

6 | PRESIDENT’S REPORT LKAB ANNUAL AND SUSTAINABILITY REPORT 2016 GROUP STRUCTURE WITH THREE DIVISIONS

As of January 2016, LKAB’s operations have been decentralized into three divisions plus group- wide functions. The group-wide units run important development areas. The new structure means a greater focus on production and gives a clearer mandate and responsibility to the organization. 1 2 3 NORTHERN DIVISION SOUTHERN DIVISION SPECIAL PRODUCTS Comprises production of crude ore Comprises production of crude ore DIVISION and processing in Kiruna, including and processing in Malmberget and Alongside its iron ore business, LKAB the world’s largest underground iron Svappavaara, including an under- is active in the industrial minerals ore mine as well as three pelletizing ground mine and two pelletizing market and sells drilling technology plants. plants in Malmberget as well as that it has developed to the mining open-pit mines and a pelletizing and construction industries. plant in Svappavaara.

The new structure means a greater focus on production and gives a clearer mandate and responsibility to the organization.

GROUP-WIDE FUNCTIONS Within the LKAB Group a number of group-wide functions are To support the divisions, there are also group functions for responsible for the provision of such things as rail transport, Finance, HR and Sustainability, Operational Support and rock and engineering services and explosives, as well as prop- Business Development, and for Sales and Logistics. There are erties, insurance and the electricity network. Some of these also group-wide units for Urban Transformation and for are run as wholly owned subsidiaries which mainly supply Communications and Community Contacts. products and services within the Group.

LKAB ANNUAL AND SUSTAINABILITY REPORT 2016 GROUP STRUCTURE | 7 MARKET TRENDS AND DEVELOPMENT

LKAB is well positioned as a sustainable supplier of high-grade iron ore products.

LKAB’s loading port in Narvik.

8 | MARKET TRENDS AND DEVELOPMENT LKAB ANNUAL AND SUSTAINABILITY REPORT 2016 FIVE EXTERNAL TRENDS

1 DEMAND FOR BETTER GRADES OF IRON ORE MARKET TRENDS AND DEVELOPMENT MARKET 2 FOCUS ON COST REDUCTION

3 CONTINUED SHORTAGE OF PELLETS ON THE WORLD MARKET

4 LARGE PRICE VARIATIONS BUT STABLE PELLET PREMIUMS INCREASED SUSTAINABILITY REQUIREMENTS ACROSS 5 THE VALUE CHAIN

The iron ore market is driven by demand for steel, which in turn is linked to developments and growth in the global economy. The deceleration of China’s growth has created excess capacity and overproduction of steel in China, resulting in a continued high level of steel exports.

China’s steel exports remained high, but longer-term development of the steel decreased somewhat compared with the market. Despite this, both demand and previous year from 112 million tonnes to prices for steel increased in the final 109 million tonnes. Thanks to a strong end quarter of 2016 and development of the to the year, total global steel production market in Europe as a whole is expected to increased by 0.8 percent in 2016 compared remain relatively positive and stable. with 2015. Protectionism in the US and In the Middle East and North Africa Europe, combined with speculation in China (MENA) the development of the steel indus- and higher raw materials prices, contrib- try is difficult to assess. Steel imports from uted to relatively high global market prices China and the CIS, political unrest, volatile for steel – although the global growth in oil prices and a shortage of DR pellets are demand remains weak. factors contributing to the unsettled situa- In Europe the market situation of continued tion. Despite this, domestic steel production excess capacity and reduced steel production increased in 2016. Although steel prices is signalling continued consolidation among strengthened towards the end of the year, steel producers. Brexit effects are also the unrest in MENA is expected to continue creating uncertainty surrounding the in 2017.

STEEL CONSUMPTION IN CHINA AND THE WORLD STEEL PRODUCTION AROUND THE WORLD China Rest of world Source: World Steel Association Source: World Steel Association

Mt Mt 1 600 2 000

1 200 1 500

800 1 000

400 500

0 0 2000 2005 2010 2015 2016 2000 2005 2010 2015 2016

LKAB ANNUAL AND SUSTAINABILITY REPORT 2016 MARKET TRENDS AND DEVELOPMENT | 9 EXTERNAL TRENDS AFFECTING

1 2

DEMAND FOR BETTER GRADES FOCUS ON COST OF IRON ORE REDUCTION

The prevailing market situation means that The price drops of recent years, down to steelmakers are continuing to focus on the price level effective at the beginning costs and productivity. Upgrading inputs of 2016, brought the strong expansion of to a higher grade of iron ore is one way of the iron ore market to a halt. All mining achieving more efficient and competitive companies are trying to adapt to the pre- processes. China’s iron ore imports there- vailing market situation and are focusing fore increased by just over seven percent in on reducing their costs per tonne produced. 2016, while at the same time the country’s Among other things, this means a more own low-value and cost-intensive min- restrictive approach to new projects, moth- ing production is gradually being phased balling low-grade cost-intensive deposits out. The focus on productivity in the steel and increasing production, automation and industry is also reflected in spot prices for cost-consciousness in existing operational iron ore fines, where the price difference mines. between high-grade products and standard products increased during the year. LKAB’s response: LKAB’s relative position on the cost curve is close to the average LKAB’s response: LKAB has a stated strat- cost for pellet producers globally. To be egy to be a leading niche supplier of high- competitive regardless of the market grade iron ore products. The global market situation, LKAB must continue to lower its trend among steel producers to demand cost level through cost control and through higher grades of input materials for more volume and production increases. Improved efficient, more environmentally friendly and productivity is to be achieved through competitive processes is entirely in line increased availability and access to raw with LKAB’s product range of pellets and materials in the mines, optimization of pro- high-grade fines. duction control and working methods, and through technological developments.

IRON ORE SUPPLY AND DEMAND CASH COST PELLETS Supply Demand Source: CRU Cost Model Q4 2016 Source: Wood Mackenzie

Mt USD/tonne 2 500 100 LKAB 2 000 75

1 500 50 1 000 25 500

0 2000 2005 2010 2015 2016 0 50 100 150 200 250 Mt

Average production cost for global pellet producers Global pellet production

10 | MARKET TRENDS AND DEVELOPMENT LKAB ANNUAL AND SUSTAINABILITY REPORT 2016 OUR MARKET

3 4 5 MARKET TRENDS AND DEVELOPMENT MARKET CONTINUED SHORTAGE OF LARGE PRICE VARIATIONS BUT INCREASED SUSTAINABILITY PELLETS ON THE WORLD MARKET STABLE PELLET PREMIUMS REQUIREMENTS ACROSS THE VALUE CHAIN The world’s second-largest pellet pro- While the price of iron ore fines was ducer for the seaborne market, Samarco, pressed in 2014 and 2015, the pellet In autumn 2016 the US president and was forced to close down its production premiums quoted on the market remained China’s general secretary agreed to adopt following a tragic dam accident at the end at a stable level. The shortage of pellets the UN’s 17 sustainable development goals. of 2015. This meant a production shortfall combined with increased demand for Among other things, these involve efforts to of nearly 30 million tonnes in the seaborne high-grade iron ore products as an input substantially reduce the countries’ carbon pellet market – a loss which other pellet material for steelmaking even helped bring dioxide emissions. Global political decisions producers have not succeeded in compen- about a somewhat upward price trend for to deal with the climate crisis are having sating for. In addition, the supply of pellets pellet premiums in Europe and MENA in an increasing effect and impact across the from certain of LKAB’s competitors has 2016. In China, demand for pellets in- value chain among all the world’s compa- been limited. creased because of a decrease in domestic nies. The iron ore and steel industry is also fines production. The pellet premium on the a strong driving force as regards meeting LKAB’s response: Demand for blast fur- Chinese market has therefore also been goals for increased prosperity and social nace pellets and DR pellets, in particular, strengthened. development, among other things. is very good in LKAB’s primary markets, Europe and MENA. LKAB intends to meet LKAB’s response: The steel industry is LKAB’s response: LKAB is one of the this demand and aims to increase the 2015 demanding and places a premium on high, world’s technologically leading producers production level by five percent per year consistent quality, which favours LKAB and of pellets that contribute to more efficient up until 2021. LKAB is currently the world’s is in line with the company’s stated pellet steel processes with less climate impact. second-largest pellet producer in the strategy. Most of LKAB’s deliveries to the LKAB has also taken the initiative for lead- seaborne market and pellets account for steel industry consist of iron ore pellets ing research into new reduction processes around 85 percent of sales. with an iron content in excess of 66 percent. with reduced or no carbon dioxide emis- sions. In partnership with steelmaker SSAB and energy group Vattenfall, a new project was initiated during the year.

GLOBAL PELLET PRODUCTION TREND IN IRON ORE PRICE TOP 5 PELLET PRODUCERS FOR THE Global total Of which seaborne market AND PELLET PREMIUM SEABORNE MARKET Source: Wood Mackenzie Source: PLATTS Source: Wood Mackenzie

Mt USD/tonne 500 200 NO. COMPANY EXPORTS, Mt 400 150 1 Vale 33 300 2 LKAB 17 100 200 3 Ferrexpo 11 50 100 4 IOC 10

0 0 5 Cliffs 7 2000 2005 2010 2015 2016 2013 2014 2015 2016

Spot Price Fines Premium Blast Furnace Pellets Premium DR Pellets

LKAB ANNUAL AND SUSTAINABILITY REPORT 2016 MARKET TRENDS AND DEVELOPMENT | 11 OBJECTIVES FOR SUSTAINABLE DEVELOPMENT

LKAB’s overall objective is cost-effective expansion and growth with long-term profitability from a perspective of economic, social and environmental sustainability. LKAB aims to create prosperity by being one of the most innovative, resource-efficient and responsible mining companies in the world.

TARGET AREA OBJECTIVES AND RESULTS1

ECONOMIC Objective 2016 2015 Objective SUSTAINABILITY Return on equity of at least 12 percent over a business cycle neg neg >12% LKAB needs to be financially strong in order to be an Net debt/equity ratio 0–20 percent 20.7% 4.1% 0–20% innovative and responsible Ordinary dividend of 30–50 percent of profit for the year 0 0 30–50% company that contributes to prosperity.

SOCIAL Objective Base year Objective for SUSTAINABILITY 2016 2015 2021 Reduce accidents resulting in absence to a rate of 3.5 per LKAB shall be a secure and million hours worked by 2021 6.9 6.9 3.5 attractive workplace and exert a positive influence Women to make up at least 25 percent of employees by 2021 20.6% 20.0 % >25 % on our business partners Women to make up at least 25 percent of management by 2021 19.5% 17.7% >25% and our immediate envi- Compliance with LKAB’s Code of Conduct and well-functioning According to According ronment. dialogue with stakeholders plan for 2016 n/a to plan

ENVIRONMENTAL Objective Base year Objective for SUSTAINABILITY 2016 2015 2021 Reduce carbon emissions by at least 12 percent per tonne 26.0 kg/tonne 27.2 kg/tonne <23.9 kg/tonne LKAB aims to be one of of finished product by 2021 compared with 2015 and at the the most resource-efficient same time reduce emissions of nitrogen to air (NOx) -6% 165 g/tonne n/a and environmentally Reduce energy intensity (kWh per tonne of finished product) 158 kWh/ 166 kWh/ <138 kWh/ efficient mining companies by at least 17 percent by 2021 compared with 2015 tonne tonne tonne in the world. Reduce discharges of nitrogen to water by at least 20 percent per tonne of finished product by 2021 compared with 2015 18.6 g/tonne 21.0 g/tonne 16.8 g/tonne Reduce emissions of particulates to air from scrubbing equip- ment by at least 40 percent by 2021 compared with 2015, 821 tonnes 532 tonnes 319 tonnes calculated as an average for all equipment 212 mg/m3 ntg 17 mg/m3 ntg 10 mg/m3 ntg

1 During the year LKAB drew up a strategy for 2017–2021. In conjunction with this, the company adopted new sustainability objectives. Previous sustainability objectives and their achievement are reported in LKAB’s Annual Report for 2015. 2 One measurement point for particulates in Kiruna is reported separately – see table of emissions from product manufacturing on page 48.

12 | OBJECTIVES AND STRATEGY LKAB ANNUAL AND SUSTAINABILITY REPORT 2016 BUSINESS CONCEPT VISION To manufacture and deliver upgraded iron ore products and To be perceived by customers as the services for ironmaking that create added value for customers supplier that provides the best added on the world market from our base in the Swedish orefields. value, thus becoming the market leader

Other closely-related products and services that are based on in our chosen market segments. AND STRATEGY OBJECTIVES LKAB’s know-how and that support our main business activities may be included in operations.

COMMENTS LKAB’s objective ECONOMIC SUSTAINABILITY is to create prosperity In 2016 LKAB’s profitability, debt and ability to pay a dividend were negatively affected by impairment losses for Mertainen and provisions by being one of the for urban transformation. most innovative, resource-efficient and responsible SOCIAL SUSTAINABILITY mining companies The accident rate remains at the same level as in 2015. The most common in the world. causes of accidents are slipping and tripping. A stronger safety culture is part of the strategy for operational excellence. The percentage of women and of female managers increased over the year. In addition, the Code of Conduct was updated and translated into six different languages. Read more about how LKAB works on its objective relating to the Code of Conduct and stake- holders on page 45.

ENVIRONMENTAL SUSTAINABILITY LKAB continually investigates measures to reduce energy intensity and the levels of carbon dioxide, particulates and nitrogen released into the air from our processes. Improvements have been made to the maintenance of particulate separators, since problems with a few separators had a substantial effect on particulate results. Actions to improve measurement and reduce the quantity of nitrogen discharged to water are being charted. See pages 46–49 for more information on measures in the area of energy and the environment.

LKAB ANNUAL AND SUSTAINABILITY REPORT 2016 OBJECTIVES AND STRATEGY | 13 STRATEGIC FRAMEWORK

LKAB’s main strategic focus is on creating mining operations that are sustainable in the long term through operational excellence and growth. Our four focus areas for sustainability are central to this work.

STRATEGIC PRIORITIES

Highly productive Highly upgraded Energy- and climate- mining operations iron ore products efficient processes

COMMERCIAL AND SUSTAINABILITY STRATEGY

OPERATIONAL GROWTH EXCELLENCE

FOCUS AREAS FOR SUSTAINABILITY

Resource-efficient Attractive Responsible Attractive production LKAB operations communities

LEADERSHIP AND EMPLOYEESHIP

Ivar Van der Stijl.

THE VALUES THAT GUIDE US

COMMITTED INNOVATIVE RESPONSIBLE

Our customers’ results are We emphasize creative thinking We think long-term, are respectful the focus of everything we do. to drive improvements forward. and put safety first.

14 | OBJECTIVES AND STRATEGY LKAB ANNUAL AND SUSTAINABILITY REPORT 2016 Our employees’ active participation in continuous improvement work is the key to success. OBJECTIVES AND STRATEGY OBJECTIVES

LKAB’s Jan-Ivan Johansson and Peder Nensén point the way forward for LKAB.

LKAB’S ROADMAP 2017–2021 In the forthcoming years competitiveness is to be enhanced by exploiting existing production capacity and investments made, combined with identifying and acting on our growth opportunities.

OPERATIONAL EXCELLENCE mines will also add mineral resources and It is vital that our operating locations are LKAB will increase productivity and contin- mineral reserves1. Attractive communities in order that we ue to reduce costs through more efficient are able to recruit and be an attractive em- processes. This is largely about leadership FOCUS AREAS FOR SUSTAINABILITY ployer. LKAB will make a positive contribu- and employeeship in order to secure Since 2012 LKAB has been working in four tion to the development of our operating continuous improvement in our daily work focus areas for sustainability: Resource- locations, in close partnership with resi- at all levels. In addition, we are focusing on efficient production, Attractive LKAB, dents, authorities and other enterprises. more efficient plant and machinery utili- Responsible operations and Attractive zation as well as efficient and sustainable communities. LEADERSHIP AND EMPLOYEESHIP purchasing. By being more resource-effi- Resource-efficient production means mak- Alongside expertise and technical devel- cient we cut not just our costs, but also our ing efforts to reduce our energy consump- opment, our strategy is based on how impact on the environment. tion, minimize emissions and contribute we lead and the responsibility that we as to increased resource-efficiency in our employees take. With committed, innova- GROWTH customers’ processes. LKAB will offer safe tive and responsible employees we ensure Our strategy for growth primarily involves workplaces and attractive career paths and, that production is competitive and installed expanding existing production units with through our focus area of Attractive LKAB, capacity is utilized, thereby securing a new main haulage levels in existing under- we are also working to increase diversity basis for future structural investments. ground mines. We will optimize investments and equality. Conducting Responsible op- Our employees’ active participation in our made, while at the same time evaluating erations means that we take responsibility improvement work is the key to success and developing new technology that can for minimizing the negative impact of our for LKAB – and our customers. increase our productivity further. Focused operations on the environment. 1 A detailed calculation and list of LKAB’s mineral resources and mineral reserves can be found on pages 123–125. exploration based on existing underground

LKAB ANNUAL AND SUSTAINABILITY REPORT 2016 OBJECTIVES AND STRATEGY | 15 HOW WE CREATE VALUE

LKAB’s mission is to exploit our iron ore resources in a responsible way and to secure lasting competitiveness and long-term value creation. Sustainability work is therefore central to our business strategy.

RESERVES AND RESOURCES CORE BUSINESS

• Iron ore of the highest quality EXPLORATION • Our employees’ expertise in minerals and Responsible exploration and mining expansion of existing mines

• Core values that promote diversity and a safety culture

• Modern, automated facilities that meet MINING strict environmental requirements Safe, high-tech mining

• Investments made to increase capacity

• Research and development in close cooperation, both in-house and with our PROCESSING customers Innovative and resource-efficient production of upgraded iron ore products • Responsible relationships with suppliers

• Efficient logistics and good transport capacity TRANSPORT • Trusted by local residents and the world Regular transport and loading around us of large volumes

CREATED AND DISTRIBUTED ECONOMIC VALUE 2016

A profitable LKAB creates economic value both within and outside of the company. The company MSEK 0 MSEK 3,340 MSEK 8,763 creates jobs for employees, contractors and suppliers. Dividend to owner Employee benefits Supplier payments The dividend to the owner, the Swedish state, and taxes are significant. Investments in areas such as research and development and infrastructure MSEK 117 MSEK 4,213 MSEK1,035 are other effects of our economic value creation. Taxes paid by the Group Reinvested in the business Expenditure on urban transformation

16 | OBJECTIVES AND STRATEGY LKAB ANNUAL AND SUSTAINABILITY REPORT 2016 OUR STAKEHOLDERS AND THEIR EXPECTATIONS OF US Our ability to work for mining operations that are sustainable in the long term and to contribute to sustainable development requires the confidence of our stakeholders.

CUSTOMERS SOCIETY CREATING VALUE Suppliers Hospitality industry LKAB

Authorities Interests of AND STRATEGY OBJECTIVES and legislators Sami villages EMPLOYEES OWNER FOR CUSTOMERS

LKAB enjoys an active and ongoing dialogue with many different stakeholders in order to encourage the kind of FOR OUR OWNER cooperation required to pursue sustainable mining oper- ations. Our business requires a long-term approach and collaboration on numerous different levels and we place considerable emphasis on being responsive and transparent. FOR EMPLOYEES Read more about our dialogue with stakeholders in LKAB’s GRI appendix.

FOR THE OPERATING LOCATIONS MATERIAL ISSUES LKAB has identified a number of material issues that guide us as we prioritize and report on our sustainability work. The starting point for this was to define the areas where LKAB FOR SOCIETY IN GENERAL has the greatest impact and where our stakeholders feel we should focus our resources. Read more on page 69 or in our GRI appendix. LKAB strives to improve sustainability and value crea- Environmental benefits of the product tion across the value chain, and to do so together with Resource-efficient use of raw materials our stakeholders. LKAB will contribute to customers Urban transformation having efficient, sustainable processes. What is good Responsible purchasing for our customers’ business also generates a return Interests of Sami villages for our owner. As a significant employer, LKAB offers Human rights its employees attractive career paths and a safe work Occupational health and safety environment. By creating jobs and through our product Biodiversity offering we also want to be a positive force in society Environmental emissions and in the locations where we operate. Land impact

CREATED AND DISTRIBUTED ECONOMIC VALUE 2016

MSEK 17, 4 68 Created and distributed value for the year TOTAL

LKAB ANNUAL AND SUSTAINABILITY REPORT 2016 OBJECTIVES AND STRATEGY | 17 PRODUCTS AND MARKETS

LKAB’s core business is to mine and process iron ore for customers within the steel industry. The Group’s business also encompasses special products, which include industrial minerals, and sales of technology that we have developed.

The new shiploader at ore Quay 7 in Narvik has increased LKAB’s loading capacity by 50 percent.

18 | PRODUCTS AND MARKETS LKAB ANNUAL AND SUSTAINABILITY REPORT 2016 IRON ORE PRODUCTS

LKAB’s customers are mainly found among the world’s top steel producers. Our iron ore products are meant to help give steelmill customers stable processes and increased productivity that improve competitiveness and profitability.

Magnetite ore from the Swedish orefields with customers, LKAB has positioned not only has a very high iron content, but itself as one of the world’s quality-leading also gives off energy when processed into suppliers of iron ore pellets. pellets. A high degree of processing and We thereby contribute to a more efficient, pellet quality also reduce energy consump- and thus a more economical and environ- tion and carbon dioxide emissions in the mentally friendly, production chain from customers’ reduction processes. mine to crude steel. That is at the core of Through a combination of experience, our customer promise, Performance in cutting-edge technology and cooperation Ironmaking. AND MARKETS

The ore trains have 68 ore cars with pay- load of 100 tonnes each. Each train carries

6,800 tonnes of iron ore products and is PRODUCTS 750 metres long.

PRODUCTS 78% within the EU LKAB accounts for almost 78 percent of the EU’s iron ore production and our customers are some of the most prominent steel producers in the world. Blast furnace pellets Direct reduction (DR) pellets Fines Reduced The majority of LKAB’s deliveries to the steel Direct reduction (DR) pellets CO2 emissions industry consist of iron ore pellets with an DR pellets are reduced with natural gas to CO2 emissions from mine to steel per iron content of 66 percent. Well-balanced, direct reduced iron (DRI), which is used to tonne of hot rolled coil are reduced by proven additives in pellet production increase make steel in an electric arc furnace. This 15 percent with LKAB’s pellets compared productivity, reduce energy requirements, method is today common in countries with with sintered hematite fines.1 result in less wear and tear and reduce the access to natural gas, for example, in the amount of slag in steelmaking. Middle East and the US.

Blast furnace pellets Fines Blast furnace pellets make up LKAB’s Fines is finely crushed iron ore that is 84% largest product group. They provide great agglomerated to form large pieces (sintered) pellets customer value in steelmill blast furnaces, before being used to produce iron in a blast where they are reduced to crude iron. The furnace. LKAB produces high-grade fines in Iron ore pellets account for 84 percent of LKAB’s delivery volumes. optimized addition of various minerals such Malmberget known as MAF. as olivine improves the high-temperature properties of these input materials. 1“Benchmarking of carbon dioxide emissions from iron ore pelletizing”. The report refers to contract research commissioned by LKAB.

LKAB ANNUAL AND SUSTAINABILITY REPORT 2016 PRODUCTS AND MARKETS | 19 IRON ORE MARKET AND MARKET DEVELOPMENT

In an overall perspective, LKAB is a niche tion in Europe is decreasing at a faster rate SALES OF IRON ORE PRODUCTS FOR STEEL PRODUCTION supplier in the global iron ore market. We are, than in the rest of the world, primarily in however, the world’s second-largest supplier southern Europe and the UK. The situation SALES BY REGION in the seaborne import market for pellets. is creating some uncertainty concerning the Percentage of sales (MSEK) The import markets for iron ore consist development of European steel companies, mainly of Asia, Europe and the Middle East with signals of further consolidation. & North Africa (MENA). Other markets are very small or essentially have their own LKAB’s pellets are in demand in MENA % domestic production. In the Middle East and North Africa (MENA), Demand from growth markets with major access to a good supply of natural gas and construction and infrastructure projects tends a lack of high-quality scrap means that to be for more basic grades of steel in large steelmaking with direct reduced iron (known % volumes, while mature markets tend to demand as DRI) is the most common method of Europe...... 73 niche steel products of higher quality. production. To produce DRI, high quality and MENA...... 25 a high iron content are required in the China...... 1 USA...... 1 Europe is our biggest market crushed ore that is input. Shipping neutrality LKAB’s main market is Europe, where we and strong demand for LKAB’s DR pellets have built up good relationships over more for direct reduction are what make MENA SALES BY PRODUCT AREA Percentage of sales (MSEK) than 125 years. Focusing on efficiency and our second-largest market. consolidation, the main demand is for iron Steel production in MENA decreased ore products that allow European steelmakers substantially during the year. This was to produce as much or more steel from fewer mainly due to low oil prices, steel imports production units. This means that LKAB’s from China, a shortage of DR pellets and % pellets are much sought-after for customers’ political unrest in the region. While steel production. Our geographical proximity to prices in other parts of the world were the European customers also gives us a stable and even rising, steel prices in freight advantage over our competitors. MENA fell and the trend remains negative. % The European steel market is stable with However, the shortage of DR pellets in Blast furnace pellets...... 63 DR pellets...... 26 slightly positive development. Despite rising the seaborne global market means that Fines...... 11 steel prices, there is oversupply and excess demand for DR pellets in MENA remains capacity in the steel market. Steel produc- high.

RESEARCH AND DEVELOPMENT Hot rolled coil (HRC).

Research and development costs for the full year amounted to MSEK 245 (365), corres- ponding to about 1.3 (2.2) percent of Group costs (excluding impairment losses). The focus of operations was on safe, predictable mining conditions, product and process development, and on exploration under- ground and in existing open-pit mines.

Read more in the section Operations and impact on pages 26, 27, 30, 33, 34 and 35.

Dewatering of Svappavaara ore.

20 | PRODUCTS AND MARKETS LKAB ANNUAL AND SUSTAINABILITY REPORT 2016 SPECIAL PRODUCTS

As a complement to our core business, LKAB also processes and sells selected minerals as well as iron ore for industrial applications other than steelmaking, and supplies technology developed by LKAB for the mining and construction industries.

A new application for .

SPECIALCaption PRODUCTS DIVISION

The subsidiaries LKAB Minerals and LKAB Wassara form the Special Products Division.

• LKAB Minerals mines and sells minerals and also processes and sells iron ore for applications outside the steel industry. INDUSTRIAL MINERALS • The business has sales offices and produc- tion units in Europe, the US and Asia. LKAB Minerals is a global supplier of indus- Market development • LKAB Wassara develops and manufactures water-powered precision drilling systems

trial minerals. Magnetite, mica and huntite In 2016 LKAB Minerals focused on in- AND MARKETS for mining, construction and exploration are LKAB Minerals’ core products, where vestments, development and sales in two drilling as well as dam building and the company’s own resources and product specific business areas: Magnetite and geothermal energy. expertise allow it to provide customers with Polymers & Coatings. The company has a • Customers are located throughout the world.

greater added value. stated aim to grow within the industrial use PRODUCTS of magnetite outside of steelmaking. Global Magnetite is used for water purification, noise oversupply of iron ore affected prices and and vibration damping and as aggregate in margins, while at the same time low oil SALES OF SPECIAL PRODUCTS high-density concrete, among other things. and gas prices stopped or deferred many Huntite is used, for example, as a halogen- investments within the offshore sector. SALES BY REGION free, fire retardant additive in plastics and Nonetheless, magnetite for use in high-den- Percentage of sales (MSEK) cables. sity concrete in several pipeline projects Mica has a wide range of applications, was sold. The construction industry has including as reinforcement and heat pro- also recovered somewhat, although growth tection in plastics and to provide decorative is weak. Increased sales to projects in % elements in ceramic materials. which magnetite ore has new applications, Mineral sands are used for production of for example, within tunnelling and offshore welding rods and welding wire. wind farms, is providing LKAB Minerals Refractory minerals are used to produce with opportunities to broaden its business % Europe...... 58 refractory bricks and casting sand. and increase its profitability. Asia...... 31 USA...... 11

DRILLING TECHNOLOGY SALES BY PRODUCT AREA Percentage of sales (MSEK) LKAB Wassara develops and sells advanced other minerals. At the same time, sales drilling technology systems all over the to the construction and civil engineering world, mainly to the mining and construction industries increased strongly. LKAB industries. The patented water-powered Wassara’s drilling technology is increasingly % drilling technology was developed by LKAB attracting attention outside the mining to improve efficiency in its own under- industry and is in demand for many large ground mining. urban infrastructure projects, particularly in Europe and Scandinavia, but also in North % Market development America. Since the company’s external Magnetite...... 33 Reduced demand for drilling technology sales are mainly project-driven rather than Mineral sands...... 27 Refractory material & foundry19. from iron ore producers is affecting the being driven by the business cycle, the Polymers & coatings...... 16 company’s sales, but this is being compen- trend is stable and remains positive. Drilling technology...... 5 sated by sales to companies that mine

LKAB ANNUAL AND SUSTAINABILITY REPORT 2016 PRODUCTS AND MARKETS | 21 OPERATIONS AND IMPACT

EXPLORATION MINING PROCESSING TRANSPORT see page 24 see page 26 see page 30 see page 34

DEVELOPMENT

SUSTAINABILITY ACROSS THE VALUE CHAIN

During the year LKAB focused efforts on sibility for the impact of the operations the long term, we are keen that our oper- efficiency improvements within our oper­ across the value chain. We are working to ating locations continue to be attractive a­tions. Aiming for continuous improve- minimize the impact on the surrounding communities for people to live in. ment, we are creating a stronger LKAB in environment and to increase resource Throughout the value chain we have which we utilize all the capacity we have efficiency at all stages. LKAB wants to a customer/supplier relationship. This in mines, processing plants and logistics. be an international model for the mining means that we are dependent on each At the same time, we continue to invest industry in terms of ethics, the work envi- other if we are to achieve responsible, in the common future of the company ronment, equality and diversity. To secure effective and trouble-free production. and its stakeholders by taking respon- mining operations that are sustainable in

ENVIRONMENTAL SUPPLIERS EMPLOYEES SOCIAL RESPONSIBILITY RESPONSIBILITY see page 36 see page 38 see page 42 see page 46

22 | OPERATIONS AND IMPACT LKAB ANNUAL AND SUSTAINABILITY REPORT 2016 By identifying and acting on risks and opportunities and taking responsibility for our impact throughout the value chain we are strengthening LKAB’s long-term competitiveness. OPERATIONS AND IMPACT OPERATIONS

The ore trains are made up of 68 cars and have a payload capacity of 6,800 tonnes per train.

LKAB ANNUAL AND SUSTAINABILITY REPORT 2016 OPERATIONS AND IMPACT | 23 EXPLORATION EXPLORATION

The mineral reserve is the most important resource of any mining CHALLENGES company. The mineral reserve’s size and quality are critical to product Ensuring long-term access to quality, production volumes and costs. Successful exploration there- iron ore is a precondition for fore plays a crucial role in LKAB’s long-term mining operations, value continued mining, improved pro- ductivity and increased produc- creation and competitiveness. A detailed calculation and list of our tion volumes. The main focus mineral resources and mineral reserves can be found on page 123. is on carrying out exploration adjoining existing underground mines and open-pit mines. Exploration drilling in the Printzsköld orebody in Malmberget’s underground mine at a depth of 1,250 metres. Cooperation and dialogue with the communities around us and with stakeholders affected by the mining operations is vital for continued mining as more and more land is taken into use. LKAB maintains continual dialogue with neighbours, authorities, the hospitality industry and the Sami villages – dialogue that is based on consideration, cooperation and a willingness to compromise.

MAJOR EXPLORATION PROJECTS IN 2016 The main focus has been on exploration adjoining existing underground mines. In Leveäniemi and Gruvberget production geology and new block models have been produced for mine planning. In Ylipääsnjaska initial investigative drilling has taken place, with documentation and analysis of a potential ore deposit. • Ylipääsnjaska: Drilling pro- gramme stage 1 complete. Block-modelled and interpreted • Per Geijer: Evaluation of drilling programme, block-modelled and interpreted • Leveäniemi: Production geology and new block model • Gruvberget: Production geology Mineral reserves and mineral and new block model • Mertainen: New block model and resources are the basis of a block modelling • Kaptensmalmen: Interpreted and mining company’s operations. block-modelled

24 | EXPLORATION LKAB ANNUAL AND SUSTAINABILITY REPORT 2016 PACE OF EXPLORATION IN MALMBERGET INCREASES

Core samples for archiving from the Printzsköld orebody in the underground mine in Malmberget. COOPERATION IS THE WAY FORWARD Reindeer herding is central to Sami culture and an important industry in the region. The mining industry and its expansion affects reindeer herding and LKAB strives to maintain a good dialogue with the Sami villages affected by the operations. In 2016 LKAB negotiated a cooperation agreement with a Sami village in Gällivare. Similar agreements had already been negotiated with two Sami villages in Kiruna. The third agreement means that LKAB has cooperation agreements with all the Sami villages that have reindeer grazing lands neighbouring LKAB’s mining operations. This approach, which focuses on dialogue, provides better prospects of reaching agreement and finding functioning solutions for issues where the parties have conflicting interests. The agreements establish a framework for the forums 50,000 85,000 and working methods that are needed for sharing information, decision-making and Exploration drilling underground in Malmberget increased from approximately ongoing consultation. Where applicable, 50,000 drilled metres per year to around 85,000 drilled metres in 2016. The they are based on the principle expressed primary focus has been on improving the basis of production planning and in international law governing the rights securing knowledge of ore resources in existing underground mines after 2030. of indigenous peoples – known as FPIC (Free Prior and Informed Consent). OPERATIONS AND IMPACT OPERATIONS

New exploration organization

The focus is shifting from new iron ore projects INTERACTIVE TRAINING above ground to exploration in existing under- Josefine Johansson, Jan-Anders Perdahl and Anton Lidström carry out exploration FOR DRILLING ground mines. As a result of an organizational underground in Malmberget. change, responsibility for operations geology TECHNICIANS in operational open-pit mines is being trans- LKAB has produced interactive ferred to the production divisions. At the same training for our exploration drilling time, the exploration organization is taking technicians focusing on environ- over responsibility for all underground mental responsibility and the exploration, with the task of calculating and management of sensitive natural compiling the mineral reserves and mineral environments. The training aims to resources in the underground mines. The ensure minimal or no impact by documentation from the exploration is an man or equipment when LKAB important piece of the puzzle in the work on carries out test drilling in sensitive producing long-term plans for the operation natural environments. of the mines – known as life-of-mine plans.

LKAB ANNUAL AND SUSTAINABILITY REPORT 2016 EXPLORATION | 25 MINING MINING

LKAB’s primary task is to mine and exploit northern Sweden’s iron-rich CHALLENGES ore in order to create maximum value for the company and our stake- Safe and predictable mining holders. We do this by means of safe, resource-efficient production with conditions are essential for ef- a focus on improved productivity, delivery assurance and quality. It is ficient mining at a fast rate. The crucial for the mining operations and our long-term value creation that challenge for LKAB is managing the mine-induced seismicity we secure access to land, and thereby to iron ore resources for our that affects both access and processing chain. safety underground, and also managing its environmental and social impact above ground.

Resource-efficient production is a challenge that requires Production drilling using more efficient utilization of plant coiled tubing is an example of and machinery as well as the development of new technology one of LKAB’s development and new ways of working. Work on employeeship and leader- projects for more efficient ship based on our values forms a basis for improvements in underground mining. development work.

Securing access to land for continued iron ore mining is a major challenge for LKAB. Among other things, the effects of the mining operations on the communities in Kiruna and Malmberget mean that these communities need to be grad- ually moved. It is crucial that detailed plans and permits are put in place in time; otherwise, mining operations could be jeopardized.

1,365 m MINE PRODUCTION

CRUDE ORE PRODUCTION BY OPERATING LOCATION MILLION TONNES Kiruna Malmberget Svappavaara 1,250 m 2016 26.9 16.4 6.1 LKAB mines ore in Kiruna and Malmberget at a depth of more than a kilometre. 2015 26.1 16.3 4.6

26 | MINING LKAB ANNUAL AND SUSTAINABILITY REPORT 2016 OUR MINES

LKAB mines iron ore in three operating locations. In Kiruna and Malmberget mining takes place underground at a depth of more than 1,000 metres. In Svappavaara the ore is mined in open-pit mines. Mining ore underground is a logistical challenge that requires efficient, large-scale mining methods with a high level of automation.

Kiruna Malmberget Svappavaara The orebody in Kiruna is an inclined slab of In Malmberget the underground mine con- Iron ore is currently mined in the Gruv­berget magnetite that is around 80 metres wide, sists of around 20 dispersed orebodies, of and Leväniemi open-pit mines. Increased four kilometres long and extends at least which around 10 are currently mined. In the production in LKAB’s processing chain two kilometres underground. The current eastern field only magnetite is mined, while requires access to iron ore as a raw material. main haulage level is at a depth of 1,365 in the western field a small proportion of Svappavaara’s open-pit mines give LKAB metres. hematite is also mined. The current main a flexible additional source of material to haulage level is at a depth of 1,250 metres. supplement the ore from the underground mines.

Large-scale sub-level caving for competitiveness OPERATIONS AND IMPACT OPERATIONS Most of LKAB’s iron ore is mined in Kiruna and Malmberget. Underground mining is more cost-intensive, so to be able to compete with the world’s open-pit mines LKAB has developed highly automated, safe and efficient production methods and processes below ground.

The method that LKAB uses for under- Crucial for profitability LKAB is constantly refining and devel- ground mining is known as sub-level cav- Using blasting and drilling techniques oping accessibility and techniques for ing. After production drilling and blasting that it has developed itself, LKAB has underground mining. This includes fac- the ore is allowed to fall down into been able to increase the height of the tors such as increased safety, improved underlying production tunnels, known as part of the orebody taken out from each communications, increased automation drifts, for loading and onward haulage to drift from around 15 metres to 28 me- and new and refined technology. The ground level by rail and ore hoists. tres. This means that today each blasting next-generation production drilling sys- The construction of drifts through provides around 10,000 tones of crude tem from LKAB Wassara will be capable the orebody represents a major cost in ore, compared with 1,200 tonnes in the of optimizing the caving flow and reduc- sub-level caving. Increasing the vertical 1980s. Efficient, large-scale sub-level ing the level of waste rock mixed in with and horizontal distance between the caving is the sole reason why LKAB has the ore. Since every extra percentage unit drifts means significantly more ore can been able to remain competitive in its of ore in each caving represents millions be mined. underground mining operations. of kronor, this is highly significant for LKAB’s profitability.

LKAB ANNUAL AND SUSTAINABILITY REPORT 2016 MINING | 27 NEW DRILLING TECHNOLOGY IMPROVES THE EFFICIENCY OF UNDERGROUND MINING Mining ore at great depths is a logistical challenge that makes the mining process more expensive and more difficult. The introduction of LKAB Wassara’s water- powered hammer drill in the 1990s made it possible to precision-drill fan-cuts to a length of 55 metres rather than the previous 28 metres. Now comes the next technological leap, which provides controlled and seamless drilling in which the drill bit is affixed to a length of flexible coiled tubing that is wound up on a drum, known as coiled tubing drilling. The advantages are that the drilling can be controlled according to the appearance of the orebody. Contaminants mixed in – such as waste rock – can be reduced and the caving flow can be optimized, with LKAB’s head of mining technology, Lars Malmgren, with the developers of more even fragmentation as a result. the new measuring system Jesper Martinsson, a researcher in mathematical The technology is being tested in statistics, and Ville Törnman, a researcher in technical physics. Malmberget for validation during the latter half of 2017. The aim is for coiled tubing drilling to be introduced in production by 2020. INNOVATION PAVES THE WAY FOR A UNIQUE SEISMIC MEASURING SYSTEM SEISMICITY Access to high-quality measurement data from seismic events caused by mine production is crucial for safe and predictable mining AFFECTS MINING conditions underground. At present the measured values from about OPERATIONS 400 geophones in Kiruna and Malmberget are interpreted manually The mining of iron ore in LKAB’s by a contractor. underground mines causes stress within the rock that can cause As well as giving rise to large assessment and statistics, has proved successful. The quakes, known as seismicity. The variations, the manual process is very automated system is five times more accu- seismic effect of the underground expensive and the analysis is delayed by rate and analysis is 40 times faster. mines in Malmberget on the nearby around 40 minutes or even by hours during communities increased in 2016, peak workloads. Improved quality of information which negatively affected the rate During 2016 the system for automatic data of mining. To maintain the supply Automated realtime analysis analysis was evaluated in the Malmberget of crushed ore to the processing Rapid and precise results for locating and mine in parallel with the existing measuring plants, production plans had to assessing the magnitude of seismic events system, with the results being presented be revised and mining brought are crucial for time-critical safety decisions, directly in the existing analysis tool. The forward in other areas. Trials are but also for long-term analyses of the link trials indicate results almost in real time, as in progress in both Kiruna and between seismicity and production. Since well as substantial improvements in infor- Malmberget to attempt to reduce these stresses by pumping water 2009, therefore, LKAB has been carrying mation quality and location reliability. The into the drilled hole at high pres- out research to find its own unique system self-calibrating system is extremely cost sure in order to create cracks in for automated realtime analysis. An inter- efficient compared with the current manual the rock mass, known as hydraulic disciplinary approach, in which convention- analysis methods, and opens the way for fracturing. al models and principles are replaced by national and international research collabo- problem-solving via a mixture of physics ration via an open research platform.

28 | MINING LKAB ANNUAL AND SUSTAINABILITY REPORT 2016 URBAN TRANSFORMATION

700,000 square metres of residential and other properties are to be phased out 10,000 people are affected by urban transformation

ACCESS TO LAND AT THE RIGHT TIME, AT THE RIGHT PRICE CRUCIAL TO LKAB For mining to continue, LKAB must AND WITH MUTUAL UNDERSTANDING take more land into use. The location The mine and the community live side by side and are dependent on each of the orebodies and mining of ore at other. LKAB’s growth and success are good for its operating locations, greater depths means that central parts of Kiruna and Malmberget need to be and vice versa. It is therefore important that urban transformation successively moved. The aim of urban takes place in cooperation and agreement with our stakeholders. transformation is to guarantee contin- ued mining of iron ore, while at the same In addition to LKAB and the municipalities, Impact on mine planning time LKAB has a great responsibility to urban transformation involves a number In 2016 two important negotiations had a compensate for the impact of the mines of authorities such as the County Adminis- substantial impact on LKAB’s long-term mine AND IMPACT OPERATIONS and to be involved in creating vibrant, trative Board, the Swedish Transport planning. Discussions with the Swedish Trans- attractive communities. Administration, the National Board of port Administration and the Municipality of Planning and implementing urban Housing, Building and Planning and the Kiruna on levels of compensation for the new transformation in a way that allows Swedish National Heritage Board, as well section of road E10 past the town threatened LKAB to meet its social and environmental as many private interests and companies. to jeopardize continued mining in Kiruna. The responsibilities at a reasonable cost LKAB has taken on huge responsibility slow pace of negotiations between LKAB and and with a fixed schedule is a challenge. in terms of compensating for the impact the Municipality of Gällivare on compensation Schedules are produced in cooperation of the mines and developing attractive for western Malmberget and delays in with the municipalities, and it is the mu- communities. It is just as important that amendments to detailed plans also reduced permit processes and planning take place the possibilities for the mining of various nicipalities’ task to establish area plans on time and at the right cost for LKAB. orebodies in Malmberget. and detailed plans showing how the new This is vital in order for mining operations In October 2016 an agreement was concluded communities are to be developed. to be profitable in the long term and for between the Municipality of Gällivare and LKAB has taken on a more operational the company’s ability to shoulder an LKAB on compensation levels for western and driving role in the urban transfor- extensive social responsibility in its Malmberget, and in November the Swedish mation in order to have greater control operating locations. Transport Administration reached agreement over both scheduling and costs. Among with LKAB on compensation for the new other things, LKAB acts as a purchaser of section of road E10 past Kiruna. new properties together with other large commercial construction companies. Read more about our social responsibility on pages 42– 45.

LKAB ANNUAL AND SUSTAINABILITY REPORT 2016 MINING | 29 PROCESSING PROCESSING

LKAB is a quality-leading producer of highly upgraded iron ore products. CHALLENGES Consistently high pellet quality helps give our steelmill customers Product development for stable processes and increased productivity for improved competi- growth takes place in close tiveness and profitability. LKAB’s aim is to deliver maximum customer cooperation with customers in order to improve the efficiency benefit and the best added value on the market, from product perfor- of the products during steel- mance to delivery and service. We call this Performance in Ironmaking making. Challenges include – our customer promise. producing products using ore from different mines in order to create flexibility in the crushed ore supply, and continuous Product and process development are part of core research at LKAB. quality improvements such as the stability of the pellets during transport.

Improved productivity is a challenge that calls for more efficient utilization of plant and machinery through streamlining and better process stability. Work on employeeship and leadership – taking our values as a starting point – provides a basis for improvements in this development work.

Sustainable mine and steel production s an important global challenge. Here, LKAB’s knowledge makes it a prominent player, as evidenced by its par- ticipation in HYBRIT, a Swedish

project for hydrogen-based CO2- free ironmaking.

1.7 GJ PROCESSING PLANT PRODUCTION less energy per tonne of steel with LKAB’s pellets compared with hematite fines1

UPGRADED PRODUCTION BY OPERATING LOCATION PRODUCTS MILLION TONNES Kiruna Malmberget Svappavaara 15 % 2016 lower emissions of CO2 per tonne of steel with 14.4 9.0 3.5 LKAB’s pellets compared with hematite fines1 2015 1 “Benchmarking of carbon dioxide emissions from iron 12.5 8.5 3.5 ore pelletizing”. The report refers to contract research commissioned by LKAB.

30 | PROCESSING LKAB ANNUAL AND SUSTAINABILITY REPORT 2016 LKAB’S PROCESSING OPERATIONS

LKAB's production structure reflects a high degree of processing and flexibility. Being able to direct the flows of crushed ore between the different production locations allows maximum utilization of existing plant capacity.

SORTING CRUSHING CONCENTRATING SCREENING MAGNETIC COMMINUTION SEPARATION MAGNETIC FILTERING PELLETIZING SEPARATION BALLING Binder DRYING AND PREHEATING SINTERING

1300°C

Sorting In the concentrating plants the crushed Pelletizing LKAB currently has two sorting plants in ore goes through several stages of grind- LKAB currently has six pelletizing plants operation: one in Kiruna and one in ing and magnetic separation using water in operation: three in Kiruna, two in Malmberget. Sorting is a dry process in in order to release and remove impurities Malmberget and one in Svappavaara. which the ore is crushed and screened in before the concentrated product (slurry) Malmberget och Svappavaara produce order to magnetically separate types of goes on to the processing plants to be blast furnace pellets. Kiruna produces rock that are not iron ore. The iron made into pellets. The iron content has both blast furnace pellets and pellets for content in the crushed ore is increased then increased from around 62 percent direct reduction. from approximately 45 percent to around to around 68 percent. The total capacity of the plants is around 62 percent. In Malmberget, in addition to slurry for 28 million tonnes of pellets per year. the pelletizing plant, the first stage of the In the pelletizing plant the slurry is Concentrating concentrating process also produces a filtered and a binder (bentonite) is added To further purify the ore after sorting, fine iron ore sand with a high iron content, before the iron ore concentrate is rolled the crushed ore is ground finer still in a known as fines. into 10-millimetre pellet balls. The pellets concentrating process. Kiruna has three AND IMPACT OPERATIONS are dried, preheated, sintered, and then concentrating plants, while Svappavaara cooled down before being transported to and Malmberget have one each. a storage silo for onward transport by rail to the ports of Narvik and Luleå.

EVALUATION OF NEW PELLET The highest priority is to ensure PRODUCT IN MALMBERGET rock stability and To meet demand from steelmakers and increase production flexibility, LKAB’s department accessibility in the for process and product development has come up with a new blast furnace pellet for production in Malmberget. Previously, the Southern Division only produced olivine pellets underground mines. specially developed for SSAB. In the processing plants The new pellet product offers greater flexibility as an input material when mixed with sinter and is therefore better adapted to the blast furnace processes of many of our the focus is on process customers in Europe. In October positive full-scale trials were carried out in LKAB’s experimental blast furnace in Luleå. stability and availability.

LKAB ANNUAL AND SUSTAINABILITY REPORT 2016 PROCESSING | 31 ENHANCING DAM SWEDISH INDUSTRY TAKES SAFETY In 2016 two measures were im- THE INITIATIVE FOR CARBON plemented to improve dam safety. In Kiruna a dam raising measure begun in 2015 was completed, DIOXIDE-FREE STEELMAKING involving the construction of a new spillway with an erosion-protected Together with SSAB, Vattenfall and the Swedish Energy Agency, channel and the removal of the previous risk structure. The instru- LKAB has initiated a project of which the aim is develop sustainable ments for control of dam stability technology for carbon dioxide-free iron and steel production. on the section concerned have also been reinforced. In Malmberget increased checks on dam stability With a budget of MSEK 13.4, the project Requires access to fossil-free energy were implemented and an extra will chart the conditions required for The challenge lies in the fact that producing supporting bank was constructed using hydrogen in the reduction process hydrogen is a highly energy-intensive process. along part of the tailings pond in instead of coal and coke. Should the tech- Crucial to the project’s success is therefore a conjunction with dam raising. nology become a reality on an industrial large supply of pure, fossil-free energy such Two new positions have been scale, it could make Sweden the first in as hydroelectric power, solar power or wind appointed in 2017 as part of rein- the world to have carbon dioxide-free power. The conditions must also be put in place forcing the organization in respect steel production. for storage of hydrogen in sufficient quantities of dam safety. At present the direct reduction method to ensure uninterrupted operating conditions. Read more about dam safety is used to reduce (remove the oxygen Replacing large parts of the existing infrastruc- under risks and risk management on page 52. content) in iron ore pellets using natural ture in steelmaking will also be very expensive. gas to produce what is known as sponge Good forward planning is therefore important, iron or Direct Reduced Iron (DRI). However, so that the switch is made when earlier invest- natural gas is a fossil reduction agent that ments have reached end-of-life. gives off carbon dioxide into the atmos- One of the upsides, however, is that the phere. If hydrogen were used instead, the residual product of hydrogen production is residual product of the reduction process pure oxygen. The oxygen can then be used in would be regular water. combination with other biofuels to eliminate fossil fuel entirely from LKAB’s pellet production.

Carbon footprint of LKAB’s pellet production verified In 2016 LKAB carried out a thorough Reduced climate impact from charting and certification of the CO2 emis- mine to crude steel NO CARBON DIOXIDE sions generated by pellet production from That LKAB can now produce verified data EMISSIONS FROM mine to port. The calculation includes not for carbon emissions is both something just emissions in the processing plants demanded by customers and something that ENERGY USE but also the impact from all operations, forms part of LKAB’s own objective to reduce By buying Guarantees of Origin for including mine production and rock rein- its climate impact. Earlier LKAB also presented renewable electricity, in 2016 LKAB forcement, subcontractors and all types the results of a report by industrial research brought carbon dioxide emissions of travel and transport. The certification institute Swerea MEFOS, which confirm that from electricity use by the mining was carried out by SP Technical Research LKAB’s magnetite pellets emit less carbon and processing operations right Institute of Sweden and LKAB is now dioxide and use less energy in the blast down to zero. The decision to buy the first pellet producer in the world to furnace process. The research report shows in Guarantees of Origin, which produce certified figures for the carbon that blast furnace energy consumption is are issued by the Swedish Energy Agency, is part of LKAB’s objective footprint of its pellet production. The reduced by a total of 1.7 GJ per tonne of to reduce carbon dioxide emis- emissions vary between 32 and 57 kg CO2 hot-rolled coil (HRC) when using magnetite sions by 12 percent by 2021 using per tonne of pellets, depending on the pellets as input material compared with using 2015 as the base year. Read more product. sintered hematite fines. Emissions of carbon under “Environmental impact and dioxide are also reduced by 15 percent resource consumption” on page 48. (around 320 kg) per tonne of HRC compared with sintered fines.

32 | PROCESSING LKAB ANNUAL AND SUSTAINABILITY REPORT 2016 Ramesh Abrahamsson hauls ore LEVEÄNIEMI PROVIDES A FLEXIBLE in the Leveäniemi open-pit mine. SUPPLY OF CRUSHED ORE

A continued increase in production requires the More Leveäniemi ore for Malmberget ore from the underground mines to be topped Among other things, the proportion of up with crushed ore from the open-pit mines in crushed Leveäniemi ore that can be mixed the Svappavaara field. A flexible supply of ore with the ores from the underground mines also reduces the risk of a shortage of crushed depends on the iron content and the ore and increases the opportunities for con- composition of the ores; the pellet product sistently high pellet production. In the second must meet product specifications. quarter of 2016 the Leveäniemi open-pit mine According to plan, Malmberget is expected began supplying crushed ore to the processing to increase the proportion of crushed ore plants in both Malmberget and Kiruna. In from Leveäniemi to around 25–30 percent in Malmberget an average of 20 percent of the 2017, while the processing plants in Kiruna crushed ore for pellet production was made will primarily use ore from the Kiruna up of iron ore from Leveäniemi, while in underground mine with the Leveäniemi Kiruna the figure was around 10 percent. ore as a buffer for its production.

FEWER STOPPAGES MEANS SUSTAINABLE PRODUCTION

The road to a profitable, competitive and and processing chain with many short production volumes and quality. Stability sustainable LKAB involves increased stoppages increases wear and tear on and predictability in the supply chain are production with lower costs and less envi- machinery, increases emissions and energy vital for improved productivity and LKAB’s ronmental impact. An unstable production consumption and has a negative impact on growth target.

PARTICULATE EMISSIONS PRODUCTION VOLUME ENERGY CONSUMPTION PER TONNE One of LKAB’s sustainability objectives is to reduce total A profitable, competitive LKAB requires that we can make One of LKAB’s sustainability objectives is to reduce its emissions of particulates to air from our scrubbing maximum use of the available capacity in existing processing energy intensity by 17 percent per tonne of finished product, equipment by at least 40 percent, from 17 mg/m3 ntg in 2015 plants. This means that we must stabilize and rationalize from 166 kWh in 2015 to approximately 138 kWh in 2021. to 10 mg/m3 ntg in 2021. existing plants, processes and work methods. An objective of major significance for production costs and environmental impact.

mg/m3 No. of stops Mt No. of stops kWh/tonne No. of stops 60 900 28 900 168 900

50 720 26 720 164 720

40 540 24 540 160 540

30 360 22 360 156 360 OPERATIONS AND IMPACT OPERATIONS 20 180 20 180 152 180

10 0 18 0 148 0 2012 2013 2014 2015 20161 2012 2013 2014 2015 2016 2012 2013 2014 2015 2016

CARBON DIOXIDE EMISSIONS PER TONNE SULPHUR DIOXIDE EMISSIONS NUMBER OF ACCIDENTS IN PRODUCTION One of LKAB’s sustainability objectives is to reduce carbon In recent years LKAB has invested in flue gas scrubbing LKAB has a sustainability objective to reduce the rate of dioxide emissions by 12 percent per tonne of finished product, equipment at Malmberget and Svappavaara, and this has accidents resulting in absence to 3.5 per million hours from 27.2 kg in 2015 to 23.9 kg in 2021. At the same time, significantly reduced emission levels. Stable processes and worked by 2021. emissions of nitrogen to air (NOx) are to reduce. An objective additional flue gas scrubbing equipment are contributing to of major significance for costs and environmental impact. meeting our sustainability objective of reduced sulphur dioxide emissions4. Number of accidents kg/tonne No. of stops Tonnes No. of stops per million hours worked No. of stops 28 900 2100 900 10 900

27 720 1720 720 8 720

26 540 1340 540 6 540

25 360 960 360 4 360

24 180 580 180 2 180

23 0 200 0 0 0 2012 2013 2014 2015 2016 2012 2013 2014 2015 2016 2012 2013 2014 2015 2016

No. of stops 1 One measurement point for particulates in Kiruna is reported separately – see table of emissions from product manufacturing on page 48. 2 Energy consumption in 2012 and 2013 relates to Kiruna, Svappavaara, Malmberget, Luleå and Narvik, excluding electricity for ore trains. 3 Carbon emissions in 2012 and 2013 relates to Kiruna, Svappavaara and Malmberget, excluding electricity for ore trains. 4 Read more about reductions in sulphur dioxide in the table of emissions from product manufacturing on page 48 and the picture caption on page 49.

LKAB ANNUAL AND SUSTAINABILITY REPORT 2016 PROCESSING | 33 TRANSPORT TRANSPORT

LKAB handles and delivers millions of tonnes of iron ore products every CHALLENGES year, from mining below ground through processing to transport to the Capacity and flexibility in the ports of Narvik and Luleå. Our competitiveness in the global marketplace logistics chain must be ensured in order to achieve LKAB’s is based on an efficient logistics chain both above and below ground. long-term growth target. Trials involving increased axle loads on the whole of the Ore Railway will be carried out in 2017. Capacity-increasing measures and national infrastructure LKAB accounts for around investments such as harbour dredging in Luleå and double 35 percent of the freight carried tracks on the Ore Railway are being investigated. on Swedish railways, making us

Resource and process Sweden’s largest freight company. optimization is a priority and work on reviewing which parts of the logistics system are to be staffed in-house or outsourced is continuing. This also applies to the planning of maintenance, as well as the review and optimization of operations in existing facilities.

The year in brief With relatively few possibilities for interim storage in depots and ports of shipment, one of LKAB’s main objectives is to transport and deliver as much volume as possible at the steadiest pace possible. The focus in 2016 was on reviewing the organization and resource requirements, optimizing audit times and maintenance plans and increasing capacity and flexibility in the logistics chain.

Efficiency gains have been achieved with the commission- ing of the new terminals at the operating locations as well as the bentonite plant in Luleå. Success- ful trials involving increased axle loads have been carried out on the Ore Railway and the new ore quay in Narvik was officially opened during the year.

34 | TRANSPORT LKAB ANNUAL AND SUSTAINABILITY REPORT 2016 The new shiploader at ore Quay 7 Streamlining was taken into operation in April 2016. freight reduces environmental impact In partnership with SSAB and Scania Ferruform, in 2016 LKAB began a pilot project of which the aim is to shift parts of the companies’ freight from road to rail. The idea is to exploit unused capacity on SSAB’s rail freight services between Luleå and Borlänge, known as the steel shuttle. SSAB’s trains depart three times a day all year round from both locations and changes are expected to have a number of positive effects, including increased delivery precision, reduced carbon dioxide emissions and reduced transport times and delivery costs.

TRIALS INVOLVING HEAVIER LOADS ON THE ORE RAILWAY It is vital for LKAB’s logistics system that delivery capacity is ensured along the NEW ORE QUAY IN NARVIK Ore Railway to the ports of Narvik and Luleå. When the transport capacity on the Ore Railway starts to reach its upper OFFICIALLY OPENED limit, the long-term solution is to build a double track. However, since this would In September 2016 LKAB’s new ore Quay 7 increased by 50 percent, from 20 million be a major infrastructure investment that in Narvik was officially opened. The capacity tonnes to nearly 30 million tonnes of iron is far off in the future, trials involving of Quay 7, with its mooring system, screening ore products per year. The investment cost increased axle loads – from 30 tonnes to

station, shiploader, weighing station and belt is just over SEK 1.1 billion. The completion AND IMPACT OPERATIONS 32.5 tonnes – have been carried out along conveyors, is around 9,000 tonnes of pellets of Quay 7 means that over the past 10 years the Malmberget to Luleå section. Initially, or 11,000 tonnes of fines per hour. It can be LKAB has invested more than SEK 4 billion one of the five daily ore trains was loaded used in parallel with the older Quay 5 and in in the ore port in Narvik. with an extra 680 tonnes, increasing to total the loading capacity in Narvik has two in five trains towards the end of 2016. It is hoped that trials involving higher loads can also be carried out on NEW SIGNALLING SYSTEM CREATES UNCERTAINTY the Kiruna to Narvik section in 2017. To facilitate rail traffic between the countries LKAB’s position is that while the intro- of Europe, the EU has decided that a duction of ERTMS is desirable, at the current standardized signalling system known as the time the system must be regarded as a European Rail Traffic Management System serious business risk because of the (ERTMS) is to be introduced in all EU countries. uncertainty surrounding availability and In Sweden, ERTMS has been tested out on delivery assurance on the Ore Railway. The the Haparandabanan, Bothniabanan, Ådals- total cost of the system to train operators banan and Västerdalsbanan lines. The plan has also not been guaranteed, and in addition is for introduction of the system to begin on all LKAB’s locomotives will need to be the Ore Railway in 2021, despite the fact adapted for the new system – representing that the system is not yet fully developed a risk of loss of capacity. and major teething problems have arisen on a number of sections.

LKAB ANNUAL AND SUSTAINABILITY REPORT 2016 TRANSPORT | 35 RESPONSIBLE AND SUPPLIERS EFFICIENT PURCHASING

CHALLENGES Responsible and efficient purchasing is a central part of LKAB’s work to Cost-efficient and responsible strengthen its competitiveness going forward. LKAB will choose to work purchasing is one of the ways with the most competitive and sustainable suppliers in order to create that LKAB takes lasting respon- the greatest possible added value for the Group and, by extension, for sibility. This requires coopera- our customers. LKAB’s suppliers must always act in a sustainable way tion with key suppliers, as well as a clear division of responsi- throughout the supply chain. There is particular focus on environmental bility between LKAB’s operating aspects, the work environment, ethics and human rights. LKAB has a and purchasing organizations new approach to developing sustainable purchasing partnerships in in order to ensure competition and to follow up and manage which we strive to achieve sustainability throughout the whole value supplier performance. chain. In 2016 the focus was on developing higher-risk suppliers.

Follow-up of higher risk suppli- ers, spreading the approach and emphasizing the impor- tance of suppliers auditing their own suppliers from a sustaina- bility perspective are priorities and challenges for LKAB.

Compliance with LKAB’s basic requirements is to be ensured by all suppliers. Of the existing suppliers, 51 percent1 have approved the basic require- ments to date. 1 Calculated for purchasing by the Parent Compa- ny, rolling 12 months. HOW LKAB CREATES SUSTAINABLE Suppliers LKAB is a significant buyer and has PURCHASING PARTNERSHIPS just over 4,000 suppliers in various sectors. Since 1 January 2015, LKAB’s suppliers into consideration the industry, ownership Just over half of purchasing con- have had to approve its basic requirements structure and where in the world the sup- sists of contract work, transport and in order to be able to supply products and plier is located. logistics. A further significant part services to us. Higher-risk suppliers also Suppliers usually run a responsible, is made up of purchases of equip- make a self-declaration based on our evolving business, but the follow-ups have ment, raw materials and chemicals, Supplier Code of Conduct. However, it is not nevertheless identified areas for improve- as well as various types of services. sufficient to rely entirely on this self-dec- ment based on the requirements we set in LKAB’s suppliers can be found in laration. LKAB therefore follows up on site our Supplier Code of Conduct. 35 different countries; mostly in at the supplier’s premises, in order to see This way of working has a number of Sweden and , but also in the how the requirements are being met and to advantages: the improvement projects can rest of Europe, the US and Asia. Our discuss and run improvement projects. result in cost savings, higher quality and aim is to work with suppliers who LKAB’s work on sustainable purchasing fewer commercial risks, while at the same set a good example of sustainable enterprise and who form a stable is based on a risk perspective. The supplier time LKAB’s engagement in the relationship supplier base that contributes to base has been categorized using the Supply creates reassurance for the supplier. In reducing business risks and making Chain Management Tool, which has its own this way, LKAB contributes to the develop- savings. risk index, known as the LKAB Supplier ment of both the supplier’s and our own Risk Index. Among other things, this takes business.

36 | SUPPLIERS LKAB ANNUAL AND SUSTAINABILITY REPORT 2016 SITE VISITS ENSURE BASIC REQUIREMENTS OF SUPPLIERS SUSTAINABLE BUSINESS LKAB strives to achieve sustaina- bility throughout the value chain, LKAB has identified 150 suppliers with a higher risk of potential which includes all our suppliers. To be able to sign an agreement shortcomings in compliance with our Supplier Code of Conduct. with LKAB, the suppliers must Supplier follow-up enables LKAB to help increase awareness of approve our basic sustainability sustainability at the supplier and ensure that the Code of Conduct requirements. Eight fundamental requirements have been defined is complied with in practice. on the basis of international guidelines such as the UN Global In 2016 a total of 42 supplier follow-ups A relatively common deviation from the Compact, the OECD’s Guidelines were conducted in seven countries (China, Code of Conduct is if the supplier does not for Multinational Enterprises, India, Czech Republic, Finland, Nether- follow up its own suppliers from a sustaina- the UN’s “Children’s Rights and lands, UK and Sweden). In some cases this bility perspective. Spreading awareness of Business Principles” and the UN follow-up resulted in LKAB choosing not to the importance of such work is one of Guiding Principles for Business enter into a business relationship or ending LKAB’s foremost challenges. and Human Rights. its cooperation with the supplier. The visits often end in constructive For the 150 or so of LKAB’s suppliers considered to be at In these on-site visits LKAB examines the discussions that lead to a more developed a higher risk1 of breaching the business, reviews such things as policies approach. LKAB always gives the supplier a basic requirements, LKAB has and procedures, tours production facilities, report on the follow-up detailing deviations introduced a more detailed set of interviews employees and management identified and, above all, recommendations requirements – a Supplier Code and visits the supplier’s subcontractors. concerning areas of improvement which of Conduct which consists of 80 Examples of areas for improvement include they should prioritize. The supplier then requirements in seven areas of human rights, work and employment responds with an action plan that results sustainability. conditions, emergency management and in joint improvement projects, for example, In 2016 the Supplier Code of fire safety, as well as training in business within health and safety. Conduct was expanded to include ethics. the requirement that our suppliers must not trade in what are known as conflict minerals – minerals which directly or indirectly help finance conflict, for example, in the Democratic Republic of the Congo and neighbouring countries.

8 AND IMPACT OPERATIONS fundamental requirements defined on the basis of international guidelines 80 detailed requirements within seven areas of sustainability for suppliers considered to be higher risk1 LKAB Trading in Asia A wholly owned subsidiary, LKAB Trading, ensure that they can meet defined supplier 42 which is a purchasing office for the whole and quality requirements in accordance follow-up ups were carried out in 2016 of 150 identified high-risk suppliers1 within Group, opened in Shanghai, China, in 2011. with our Supplier Code of Conduct. Pro- the Group, relating to the requirements in From here purchases are made all over cesses of change are also encouraged by our Supplier Code of Conduct. Asia, which is part of LKAB’s long-term supporting suppliers with good potential strategy to expand its purchasing market, to develop and improve; for example, by 1 High or extreme risk (based on results from our risk analysis tool), as well as suppliers flagged up. cut out unnecessary middlemen and reduce making sure that suppliers have proper Suppliers that are flagged up are not at a high risk of deviation from the supplier requirements, but may be purchasing costs. A large part of this work terms of employment and clear anti- associated with an industry or region involving risk and also have a major impact on production. is based on evaluating the suppliers to corruption guidelines.

LKAB ANNUAL AND SUSTAINABILITY REPORT 2016 SUPPLIERS | 37 EMPLOYEES EMPLOYEES

CHALLENGES

A safe work environment means continued work on the safety culture, focusing on training and workplace-related efforts involving dialogue and follow-up. LKAB works to con- tinually improve the physical, organizational and psychosocial work environment.

Long-term human resource management and attractive- ness are required for a success- ful LKAB. Despite rationalization and staff reductions, LKAB must continue to be an attractive em- ployer. We are also continuing It’s the people that make our partnerships with schools and universities and our cooper- LKAB. Our values form the ation with the local community.

Responsible staff cuts are guided basis of everything we do. by a long-term approach to human resource management. LKAB has worked on matching Our employees’ commitment, innovation and responsibility form a surplus personnel with positions available based on the skills basis for an LKAB that remains competitive. The active involvement they have. of our employees in our improvement work is crucial to the success of both the company and our customers. LKAB must be an attractive employer with a culture characterized by safety, inclusion and Employees opportunities to develop. The total number of employees (average) in 2016, including part- A wide range of expertise is required to is also based on our ability to attract and time and fixed-term workers, was operate LKAB’s large-scale modern iron ore retain the right skills through professional 4,224. mines, as well as our production plants and challenges, broad career paths and person- • 4,042 permanent employees, extensive logistics. Around 200 different al development. This work is supported by of whom 1,333 were white-collar positions in various professional categories our talent management process, which is workers and 3,068 were blue- are represented within LKAB – from mine- aimed at succession planning and identify- collar workers. workers, electricians and process operators ing talent and key positions. This process • 34 people were employed part-time. to automation engineers, rockwork techni- allows us to offer various different career • 359 people were fixed-term workers. cians and research engineers. paths. Annual staff reviews provide an Full-time and part-time employ- important basis for our employees’ devel- ment options are available for Human resource management and attrac- opment. employees with young children. All tiveness LKAB employees in Sweden and At the same time, we can offer a variety of Commitment, innovation and responsibility Norway are covered by collective career paths – and an attractive environ- Our values – committed, innovative and agreements, with the exception of ment in which to live in a beautiful region. responsible – are about taking responsi- Group management and the heads There is a strong economy here alongside bility for the future of the company, being of subsidiaries. the mining operations, as well as a good committed to our customers’ results and For reporting on LKAB’s incentive programme, see Note 6 on page 106. quality of life for our employees and their being innovative so that we continue to families. Our long-term competitiveness develop and improve all the time.

38 | EMPLOYEES LKAB ANNUAL AND SUSTAINABILITY REPORT 2016 The proportion of women in the Group is 20.6 (20.0) percent and the proportion of female managers is 19.5 (17.7) percent. The aim is that by 2021 women will make up 25 percent of both employees and managers at LKAB.

PROPORTION OF WOMEN AT LKAB Proportion of female managers Proportion of women

% 25

20

15

10

5

0

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

The proportion of women within LKAB continues to increase. Although the total average number Kamilla Bruksås and Truls Johan Mojlanen of employees decreased during the year, the in front of the new shiploader in Narvik. trend towards a greater proportion of women was maintained. Of a total of 4,042 (4,278) permanent employees It is LKAB’s ambition to set an international in 2016, 831 (857) were women. example in the mining industry as regards A ROCKET IN THE CAREER ethics, the work environment, equality and BAROMETER SURVEY diversity. We observe internationally recognized In the 2016 Karriärbarometer1 (Career declarations and conventions such as the UN Diversity Global Compact’s ten principles, the “Children’s Barometer) survey LKAB was one of the “rockets” – in other words, one of Rights and Business Principles”, the OECD All employees, with their different the companies that has increased qualities, backgrounds and life AND IMPACT OPERATIONS Guidelines for Multinational Enterprises and most in popularity. Compared with the experiences, contribute to LKAB’s the UN Guiding Principles for Business and previous year, LKAB rose 38 places diversity. Diversity and equality con- Human Rights. To ensure responsibility among those with a Bachelor’s degree throughout the value chain we also have a in engineering and 12 places among tribute to long-term sustainability. Supplier Code of Conduct. LKAB has a three- those with a Master’s degree in • According to Statistics Sweden’s year diversity plan, and during the year the focus engineering. Swedish engineers place analysis, 6.7 (6.5) percent of LKAB was on including diversity when producing the company among the 70-highest employees were born abroad. standards and ground rules in the workplaces. ranked employers. Grete Solvang Stoltz was named • The percentage of white-collar by Universum as human resources employees who were born abroad LKAB’s employee survey director of the year for her work on is slightly higher at 8.8 (8.7) In December LKAB’s employee survey was strengthening LKAB’s brand as an percent. sent out to all employees in order to identify employer and establishing this among • Diversity is discussed at work- areas where LKAB can improve. The last LKAB’s management. place meetings and at CPD days employee survey was conducted in 2013. In December Karriärföretagen named for health and safety represent- As in the 2013 survey, the questions fall into LKAB one of Sweden’s best places to atives. four main areas: Me as an employee, In my work, for the fifth consecutive year2. workplace, My boss and LKAB as an employer. 1 Karriärbarometern (the Career Barometer) is • Diversity is included in manage- Universum’s annual survey which asks young ment training and seminars. This year’s survey included more questions working graduates about employers and careers. on diversity and questions linked with the 2 Karriärföretagen is an independent organization • LKAB also discusses diversity which each year names Sweden’s 100 foremost management philosophy. The results of the employers. with suppliers and contractors. employee survey will be compiled 2017.

LKAB ANNUAL AND SUSTAINABILITY REPORT 2016 EMPLOYEES | 39 ACCIDENTS WITH ABSENCE, LKAB GROUP Number Number in 2016 Frequency/million hours worked

100 20

80 16

60 12

40 8

20 4

0 0 Checking reinforcement work in the Printzsköld orebody in Malmberget. 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

Accidents FOCUS ON WORK ENVIRONMENT The overall accident rate did not decrease during the year and re- AND SAFETY CULTURE mains at 6.9 accidents resulting in absence per million hours worked. LKAB is working towards the goal of zero accidents, a good physical A continued focus on preventive and psychosocial work environment, and employees who are healthy safety work has had a positive impact in parts of the operations, in the long term. This means ongoing systematic work on the safe- however. A strong safety culture ty culture and an improved physical, organizational and social work is also a priority in the leadership environment, so that all employees thrive, feel secure and are healthy and employeeship initiative that is taking place throughout LKAB. It in their workplace remains the case that most of the . Another important area in terms of accidents have undramatic causes Safety First! is the name of LKAB’s contin- developing a good work environment for such as slipping and tripping. The uous work for safe and secure workplaces. everyone who spends time within LKAB’s objective for 2021 is a maximum As part of developing a safety culture in the operations is cooperation with, and clarity of 3.5 accidents per million hours workplace, training and dialogue have been in, the requirements made of suppliers. worked. taking place out in the workplaces. The accident rate for 2016 remains at the same In 2016 we investigated approaches, level as last year, despite systematic and methods and management in the area of extensive preventive efforts. The measures the work environment in preparation for the have had a positive impact in parts of the forthcoming certification according to the operations, however, and safety work con- international work environment standard tinues to have a high priority. OHSAS 18001. Another priority is indus- % The psychosocial work environment has try-wide consensus on work environment 3.7 also been in focus during the year. Manda- matters, and LKAB is driving these issues Sick leave is at 3.7 percent, of which long-term tory activities, psychosocial safety rounds actively through its participation in GRAM- sick leave accounts for just 0.8 percent. and group discussions have taken place KO (the work environment committee of the dealing with shared standards and ground mining industry) as well as in various exter- 1 rules based on the Code of Conduct. nal collaborations and research projects. case of corruption in which an employee exploited their position in the company for SPEAKUP – A CHANNEL FOR WHISTLEBLOWERS their own gain. Work on matters such as anti-corruption issues that can be reported are breaches of and non-discrimination has a high priority the Code of Conduct, financial crime such at LKAB, and our stated aim is for our Code as bribery, corruption and fraud, as well as of Conduct to be complied with throughout security breaches, breaches of environmen- the organization. LKAB has a whistleblower tal rules, discrimination or harassment. 11 programme, SpeakUp, which was launched The Code of Conduct sets out LKAB’s cases of arbitrary acts in which there were in January 2016. SpeakUp supplements the guidelines in areas such as anti-corruption consequences for an employee under labour Code of Conduct and employees can use and discrimination. In 2017 interactive law because of breach of the employment contract. the system to report anonymously anything training in the Code is also being launched that they feel is not right. Examples of and implemented for LKAB employees.

40 | EMPLOYEES LKAB ANNUAL AND SUSTAINABILITY REPORT 2016 Employee interview: WELL-DEVELOPED Now my role is more operational EMPLOYEESHIP AND LEADERSHIP and I can see the results directly. To remain sustainable, a com- When LKAB and the market change, new opportunities for pany must be flexible and able unexpected career leaps arise. Daniel Ulvefeldt took the step to adapt – particularly under to something completely new. A former market analyst, he is tough market conditions. Com- now responsible for LKAB’s treasury unit and currency trading. mitted, involved employees are the key to such change work. How did this leap come about? What are your feelings about the change I heard about the position of treasury unit of position? In 2016 LKAB formulated its view of manager and currency trader and my Was it what you thought it would be? employeeship and leadership – a pointer curiosity was aroused. Previously my work I have had to get to grips with an awful lot for how we should act as individuals, was long-term and strategic, monitoring in order to be able to take on this role and team members and leaders. It is cen- what was going on in the world and its responsibility, but I have learnt from my tred on LKAB’s continued development working on market analysis and statistics. colleagues and from our counterparties. and how leaders and employees must My new job is different – more operational My role quickly became operational and now work on improvements every day. The and tangible. I can see the results of my work directly. new philosophy will provide support I’m also in contact with more people and for prioritization, decision-making and subsidiaries around the organization than daily improvements, with successful previously. It’s enjoyable and I feel it is a customers as the end goal. Everything is privilege. always based on our values: committed, innovative and responsible. What have you found useful from your previous job? Dialogues and training Knowing how the iron ore and steel markets Where leadership is concerned, relevant work has been a great advantage and aspects include how LKAB’s leaders market analysis remains a large part of my show the way forward, create condi- daily work, but now it is linked to my area tions, encourage participation and coach of responsibility. The fact that I had also their team members. The employees in completed LKAB’s trainee programme has turn have responsibility for the quality also been valuable and given me a good of their own work, as well as continually understanding of LKAB’s business, as well seeing opportunities for improvements as the route that the ore takes from mine and delivering in line with the custom-

to port. er’s expectations. Compliance with the AND IMPACT OPERATIONS Code of Conduct applies to everyone and ensures that we act responsibly and have an open corporate climate. LONG-TERM THINKING GUIDES STAFF CUTS Changing behaviours and how we work is a challenge. In 2017 the new Work on adapting LKAB to the market Important starting points for this work approach will be implemented through situation by reviewing the organization were respect for the individual and LKAB’s dialogues and training at all levels continued throughout 2016. The focus was long-term skills requirements. Thanks to within LKAB. on costs and efficiency. Within the frame- a stop on external recruitment, targeted work of the Group’s new structure, a new pension solutions and matching of existing underlying organization based on divisions skills to vacant positions, the number of has been put in place and during the au- positions has been reduced without layoffs tumn 95 people were given notice that their in the Parent Company. employment would be terminated. 90 dialogues Matching of existing skills to vacant positions has on diversity issues took place in LKAB’s oper- been an important part of the adaptation work. ations during the period 2013 to 2016. These dialogues formed part of the work on LKAB’s diversity plan.

LKAB ANNUAL AND SUSTAINABILITY REPORT 2016 EMPLOYEES | 41 SOCIAL RESPONSIBILITY SOCIAL RESPONSIBILITY

The rich iron ore of northern Sweden generates considerable socio­ CHALLENGES economic value. It laid the foundation for the communities in the Swedish Securing the confidence of orefields and was the reason for the development of Swedish hydro­ the world around us, including cooperation and good relations electric power and of 500 km of railway track from the Atlantic to the with the local community, is a Gulf of Bothnia. It has given rise to two ore ports and a steelworks, and challenge and a precondition for contributed to one of the world’s northernmost universities of technology. LKAB’s operations. Great impor- tance is attached to dialogue, A cluster of primary industry, cutting-edge technology and research. accessibility and transparency, as well as actively dealing with Since LKAB was formed in 1890, its operations and with the reindeer herding and tourism concerns and discussing indi- have been characterized by a long-term industries are key. Urban transformation vidual property owner’s wishes. approach, cooperation and far-reaching – in which development must always At the right time, at the right social and environmental responsibility. We precede phase-out – is one of the single price and with mutual under- have a strong ambition to continue to take most important issues for both LKAB and standing are the watchwords responsibility and be a positive force – as a the operating locations. for carrying out urban trans- sustainable supplier to the steel industry, That our operating locations continue to formation in our operating but also as a partner, employer and citizen be attractive communities where people locations. LKAB has taken on of society. want to live is also essential for attracting an active role in order to have expertise: communities with a good housing control over scheduling and costs, and to ensure that “de- Cooperation with many different stakeholders market, good schools, a broad range of velopment precedes phase-out”. LKAB’s operations impact and are impacted cultural and outdoor offerings, and One of the ways we do this is by by many different interests. Dialogue with our attractive public spaces. For this it is acting as a purchaser and offer- various stakeholders guides us when we essential that LKAB enjoys good coopera- ing replacement properties. prioritize and report on the issues that are tion with residents, communities, regional most material in our sustainability work. and local industries, landowners and At our operating locations in the Swedish authorities. orefields, relations with local residents

Communication is vital LKAB operates in an industry that has a great impact on society and individuals. Transparency, acces- sibility and ongoing dialogue both within and outside of the company are therefore absolutely crucial if we are to retain the trust of those around us. Our main communication chan- nels are the website lkab.com, the magazine “LKAB Framtid” (“LKAB Future”) and our activities in the operating locations. We commu- nicate in the news media and also hold regular public and individual meetings and information sessions in various forums. Central Kiruna with the mine area and the terraces of Kirunavaara mountain in the background.

42 | SOCIAL RESPONSIBILITY LKAB ANNUAL AND SUSTAINABILITY REPORT 2016 RESEARCH & DEVELOPMENT COLLABORATION Since autumn 2013 LKAB has been a part- ner of Narvik Equestrian Club – an example of our local commitment. LKAB collaborates with a number of external parties and knowledge SOCIAL RESPONSIBILITY centres, nationally and internationally, in areas that are important focus areas for the company. The aim is to develop knowledge, attract competent employees, work to reduce energy and climate impact and secure the company’s competitiveness.

• National and international collaboration • Collaboration within process industry IT with the mining industry, for example, and automation takes place nationally through the Bergforsk arena, in the and within the EU, including through the research programme STRIM, and in the strategic growth programme PiiA and Nordic Rock Tech Center and EIT Raw Vinnova. Materials. • Close and long-term cooperation with Sponsorship • Collaboration and partnership with the Luleå University of Technology on a num- strengthens the brand Swedish and European steel industries, ber of different platforms, programmes LKAB works actively on sponsorship for example, through the Research Fund and projects. and partnerships as part of the compa- for Coal and Steel and Swerea MEFOS. ny’s commitment to the locations where we operate. LKAB’s commitment consists mainly of donations to culture, sport, research and education in the communities LONG-TERM SCHOOL INITIATIVES where LKAB operates. We are also To secure LKAB’s long-term hu- in the Swedish orefields and Narvik. The involved in sponsorship of sport and culture at a national level, primarily with man resource requirements we aim is to encourage an interest in science and technology among children and young a view to strengthening the brand in are involved in various kinds of people. So far support has been given to order to support future recruitment. school initiatives. This work aims more than 50 school projects in the orefield to provide young people with municipalities. In 2016 the foundation Examples of major distributed around MSEK 3.6 to various good educational opportunities development projects. sponsorships include: and a stable basis for the future. • Norrbottensteatern ( Schools also form a basis for an Learning from a construction project Theatre) • Teknikens Hus science centre – attractive community. During the year students from Upper Secondary School got to build a “Mining and Geology” exhibition new assembly hall in LKAB Fastigheter’s • Tekniska Museet (Swedish We work closely with institutions such as residential area in Gällivare. The build took National Museum of Science and Technology) – “The Mine” AND IMPACT OPERATIONS Luleå University of Technology and are place as a partnership between LKAB and exhibition jointly with industry actively involved in the local compulsory the school, and students in the Building and organization SveMin and upper secondary schools, as well as Construction Programme were involved • Ice hockey – Kiruna IF, Kiruna AIF through the LKAB upper secondary school. throughout the project. The focus was on and Luleå Hockey The foundation LKAB Academy provides the work environment, risk and learning the • Cross-country skiing – Charlotte financial support to pre-schools, compul- various elements involved in a construction Kalla and Marcus Hellner sory schools and upper secondary schools project.

NEW SOCIAL SUSTAINABILITY OBJECTIVES FOR 2017–2021

During the year new objectives for social This objective is being followed up as follows: • Cooperation agreements are to be drawn up for sustainability were adopted that we will • All operations shall have carried out an Sami villages that have reindeer grazing lands be working on over the period 2017–2021. impact analysis in respect of human rights neighbouring LKAB’s mining operations. In addition to objectives for workplace and, if necessary, drawn up an action plan. • Audits of high-risk suppliers are to be carried safety and the percentage of women • Confidence in LKAB is to be maintained out and agreed action plans followed up. and female managers, we have defined through the urban transformation process • We will work in partnership with our the following objective: Compliance with (annual SIFO surveys in Kiruna and Gällivare). customers on sustainability initiatives. LKAB’s Code of Conduct and well-func- • All employees are to be trained in the Code • We will have a system in place for external tioning dialogue with our stakeholders. of Conduct. grievances.

LKAB ANNUAL AND SUSTAINABILITY REPORT 2016 SOCIAL RESPONSIBILITY | 43 Principles of the URBAN TRANSFORMATION urban transformation

Dialogue and collaboration IN THE SWEDISH OREFIELDS In consultation with municipalities, resi- dents, landowners, authorities, reindeer herders and others, LKAB is working Urban transformation in Kiruna and Malmberget is a consequence of to ensure that urban transformation provides security and foster belief in the the expansion of mining and the location of the orebodies. When mining future. Cooperation, collaboration and implementation agreements set out what takes place at a great depth, it has an impact on people and communities, has been agreed. which have to move in order for mining operations to continue. Developing before phasing out One important aspect is that new housing, Urban transformation is a challenge for mine and community. LKAB’s aim is that services and infrastructure should be everyone involved. It is LKAB’s ambition to nobody should have to live or stay next to completed and under construction before LKAB phases out older settlement areas. facilitate this transformation and compensate industrial fencing. for the direct impact that it has on the Urban transformation is being carried LKAB’s responsibilities people and communities affected. out in partnership and consensus with our Under the Minerals Act, LKAB must compensate for the impact and costs stakeholders. We are also playing an active of urban transformation necessitated Developing before phasing out role, both as a purchaser of new properties by the company’s mining. For LKAB and our stakeholders it is and as a collaborative partner, in order to Compensation to owners of houses essential that important social functions identify suggestions for housing solu- and other properties are complete or under construction before tions and create freedom of choice in this Those who own a property can choose buildings are decommissioned. This will take area. We are also looking for constructive to receive a replacement building that is place gradually with Mine City Parks being solutions for industrial and commercial equivalent to the current one or a sum of money corresponding to the market value constructed as the areas are phased out, properties together with the companies plus 25 percent. thereby creating soft transitions between concerned. Compensation to owners of cooperative housing units Owners of cooperative housing units will receive a sum of money in compensation. The compensation is an amount per square metre of living area that corre- sponds to the price per square metre for 64% 64% a newly built cooperative housing unit in of Gällivare residents see the urban of Kiruna residents see the urban trans- the Swedish orefields plus a supplement transformation as something positive and formation as something positive and 80 based on the condition and standard of 80 percent have great confidence in LKAB’s percent have great confidence in LKAB’s their current cooperative housing unit. ability to shoulder its responsibility for the ability to shoulder its responsibility for the urban transformation.1 urban transformation.1 Compensation to business owners, authorities and organizations Those who own their property will be of- fered a replacement property, while those who rent will be offered new premises with the rent increasing in stages over up to five years. In addition, LKAB will pay relocation expenses and compensate for loss of income due to relocation. Compensation to tenants Tenants who do not own a property will be compensated by staged rent increases and will be given priority access to both older and newer rental apartments. This means that the rent remains at the current level for the first year, and then increases in stages over seven years. Regardless of landlord, all tenants who must move are covered by LKAB’s staged rent increases.

1 Attitudes to urban transformation in the Swedish ore- fields are measured each year through a survey by SIFO aimed at various interest groups in the orefields, in and nationally in Sweden.

44 | SOCIAL RESPONSIBILITY LKAB ANNUAL AND SUSTAINABILITY REPORT 2016 AGREEMENT ON ROAD HERITAGE BUILDINGS Urban transformation PRESERVED E10 IN KIRUNA milestones in 2016 During the autumn the Swedish Transport Kiruna A significant proportion of the buildings Administration and LKAB reached agree- • The decision is taken to move Bolag- in the areas affected by the changes are ment on the financing and construction of shotellet to the Luossavaara area along of cultural historical value. A number are a new section of road E10 around Kiruna. with other cultural buildings. unique and popular, and some are also LKAB will finance the new route, which is • LKAB buys 10 key properties in central listed buildings. The phase-out work must essential for good communications in the Kiruna from Telerit. • LKAB announces that the company will therefore take place with great care and new Kiruna. This will be a significant cost for LKAB, finance the new E10 road. respect. • 16 new apartments are ready for occu- but the project is necessary in order to be LKAB and the Municipality of Kiruna pancy in the Jägarskolan area. able to continue mining iron ore in Kiruna. have agreed that LKAB will be responsible • Negotiations with Ortdrivaren housing The Swedish Transport Administration and cooperative with a view to sale. This will for preserving several of the buildings. LKAB will work together to find possible be the first housing cooperative sold LKAB has undertaken to move around 21 efficiencies and savings in the project, for to LKAB. buildings, including the church and Hjalmar example, through technical solutions. Malmberget Lundbohmsgården. Bolagshotellet is not Construction of the new section of road • The four communicated stages are covered by the agreement but is being will begin in 2017 and is expected to be detailed, resulting in the urban trans­ moved on LKAB’s own initiative. The first completed in 2019–2020. formation stepping up a gear. heritage buildings are being moved in 2017. • The Board of Directors approves the investment for land and infrastruc- In Malmberget around 30 heritage ture works at Repisvaara in Gällivare. buildings will get a new address. By moving Around 120 plots are to be prepared older buildings, LKAB is helping to ensure RELOCATION IN for single-family homes. that there is a varied stock of homes. • LKAB buys the ice rink in Malmberget, MALMBERGET MOVES UP which was previously owned and run by Older homes can be offered at a lower A GEAR the sports club Allmänna rent than newly built properties, which Idrottsförening (MAIF). also adds to freedom of choice. During the year LKAB presented the de- • LKAB and the Municipality of Gällivare To preserve the cultural environments tailed plans for purchases and relocations reach agreement on compensation for LKAB is also financing and running an in Malmberget. A total of 1,740 homes are municipal premises and land in affected areas of Malmberget. extensive project to document the build- now covered by the current schedules. ings; this is also required by the County The increased pace of urban transfor- Jointly mation is due to forecasts of future land • LKAB launches detailed principles for Administrative Board and the Swedish compensation to property owners, National Heritage Board. movements caused by the mining. The tenants and businesses. plans mean that large parts of Malmber- • Increased dialogue between LKAB and get will be vacated during 2019. the municipalities to secure building Hjalmar Lundbohmsgården, Kiruna. The new timetable makes the future more land in the development areas that are predictable for the residents of Malmberget. crucial for future mining. In 2016 the tenants of 78 apartments in • LKAB signs agreements with seven building contractors that will build buildings owned by LKAB were affected by replacement homes in the orefields.

the move. The tenants were given AND IMPACT OPERATIONS assistance with moving into temporary What’s happening in 2017? • The old railway station, LKAB’s accommodation and replacement homes. annex, Järnvägshotellet (the Railway Within a few years municipal opera- Hotel), Hotell Rallaren and other tions such as a sports hall, retirement buildings will be demolished in Kiruna. home and school will also be affected. • Start of construction of a new section The Municipality of Gällivare will build of road E10. these in new premises in Gällivare. • Hjalmar Lundbohmsgården and Bolags­ hotellet will be moved to Luossavaara in Kiruna. • Ingenjörsvillan will be converted into Provisions for and costs of urban transformation an accommodation and conference building and moved to Luossavaara in LKAB’s provisions for urban transforma- Disbursements for the year totalled Kiruna. tions in the Swedish orefields amounted MSEK 1,035 (291). • Construction of homes will start in the to MSEK 13,062 (12,234) at year-end. More detailed reporting on urban Kommunalhemmet district, Hasseln district, in Repisvaara and in Koskull- The costs of provisions for urban trans- transformation can be found on the skulle in Gällivare. formation during the year totalled MSEK website lkab.com. Further details • The first heritage buildings in Koskull- 2,106 (1,568) and related primarily to concerning provisions as a result skulle will be ready for occupancy, costs resulting from impact boundary of mining operations can be found in while the remaining 14 out of a total movement as well as revaluations of Note 1, 28.1.1 on page 91 and in of 30 heritage buildings will be moved from Malmberget to Koskullskulle in earlier provisions – see also Note 31. Note 31 on page 109. Gällivare.

LKAB ANNUAL AND SUSTAINABILITY REPORT 2016 SOCIAL RESPONSIBILITY | 45 ENVIRONMENTAL ENVIRONMENTAL RESPONSIBILITY RESPONSIBILITY

LKAB’s mining operations have a LKAB technician Ulf Nilsson samples the water significant environmental impact quality in the river Rakkurijoki, Municipality of Kiruna. on the surrounding landscape and communities. Primarily from emissions to air and discharges to water, noise, vibrations and land impact from industrial and ore processing operations.

LKAB is one of Sweden’s biggest energy users. Streamlining energy use is important work, both to keep costs down and to limit impact on the environment. The sustainability objectives drive the direction and improve- ment work, which includes energy consump- tion, emissions to air and climate-smart products. The work is taking place within the focus areas of Resource-efficient Production and Responsible Operations.

Permit requirements Activities are conducted within the Group that require permits under the Environ- mental Code. The most extensive permits Land impact and deformation limits, and what is known as ecological remediation, relate to the mining and processing of iron how they are to be checked and followed which means creating new nature values ore and to the depositing of waste sand up, are regulated via conditions in the on land used for industrial purposes. and barren rock in stockpiles. Pit and port environmental permits. This is measured operations also require permits. primarily through GPS measurement rods Biodiversity We regularly check how well LKAB is (approximately 372 rods in Kiruna and In remediation the aim is for there to be no complying with permits issued and their approximately 218 rods in Malmberget) net loss of biodiversity. The starting point is conditions, and carry out checks on our distributed around the community. the location’s possible biodiversity, either environmental impact. How well we are by imitating the surrounding landscape or complying with permits, conditions and Vibrations and atmospheric shock waves by introducing new conditions. This work other requirements is reported in the are measured continuously by online is based on what are known as the four annual environmental reports, which are meters at the operating locations of Kiruna, stages of the consideration hierarchy: available on the website lkab.com. Malmberget, Svappavaara and Masugnsbyn. avoid, minimize, restore and offset. This Our main activities are certified according approach requires great knowledge of types to quality, energy and environmental Noise is measured annually at a number of nature and species even at the planning management systems ISO 9001, ISO 50001 of measurement points at all the operating stage, as well as well documented nature and ISO 14001, as are the main operations locations in accordance with the Swed- values for both land and water. The work within LKAB. ish Environmental Protection Agency’s is preceded by consultation and dialogue guidelines for emissions measurement of with stakeholders affected. One example The impact on the surroundings caused external industrial noise. of how LKAB works to promote biodiversity by the mining operations is continually is the cultivation trials that were conducted measured. This mainly concerns vibra- Remediation during the year to determine how new tions or atmospheric shock waves, noise LKAB is responsible for and obliged to restore environments for calciphyte species can and ground deformation and movements areas affected by the mining operations be created as part of remediation of the in the rock mass that are felt in the local through planned remediation. LKAB’s dolomite mine in Masugnsbyn. communities. guidelines on land use state that the aim is

46 | ENVIRONMENTAL RESPONSIBILITY LKAB ANNUAL AND SUSTAINABILITY REPORT 2016 MAJOR FOCUS ON MAJOR PERMIT EVENTS IN 2016 MANAGEMENT OF MINING AND PROCESS WATER Our impact is regulated by early 2017 and LKAB is await- Tingvallskulle­ and the Viri current legislation and environ- ing a ruling in the case. pit was drawn up during the Ore processing requires large mental permits. At the same • The County Administrative year. Submitted to the Land time, LKAB has a stated aim to Board ordered LKAB to apply and Environment Court at the amounts of water. The water be one of the world’s leading for a permit for measures beginning of 2017. has a major impact on LKAB’s mining companies as regards involving the tailings pond • The content of particulates resource-efficient production in Svappavaara. LKAB’s in overflow water from ore concentrating and pelletizing and minimizing environmental request for the decision to be processing in Vitåfors was processes, among other things. impact. reviewed was not granted, and, exceeded three times during Kiruna consequently, LKAB appealed the year and on several occa- At the same time, LKAB’s mine produc- • In February the Land and En- the decision to the Land and sions was on the limit of the vironment Court of Appeal de- Environment Court. The County permitted level. Improvement tion and processing mean that there is cided not to review the decision Administrative Board submit- measures taken include a new a risk that undesirable pollutants, such to reject LKAB’s application ted a notification of legal action pumping station and dredging as nitrogen, , nickel and zinc, to amend its permit to allow in respect of action taken. of the settling pond. The County will get into surrounding watercourses increased pellet production at • LKAB had its trial period Administrative Board request- ed an earlier submission and as part of surplus process water. KK4. LKAB has appealed the extended for the investigation decision to the Supreme Court. of discharges to a recipient. information on measures and Emissions to water are regulated in plans to ensure compliance • LKAB decided to submit an Proposals are to be submitted with this condition. the Environmental Code based on EU application for a new basic by 2019 at latest for maximum discharge values for sulphates, standards for environmental quality. The permit that allows increased Luleå production in existing mining zinc, copper and uranium, ruling by the European Court of Justice • An application for a new permit and processing operations. as well as a monthly mean concerning dredging of the Weser River for LKAB’s ore port in Luleå The decision means a full value for uranium. As a safety was submitted in May 2016. in Germany (the Weser case) has result- examination of the operations, measure LKAB may pump The application does not relate ed in a tightening up of application of for which preparatory work is water from the River to to any new operations, but the rules on discharges to water. Good in progress. the Liukattijoki watercourse in consultation with the County aims for existing operations to ecological status must be achieved, • The County Administrative Administrative Board. be covered by a modern permit which under the new stricter require- Board decided that at the with appropriate terms. present time it would not ments means that the water quality Malmberget • During the year LKAB received approve LKAB’s request for a • In July 2016 LKAB applied to a number of complaints con- must not be impacted by human activity. new location for stockpiling the Land and Environment cerning dust from the ore port In principle, this means that even very barren rock within an existing Court for an amendment that in Luleå. A measurement pro- industrial area. small changes are not acceptable. would allow extended stock- gramme and action plan were The new application of the environ- • An application for a new permit piling of sand and handling of produced and a comprehensive mental quality standards is of great for continued and expanded external crushed ore during project to limit the dust was mining of dolomite in the significance for and has a great impact the period 2017–2018. The started early in 2017. Masugnsbyn open-pit mine application was supplemented on LKAB. During the year extensive was submitted to the Land and at the request of the County Narvik work was carried out, for example, to Environment Court in April. Administrative Board. • In December 2015 the Nor- Dolomite is used for certain chart how mixing in new ores affects • In December work began on wegian Environment Agency pellet products. the process water and how the chemical preparing the application for ruled on the appeal by both neighbours and LKAB con- composition in turn affects the pellet Svappavaara a permanent permit amend- AND IMPACT OPERATIONS ment to allow extended stock- cerning parts of LKAB’s permit products and recirculation to water- • In March 2016 LKAB applied piling of sand and handling for expanded operations from to the Land and Environment courses. The objective of reducing of external crushed ore with 2013. The Environment Agency Court to take measures to nitrogen discharges to watercourses effect from 2019. ruled largely in LKAB’s favour. increase the capacity of LKAB’s In January 2016 a permit from explosives in mine production is dams in Svappavaara. The • An application for new was granted with updated also a major challenge. Here, we review main proceedings were held in barren rock stockpiling in conditions. various possibilities for making the use of explosives more efficient and tailoring the upgraded iron ore products further. REMEDIATION DURING THE YEAR

Remediation measures were taken mainly ued operating areas at Luossavaara and in LKAB’s old operational areas. Among Tuolluvaara. As a result of the measures the other things, a couple of old exploration remediated areas are now suitable for new areas were checked and remediation residential building. measures were taken; for example, casings Remediation work is carried out both were capped after having been left too long gradually and after operations have ceased according to today’s standard. In addition, and must take into account safety, environ- remediation in the form of a clean-up was mental, economic and aesthetic aspects. Settling pond, Kiruna. carried out at a domestic landfill site in For details of provisions for remediation, Koskullskulle and in parts of the discontin- refer to Note 10 on page 97.

LKAB ANNUAL AND SUSTAINABILITY REPORT 2016 ENVIRONMENTAL RESPONSIBILITY | 47 ENVIRONMENTAL IMPACT AND RESOURCE CONSUMPTION

Our impact is regulated by current legislation and environmental permits. At the same time, LKAB has a stated aim to be one of the world’s leading mining companies as regards resource-efficient production and minimizing environmental impact.

EMISSIONS TO AIR

LKAB’s emissions to air come mainly from the ore processing plants CARBON DIOXIDE EMISSIONS PER TONNE OF PRODUCT1 and consist primarily of carbon dioxide, nitrogen oxides, particulates 2016 2015 and acid gases such as sulphur dioxide, hydrogen fluoride and hy- Carbon dioxide (kg/tonne of product) 26.0 27.2 drogen chloride. One of LKAB’s sustainability objectives is to reduce 1 Refers to facilities in Kiruna, Svappavaara, Malmberget, Luleå, Narvik and electricity for ore trains. carbon dioxide emissions by at least 12 percent per tonne of finished product by 2021 compared with 2015. At the same time, emissions of 1 nitrogen to air (NOx) are to reduce. EMISSIONS FROM PRODUCT MANUFACTURING Another sustainability objective is for total emissions of particulates 2016 2015 to air from our scrubbing equipment to decrease by at least 40 per- Emissions to air cent by 2021 compared with 2015. We also measure and check other Particulates (t) 8212 532 operations-generated dust and precipitated particulates at a number Particulates (mg/m3 ntg) 212 17 of measurement points in our production locations. Sulphur dioxide4 (t) 372 1,1363 Hydrogen fluoride (t) 34 46 CARBON DIOXIDE EMISSIONS, LKAB GROUP 1 Hydrogen chloride4 (t) 90 381 Nitrogen oxide (t) 4,179 4,053 Per energy type % ktonne Nitrogen oxide (g/t product) 155 165 Coal...... 57 406 1 Refers to facilities in Kiruna, Svappavaara, Malmberget, Luleå, Narvik and electricity for ore trains. Fuel oil...... 23 160 2 Filter leakage in a single dust extraction facility in Kiruna substantially increased the average value for the Additives...... 16 117 year for all LKAB’s facilities, to 57 mg/m3 ntg. The average value for the year excluding the faulty facility was 21 mg/m3 ntg. % Diesel oil...... 3 22 3 As from 2015 a new measurement method has been in use in Svappavaara. Other types of fuel...... 1 8 4 Decreased emissions of sulphur dioxide and hydrogen chloride in 2016. Effect of investments in flue gas scrubbing equipment in Svappavaara. Read more in the picture caption on page 49. Electricity...... 0 0 District heating...... 0 0 Carbon in pellets...... - -13 CARBON EMISSIONS LKAB MINERALS, OUTSIDE SWEDEN TOTAL 100% 700 2016 2015 1 Refers to facilities in Kiruna, Svappavaara, Malm- Carbon dioxide (kt) 13.1 13.3 berget, Luleå, Narvik and electricity for ore trains.

ENERGY CONSUMPTION AND ENERGY INTENSITY

ENERGY CONSUMPTION FOR THE LKAB GROUP1 LKAB is one of Sweden’s largest consumers of energy and accounts for a large proportion of the country’s total electricity consumption. As energy represents a significant part of our total costs, we have a Per energy type % GWh long-term strategy for managing both energy acquisition and energy Electricity...... 55 2,370 Coal...... 28 1,217 efficiency. One of LKAB’s sustainability objectives is to reduce ener- Fuel oil...... 14 578 gy intensity by at least 17 percent per tonne of finished product by Diesel oil...... 2 84 2021 compared with 2015. % Other types of fuel...... 1 39 District heating...... 0 7 ENERGY INTENSITY PER TONNE OF PRODUCT1 Waste heat...... - -45 2016 2015 TOTAL 100% 4,250 Energy intensity (kWh/t product) 158 166 1 Refers to facilities in Kiruna, Svappavaara, Malm- berget, Luleå, Narvik and electricity for ore trains. 1 Refers to facilities in Kiruna, Svappavaara, Malmberget, Luleå, Narvik and electricity for ore trains.

ENERGY CONSUMPTION LKAB MINERALS, OUTSIDE SWEDEN 2016 2015 Energy consumption (GWh) 39.0 38.1

48 | ENVIRONMENTAL RESPONSIBILITY LKAB ANNUAL AND SUSTAINABILITY REPORT 2016 LKAB’s pelletizing plant in Svappavaara. REDUCED EMISSIONS TO AIR Between 2012 and 2015 LKAB invested SEK 1.5 billion in flue gas scrubbing for the facilities in Malmberget and Svappavaara. In 2016 the flue gas scrubbing equipment was able to be fully utilized and this is clearly notice- able from the emissions levels measured. Emissions of sulphur dioxide decreased by more than 67 percent and hydrogen chloride emissions by around 76 percent compared with the previous year.

RESOURCE USE, WASTE & STOCKPILING DISCHARGES TO WATER

Most operational waste consists of types of rock that are not ore, Ore processing requires large amounts of water, even if 75 percent known as barren rock, which is deposited mainly in stockpiles. LKAB is reused in the process. Surplus water is returned to rivers and also handles smaller volumes of waste lime/purification waste, lakes, many of which are tributaries to or included in Natura 2000 scrap, industrial waste and hazardous waste. Crushed barren rock areas. Internal controls include biological and chemical measure- and waste lime are reused in our own concrete production for in- ments of water that is returned. Other water from production is led

creased resource utilization and to reduce stockpiles and waste. The to the municipal sewerage systems for treatment. One of LKAB’s AND IMPACT OPERATIONS risks identified in connection with waste management, in addition sustainability objectives is to reduce emissions of nitrogen to water to specific and controlled risks relating to hazardous waste such as by at least 20 percent per tonne of finished product by 2021 com- waste lime, are associated with the risk of collapse when stockpiling. pared with 2015.

MINED VOLUMES, INPUT GOODS AND BY-PRODUCTS DISCHARGES TO WATER1 2016 2015 2016 2015 Mined amounts Nitrogen (t) 501 515 Crude ore, magnetite and hematite (Mt) 49.4 47.0 Nitrogen (g/t product) 18.6 21.0 Huntite (kt)1 20 21 Phosphorus (kg) 660 615 Dolomite (kt) 89 123 Emissions of trace metals Input goods Chromium (kg) 2.4 3.0 Explosives (kt) 21.7 21.8 Cadmium (kg) 0.7 0.5 Concrete produced (103m3) 264 233 Copper (kg) 39.9 35.2 Additives (kt) 846 842 Nickel (kg) 96.9 128.0 By-products Lead (kg) 0.2 0.1 Barren rock (Mt) 25.4 27.6 Zinc (kg) 104.0 128.7 Tailings (Mt) 5.6 4.6 Arsenic (kg) 14.9 8.1 Waste lime (Mt) 0.069 0.053 TOTAL Trace metals (kg) 259.0 303.6

1 Provisional data for 2016, to be confirmed in April 2017. 1 The quantities are based on overflow water from ponds in Kiruna, Svappavaara and Malmberget.

LKAB ANNUAL AND SUSTAINABILITY REPORT 2016 ENVIRONMENTAL RESPONSIBILITY | 49 RISKS AND RISK MANAGEMENT

The Safety First! programme brings risk management into focus and emphasizes work to strengthen the safety culture.

All business operations involve risk. Within identified is being made clearer. The Chief LKAB, the company’s risks are identified Risk Officer coordinates the overall risk and measured before decisions are made work and is responsible for coordinating on how the risks are to be managed. The and informing Group management of the aim is to create a high level of awareness company’s risk exposure. of the risks inherent in the operations for The Board’s Audit Committee is responsi- the Group as a whole. ble for monitoring strategic and operational In 2016 LKAB’s organization was changed risk, as well as risks in the area of sustaina- and decision-making was decentralized. ble business. As a result, responsibility for the risks

50 | RISKS AND RISK MANAGEMENT LKAB ANNUAL AND SUSTAINABILITY REPORT 2016 STRATEGIC RISK

LKAB is exposed to a number of different risks that are difficult to influence. The ways that LKAB manages strategic risk include monitoring the outside world, analyzing scenarios, building long-term customer relationships and having a flexible customer and product portfolio.

RISK RISK MANAGEMENT Risk of not gaining access to land for mining operations

Delays in the process of obtaining permission to use the LKAB’s impact on the communities in the Swedish orefields means that LKAB must have access to the land land needed for continued mining operations entails a impacted by mining operations. Delays in the process could be caused by proceedings becoming drawn out, risk of LKAB having to reduce its rate of production or by incorrect prioritization or by property owners who oppose negotiated solutions. In order for the urban even stop parts of production. This would have a major transformation process to continue in the way required, LKAB has clear guidelines and a good working impact on LKAB’s earnings and cash flow. relationship with the parties concerned. Urban transformation is long-term work that is based on a broad sustainability perspective. Control and follow-up of LKAB’s impact on the land in the areas affected is necessary and takes place continually. There is also a preparedness to manage situations in which voluntary agreements cannot be reached.

Risks relating to environmental permits

LKAB conducts activities that require permits under Compliance with environmental requirements is of great importance in LKAB’s operations. The present the Minerals Act and the Environmental Code in the business cannot be conducted without environmental permits. The most extensive environmental permits Parent Company as well as in the Swedish subsidiaries. relate to large-scale mining and facilities for processing iron ore products. This includes, in particular, Violations of applicable environmental legislation could permits for tailings ponds and barren rock deposition, and for crushing, dressing and pellet production. result in criminal proceedings and enforcement actions. LKAB is forward-looking and uses long-term planning to ensure that the permits meet the needs of the Permits in force could also be affected. operations as regards both extent and flexibility. LKAB’s organization has been adapted so as to deal with essential permit matters in good time, based on what is needed for efficient production and the expected environmental requirements.

Customer dependency

The global iron ore and steel markets are made up of a To ensure long-term profitability and competitiveness LKAB strives to ensure that, regardless of economic small number of players. This concentration gives each fluctuations, it can always sell everything it produces. This is achieved through close, long-term customer individual player increased importance and results in relationships, technical partnerships and long-term delivery scheduling. By ensuring flexibility in product considerable interdependence between supplier and portfolios, in customer portfolios and in production and logistics systems, LKAB is better prepared to cope customer. Significant economic fluctuations that could with sudden fluctuations in the economy. LKAB always strives to consistently offer high-quality products cause problems for LKAB’s iron ore customers increase and reliable delivery in order to create a competitive advantage during downturns in the market. the risk of reduced sales volumes for LKAB. LKAB Minerals has a more diversified customer base and product portfolio that helps dampen economic fluctuations, since different geographical regions, segments and minerals have different economic cycles.

Political risk

The countries in which LKAB’s customers operate have Should LKAB’s customers be affected by one or more of these factors, this could have a negative impact on varying degrees of political and commercial stability. future demand for LKAB’s products. LKAB actively monitors the outside world in order to manage political Business risk may arise as a result of political decisions risk and cooperates with both national and international industry organizations in respect of these risks. or changes in the legislation and regulations that exist within the industry.

Capital expenditure risk

Due to the relatively long project periods for capital LKAB is a highly capital-intensive company. Capital expenditure on new main haulage levels or new pelletiz- expenditure such as expenditure on new main haulage ing plants, for example, requires planning around 5 to 10 years ahead. To manage the risks inherent in capital levels or new processing plants, there are risks includ- expenditure, risk assessment is included as part of the capital expenditure process. Strategic capital expendi- ing market risk, purchasing risk and the risk of techni- ture plans are produced annually and presented to Group management and the Board for decisions. cal change and changed environmental requirements.

Risk of insufficient mineral reserves

In order to secure LKAB enduring access to iron ore it is Mining relies on ore resources being utilized. Since the mid-1960s the underground mines in Kiruna and necessary to have a long-term plan, to mine under ex- Malmberget have been lowered in stages. Work is continuously under way to document the extent of the isting main haulage levels and/or to find new deposits deposits. through exploration. To obtain information concerning mining under existing main haulage levels and in new mines, a forward planning horizon of around 10 years is required before commissioning can take place.

Exploration work is conducted continuously in the surrounding area in order to find new deposits. LKAB GOVERNANCE CORPORATE has applied for and been granted several concessions for exploration in the Swedish orefields. Read more in the section on mineral reserves and mineral resources on pages 128–130.

LKAB ANNUAL AND SUSTAINABILITY REPORT 2016 RISKS AND RISK MANAGEMENT | 51 OPERATIONAL RISKS

Through its operations LKAB is exposed to a number of operational risks, including risks associated with production facilities, environmental impact and personnel. The main operational risks are described below.

RISK RISK MANAGEMENT Risk of accidents and illness

LKAB’s employees and contractors are periodically LKAB works systematically to secure the work environment and has well-established procedures to prevent exposed to risky situations which may involve a risk of illness and minimize the risk of future injuries. The Safety First! programme focuses on strengthening the accident and/or illness. safety culture in the company.

Risk of dam accidents

One risk scenario for LKAB and the mining industry in LKAB works proactively and systematically on dam safety according to the industry’s safety directive GruvRI- general is the risk of a dam accident with major finan- DAS. For damages to third parties caused by dam accidents, absolute and unlimited liability applies in Sweden. cial, social and environmental consequences. LKAB is insured through what is known as dam liability insurance.

Risk of environmental impact through emissions

Emissions to air, discharges to water and the LKAB systematically measures emission levels to check compliance with applicable environmental conditions generation of noise and waste, through accidents or and permits, and makes any improvements considered necessary. temporarily exceeded permit levels or other applicable Research and development are also carried out in order to comply with future laws and requirements. regulations, may adversely affect LKAB’s credibility and thus its ability to continue to run the business.

Risk of unplanned production stoppages

LKAB’s production largely consists of continuous Safe, uninterrupted production is LKAB’s backbone and is based on being large-scale with continuous optimi- processes in which unplanned stoppages can affect zation. The safety levels of all facilities are audited every year relative to LKAB’s requirements and stoppage production volumes, product quality, emissions to air, studies are conducted to determine the current level of risk. Active decisions on how the risk should be managed discharges to water and financial results. Production are taken based on the results. Historically, stoppages due to fire have resulted in the greatest economic losses, disruption may be due to factors such as technical so fire prevention efforts are a top priority. To safeguard against unforeseen events the Group’s facilities are problems, seismicity in the mines, accidents or strikes. insured. The largest single insurable risks relate to property and stoppages. To reduce the risk of major mining-induced seismic events there are rules on, among other things, firing salvos for production and development purposes. The mining sequences are controlled such that critical structures or weak zones are not overloaded. To reduce the risk of rockfalls due to mining-induced seismicity, rock reinforcement systems that are highly energy-absorbent and can therefore prevent rockfall are used. LKAB has made a risk- reducing investment in Narvik in the form of a new shiploader and quay to achieve redundancy. LKAB tries to avoid disruption due to strikes by being an attractive employer and maintaining ongoing dialogue with the unions.

Risk of uncompetitive production costs

LKAB’s major competitors mine their ore in open-pit LKAB’s competitiveness is strongly linked to the continuous improvements implemented to increase efficiency mines and therefore have considerably lower produc- in all the operations and to increase delivery volumes. In recent years LKAB has invested in increasing its pro- tion costs. duction capacity with a view both to allowing it to grow with its customers and to improving cost efficiency by distributing fixed costs across increased volumes, thereby reducing the cost per unit produced and delivered. To achieve a competitive cost level, LKAB also carries out structured long-term work involving cost efficiency measures in which identified potential is continually evaluated and implemented.

Risk of insufficient skilled workers

Being able to attract and retain employees is a very Young people in the labour market are willing to move, but mainly to areas that are considered attractive. LKAB important prerequisite for LKAB’s long-term competi- is therefore strongly committed to the development of the communities in the Swedish orefields so they remain tiveness. attractive, viable places to live. For example, LKAB provides a variety of support for the education of young people in the communities. This increases the possibility of recruiting persons with the necessary skills in the future.

Risk of deficits in the supply chain

Deficits in the supply chain could have a negative Risk analyses are performed continually in respect of both existing and potential suppliers. LKAB has developed impact on LKAB’s operations, reputation and financial its own tool for grading risk, the main pillars being risk associated with business ethics, the environment and hu- results. man rights. The risks are measured in relation to LKAB’s Supplier Code of Conduct. Based on this grading of risk, each year LKAB performs sustainability audits on a number of suppliers identified as being high risk. Vulnerability analyses within the supply chain are also carried out continually, in order to ensure that critical deliveries to LKAB can continue in the event of an interruption. This is done by means of alternative supply channels.

Risk of insufficient allocation of emission allowances

LKAB’s business is covered by the EU’s emissions trading LKAB is in dialogue with decision-makers in both Sweden and the EU concerning the future model for emission system (EU ETS) and LKAB has a free allocation of emission allowances. To meet the EU’s and Sweden’s long-term climate targets through the necessary investments in allowances in the current trading period, i.e., up until 2020. continued reductions in carbon emissions, the free allocation of emission allowances needs to continue. In a However, it is predicted that LKAB may need to supplement global perspective, LKAB’s magnetite ore involves a lower level of carbon emissions than, say, hematite ore, which its supply of emission allowances in 2017–2020. The free is used by many of its competitors. LKAB aims to reduce carbon emissions from the current level of 27 kg per allocation applies until the next trading period, which tonne of finished products to 17 kg by 2020. Through ongoing efficiency improvements LKAB is attempting to find begins in 2021. Should LKAB then lose its free allocation, more environmentally attractive alternative fuels to replace coal and oil. As a first step towards achieving entirely this would be a competitive disadvantage as compared with fossil-free production, trials are being conducted using natural gas which would later be replaced by biogas. competitors outside the EU’s emissions trading system.

52 | RISKS AND RISK MANAGEMENT LKAB ANNUAL AND SUSTAINABILITY REPORT 2016 FINANCIAL RISKS

LKAB’s financial risks are mainly associated with fluctuations in the global iron ore price and the USD/SEK exchange rate, but also with price risk in respect of raw materials and energy. Together, these factors could have a major negative impact on LKAB’s income statement, balance sheet and/or cash flow.

RISK RISK MANAGEMENT Price risk of iron ore products

Price volatility in the global iron ore market brings In 2016 the price risk for iron ore products and its effect on future cash flows were managed using the usual about substantial changes in LKAB’s earnings and cash hedging instruments within the framework of the finance policy. flows. The price of LKAB’s products is affected mainly In February 2017 a revised finance policy was adopted, in which the basic rule is that LKAB will not normally by the global price for iron ore and by pellet premiums. hedge price risk in the Group’s forecast iron ore sales. Some exceptions may be made; for example, prices The price of iron ore changes daily with trading, while may be hedged for individual commercial flows where a binding contract provides certainty. premiums are negotiated annually between LKAB and customers.

CHANGE IN IRON ORE PRICE 2012–2016

USD/tonne 200

150

100

50

0 2012 2013 2014 2015 2016 Source: The Steel Index, TSI (Platts)

Currency risk

LKAB is exposed to various types of currency risk. The main In 2016 transaction exposure in USD and its effect on future cash flows were managed using the usual hedging exposure stems from sales of iron ore where market pricing is instruments within the framework of the finance policy. in USD. This currency risk is called transaction exposure. In February 2017 a revised finance policy was adopted, in which the basic rule is that LKAB will not normally Currency risks are also found in the translation of foreign currency-hedge the Group’s forecast future cash flows. Outstanding accounts receivable are hedged, however. subsidiaries’ assets and liabilities to the Parent Company’s LKAB does not normally hedge its translation exposure. functional currency, known as translation exposure. The foreign subsidiaries within the Group operate mainly in their local currencies, and both investments and financing are mainly carried out in local currency in order to reduce translation exposure.

CHANGE IN EXCHANGE RATE 2012–2016

USD/SEK 10

9

8 CORPORATE GOVERNANCE CORPORATE

7

6 2012 2013 2014 2015 2016

Source: Bloomberg

LKAB ANNUAL AND SUSTAINABILITY REPORT 2016 RISKS AND RISK MANAGEMENT | 53 RISK RISK MANAGEMENT Price risk for commodities and energy

Commodity price risk refers to the change in the Electricity prices are hedged at indexed prices and through relevant financial contracts in the electricity price of input goods and its impact on earnings. It market for purchasing at a variable price. is mainly changes in energy prices that constitute a large commodity price risk for LKAB.

Interest rate risk

Interest rate risk refers to how the return on an LKAB’s cash and cash equivalents are allocated to three portfolios: interest-bearing asset or the interest expense on an • Liquidity portfolio interest-bearing liability is affected by a change in • Urban transformation portfolio interest rates. The level of interest rate risk is affect- • Pension portfolio ed by changes in interest rates and by the asset’s The finance policy governs the maximum average duration in each asset portfolio. The frameworks are set in sensitivity to interest rates. LKAB is mainly exposed relation to each portfolio’s commitments or purpose and in relation to a range of risk measures and restric- to interest rate risk with regard to short-term invest- tions. ments and cash and cash equivalents.

Credit risks

LKAB’s credit risks are primarily associated with The Group’s finance policy contains rules on rating new and existing customers from a credit risk perspective accounts receivable, derivatives and short-term as well as rules on other credit risks. investments.

Financing risk

Financing risk is the risk that LKAB cannot meet its The Group’s finance policy defines the Group’s financing needs, in the form of operating capital and needs commitments due to lack of liquidity or the inability caused by fluctuations in cash flow, planned expenditure for urban transformation commitments, pensions to raise external loans for operating activities. and remediation. Long-term financing is to cover these financing needs as a minimum.

LKAB has a centralized finance function that manages financial risks in line with the finance policy established by the Board of Directors. In February 2017 a revised finance policy was adopted. The Group’s aim is that financing activities will at all times support the business plan adopted and ensure that financial risks are identified, quantified and managed.

SENSITIVITY ANALYSIS

The following sensitivity analysis summarizes LKAB’s Iron ore price earnings sensitivity to a hypothetical change in vol- umes, prices and currencies. Changes in the SEK/USD Dollar rate exchange rate, market prices and delivery volumes Delivery volumes have the greatest impact on earnings. In the analysis, Costs the delivery and price analysis refers to the Parent 0 500 1 000 1 500 Company and the remaining factors to the entire Group.

SENSITIVITY ANALYSIS Effect on Effect on Exposure operating profit, Exposure operating profit, Group Change 2016 2016 (MSEK) 2015 2015 (MSEK) Iron ore price1 10% 14,715 1,463 14,494 1,445 Dollar rate1 10% 1,738 1,472 1,802 1,454 Delivery volume 10% 27.0 1,098 24.2 1,114 Costs2 10% 14,722 1,472 14,652 1,465

1 Not including effects of hedging 2 Excluding provisions for urban transformation and impairment of property, plant and equipment

54 | RISKS AND RISK MANAGEMENT LKAB ANNUAL AND SUSTAINABILITY REPORT 2016 GOVERNANCE AND CONTROL CORPORATE GOVERNANCE CORPORATE

LKAB ANNUAL AND SUSTAINABILITY REPORT 2016 55 CORPORATE GOVERNANCE REPORT

We must maximize the value that LKAB adds at all stages, while at the same time minimizing the negative impact of the business.

CHAIRMAN OF THE BOARD STEN JAKOBSSON: LKAB has had an intensive year, and it is pleasing to be able to state that the adaptation work begun in autumn 2015 is having results. We have seen good development towards higher volumes and greater cost efficiency.

In 2016 the Board focused primarily on LKAB is efficiently producing the volumes At the forefront of sustainability three major matters. Firstly, work to secure that the company has the capacity for and In 2016 the Board adopted new, more strin- a more production-focused organization that are profitable, it is time to establish the gent sustainability goals, which also focus and a strategy that aims to rapidly bring strategy for the longer term. more on what we consider to be the most about an improvement in LKAB’s profita- The market situation improved some- material aspects. bility and a return on investments made. what during the year, but iron ore prices LKAB must set an example. That also Another key issue was the urban trans- remain at a level which means that, as far applies in respect of safety work, where formation – and LKAB’s ability to continue as LKAB is concerned, taking the open- we need to do more to reduce the accident operating at all. In addition, sustainability pit mine in Mertainen into production is rate. Work to strengthen the safety culture continues to have a high priority at LKAB not worthwhile. At the end of the year we is an important part of the leadership and and the Board’s ambitions for this work therefore judged it necessary to write down employeeship initiative that is currently have been raised further. the value of Mertainen. under way in the organization. LKAB has a great responsibility to the New organization and strategy Urban transformation – a challenge community as regards the environment, Jan Moström was appointed as new CEO in During the year negotiations to secure and we have set ourselves more stringent autumn 2015, and under his leadership a access to land for continued mining have targets in order to bring down atmos- new Group structure was implemented as sometimes been tough, in both Gällivare pheric pollution and discharges to water. early as 1 January 2016, with decentralized and Kiruna. We are satisfied with the LKAB must also remain at the forefront of production divisions and major changes in important agreements reached during progress as regards energy efficiency. We Group management. the year, but for LKAB the costs will be see this as a duty, but also as a prerequisite The strategic work that was then carried a challenge. However, the alternative – for maintaining our position as a leading out during 2016 was aimed at increasing jeopardizing production – would hit both sustainable supplier of iron ore products. volumes as quickly as possible and im- the company and its operating locations The aim must be to maximize the value proving cost efficiency in order to achieve considerably harder. Our hope is, however, that LKAB adds at all stages, while at the a return on the major investments that that in future phases of the urban trans­ same time minimizing the negative impact LKAB has made over the past decade. We formation sustainable solutions will be of the business. are already seeing the results of this work, found more quickly. which is pleasing. Having ensured that

56 | CORPORATE GOVERNANCE REPORT LKAB ANNUAL AND SUSTAINABILITY REPORT 2016 CORPORATE GOVERNANCE STRUCTURE

LKAB’s owner, the Swedish state, is ultimately responsible for making decisions on corporate governance. At the Annual General Meeting the owner (shareholder) appoints Board members, the Chairman of the Board and an auditor. The Board is responsible to the sharehold- er for the company’s organization and the administration of its affairs. The diagram below summarizes how governance and control are organized at LKAB. The company functions are described in more detail on pages 58–63 of the corporate governance report.

BOARD AGM OWNER AUDITOR 2 NOMINATIONS 1 (THE STATE) 3

4 BOARD OF DIRECTORS

5 REMUNERATION COMMITTEE 6 FINANCE COMMITTEE 7 AUDIT COMMITTEE

Elects/Appoints 8 PRESIDENT Informs/Reports to

1 ANNUAL GENERAL MEETING 4 BOARD OF DIRECTORS The AGM is LKAB’s highest decision-making body and the forum at The Board of Directors is responsible for the company’s organiza- which the shareholder formally exercises its influence. At the AGM, tion and manages the company’s affairs on behalf of the owner. decisions are made that include adoption of the income statement The work of the Board includes continuously monitoring the and balance sheet, discharge from liability of the Board, election of company’s financial situation and ensuring that the company is Board members and auditor, the remuneration of Board members organized so that its bookkeeping, asset management and other and the auditor and guidelines for the remuneration of senior financial circumstances are controlled in a satisfactory manner. executives. The Board also appoints the President. Members of the Riksdag are entitled to attend LKAB’s AGM. The meeting is also open to the public. 5 REMUNERATION COMMITTEE The committee prepares decisions on the President’s terms of 2 BOARD NOMINATIONS employment and supports the President’s work on determining LKAB does not have a nomination committee. The preparation the salaries of senior executives. The committee also works on of decisions on the nomination of Board members instead takes succession planning. place through a Board nomination process in accordance with the 6 state’s ownership policy. The work is coordinated by the Ministry FINANCE COMMITTEE of Enterprise and Innovation. The committee prepares and monitors compliance with the See deviations from Code rules on page 58. company’s finance policy, including the company’s liquidity management, borrowing and hedging programmes for currency 3 AUDITOR (USD), electricity prices and iron ore prices. The auditor is responsible to the shareholder at the AGM and provides an audit report on the Annual Report and the Board’s 7 AUDIT COMMITTEE administration of the company. The committee oversees financial reporting by reviewing all The auditors regularly report verbally and in writing to the Audit critical accounting matters and other factors that could affect Committee on how the audit was conducted and on the auditor’s the quality of financial reporting content. assessment of order and control at the company. A summary of 8 PRESIDENT the annual audit is also submitted to the full Board. The President is appointed by the Board of Directors. Besides instructions from the Board, the President is subject to the Swedish Companies Act and various other laws and regulations relating to the company’s accounting, asset management and operational control.

LKAB ANNUAL AND SUSTAINABILITY REPORT 2016 CORPORATE GOVERNANCE REPORT | 57 GOVERNING POLICIES, GUIDELINES AND REGULATIONS

OWNER’S REQUIREMENTS MISSION, VISION, STRATEGY LKAB’S VALUES The basis for corporate governance at LKAB is Swedish legislation, the Swedish Corporate Governance Code (the Code), the state’s ownership policy and internal control documents. In the state’s ownership policy and guidelines for state-owned companies, which are determined annually, the government describes its mission and objectives, applicable frameworks and its position on important principles related to corporate governance in state-owned companies (see www.government.se).

Code of Conduct Forms the basis for how each person within the Group should act towards internal and external stake- holders. LKAB’s operations must be characterized by a high standard of business ethics and integrity.

Quality policy Environment and energy policy Communications policy LKAB shall exceed its customers’ current and LKAB has a responsibility to continually improve our LKAB shall provide employees, the world around it future expectations by involving everyone in energy performance and to prevent and minimize our and other stakeholders with a true picture of the continual improvement. We will work towards environmental impact. The goal is for operations to be company and its operations. zero defects in everything we do, and each sustainable in the long term. employee is responsible for the quality of his Human rights policy or her work. Staff policy LKAB shall effectively identify, respect and Staff and management shall help the business develop manage risks associated with direct and indirect Work environment policy by encouraging initiative taking, commitment and good infringements of human rights. LKAB workplaces shall be safe, secure and effort. We set clear requirements, provide constructive stimulating. All employees have a responsibili- feedback and continually develop skills. Insider policy ty for the safety of themselves and others, and LKAB shall manage insider information correctly must take responsibility accordingly. Finance policy and ensure that insider trading does not occur. All the Group’s financial risks shall be identified, reported and managed in accordance with instructions from the Board and executive management.

LKAB’s values ​​and policies are described in more detail on the website lkab.com.

DEVIATIONS FROM THE CODE The Swedish Corporate Governance Code (the Code) forms part of the state’s ownership policy. LKAB’s governance for the 2016 financial year deviates from the requirements contained in the Code on the following points:

Code rule Deviation and explanation/comment

ITEM 1.1 The purpose of this rule is to give shareholders the opportunity to prepare for the AGM in a timely manner Publication of information on and to have a matter included in the AGM notice. At wholly state-owned companies it is not necessary for shareholder’s right of initiative. this rule to be applied and therefore no information is published concerning the shareholder’s right of initiative.

ITEM 2 Due to its ownership structure, LKAB does not have a nomination committee. The Board nomination process The company shall have a nomination commit- follows the policies outlined in the state’s ownership policy and is coordinated by the Ministry of Enterprise tee that represents the company’s shareholders. and Innovation. Accordingly, the references to the nomination committee in items 1.2, 1.3, 4.6, 8.1 and 10.2 of the Code are not applicable.

ITEM 10.2 The provision is aimed primarily at protecting non-controlling shareholders in companies with dispersed The corporate governance report shall contain ownership. In companies that are wholly owned by the state, it is not necessary to apply this rule. information that indicates Board members are independent of major shareholders.

58 | CORPORATE GOVERNANCE REPORT LKAB ANNUAL AND SUSTAINABILITY REPORT 2016 SHAREHOLDERS AND ANNUAL GENERAL AUDITOR MEETING On behalf of the owner, the auditor independently reviews the SHAREHOLDERS management of the Board and President, as well as the company’s LKAB is wholly owned by the Swedish state, represented in the Annual Report and accounts. They also carry out a review of an government by the Ministry of Enterprise and Innovation. interim report. The election of auditors is decided at the AGM. The government exercises its ownership via an annually estab- Auditors of state-owned companies are appointed for a term of one lished ownership policy, nominations to the Board and published year. In the event that re-election of the auditor is being considered, reporting guidelines. The government’s requirement for trans- the auditor’s work is always evaluated. parency is fulfilled by direct owner representation on the Board. At the Annual General Meeting on 28 April 2016 Deloitte AB was Reports to the owner are key management tools for the continu- re-elected as auditor for a period of one year. Authorized Public ous monitoring and assessment of the companies. State-owned Accountant Peter Ekberg is the chief auditor. The remuneration companies should have at least the same level of transparency as paid to the auditor is specified in Note 7 on page 96 of the Annual listed companies. Report. The Board, via the Chairman, coordinates its views on issues of decisive importance with the owner’s representatives. Such issues include strategic changes to the company’s operations, major BOARD OF DIRECTORS acquisitions, mergers or disposals, as well as decisions affecting significant changes to the company’s risk profile or balance sheet. COMPOSITION AND DIVISION OF DUTIES OF THE BOARD OF DIRECTORS ANNUAL GENERAL MEETING 2016 LKAB’s Articles of Association state that the company’s Board of LKAB’s Annual General Meeting took place on 28 April 2016 at Directors shall consist of no fewer than six and no more than elev- Vetenskapens Hus in Luleå. The meeting was open to the public, en AGM-elected members, excluding deputies. The Board consists who were given the opportunity to ask questions of the Board and of eight AGM-elected members. Employees are represented by management. The AGM was attended by about 80 people. The own- three members and three deputies in accordance with the Board er was represented by Erik Tranaeus of the Ministry of Enterprise Representation (Private Sector Employees) Act. Board members and Innovation. Chairman of the meeting was Board Chairman Sten have broad and extensive business experience and most maintain Jakobsson. The following decisions were made at the meeting: other duties as Board members of large companies. The Board’s • No dividend for the 2015 financial year. composition is shown in the presentation of the Board on pages • Re-election of Board members Leif Darner, Eva Hamilton, 64–65. Maija-Liisa Friman, Lars-Åke Helgesson, Sten Jakobsson and The Board annually establishes rules of procedure for the Board, Hanna Lagercrantz. Election of new Board members Bjarne instructions to the President and instructions for financial report- Moltke Hansen and Ola Salmén. ing. These documents define the basic divisions of responsibility • Re-election of Sten Jakobsson as Chairman of the Board. and powers between the Board, Board committees, the Chairman • Remuneration of SEK 615,000 to the Chairman of the Board and the President. and SEK 270,000 to the other Board members elected at the AGM. Remuneration is not paid to Board members who are CHAIRMAN OF THE BOARD employed at the Government Offices, nor to employee repre- The duties of the Chairman are subject to the Swedish Companies sentatives. Act, the Code and the ownership policy. They are further specified • Re-election of the registered public accounting firm Deloitte AB in the Board’s rules of procedure. The Chairman’s duties include or- as auditor for a period of one year. ganising and leading the work of the Board, ensuring that the Board • Guidelines for remuneration and other terms of employment fulfils its duties and that its decisions are implemented effectively, for senior executives. and that the Board evaluates its own work annually. The minutes of the 2016 AGM and other recent years are available Coordination responsibility is a special task assigned to the at LKAB’s website, lkab.com. chairpersons of state-owned companies. This responsibility means that the Board, through the Chairman, must coordinate its views BOARD NOMINATIONS with representatives of the owner when the company faces impor- Instead of having a nomination committee, the election of Board tant decisions or strategic changes to the company’s operation. members is prepared in accordance with the state’s ownership policy. The work is coordinated by the Ministry of Enterprise and THE WORK OF THE BOARD OF DIRECTORS IN 2016 Innovation. LKAB’s expertise requirements are analyzed based During the year the Board held nine meetings, including two on the company’s operations, situation and future challenges. telephone meetings and one constituent Board meeting. The Consideration is also given to the need for qualifications as regards meetings were held at the operating sites in Luleå, Malmberget and sustainability issues. In order to be considered for a Board position, Narvik, as well as in . The Board also made a collective a person must have a high level of expertise relevant to current visit to SSAB in Oxelösund in November 2016. business operations, business development, industry expertise, The meetings follow a set agenda to ensure the Board’s informa- financial issues or other relevant areas. They must also have a high tion needs are met. The first meeting is usually an annual accounts level of integrity and the ability to act in the best interests of the session attended by the auditor. At this meeting, the Board deliber- company. ates with the company’s auditors without the presence of the Presi-

LKAB ANNUAL AND SUSTAINABILITY REPORT 2016 CORPORATE GOVERNANCE REPORT | 59 dent or others from executive management. The Annual Report adoption of an updated strategic plan for the Group. During the year is discussed at the second Board meeting. The third to seventh the Board adopted a new policy on human rights and a new insider meetings are devoted to matters such as operational, strategic and policy. In September 2016 the Board also approved the new Code of personnel issues, as well as market trends. At the last Board meet- Conduct, which is available in six languages. ing of the year, decisions are made on budgets and the business Deputies to employee representatives participate in Board plan for the coming year. meetings. The President is not a Board member, but participates LKAB’s sustainability strategy and Code of Conduct form a basis in Board meetings. Board member attendance at 2016 Board and for work on sustainable development. In 2016 the Board adopted committee meetings is shown on pages 64–65. new goals for economic, social and environmental sustainability. The goals have been reworded and the number of goals has been COMMITTEES reduced from twelve to seven, with the aim of creating better focus. According to the state’s ownership policy, it is the Board’s respon- Sustainability objectives are monitored, with reporting to the Board sibility to assess the need for establishing special committees. and owner on a quarterly basis. LKAB’s Board has an Audit Committee, a Finance Committee and a In 2016 the Board’s work was characterized by the market situa- Remuneration Committee. Committee work is mainly of a pre- tion that LKAB finds itself in, with significantly lower iron ore prices paratory and advisory nature. However, in special cases the Board and oversupply of iron ore on the world market. Other important may delegate decision-making powers to committees. Committee matters on the Board’s agenda were the urban transformation in members and chairpersons are appointed at the constituent Board the Swedish orefields, ongoing cost efficiency programmes and the meeting that follows the AGM each year.

December: Decisions on business plan and budgets for 2017. Decision not to take the open-pit mine in Mertainen into production and to write down the value of February: LKAB’s assets by MSEK 1,192 as a Adoption of the year-end report. consequence. Review of assessment of the Review of 2015 audit. Discussions Board of Directors and of the President for 2016. between Board and auditors without management being present. November: Matters relating to the Annual Board trip to Oxelösund, including General Meeting. study visit and meeting with C JAN DE SSAB management.

FE October: V B O N Adoption of interim report March: for Q3. Decision on

compensation to the Approval of Annual and M

Municipality of Gällivare A Sustainability Report.

T R for premises for municipal C

O

operations in Malmberget.

S

September: April: E R

Appraisal of current P Adoption of interim report

P

A policies and governing for Q1. Annual General

documents. Adoption of Meeting. new policy on human rights Statutory Board meeting. and new insider policy. A U Y G A M

JUL N August: JU Adoption of interim report for Q2. June: Decisions on updated strategy and new sus- tainability goals.

60 | CORPORATE GOVERNANCE REPORT LKAB ANNUAL AND SUSTAINABILITY REPORT 2016 Audit Committee ASSESSMENT The Audit Committee has four members: chairman Lars-Åke Hel- gesson, Hanna Lagercrantz, Ola Salmén and Stefan Fagerkull. The ASSESSMENT OF THE BOARD OF DIRECTORS President and the CFO also attend the meetings. The committee The Board’s work is assessed once a year with questions on how is tasked with quality assurance of LKAB’s financial reporting and the Board as a whole and the Board members individually fulfil with ensuring that the company has appropriate risk management their duties. The assessment is used in the Board’s internal work. and complies with established principles for financial reporting The Chairman is responsible for following up the results so that and internal control, that LKAB undergoes a qualified, effective and they can form a basis for discussions and improvements. In 2016 independent audit and with preparing the Board’s proposed ap- the assessment took the form of a questionnaire. propriation of profits for the financial year. In 2016 the committee The results and analysis of the assessment were presented to also worked on, among other things, a number of different matters the entire Board as well as to the President, where appropriate. linked with the urban transformation in Kiruna and Malmberget, The Chairman of the Board notifies the owner of the results of the as well as the Group’s new consolidation structure with reporting assessment before the election of new Board members. in three divisions: Northern Division, Southern Division and Special Products Division. ASSESSMENT OF THE PRESIDENT In the course of the year the Audit Committee held six meetings. The assessment of the President is a fundamental task of the Board of Directors. The Board continually assesses the President’s Finance Committee work and has regular deliberations at Board meetings without the The Finance Committee has four members: chairman Ola Salmén, presence of executive management. In 2016 the assessment took Lars-Åke Helgesson, Hanna Lagercrantz and Stefan Fagerkull. the form of a questionnaire. The President, CFO and company treasurer also attend the meet- The results and analysis of the assessment were presented to the ings. entire Board as well as to the President. The Finance Committee’s duties include preparing and moni- toring that LKAB’s liquidity management, financing and hedging activities for currency (USD), iron ore prices and electricity prices REMUNERATION POLICIES comply with the finance policy passed by the Board, and otherwise preparing financial matters that require Board approval. In 2016 GUIDELINES the Finance Committee worked on matters such as an update of The 2016 AGM decided on remuneration levels for Board members LKAB’s finance policy, the Group’s hedging strategy and credit and auditors and on guidelines for the remuneration of senior exposure. executives. For the remuneration of Group management, the AGM The committee held five meetings during the year. decided that the government’s currently applicable guidelines regarding employment terms for senior executives at state-owned Remuneration Committee companies are to be applied. Total remuneration is based on fixed The Remuneration Committee has four members: chairman Sten remuneration, benefits and pension. No variable remuneration is Jakobsson, Lars-Åke Helgesson, Hanna Lagercrantz and Tomas paid to senior executives in Group management. Strömberg. The Senior Vice President of Human Resources also Note 6 on pages 94–96 of the Annual Report describes the attends the meetings. guidelines for remuneration of senior executives and the related The Remuneration Committee’s duties include preparing and outcomes. evaluating remuneration terms for the President, establishing salary structure policies for members of Group management and INCENTIVE PROGRAMME AND OBJECTIVES annually evaluating the company’s employee incentive programme. LKAB’s incentive programme for Group employees is designed to In 2016, the Committee also worked on LKAB’s succession planning support the Group’s strategic objectives for production volume, and talent management programmes in order to ensure that key health and safety, product quality and production cost. In the past positions within the company can be filled by competent employees two years, 2015 and 2016, no incentive payments have been made in the future. to the Group’s employees. The incentive programme is described in The Remuneration Committee held one meeting during the year. more detail in the section on Employees, page 39.

REMUNERATION TO THE BOARD OF DIRECTORS Total fees to the Board members elected by the AGM amount to SEK 2,320,000 in 2016. See Note 6 on pages 94–96.

LKAB ANNUAL AND SUSTAINABILITY REPORT 2016 CORPORATE GOVERNANCE REPORT | 61 LKAB’S MANAGEMENT INTERNAL CONTROL OVER FINANCIAL REPORTING GROUP MANAGEMENT AND GROUP MANAGEMENT STRUCTURE The Board’s responsibility for internal governance and control is The President, who is also the Chief Executive Officer of the LKAB regulated by the Swedish Companies Act, Annual Accounts Act Group, is responsible for day-to-day management in accordance and Corporate Governance Code. The Board has overall respon- with the Swedish Companies Act. General responsibilities are sibility for financial reporting, and its rules of procedure govern stated in the President’s instructions and the Board’s rules of the internal division of duties of the Board and Audit Committee. procedure. After preparation by the Audit Committee, quality assurance of Since 1 January 2016 LKAB has had an new organizational the company’s financial reporting is handled by the Board, which structure in which the operations are split into three divisions: deals with significant accounting issues and the financial reports Northern Division, Southern Division and Special Products Division. issued by the company. The Board also deals with issues relating Northern Division comprises the mine and processing plant in to internal control, compliance, material uncertainty in carrying Kiruna, while Southern Division consists of mines and processing amounts, uncorrected errors, events after the end of the report- plants in Malmberget and Svappavaara. The Special Products ing period, changes to estimates and assessments, any identified Division comprises the subsidiaries LKAB Minerals, which produces irregularities and other circumstances that affect the quality of the and sells industrial minerals, and the drilling technology company financial reports. LKAB Wassara. To support the divisions there are Group func- tions for Finance, HR and Sustainability, Operational Support and CONTROL ENVIRONMENT Business Development, Sales and Logistics, Communications and LKAB’s internal control structure is based on a defined division Community Contacts, and Urban Transformation. of responsibilities between the Board, Board committees and the Governance of the major subsidiaries is through the companies President. The internal control structure is also based on the com- being part of a division or unit, with Group management members pany’s organization and the way business is conducted, including chairing the subsidiaries’ boards. The subsidiaries run their busi- well-defined roles and responsibilities, delegation of powers, nesses independently in accordance with the company’s mission in steering documents such as policies, and clearly defined planning the Group, as formulated in the Articles of Association. and support processes. Responsibility and authority within the Group are assigned to The most important elements of the control environment for individual executives, rather than to teams and committees. financial reporting, including the preparation of the consolidated Information on the members of the Group management can be accounts, are dealt with in Group-wide steering documents relating found on pages 66–67. to accounting, financial transactions and regulation of division of authority. The purpose of Group-wide guidelines and systems for reporting and consolidation of the Group accounts is to safeguard the financial reporting and ensure the accuracy of the consolidated accounts.

RISK ASSESSMENT As part of internal governance and control, risks related to financial reporting are identified. Risk assessments are conducted contin- ually for the most important processes in order to manage and minimize these risks. A number of higher risk areas for financial reporting were identified, such as in respect of accounting and tax issues linked to the urban transformation in the Swedish orefields and the large number of ongoing capital expenditure projects. Other more general risks are loss or misappropriation of assets and other significant errors in the company’s reporting, such as accounting and measurement of balance sheet items, completeness of income statement items or deviation from disclosure requirements.

62 | CORPORATE GOVERNANCE REPORT LKAB ANNUAL AND SUSTAINABILITY REPORT 2016 CONTROL ACTIVITIES FOLLOW-UP Key elements of LKAB’s control structure include control of busi- Alone, or with the support of external resources, the Group-wide ness transaction approval (authorization instructions), division of controller function conducts audit activities relating to the business authority descriptions and annual accounts instructions. There processes that are deemed to have a material impact on financial are also controls relating to the annual accounts process and the reporting. processes for interim results and the Annual Report that deal A plan for internal control activities is prepared annually by the with more unique risks of errors that may occur in the financial Group-wide controller function. In 2016 the focus was on fol- reporting. low-up of prioritized internal processes, including the decision and The Group’s legal entities that conduct business have financial procurement processes for capital expenditure projects and the managers, while reporting units have controllers. acquisition process within the urban transformation. The results These participate in the analysis of earnings by subsidiaries and of the completed reviews are summarized in review reports and the reporting entities. The analyses cover assets, liabilities, income, feedback is given to the operations concerned. Compliance with expenses and cash flows. For the urban transformation and for measures specified following the completion of reviews is followed strategic capital expenditure projects there are also designated up regularly by the Group-wide controller function. controller resources that monitor, analyze, make forecasts and examine specific issues relating to the financial information. LKAB INTERNAL AUDIT uses a Group-wide consolidation system for the preparation of its The structure for monitoring internal control that currently exists at consolidated accounts where the companies’ CFOs/controllers are LKAB is deemed to meet the Board’s requirements, and conse- responsible for the accuracy of the financial information reported. quently no separate internal audit function has been established. Together with the comprehensive analysis performed at Group The decision on internal audits is reconsidered annually by the level, the aim is to limit the risk of material misstatement in the Board. financial reporting.

Luleå, 21 March 2017 INFORMATION AND COMMUNICATION The Board of Directors, through the Chairman Information on governing documents such as policies, guidelines and procedures are available on the LKAB intranet. Changes to guidelines for financial reporting are updated regularly and com- municated to the departments and operations concerned by email, via the intranet and at meetings. Sten Jakobsson There is a communications policy for communication with exter- nal parties that specifies guidelines for how information should be presented. The purpose of the policy is to ensure that all infor- mation obligations are met in an accurate and complete manner. External financial communications are issued through Annual Reports, interim reports, year-end reports, press releases and via lkab.com.

LKAB ANNUAL AND SUSTAINABILITY REPORT 2016 CORPORATE GOVERNANCE REPORT | 63 BOARD OF DIRECTORS

STEN JAKOBSSON / CHAIRMAN LEIF DARNER MAIJA-LIISA FRIMAN EVA HAMILTON Position Director Position Director Position Director Position Director Education MSc Engineering Education MSc Business and Economics, School Education MSc Chemical Engineering, Helsinki Education Dag Hammarskiöld College, Year elected 2012, Chairman since 2014 of Economics, Gothenburg, Masters in Business University of Technology Economics, University of Uppsala 1974, Administration, University of Gothenburg. Bachelor’s Programme in Journalism, Stockholm Born 1949 Year elected 2008 Year elected 2015 University 1976 Other directorships Chairman of the Board Born 1952 Year elected 2015 at Power Wind Partners AB. Board Member at Born 1952 Other directorships Chairman of the Board at Saab AB, Stena Metall AB, FLSmidth A/S and Other directorships Board member at Flows- Helsinki Deaconess Institute. Deputy Chairman at Born 1954 Xylem Inc. erve Corporation Dallas US, I-Tech AB and Vicore Neste Oyj. Board member at Svenska Cellulosa Other directorships Chairman of the Board at Background President and CEO at ABB Sweden, Pharma Holding AB. Aktiebolaget SCA, Finnair Oy, Boardman Oy and Nexiko Media AB. Board member at Fortum Oyj, Deputy CEO at Asea Brown Boveri AB Sweden, Background Executive Board Member, AkzoNobel Värdepappersmarknadsföreningen, Finland. AB Lindex, Kungliga Dramatiska Teatern AB and Business Area Manager for Business Area Amsterdam NL. Responsible for Performance Background CEO at Aspocomp Group Oyj 2 EGroup AB. Chairman of the Business Cables, CEO at ABB Cables AB, CEO at Asea Coatings 2008–2013 and for Chemicals 2004–2008. 2004–2007, CEO Vattenfall Oy 2000–2004, CEO Executives Council at the Royal Swedish Cylinda, Production Manager at Asea Low Managing Director Business Unit Marine & Protec- Gyproc Oy 1993–2000, various managerial Academy of Engineering Sciences (IVA) and Voltage Division, Asea central staff – Production, tive Coatings, AkzoNobel London UK 1999–2004. positions at Kemira Oyj in Finland, Mexico and member of the Academy’s Executive Committee. Asea trainee. Director Worldwide Yacht & Protective Coatings, the US 1978–1993. Board member at the Nobel Center Committee. Remuneration SEK 615,000 Courtaulds plc London UK 1997–1999. Chief Remuneration SEK 270,000 Background CEO at SVT 2006–2014. Head of Executive Coatings Northern Europe, Courtaulds SVT Fiction 2004–2006. Head of SVT News and Board meeting attendance 9 of 9 meetings. Board meeting attendance 7 of 9 meetings. plc Gothenburg 1993–1997. Chief Executive Sport 2000–2004. Journalist at Sydsvenska Remuneration Committee attendance 1 of 1 Protective Coatings Europe, Courtaulds plc Dagbladet, Sundsvalls Tidning, Aftonbladet, meeting. London UK 1991–1993. Managing Director of SvD, Dagens Industri and Rapport/SVT. International Färg AB, Gothenburg 1987–1991. Remuneration SEK 270,000 Remuneration SEK 270,000 Board meeting attendance 9 of 9 meetings. Board meeting attendance 9 of 9 meetings.

LARS-ÅKE HELGESSON HANNA LAGERCRANTZ BJARNE MOLTKE HANSEN OLA SALMÉN Position Director Position Deputy Director, Ministry of Enterprise Position Group Executive Vice President Position Director Education Graduate engineer, MBA, School of and Innovation (Koncerndirektør), Product Companies Division, Education MSc Business and Economics, Economics, Gothenburg. Education MSc Business and Economics, Stock- FLSmidth & Co. A/S Stockholm University Year elected 2000 holm School of Economics, MPhil in Economics, Education BSc Engineering Year elected 2016 Cambridge University Born 1941 Year elected 2016 Born 1954 Year elected 2010 Other directorships Chairman of the Board Born 1961 Other directorships Board member at Lernia at Translink Holding AB. Board member at Axel Born 1970 Other directorships Deputy Chairman at RMIG AB, Svevia AB and Eniro AB. Christiernsson International AB, STS Holding AB Other directorships Board member at Svenska A/S. Board member at BWSC A/S. Background CFO Sandvik AB, CFO Vin & Sprit and Crane Inc., Dalton MA, USA. Rymdaktiebolaget and Swedfund International AB. Background Within the FLSmidth & Co. A/S AB and CFO Adcore AB. Finance Director Han- Background President and CEO at Haldex 1981– Background Corporate Finance at S.G. Warburg, group since 1984: previously Group Executive delsbanken Markets. Senior positions in finance 1988, Division Manager at Stora 1988–1992, UBS, Brunswick-Warburg 1994–1998. Market an- Vice President, Customer Services Division, and controlling within the groups Swedish Match President and CEO of Stora 1992–1998. alyst and Investor Relations at SEB 1999–2008. FLSmidth 2002–2015, President Aalborg Port- and Stora. Remuneration SEK 350,000 Swedish Government Offices since 2008. land Holding A/S 2000–2002, President Cembrit Remuneration SEK 330,000 Holding A/S 1992–2000, various managerial Board meeting attendance 8 of 9 meetings. Remuneration SEK 0 Board meeting attendance 6 of 9 meetings.1 positions at Unicon A/S 1984–1995. Audit Committee attendance 6 of 6 meetings. Board meeting attendance 9 of 9 meetings. Audit Committee attendance 3 of 6 meetings. 1 Remuneration SEK 270,000 Finance Committee attendance 5 of 5 meetings. Audit Committee attendance 6 of 6 meetings. Finance Committee attendance 3 of 5 meetings. Board meeting attendance 5 of 9 meetings.1 Remuneration Committee attendance 1 of 1 Finance Committee attendance 5 of 5 meetings. 1 meeting. 1 of 1 1 Joined the Board after the 2016 AGM. Remuneration Committee attendance 1 Joined the Board after the 2016 AGM. meeting.

64 | BOARD OF DIRECTORS LKAB ANNUAL AND SUSTAINABILITY REPORT 2016 THE BOARD’S EMPLOYEE REPRESENTATIVES FULL/DEPUTIES

AUDITOR AND SECRETARY

AUDITOR

Deloitte AB Peter Ekberg Authorized Public Accountant

SECRETARY

Malin Sundvall Legal Director, LKAB Secretary of the Board since 2008 JAN THELIN / FULL MEMBER TOMAS STRÖMBERG / FULL MEMBER STEFAN FAGERKULL / FULL MEMBER Position Welder Position Ore developer Position Project manager Education Trained international welding Education Secondary education Education Engineer, Mining and Civil Engineer- specialist Year elected 2011 ing, Bergsskolan Filipstad Year elected 2010 Born 1967 Year elected 2011 CHANGES TO THE BOARD OF Born 1955 Other directorships Chairman of the union Born 1963 Other directorships Chairman of the union club Gruv 4:an, IF Metall Malmfälten. Other directorships Board member of the DIRECTORS club Gruv 12:an in Kiruna, IF Metall Malmfälten. Background Employee at LKAB since 1987. union club Ledarna in Kiruna. Board member at LKAB Fastigheter AB. Ola Salmén Remuneration SEK 0 Background Employee at LKAB 1987–1989 and Background Employee at LKAB 1974–1977 and since 1995. Studies and UN service 1989–1995. Joined the Board after the 2016 AGM Board meeting attendance 9 of 9 meetings. since 1995. Employed by various engineering Remuneration SEK 0 firms 1977–1995. Remuneration Committee attendance 1 of 1 Bjarne Moltke Hansen meeting. Board meeting attendance 9 of 9 meetings. Remuneration SEK 0 Joined the Board after the 2016 AGM Audit Committee attendance 6 of 6 meetings. Board meeting attendance 9 of 9 meetings. Finance Committee attendance 5 of 5 meetings.

PENTTI RAHKONEN / DEPUTY TOMMY WETTAINEN / DEPUTY DAN HALLBERG / DEPUTY Position Process operator Position Plant electrician Position R&D specialist Education Secondary education, Education Authorized electrician, secondary Education BSc Chemical Engineering, Luleå training education, board training University of Technology Year elected 2010 Year elected 2016 Year elected 2014 Born 1965 Born 1988 Born 1965 Other directorshipsChairman of the union club Other directorships Chairman, IF Metall Other directorships Board member of the Gruv 135:an, IF Metall Malmfälten. Board mem- Svartöstaden. Board member at the Mine Work- union club Unionen for Luleå & Malmberget. ber at the Mine Workers’ Industry Forum. ers’ Industry Forum. Board member of PRISMA (Centre for Process Background Employee at LKAB since 1987. Background Employee at LKAB since 2008. Integration in Steelmaking). Remuneration SEK 0 Remuneration SEK 0 Background Employee at LKAB since 1990. Board meeting attendance 9 of 9 meetings. Board meeting attendance 6 of 9 meetings.1 Remuneration SEK 0 Board meeting attendance 9 of 9 meetings. 1 Joined the Board after the 2016 AGM.

LKAB ANNUAL AND SUSTAINABILITY REPORT 2016 BOARD OF DIRECTORS | 65 GROUP MANAGEMENT

JAN MOSTRÖM MAGNUS ARNKVIST LEIF BOSTRÖM PETER HANSSON Position President and CEO 1 Position Senior Vice President, Southern Division Position Senior Vice President, Special Products Position Senior Vice President, Finance Education Mining Engineer, Bergsskolan Education Mining Engineer, Bergsskolan Education MSc Business Economics, Luleå Education MSc Business Economics, Luleå Filipstad, 1983 Filipstad, 1994 University of Technology, 1990 University of Technology, 2000 Year employed 2015 Year employed 2016 Year employed 1992 Year employed 2016 Born 1959 Born 1967 Born 1959 Born 1970 Other engagements Board member at SveMin Background Bergteamet AB 2013–2015, Kiruna Other engagements Board member at Inland- Background Boliden Mineral AB 2002–2015, (industry association of mining, mineral and metal Iron 2012–2013, Boliden Tara Mines 2008–2012, sinnovation and EuroMin. Riksskatteverket (National Tax Board) producers) and GAF (the Association of Mining Rapallo Pty Ltd 2006–2007, Boliden Mineral AB Background NCC 1980–1992. 2000–2002, Skatteverket (Swedish Tax Agency) Employers), member of the Advisory Council at 2001–2006, Bergteamet AB 2000–2001, Boliden- 1991–2000. Remuneration See Note 6, pages 94–96. SGU (the Geological Survey of Sweden), deputy Mineral AB 1989–2000. Remuneration See Note 6, pages 94–96. board member at Svenskt Näringsliv (the Con- Remuneration See Note 6, pages 94–96. federation of Swedish Enterprise). Background Boliden 2000–2015, Skellefteå municipality 1998–2000, Boliden 1979–1998 Remuneration See Note 6, pages 94–96. 1 Neither the CEO nor any natural person or legal entity related to him has significant sharehold- ings or partnerships in companies with which LKAB has substantial business relationships.

MARKUS PETÄJÄNIEMI STEFAN ROMEDAHL GRETE SOLVANG STOLTZ ÅSA SUNDQVIST Position Senior Vice President, Sales and Position Senior Vice President, Northern Division Position Senior Vice President, HR and Position Senior Vice President, Operational Logistics Education MSc Engineering, Luleå University of Sustainability Support and Business Development Education MSc Urban Planning and Envi- Technology, 1994 Education MSc Business Economics, Luleå Education Licentiate in Engineering (1993) and ronmental Engineering, Luleå University of Year employed 2016 University of Technology, 1993 PhD (1996) Water Engineering, Luleå Univer- sity of Technology; MSc Urban Planning and Technology, 1985; Born 1967 Year employed 2009 Mechanical engineering (4-year technical Environmental Engineering, Luleå University of Born 1970 course), 1979 Background Boliden Tara Mines 2013–2016, Technology, 1987 SKB 2010–2013, RTC Nordic Rock Tech Centre Other engagements Chairman of the Board at Year employed 2005 Year employed 2000 AB 2009–2010, Rio Tinto/Lundin Mining Group Career Centre, Luleå University of Technology, Born 1959 (Zinkgruvan Mining AB) 2003–2009, Boliden board member at SveMin and GAF (the Associa- Born 1962 Background Sema/Schlumberger/Atos/WMdata Group 1994–2003. tion of Mining Employers). Background Expandum, Gällivare 2001–2003, 1996–2005, De-Icing Systems/Kiruna Industrial Remuneration See Note 6, pages 94–96. Background LKAB 1993–1995, SCA 1995–2008, NAB Industrikonsult AB/SWECO Industriteknik Systems 1995–1996, Kiruna Värmeverk och Northland Resources 2008–2009. AB 1996–2000, Luleå University of Technology Renhållning 1988–1995, NAB (now Sweco) 1990–1996, NAB Arkitekter & Ingenjörer 1989– Remuneration See Note 6, pages 94–96. 1985–1988. 1991, Scandiaconsult VA-Teknik 1987–1989. Remuneration See Note 6, pages 94–96. Remuneration See Note 6, pages 94–96.

66 | GROUP MANAGEMENT LKAB ANNUAL AND SUSTAINABILITY REPORT 2016 AUDITOR’S STATEMENT ON THE CORPORATE GOVERNANCE REPORT

To the Annual General Meeting of the shareholders of Luossavaara-Kiirunavaara AB (publ), corporate identity number 556001-5835

ENGAGEMENT AND RESPONSIBILITY OPINIONS It is the Board of Directors who is responsible for the corporate A corporate governance statement has been prepared. Disclosures governance statement for the year 2016 on pages 56–66 and that it in accordance with chapter 6 section 6 second paragraph points has been prepared in accordance with the Annual Accounts Act. 2–6 of the Annual Accounts Act and chapter 7 section 31 second paragraph of the same law are consistent with the annual accounts THE SCOPE OF THE AUDIT and the consolidated accounts and are in accordance with the Our examination has been conducted in accordance with FAR’s Annual Accounts Act. auditing standard RevU 16 The auditor’s examination of the corporate governance statement. This means that our examination Stockholm, 21 March 2017 of the corporate governance statement is different and substantial- ly less in scope than an audit conducted in accordance with Deloitte AB International Standards on Auditing and generally accepted auditing standards in Sweden. We believe that the examination has provided us with sufficient basis for our opinions.

Peter Ekberg Authorized Public Accountant

LKAB ANNUAL AND SUSTAINABILITY REPORT 2016 AUDITOR’S STATEMENT | 67 AUDITOR’S LIMITED ASSURANCE REPORT ON THE SUSTAINABILITY REPORT

To Luossavaara-Kiirunavaara AB (publ)

INTRODUCTION Standard on Quality Control) and accordingly maintains a compre- We have been engaged by the Board of Directors of Luossavaara- hensive system of quality control including documented policies Kiirunavaara AB (“LKAB”) to undertake a limited assurance and procedures regarding compliance with professional ethical engagement of LKAB’s Sustainability Report for the year 2016. requirements, professional standards and applicable legal and The company has defined the scope of the Sustainability Report regulatory requirements. The procedures performed consequently in conjunction with the table of contents on page 1. do not enable us to obtain assurance that we would become aware of all significant matters that might be identified in a reasonable RESPONSIBILITIES OF THE BOARD OF DIRECTORS AND THE assurance engagement. Accordingly, we do not express a reasona- EXECUTIVE MANAGEMENT FOR THE SUSTAINABILITY REPORT ble assurance conclusion. The Board of Directors and the Executive Management are respon- Our procedures are based on the criteria defined by the Board sible for the preparation of the Sustainability Report in accordance of Directors and the Executive Management as described above. with the applicable criteria, which are explained on pages 70–71 We consider these criteria suitable for the preparation of the of the Sustainability Report and are the parts of the Sustainability Sustainability Report. Reporting Guidelines (published by the Global Reporting Initiative We believe that the evidence we have obtained is sufficient (GRI)) which are applicable to the Sustainability Report, as well as and appropriate to provide a basis for our conclusion below. the accounting and calculation principles that the Company has developed. This responsibility also includes the internal control CONCLUSION relevant to the preparation of a Sustainability Report that is free Based on the limited assurance procedures we have performed, from material misstatements, whether due to fraud or error. nothing has come to our attention that causes us to believe that the Sustainability Report is not prepared, in all material respects, RESPONSIBILITIES OF THE AUDITOR in accordance with the criteria defined by the Board of Directors Our responsibility is to express a conclusion on the Sustainabil- and Executive Management. ity Report based on the limited assurance procedures we have performed. We conducted our limited assurance engagement in accordance with RevR 6 Assurance of Sustainability Reports issued by FAR. Stockholm, 21 March 2017 A limited assurance engagement consists of making inquiries, Deloitte AB primarily of persons responsible for the preparation of the Sustain- ability Report, and applying analytical and other limited assurance procedures. The procedures performed in a limited assurance engagement vary in nature from, and are less in extent than for, a reasonable assurance engagement conducted in accordance with IAASB’s Standards on Auditing and other generally accepted au- Peter Ekberg Lennart Nordqvist diting standards in Sweden. The firm applies ISQC 1 (International Authorized Public Accountant Expert Member of FAR

68 | AUDITOR’S ASSURANCE REPORT LKAB ANNUAL AND SUSTAINABILITY REPORT 2016 MATERIALITY ANALYSIS

An open stakeholder dialogue and broad business intelligence is the basis for assessment of what issues are material for LKAB to address in order to conduct sustainable mining. The materiality analysis maps the aspects that impact on LKAB’s business and that we can influence. The material aspects are the basis of our sustainability reporting.

MATERIALITY ANALYSIS GOVERNANCE AND COMMUNICATION LKAB conducts a materiality analysis every Our material aspects are grouped into four COMMUNICATE & MANAGE second year and the latest analysis was categories. The strategy for managing these Responsible purchasing By ensuring responsible purchasing, human and done in 2015. It included business intelli- depends on how important LKAB and our labour rights are respected and negative impact on gence, in-depth interviews, workshops and stakeholders consider each to be in order the environment and society is reduced in our surveys in which different stakeholders to secure sustainable development. operations and global value chain. Environmental benefits of products conveyed what sustainability aspects For matters that both LKAB and stake- The products bring environmental benefits when used mattered to them, from their perspective. holders consider crucial in terms of the in customers’ processes because of the low level of impurities in the raw material and consequently low For the full analysis, see the GRI appendix. Group’s impact, the company is focused carbon dioxide emissions. High iron content on improvment and development. We also minimizes relative mining waste for landfill. communicate on how the company controls, Interests of Sami villages manages and follows up on these issues. Respect for other industries and plenty of room for dialogue forms the basis of LKAB’s principles for collaboration and understanding. The principles include mutual respect and willingness to negotiate, open dialogue and access to information at an The material aspects are presented briefly below. LKAB’s focus areas for sustainabily early stage. and governance of materiality issues are further described in the GRI appendix. Resource-efficient use of raw materials Mining of the natural resources of iron ore and minerals. Additives are used in production processes and in rock reinforcement. Resource-efficient use Responsible operations Resource-efficient production Attractive LKAB Attractive communities requires future planning in order to ensure adequate mineral reserves through exploration.

Human rights Identification, management and follow-up of the operations’ direct and indirect impact on human COMMUNICATE & MONITOR COMMUNICATE & MANAGE rights, in order to take action to address such impact.

Closure plan Responsible Impact on land Work environment, health and safety purchasing Ongoing and preventive work to ensure a safe work Emergency preparedness Environmental environment and the health of co-workers. This Interests of Sami benefits of products aspect has a long-term impact on the ability to Management of viewpoints villages recruit and retain competence. on environment and society Resource-efficient MORE SIGNIFICANT Human rights use of raw materials Urban transformation Gradual and responsible relocation of communities Work environment, Urban due to deformation or other factors enables continued health and safety transformation mining and is a prerequisite for LKAB’s operations. Transparency, planning, dialogue and collaboration Biodiversity with the communities, authorities, business Environmental community and local residents are essential. emissions Biodiversity LKAB works proactively to prevent any loss of biodiversity and ecosystem services in the course of operations. The mitigation hierarchy’s four steps MONITOR & CONSIDER MANAGE & INFORM govern the work: avoid, minimize, remediate and compensate harm with consideration for the Importance to stakeholders landscape and habitat type. Environmental Anti-corruption Energy use investments Environmental emissions Compliance with Impact on Minimization of negative impact on our environment Union relations the terms of employment and and surroundings due to emissions to air and dis- environmental infrastructure charges to water. This aspect includes e.g. green- permits and house gases, NOx, SOx, surrounding rock, tailings Employees and legislation and environmental incidents such as oil spills and employment types chemical management. Economic Diversity and non- performance Impact on land discrimination LKAB affects society by, among others, exploration, mining, processing, transport and remediation. Due to that mining requires access to land, continuous SIGNIFICANT work with focus on corporate responsibility to SIGNIFICANT Importance to LKAB MORE SIGNIFICANT minimize our impact is performed.

LKAB ANNUAL AND SUSTAINABILITY REPORT 2016 MATERIALITY ANALYSIS | 69 REPORTING PRINCIPLES Since 2012 the sustainability report has been integrated with the AND GRI-INDEX annual financial report, which reflects the integration of sustainabi- lity issues into ongoing activities. The report has also taken the Since 2008 LKAB has prepared an annual sustainability report in Mining and Metals Sector Supplement as a guideline. accordance with the GRI (Global Reporting Initiative) guidelines. As In accordance with the Owner Directive, the sustainability report has of the financial year 2014, LKAB applies version G4 in accordance been reviewed by external auditors. Since the report has been with the Core reporting option. A report in accordance with GRI reviewed in its entirety, external review has not been reported per shall include the three sustainability areas economy, environment disclosure item in the GRI index below. The auditor’s report can and social responsibility, and shall include both governance and be found on page 68. results of the company’s sustainability work. The report shall provide a balanced and adequate presentation of the sustainability SCOPE, BOUNDARIES AND APPENDIX work, including positive aspects and challenges. As in previous years, the report largely concentrates on the Nordic activities, focusing on the iron ore operations in Sweden and Norway.

INDEX DESCRIPTION PAGE INDEX DESCRIPTION PAGE GENERAL STANDARD DISCLOSURES Report Profle Strategy & Analysis G4-28 Reporting period 70 G4-1 Comments from the CEO 5-6 G4-29 Most recent report Appendix Organizational Profle G4-30 Reporting cycle 70 G4-3 Name of organization 1 G4-31 Contact point for the report 71 G4-4 Primary brands, products and services 19-21 G4-32 GRI content index 70-71 G4-5 Location of headquarters 128 G4-33 Policy and practice with regard to external assurance 68, 70, Appendix G4-6 Countries where the organization operates 116 Governance G4-7 Ownership and legal form 1 G4-34 Governance 56, 58 G4-8 Markets 19-21 Ethics and Integrity G4-9 Scale of organization Insida, 2-3 G4-56 Code of conduct 40, 43, 58 G4-10 Description of total workforce 38 appendix SPECIFIC STANDARD DISCLOSURES G4-11 Percentage of workforce covered by collective bargaining Economic agreements Appendix DMA Economic Performance 12-15, G4-12 Supply chain 36-37 Appendix G4-13 Significant changes during the reporting period 2 G4-EC1 + MM Direct economic value generated and distributed 16-17, Appendix G4-14 Application of precautionary principle Appendix G4-EC3 Coverage of the organization’s defined benefit plan obliga- G4-15 External charters, principles and initiatives Appendix tions 106-108 G4-16 Memberships of associations Appendix DMA Indirect Economic Impact Appendix Identifed Material Aspects and Boundaries G4-EC8 Significant indirect economic impacts 14, 42 G4-17 Entities included in the organization’s consolidated Environmental financial statements 70-71, 116 DMA Materials Appendix G4-18 Process for defining report content 69 Appendix G4-EN1 Materials used by weight or volume 49 G4-19 Material aspects 17, 69 DMA Energy Appendix G4-20 Boundaries for material aspects within the organization Appendix G4-EN3 Energy consumption within the organization 48 G4-21 Boundaries for material aspects outside the organization Appendix G4-EN5 Energy intensity 48 G4-22 Corrections of information in previous reports Appendix DMA + MM Biodiversity Appendix G4-23 Significant changes compared with previous years’ reports Appendix G4-EN12 Significant impacts of activities, products, and services on 46-47, + MM biodiversity Appendix Stakeholder Engagement MM2 Sites requiring biodiversity management plan 46-47, 97 G4-24 Stakeholder groups 17, Appendix Appendix G4-25 Identification and selection of stakeholder Appendix G4-26 Approach to stakeholder engagement 17, 69 Appendix G4-27 Key topics raised through stakeholder engagement Appendix

MM = Metals and Mining Sector Specific Disclosures = Incomplete information. See GRI-appendix for information.

70 | GRI-INDEX LKAB ANNUAL AND SUSTAINABILITY REPORT 2016 Northern Division and Southern Division together represent about and more detailed descriptions of sustainability management for 90 percent of the Group’s total sales. In addition, some material material aspects. from Special Products Division, the subsidiaries LKAB Minerals and The appendix also describes omissions made in the reporting, LKAB Wassara, is included. These have operations abroad, and in in accordance with G4 requirements. The GRI index below states particular for LKAB Minerals this is considered relevant. The report whether the information has been included in the Annual and continuously indicates in connection with the reporting of data which Sustainability Report and/or in the appendix. units are involved. Changes in the boundaries, scope or measurement methods compared with the previous year are explained in the re- CONTACT port, either together with the data or in the separate GRI appendix. The contact person for LKAB’s sustainability reporting is Grete As in previous years, there is a separate GRI appendix available at Solvang Stoltz, Senior Vice President, HR and Sustainability, LKAB’s website in conjunction with the Annual and Sustainability Report. [email protected]. The appendix includes overall explanations of changes, a detailed description of the process for developing the materiality analysis,

INDEX DESCRIPTION PAGE INDEX DESCRIPTION PAGE DMA Emissions Appendix Human Rights G4-EN15 Direct carbon dioxide emissions 48, DMA Non-discrimination Appendix Appendix G4-HR3 Total number of incidents of discrimination 40 G4-EN16 Indirect carbon dioxide emissions 48, DMA + MM Indigenous Rights Appendix appendix G4-HR8 Incidents of violations of rights of indigenous peoples 25, 43, G4-EN21 NOx, SOx and other significant air emissions 48, appendix + MM appendix MM5 Total number of operations taking place in or adjacent to DMA + MM Effluents and Waste Appendix 25, 43, indigenous peoples’ territories Appendix G4-EN24 Total number and volume of significant spills 49, + MM Appendix DMA Human Rights Assessment Appendix MM3 Total amounts of overburden, rock, tailings, and sludges and G4-HR9 Operations that have been subject to human rights reviews or 6,36-37, their associated risks 49 impact assessments 43, 52, Appendix DMA Products and Services Appendix DMA Supplier Human Rights Assessment Appendix G4-EN27 Mitigated environmental impacts of products and services 19,30,32 G4-HR11 Human rights impacts in the supply chain 36-37, DMA Compliance, Environmental Appendix Appendix G4-EN29 Significant fines and other sanctions due to non-compliance DMA Human Rights Grievance Mechanisms Appendix with environmental laws and regulations Appendix G4-HR12 Number of grievances about human rights filed and addres- DMA Supplier Environmental Assessment Appendix sed Appendix G4-EN33 Environmental impacts in the supply chain 36-37, Society Appendix DMA + MM Local Communities Appendix DMA Environmental Grievance Mechanisms Appendix G4-SO2 Operations with significant actual or potential negative 25, 28-29, G4-EN34 Number of grievances about environmental impacts filed and impacts on local communities 42-45 addressed Appendix MM6 Land use disputes with local communities and indigenous Social peoples 25 Labour Practices and Decent Work DMA Anti-corruption Appendix DMA + MM Employment Appendix G4-SO5 Incidents of corruption r 40 G4-LA1 Total number and rates of new employee hires and employee 38, DMA Grievance Mechanisms for Impacts on Society Appendix turnover Appendix G4-SO11 Number of grievances about impacts on society filed and DMA + MM Occupational Health and Safety Appendix addressed Appendix G4-LA6 + MM Injuries, occupational diseases, lost days, absenteeism and 40, Resettlement) work-related fatalities Appendix MM9 Households resettled, and effect on their livelihoods 44-45 DMA Diversity and Equal Opportunity Appendix DMA Closure plan Appendix G4-LA12 Diversity among the Board, Group management and work- 39, 64-66, MM10 Operations with closure plans 46-47, 97 force Appendix Appendix DMA Supplier Assessment for Labour Practices Appendix DMA Emergency preparedness 28, 46, G4-LA15 Assessment of labour practices in the supply chain 36-37 Appendix Appendix DMA Labour Practices Grievance Mechanisms Appendix G4-LA16 Number of grievances about labour practices filed and addressed Appendix

LKAB ANNUAL AND SUSTAINABILITY REPORT 2016 GRI-INDEX | 71 GROUP OVERVIEW GROUP From and including the fourth quarter 2016, the business is being These mainly supply products and services within the Group. managed and followed up according to a new Group structure. The Figures for full year 2016 and 2015 have been restated according operations have been split into three divisions: Northern Division, to the new structure. The Group’s earnings and the breakdown of Southern Division and Special Products Division. Group-wide earnings between operating segments are described below and in functions are followed up in the segment Other, where certain Note 3 on page 93. parts of the business are operated as wholly owned subsidiaries.

FINANCIAL OVERVIEW

THE GROUP IN SUMMARY (MSEK) 2016 2015 ANALYSIS OF CHANGE IN OPERATING PROFIT (MSEK) 2016 Net sales 16,343 16,200 Operating proft 2015 -7,156 Underlying operating profit1 1,621 1,548 Delivery volumes and mix 1,825 Costs for urban transformation provisions -2,106 -1,568 Prices 672 Impairment of property, plant and equipment -1,192 -7,136 Foreign currency effect 233 Operating profit/loss -1,677 -7,156 Hedging of currency and iron ore price -2,587 Net financial income/expense 613 -115 Costs for urban transformation provisions -538 Profit/loss before tax -1,063 -7,271 Impairment of property, plant and equipment 5,944 Proft/loss for the period -978 -5,686 Depreciation 54

1 Underlying operating profit is defined in Note 42 on page 117. Production volumes, stocks -694 Other expenses and other income 570 NET SALES AND OPERATING PROFIT/LOSS Operating proft 2016 -1,677 Net sales 2016 Operating profit

MSEK For full year 2016, higher delivery volumes, improved prices and cost 30 000 efficiencies contributed to the improved result. In contrast, hedges 25 000 – mainly entered into at the lower price levels that prevailed during the fourth quarter of 2015 and first quarter of 2016 – had a negative 20 000 impact. These were effected in order to alleviate the effects of price 15 000 and exchange rate changes in the market, which meant that LKAB 10 000 was not able to take full advantage of the price increase in 2016. During the year cost efficiency measures cut costs by around 5 000 MSEK 700, which was according to plan. Impairment losses on 0 property, plant and equipment had a negative effect on operating -5 000 profit of MSEK 1,192, compared with MSEK 7,136 for full year 2015. 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 Net financial income/expense for 2016 was MSEK 613 (-115), -10 000 which is mainly due to a better return on investments, positive exchange gains and positive effects of hedging activities. FINANCIAL POSITION

NET FINANCIAL INDEBTEDNESS (MSEK) 2016 2015 NET DEBT/EQUITY RATIO (MSEK) 2016 2015 Loans payable 5,105 2,996 Net financial indebtedness, MSEK 6,330 3,202 Provisions for pensions 1,877 1,860 Equity, MSEK 30,551 32,116 Provisions, urban transformation 13,062 12,234 Net debt/equity ratio, % 20.7 10.0 Provisions, remediation 1,276 1,253 Less: The net debt/equity ratio increased to 20.7 (10.0) percent as a result of increased net financial indebtedness and lower equity. Cash and cash equivalents -2,624 -4,335 Equity decreased primarily because of impairment losses for the Current investments -11,271 -10,225 Mertainen open-pit mine, the negative impact of hedging activities Financial investments -1,096 -581 and increased costs for urban transformation provisions. Net fnancial indebtedness 6,330 3,202

The increase in net financial indebtedness is mainly due to increas- es in borrowing and in provisions for urban transformation.

72 | GROUP OVERVIEW LKAB ANNUAL AND SUSTAINABILITY REPORT 2016 OPERATING CASH FLOW AND INVESTMENTS PARENT COMPANY The Parent Company LKAB consists of Northern Division and OPERATING CASH FLOW Southern Division and the group-wide functions reported under MSEK Other Segments. The Parent Company includes the majority of 6 000 LKAB’s operating activities as well as the company’s financial 5 000 operations. 4 000 3 000 THE PARENT COMPANY IN SUMMARY (MSEK) 2016 2015 2 000 Net sales 14,904 14,770 1 000 Underlying operating profit1 902 1,010 0 -1 000 Urban transformation costs -2,106 -1,568 -2 000 Impairment of property, plant and equipment -1,184 -6,096 -3 000 2012 2013 2014 2015 2016 Operating profit/loss -2,388 -6,654

Investments in property, plant and equipment 3,087 5,817 OPERATING CASH FLOW (MSEK) 2016 2015 CHANGE Depreciation -2,213 -2,151 Cash flow from operating activities 3,569 3,672 -103

Change in working capital -3,043 162 -3,205 Deliveries of iron ore, Mt 27.0 24.2 Capital expenditures (net) -3,288 -6,204 2,916 Production of iron ore, Mt 26.9 24.5 Operating cash flow -2,762 -2,370 -392 1 Underlying operating profit is defined in Note 42 on page 117.

Operating cash flow decreased compared to 2015. Cash flow from operating activities was in line with the previous year, however – mainly due to improved profits, which were offset by increased OUTLOOK FOR 2017 expenditures for urban transformation. Working capital was nega- LKAB expects the market situation to remain largely unchanged in tively impacted by an increased level of capital tied up in pledged 2017. The oversupply situation within iron ore fines is expected to assets for outstanding hedging positions and for accounts receiva- endure, which means continued pressure on iron ore prices and ble. Lower capital expenditures made a positive contribution. thus also on LKAB’s profitability. Demand for LKAB’s pellets contin- ues to be strong, and the strategy of maximizing pellet production remains in place. LKAB is continuing its adaptation work, focusing CAPITAL EXPENDITURE, TOTAL AND BY DIVISION (MSEK) 2016 2015 on profitability, productivity improvements and cost cutting in order Group 3,341 6,354 to increase competitiveness. Northern Division 883 1,258 Work on the urban transformation is moving into a more inten- Southern Division 1,997 4,004 sive phase with continued provisions and an increased number of Special Products Division 14 31 acquisitions, which means increased expenditure over the coming Other Segments 447 1,061 year. Capital expenditure for the year totalled MSEK 3,341. Of this, MSEK GUIDELINES FOR REMUNERATION OF 2,240 was capital expenditure within the growth programme and MSEK 409 was for the new main haulage level in Kiruna’s under- SENIOR EXECUTIVES ground mine. At the underground mine in Kiruna, the fourth of five The guidelines passed by the AGM for 2016 and reporting on the phases of the main haulage level at a depth of 1,365 metres was compensation paid to senior executives can be found in Note 6 on taken into operation. The fifth and final phase will be operational pages 106–108. gradually over the coming year. The Board is proposing to the AGM to be held on 27 April 2017 In Narvik a new shiploader and quay, including new conveyor that new guidelines are passed based on the government’s guide- logistics and a screening station, were taken into operation during lines for compensation and other employment terms for senior the year. executives adopted on 22 December 2016. The Board’s proposal is In order to meet stricter environmental stipulations for atmos- designed to ensure that LKAB can offer market competitive remu- pheric emissions, investments in flue gas scrubbing at the pelletiz- neration to attract and retain qualified employees to LKAB’s Group ing plant in Svappavaara were taken into operation during the year. management. The year’s capital expenditure on environmental protection, flue gas scrubbing and dam facilities amounts to MSEK 172 (487).

LKAB ANNUAL AND SUSTAINABILITY REPORT 2016 GROUP OVERVIEW | 73 DIVISIONS

NORTHERN DIVISION SOUTHERN DIVISION

The division produces both blast furnace pellets and pellets for This division produces blast furnace pellets and fines in mines and steelmaking via direct reduction, known as DR pellets, in mines and processing plants in Malmberget and Svappavaara. The processed processing plant in Kiruna. The processed iron ore products are iron ore products are transported along the Malmbanan railway transported along the Malmbanan and Ofotbanen railway lines to the line, mainly to the port of Luleå for shipment to European steel- port of Narvik for shipment to steelworks customers around the world. works customers.

MSEK 2016 2015 MSEK 2016 2015 Net sales 10,376 8,606 Net sales 7,162 5,998 Underlying operating profit1 2,891 1,002 Underlying operating profit1 1,293 479 Costs for urban transformation provisions -1,727 -1,308 Costs for urban transformation provisions -379 -260 Impairment of property, plant and equipment -3,641 Impairment of property, plant and equipment -1,192 -3,495 Operating proft/loss 1,164 -3,947 Operating proft/loss -278 -3,276

Capital expenditure 883 1,258 Capital expenditure 1,997 4,004 Depreciation -1,264 -1,332 Depreciation -782 -794

Deliveries of iron ore, Mt 15.5 14.2 Deliveries of iron ore products, Mt 11.5 10.1 Proportion of pellets, % 90 87 Proportion of pellets, % 76 80 Production of iron ore products, Mt 15.2 13.8 Production of iron ore products, Mt 11.7 10.7

1 Underlying operating profit is defined in Note 42 on page 117. 1 Underlying operating profit is defined in Note 42 on page 117.

Net sales for the year increased by 20 percent, mainly due to higher For full year 2016 sales increased as an effect of higher delivery delivery volumes and somewhat improved iron ore prices compared volumes and somewhat improved iron ore prices compared to the to the previous year. Costs, excluding provisions for urban trans- previous year. Costs, excluding provisions for urban transforma- formation and impairment losses, were lower than in the previous tion and impairment losses, were higher than in the previous year. year. Higher costs resulting from increased production and delivery Increased costs are due mainly to higher production and delivery volumes and from chute renovation were offset by cost efficiency volumes as well as higher energy prices, which were offset to some measures. In 2016 costs of urban transformation provisions in- extent by cost efficiency measures. In November an agreement creased, partly as an effect of the agreement between the Swedish was reached with the Municipality of Gällivare on compensation Transport Administration and LKAB in which LKAB is to pay for the for premises for municipal operations and land in Malmberget. routing of road E10 through Kiruna. In December 2016 the company’s Board decided to mothball the open-pit mine in Mertainen, resulting in impairment losses for SPECIAL PRODUCTS property, plant and equipment of MSEK 1,192.

The Special Products Division encompasses LKAB Minerals, which OTHER SEGMENTS sells minerals for industrial use, and LKAB Wassara, which sells drilling technology systems for the mining and construction industries. Group-wide functions and activities that take place in operating subsidiaries are brought together in Other Segments. This segment

MSEK 2016 2015 also encompasses financial operations, including transactions and profits relating to financial hedging for iron ore prices, currencies Net sales 1,598 1,619 and the purchase of electricity. Operating profit before capital gain on sale of operations 95 89 Operating profit/loss 95 137 MSEK 2016 2015 Capital expenditure 14 31 Net sales excl. hedging 1,918 2,250 Depreciation -33 -36 Net sales hedging -2,733 -146 Total net sales -815 2,104 For full year 2016, net sales and operating profit before capital gain on sale of operations were higher than in the previous year. To counter Operating profit/loss -2,680 -195 the trend of lower prices, an efficiency programme was implemented Capital expenditure 447 1,061 within LKAB Minerals which had a positive effect on profits. In December Depreciation -667 -638 a major contract was signed for deliveries of MagnaDense to the Tuxpan gas pipeline on the border between the USA and Mexico, strengthening For full year 2016 hedging activities had a negative effect on net the company’s position in the offshore market. During the period sales and operating profit of MSEK 2,733. Net sales excluding hedg- LKAB Wassara received a large order relating to the supply of drilling ing mainly covers the operations within LKAB Berg och Betong. and pumping equipment for the rebuilding of Slussen in Stockholm.

74 | GROUP OVERVIEW LKAB ANNUAL AND SUSTAINABILITY REPORT 2016 CONTENTS

FINANCIAL STATEMENTS – THE GROUP 76 Note 16 Property, plant and equipment – urban transformation 103 Income Statement 76 Note 17 Participations in associated companies 103 Statement of Comprehensive Income 76 Note 18 Holdings in joint operations 103 Statement of Financial Position 77 Note 19 Receivables from Group companies and associated com- Statement of Changes in Equity 78 panies 103 Statement of Cash Flows 79 Note 20 Financial investments 104 FINANCIAL STATEMENTS – PARENT COMPANY 80 Note 21 Other non-current securities holdings 104 Note 22 Non-current receivables and other receivables 104 Income Statement 80 Note 23 Inventories 104 Statement of Comprehensive Income 80 Note 24 Accounts receivable 104 Balance Sheet 81 Note 25 Prepaid expenses and accrued income 104 Statement of Changes in Equity 83 Note 26 Equity 105 Cash Flow Statement 84 Note 27 Interest-bearing liabilities 105 NOTES 85 Note 28 Liabilities to credit institutions 105 Note 1 Significant accounting principles 85 Note 29 Pensions 106 Note 2 Distribution of revenue 92 Note 30 Provisions 108 Note 3 Segment reporting 92 Note 31 Urban transformation 109 Note 4 Other operating income 94 Note 32 Accrued expenses and deferred income 110 Note 5 Other operating expenses 94 Note 33 Valuation of financial assets and liabilities at fair value and categorization 110 Note 6 Employees, employee benefit expenses and remuneration of senior executives 94 Note 34 Financial risks and risk management 112 Note 7 Auditors’ fees and reimbursements 96 Note 35 Investment commitments 115 Note 8 Operating expenses by type 96 Note 36 Pledged assets and contingent liabilities 115 Note 9 Impairment of property, plant and equipment 96 Note 37 Related parties 115 Note 10 Net financial income/expense 97 Note 38 Group companies 115 Note 11 Appropriations 97 Note 39 Untaxed reserves 116 Note 12 Taxes 98 Note 40 Specifications for statement of cash flows 116 Note 13 Earnings per share 100 Note 41 Events after the closing date 117 Note 14 Intangible assets 100 Note 42 Proposed appropriation of earnings 117 Note 15 Property, plant and equipment – operations 101 Note 43 Key ratios – disclosures 117

LKAB ANNUAL AND SUSTAINABILITY REPORT 2016 FINANCIAL STATEMENTS | 75 CONSOLIDATED INCOME STATEMENT

1 January – 31 December MSEK Note 2016 2015 1 Net sales 2, 3 16,343 16,200 Cost of goods sold 14, 15, 16, 31 -17,116 -22,280 Gross proft/loss -773 -6,080

Selling expenses -143 -165 Administrative expenses -464 -512 Research and development expenses -245 -365 Other operating income 4 227 318 Other operating expenses 5 -279 -354 Operating proft/loss 3, 6, 7, 8, 9 -1,677 -7,156

Financial income 898 293 Financial expense -285 -408 Net fnancial income/expense 10 613 -115

Proft/loss before tax -1,063 -7,271

Tax 12 85 1,585 Proft/loss for the year -978 -5,686

Attributable to Parent Company shareholders 13 -978 -5,686 Earnings per share before and after dilution (SEK) 13 -1,397 -8,122

Number of shares 700,000 700,000

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

Proft/loss for the year -978 -5,686

Other comprehensive income Items that will not be reclassified to profit for the year Actuarial gains and losses on defined-benefit pension plans -79 173 Tax attributable to actuarial gains and losses 17 -38 -62 135 Items that will be reclassified to profit for the year Translation differences on translation of foreign operations for the year 26 67 -85 Changes in fair value of available-for-sale financial assets for the year 26 345 -284 Changes in fair value of cash flow hedges for the year 26 -969 126 Changes in fair value of cash flow hedges transferred to profit for the year 26 -232 414 Tax attributable to components of cash flow hedges 26 264 -119 Total items reclassified to profit or loss -525 52 Other comprehensive income -587 187 Comprehensive income attributable to Parent Company shareholders for the year: -1,565 -5,499

76 | FINANCIAL STATEMENTS LKAB ANNUAL AND SUSTAINABILITY REPORT 2016 CONSOLIDATED STATEMENT OF FINANCIAL POSITION

As at 31 December MSEK Note 2016 2015 1, 33, 34, 37

Assets 18, 35 Non-current assets Intangible assets 14 212 215 Property, plant and equipment for operations 15 32,076 32,462 Property, plant and equipment for urban transformation 16 2,009 2,235 Participations in associated companies 17 38 45

Financial investments 20 1,096 581

Non-current receivables 22 0 0 Deferred tax assets 12 30 19 Total non-current assets 35,461 35,558

Current assets Inventories 23 2,836 2,915

Accounts receivable 24 2,094 1,320 Prepaid expenses and accrued income 25 815 282 Other current receivables 22 2,525 1,392 Current investments 20, 40 11,271 10,225 Cash and cash equivalents 40 2,624 4,335 Total current assets 22,164 20,470 Total assets 57,626 56,028

Equity and liabilities Equity 26, 42 Share capital 700 700 Reserves -373 152 Profit brought forward including profit for the year 30,224 31,264 Equity attributable to Parent Company shareholders 30,551 32,116 Total equity 30,551 32,116

Non-current liabilities Non-current interest-bearing liabilities 27 3,234 1,996 Other liabilities 4 Provisions for pensions and similar commitments 29 1,877 1,860 Provisions for urban transformation 30, 31 9,914 10,951 Other provisions 30 1,198 1,178 Deferred tax liabilities 12 1,512 1,915 Total non-current liabilities 17,740 17,900

Current liabilities Current interest-bearing liabilities 27 1,871 1,000 Trade payables 1,283 1,573 Other current liabilities 1,343 443 Accrued expenses and deferred income 32 1,559 1,560 Provisions for urban transformation 30, 31 3,148 1,283 Other provisions 30 131 152 Total current liabilities 9,335 6,011 Total liabilities 27,075 23,911 Total equity and liabilities 57,626 56,028

LKAB ANNUAL AND SUSTAINABILITY REPORT 2016 FINANCIAL STATEMENTS | 77 CONSOLIDATED STATEMENT OF CHANGES IN EQUITY

SEE NOTE 26 EQUITY ATTRIBUTABLE TO PARENT COMPANY SHAREHOLDERS

Reserves

Retained ings Translation Fair value Hedging including profit MSEK Share capital reserve reserve reserve for the year Total equity

Opening equity 1 Jan 2015 700 -65 481 -316 36,954 37,754

Profit/loss for the year -5,686 -5,686

Other comprehensive income for -85 -284 421 135 187 the year

Comprehensive income for the year -85 -284 421 -5,551 -5,499

Dividend -139 -139

Closing equity 31 Dec 2015 700 -150 197 105 31,264 32,116

SEE NOTE 26 EQUITY ATTRIBUTABLE TO PARENT COMPANY SHAREHOLDERS

Reserves

Profit brought forward Translation Fair value Hedging including profit MSEK Share capital reserve reserve reserve for the year Total equity

Opening equity 1 Jan 2016 700 -150 197 105 31,264 32,116

Profit/loss for the year -978 -978

Other comprehensive income for 67 345 -937 -62 -587 the year

Comprehensive income for the 67 345 -937 -1,040 1,565 year

Dividend

Closing equity 31 Dec 2016 700 -83 542 -832 30,224 30,551

78 | FINANCIAL STATEMENTS LKAB ANNUAL AND SUSTAINABILITY REPORT 2016 CONSOLIDATED STATEMENT OF CASH FLOWS

1 January – 31 December MSEK Note 2016 2015 1, 40 Operating activities Profit/loss before tax -1,063 -7,271 Adjustment for items not included in cash flow 5,780 11,559 Income tax paid -58 -315 Expenditures, urban transformation 30, 31 -1,035 -291 Expenditures, other provisions 30 -55 -10 Cash flow from operating activities before changes in working capital 3,569 3,672

Cash flow from changes in working capital Increase (-)/Decrease (+) in inventories 79 -362 Increase (-)/Decrease (+) in operating receivables -2,610 300 Increase (+)/Decrease (-) in operating liabilities -511 224 Change in working capital -3,043 162 Cash flow from operating activities 526 3,834

Investing activities Acquisition of property, plant and equipment -3,341 -6,354 Disposal of property, plant and equipment 53 150 Change in financial assets -113 78 Disposals/acquisitions (net) in current investments -1,046 1,279 Cash flow from investing activities -4,447 -4,847

Financing activities Borrowing 2,114 204 Adjustment of other provisions -96 Dividends paid to Parent Company shareholders -139 Cash flow from fnancing activities 2,114 -31

Cash flow for the year -1,807 -1,044

Cash and cash equivalents at start of year 4,335 5,358 Exchange difference in cash and cash equivalents 96 22 Cash and cash equivalents at end of year 2,624 4,335

MSEK 2016 2015 Consolidated operating cash flow Cash flow from operating activities 526 3,834 Acquisition of property, plant and equipment -3,341 -6,354 Disposal of property, plant and equipment 53 150 Operating cash flow (excluding current investments) -2,762 -2,370 Acquisition/disposal of financial assets (net) -1,159 1,357 Cash flow after investing activities -3,921 -1,013 Cash flow from financing activities 2,114 -31 Cash flow for the year -1,807 -1,044

LKAB ANNUAL AND SUSTAINABILITY REPORT 2016 FINANCIAL STATEMENTS | 79 INCOME STATEMENT – PARENT COMPANY

1 January – 31 December MSEK Note 2016 2015 1, 37 Net sales 2, 3 14,904 14,770 Cost of goods sold 15, 16, 31 -16,687 -20,675 Gross proft/loss -1,784 -5,905

Selling expenses -38 -51 Administrative expenses -293 -343 Research and development expenses -278 -373 Other operating income 4 15 36 Other operating expenses 5 -10 -17 Operating proft/loss 6, 7, 8, 9 -2,388 -6,654

Earnings from financial items Earnings from participations in Group companies 255 2 Income from other securities and receivables held as non-current assets 49 51 Other interest income and similar profit/loss items 731 207 Interest expense and similar profit/loss items -181 -313 Proft/loss after fnancial items 10 -1,534 -6,706

Appropriations 11 -752 1,645

Proft/loss before tax -2,285 -5,061

Tax 12 421 1,082 Proft/loss for the year -1,865 -3,979

COMPREHENSIVE INCOME – PARENT COMPANY

Profit/loss for the year -1,865 -3,979

Other comprehensive income Comprehensive income for the year -1,865 -3,979

80 | FINANCIAL STATEMENTS LKAB ANNUAL AND SUSTAINABILITY REPORT 2016 BALANCE SHEET – PARENT COMPANY

As at 31 December MSEK Note 2016 2015 1, 33, 34 Assets 35 Non-current assets Intangible assets 14 48 38 Property, plant and equipment for operations 15 26,449 27,076 Property, plant and equipment for urban transformation 16 2,009 2,235 Financial assets Participations in subsidiaries 38 2,120 1,884 Participations in associated companies 17 40 40 Receivables from subsidiaries 19, 37 1,604 1,242 Other non-current securities 21 246 131 Other non-current receivables 22 110 107 Deferred tax asset 12 2,380 1,960 Total fnancial assets 6,501 5,365

Total non-current assets 35,007 34,714

Current assets Inventories 23 2,333 2,277 Current receivables Accounts receivable 24 1,785 1,063 Receivables from subsidiaries 37 1,201 1,324 Other current receivables 22 2,414 961 Prepaid expenses and accrued income 25 769 296 Total current receivables 6,170 3,645

Current investments 40 11,115 11,800 Cash and bank balances 40 2,124 2,338 Total current assets 21,742 20,060 Total assets 56,748 54,774

LKAB ANNUAL AND SUSTAINABILITY REPORT 2016 FINANCIAL STATEMENTS | 81 BALANCE SHEET – PARENT COMPANY

As at 31 December MSEK Note 2016 2015

Equity and liabilities 1, 33, 34

Equity 26 Restricted equity Share capital (700,000 shares) 700 700 Statutory reserve 697 697

Non-restricted equity 42 Retained earnings 16,025 20,003 Profit/loss for the year -1,865 -3,979 Total equity 15,557 17,422

Untaxed reserves 39 17,663 16,624

Provisions Provisions for urban transformation 30, 31 9,914 10,951 Other provisions 29, 30 1,486 1,526 Total provisions 11,400 12,478

Non-current liabilities Bond loans 28 3,234 1,996 Other non-current liabilities 4 Total non-current liabilities 3,238 1,996

Current liabilities Liabilities to credit institutions 28 1,871 1,000 Trade payables 929 1,099 Liabilities to subsidiaries 37 1,298 1,170 Other current liabilities 109 204 Accrued expenses and deferred income 32 1,403 1,346 Provisions for urban transformation 30, 31 3,148 1,283 Other provisions 30 131 152 Total current liabilities 8,890 6,254 Total equity and liabilities 56,748 54,774

82 | FINANCIAL STATEMENTS LKAB ANNUAL AND SUSTAINABILITY REPORT 2016 STATEMENT OF CHANGES IN EQUITY – PARENT COMPANY

SEE NOTE 26 RESTRICTED EQUITY NON-RESTRICTED EQUITY

Profit/loss for the MSEK Share capital Statutory reserve Retained earnings year Total equity

Opening equity 1 Jan 2015 700 697 20,142 21,539

Comprehensive income for the year -3,979 -3,979

Dividend -139 -139

Closing equity 31 Dec 2015 700 697 20,003 -3,979 17,422

SEE NOTE 26 RESTRICTED EQUITY NON-RESTRICTED EQUITY

Profit/loss for the MSEK Share capital Statutory reserve Retained earnings year Total equity

Opening equity 1 Jan 2016 700 697 16,025 17,422

Comprehensive income for the year -1,865 -1,865

Dividend

Closing equity 31 Dec 2016 700 697 16,025 -1,865 15,557

LKAB ANNUAL AND SUSTAINABILITY REPORT 2016 FINANCIAL STATEMENTS | 83

CASH FLOW STATEMENT – PARENT COMPANY

1 January – 31 December MSEK Note 2016 2015 1, 40 Operating activities Profit/loss after financial items -1,534 -6,706 Adjustment for items not included in cash flow 5,267 10,169 Income tax paid -31 -288 Expenditures, urban transformation 30, 31 -1,035 -291 Expenditures, other provisions 30 -55 -10 Cash flow from operating activities before changes in working capital 2,612 2,874

Cash flow from changes in working capital Increase (-)/Decrease (+) in inventories -56 -337 Increase (-)/Decrease (+) in operating receivables -2,373 607 Increase (+)/Decrease (-) in operating liabilities -190 -36 Change in working capital -2,619 234 Cash flow from operating activities -7 3,108

Investing activities Acquisition of property, plant and equipment -3,087 -5,817 Disposal of property, plant and equipment 332 151 Shareholder contribution paid -261 -157 Change in financial assets -372 330 Disposals/acquisitions (net) in current investments -1,002 1,287 Cash flow from investing activities -4,390 -4,206

Financing activities Borrowing 2,113 204 Group contribution received 287 125 Adjustment of other provisions -96 Dividend paid -139 Cash flow from fnancing activities 2,400 94

Cash flow for the year -1,997 -1,004

Cash and cash equivalents at start of year 4,126 5,108 Exchange difference in cash and cash equivalents 95 22 Cash and cash equivalents at end of year 2,224 4,126

84 | FINANCIAL STATEMENTS LKAB ANNUAL AND SUSTAINABILITY REPORT 2016 7 New IFRS that have not yet been applied NOTES TO THE Following is a summary of the new or amended IFRS that take effect in coming financial years and that are expected to apply to LKAB. None of these standards were adopted FINANCIAL STATEMENTS early so they do not apply to these financial statements. Applied in Standards financial year beginning: NOTE 1 IFRS 9 Financial Instruments 1 January 2018 or later SIGNIFICANT ACCOUNTING PRINCIPLES IFRS 15 Revenue from Contracts with Customers 1 January 2018 or later including amendments to IFRS 15: Date of application 1 Compliance with standards and laws of IFRS 15 The consolidated financial statements were prepared in accordance with the Inter- Clarification of IFRS 15 Revenue from Contracts with national Financial Reporting Standards (IFRS) issued by the International Accounting Customers1 Standards Board (IASB) as adopted by the EU. The Swedish Financial Reporting Board’s IFRS 16 Leases1 1 January 2019 or later Recommendation RFR 1 Supplementary Rules for Consolidated Financial Statements Amendments to IAS 7 Statement of Cash Flows 1 January 2017 or later was also applied. (“Disclosure Initiative”) The Parent Company applies the same accounting principles as the Group, except where stated below in the Parent Company’s accounting principles section. Amendments to IAS 12 Income Taxes (Recognition of 1 January 2017 or later deferred tax assets for unrealized losses)1 The Annual Report and consolidated financial statements were approved for issue by the Board of Directors and President on 21 March 2017. The consolidated income Annual improvements to IFRS (2014–2016)1 1 January 2017 or later and 1 January 2018 or later statement, consolidated statement of comprehensive income and statement of financial position and the Parent Company's income statement and balance sheet are subject to 1Not yet approved for application within the EU. approval at the Annual General Meeting on 27 April 2017. New or amended standards that will affect consolidated financial reporting from 2017: 2 Measurement bases applied in preparing the fnancial statements Described below are the new and amended standards and interpretations that are Assets and liabilities are recognized at historical cost, apart from certain financial expected to affect the consolidated financial statements in the period to which they are assets and liabilities that are measured at fair value. Financial assets and liabilities that applied for the first time. are measured at fair value consist of derivatives, financial assets classified as financial IFRS 9 Financial Instruments will replace IAS 39 Financial Instruments: Recognition assets measured at fair value via profit or loss, or available-for-sale financial assets. and Measurement. IFRS 9 contains new principles for the classification and measure- A defined-benefit pension liability/asset is recognized as the net of the fair val- ment of financial assets. The measurement category in which a financial asset is to be ue of plan assets and the present value of the defined-benefit liability, adjusted for any placed depends partly on the company’s business model (the purpose for which the asset restrictions. company holds the asset) and partly on the financial asset’s contractual cash flows. 3 Functional currency and presentation currency The new standard also contains new rules on impairment testing of financial assets The functional currency of the Parent Company is the Swedish krona (SEK), which is that are based on past events/losses. also the presentation currency for both the Parent Company and the Group. This means As regards hedge accounting, the three types of hedge accounting models currently that the financial statements are presented in SEK. Unless otherwise stated, all amounts found in IAS 39 are retained. However, IFRS 9 provides greater flexibility as regards the are rounded off to the nearest million SEK. transactions to which hedge accounting can be applied. The standard provides greater opportunity to hedge risk components in non-financial items and allows more types of 4 Assessments and estimates in the fnancial statements instruments to be used in a hedging relationship. Moreover, a quantitative requirement Preparing the financial statements in accordance with IFRS requires company man- of effectiveness is no longer required. agement to make assessments, estimates and assumptions that affect the application Management’s assessment is that IFRS 9 may affect the amounts recognized in of accounting principles and the recognized amounts of assets, liabilities, income and the financial statements, but that the effects will not be significant. The effects of expenses. Actual outcomes may diverge from these estimates and assessments. implementing IFRS 9 have not yet been analyzed in detail, so the effects cannot yet be These estimates and assumptions are reviewed regularly. Changes in estimates are quantified. recognized in the period in which the change is made if the change only affects that pe- IFRS 15 Revenue from Contracts with Customers will replace existing IFRS related to riod, or the period in which the change is made and future periods if the change affects the recognition of revenue. IFRS 15 is based on recognizing revenue when control over both current and future periods. goods or services transfers to the customer, which differs from the existing basis of the Assessments made by company management when applying IFRS that have a transfer of risks and benefits. IFRS 15 also introduces new ways of establishing how significant effect on the financial statements and estimates that may lead to significant and when revenue is to be recognized, which involves a new approach compared with adjustments to the following year’s financial statements are described in more detail in the way that revenue is currently recognized. section 28, Significant estimates and assessments. There is significantly more guidance in IFRS 15 for specific areas, and the disclosure requirements are extensive. 5 Signifcant accounting principles applied Management’s assessment is that IFRS 15 and the clarification of IFRS 15 may affect The following consolidated accounting principles were applied consistently to all periods the amounts recognized in the financial statements, but that the effects will not be that are presented in the consolidated financial statements, unless otherwise stated. significant. The effects of implementing IFRS 15 have not yet been analyzed in detail, so The consolidated accounting principles were applied consistently in the presentation the effects cannot yet be quantified. IFRS 15 contains greater disclosure requirements and consolidation of the Parent Company, subsidiaries and joint ventures. in respect of revenue, which will expand the content of the notes. IFRS 16 Leases will replace IAS 17 Leases. For lessees, IFRS 16 means that almost 6 Changes for 2016 all leases are to be recognized in the statement of financial position. Leases will thus no 6.1 Accounting principles changed due to new or amended IFRS longer be classified as operating leases and finance leases. The exceptions are leases New or amended standards and new interpretations have had no significant effect on with a term of 12 months or less and leases where the underlying asset has a low value. the consolidated accounts for 2016. Depreciation of the asset and interest expenses for the liability are recognized in the income statement. The new standard contains more extensive disclosure requirements than the present standard. Management’s assessment is that IFRS 16 may affect the amounts recognized in the financial statements, but that the effects will not be significant. The effects of implementing IFRS 16 have not yet been analyzed in detail, so the effects cannot yet be quantified. Other new and amended standards and interpretations that have not taken effect are not expected by management to have any significant effect on the consolidated financial statements when they are applied for the first time.

8 Classifcation etc. Non-current assets and liabilities consist essentially of amounts that are expected to be recovered or paid more than twelve months from the end of the reporting period. Current assets and liabilities essentially consist of amounts that are expected to be recovered or paid within 12 months of the end of the reporting period.

LKAB ANNUAL AND SUSTAINABILITY REPORT 2016 NOTES | 85 9 Operating segment reporting 12.1.1 Sales of iron ore An operating segment is a part of the Group that engages in business operations from Iron ore trading is conducted in US dollars. LKAB prices iron ore according to a variable which it may generate income and incur expenses and for which independent financial price model with an index-linked price based on the spot price. information is available. An operating segment’s earnings are also monitored by the The sale of iron ore is recognized upon delivery to the customer in accordance with company’s chief operating decision-maker, which is Group management, to assess the terms of sale. Sales are recognized less value added tax and translation is at the its performance and to allocate resources to the operating segment. There are three current exchange rate. If sales are hedged by forward exchange contracts translation is operating segments identified within the LKAB Group: Northern Division, Southern at the hedged rate. Division and Special Products. See Note 3 for a further description of the classification In the variable price model, quarterly prices are applied and the price is determined and presentation of operating segments. after the end of the quarter. The price is mainly affected by the current quarter’s average for 62%/65% sinter fines CFR in China. This means that income for the quarter 10 Consolidation principles and business combinations is based on a preliminary price. After the end of the quarter, a price adjustment is made 10.1 Subsidiaries that is allocated to the quarter. Income is recognized in net sales. Subsidiaries are companies that operate under the control of the Parent Company. Con- trol exists if the Parent Company has influence over the object of investment, is exposed 12.1.2 Sales of industrial minerals to or has rights to variable returns from its involvement and can use its influence over The Minerals group trades in a number of different minerals, both minerals in its own the investment to affect returns. In assessing whether control exists, potential voting possession such as magnetite, huntite and mica, and external minerals that are either shares and whether de facto control exists should be taken into account. further processed within the Group or sold on in unchanged form to the end customer. Subsidiaries are recognized according to the acquisition method. This method means Trade in industrial minerals occurs either in the country’s local currency or in a major that acquisition of a subsidiary is regarded as a transaction whereby the Group indirect- currency like USD or EUR. ly acquires the subsidiary’s assets and assumes its liabilities. The acquisition analysis The mineral magnetite is bought from the Parent Company. The prices are agreed determines the fair value on the date of acquisition of acquired identifiable assets and upon quarterly and are based on the Parent Company’s global price agreements for iron assumed liabilities and any non-controlling interest. ore products. Other in-house minerals are priced internally, while external minerals are In the case of business combinations where the transferred consideration, any priced according to individual price agreements with each supplier that may be agreed non-controlling interest and fair value of previously owned participating interest (in the annually or at shorter intervals. case of incremental acquisitions) exceed the fair value of the assets acquired and liabil- Sales of minerals are reported to customers in accordance with agreed upon sales ities assumed, the difference is recognized as goodwill. When the difference is negative, terms. Sales are recognized less value added tax and translation is at the current a so-called low-cost acquisition is recognized directly in profit for the year. exchange rate. Invoicing is carried out on delivery to the customer according to agreed upon prices 10.2 Associated companies and payment terms. Income is recognized in net sales. Associated companies are companies in which the Group has a significant but not controlling influence over operating and financial governance, normally by means of a 12.2 Rental income shareholding of between 20 and 50 percent of votes. From the date when the company Rental income from property is recognized on a straight-line basis in the income state- obtains a significant influence, participations in associated companies are included ment, based on the terms of the rental agreement. Rental income is recognized in other in the consolidated financial statements according to the equity method. The equity operating income. method means that the carrying amount of the Group’s shares in associated companies 12.3 Government grants is equivalent to the Group’s proportion of their share capital. The Group’s share of Government grants are recognized in the statement of financial position as deferred in- associated companies’ net profit is recognized under net financial income/expense. come when there is reasonable assurance that the grant will be received and the Group These profit shares represent the change in the carrying amount of participations in will comply with the terms associated with the grant. Grants are accrued systematically associated companies. in profit for the year in the same way and over the same periods as the costs for which 10.3 Transactions that are eliminated on consolidation the grants are intended to compensate. Government grants related to assets are recog- Intra-group receivables and liabilities, income or expenses, and unrealized gains or nized as a reduction in the asset’s carrying amount. losses arising from intra-group transactions between Group companies are eliminated 13 Leasing entirely when preparing the consolidated financial statements. Leases are classified in the consolidated financial statements as either finance leases 11 Foreign currency or operating leases. A lease is considered a finance lease when the economic risks and 11.1 Foreign currency transactions benefits associated with ownership are, in essence, transferred to the lessee. If this is Foreign currency transactions are translated into the functional currency at the not the case, it is classified as an operating lease. The Group’s leases are essentially exchange rate in effect on the transaction date. The functional currency is the currency operating leases. of the primary economic environment where the companies conduct their operations. In operating leases, lease payments are recognized on a straight-line basis over the Monetary assets and liabilities in foreign currencies are translated into the functional term of the lease. However, certain variable payments are usually expensed regularly. currency at the exchange rate in effect at the end of the reporting period. Exchange rate 14 Financial income and expense differences that arise on translation are recognized in profit for the year. Non-mone- Financial income consists of interest income on invested funds, dividend income, gains tary assets and liabilities that are recognized at historical cost are translated at the from the disposal of available-for-sale financial assets, gains from changes in value of exchange rate in effect on the transaction date. Non-monetary assets and liabilities financial assets measured at fair value via profit or loss and gains on hedging instru- recognized at fair value are translated to the functional currency at the rate in effect on ments that are recognized in profit for the year. the date of measurement at fair value. Interest income on financial instruments is recognized using the effective interest 11.2 Financial statements of foreign entities method (see below). Dividend income is recognized when the right to receive payment Assets and liabilities in foreign operations, including goodwill and other group-related is established. Earnings from the disposal of financial instruments are recognized when surpluses and deficits, are translated from the foreign operations’ functional currencies the risks and benefits associated with ownership of the instrument are transferred to to SEK, the Group’s presentation currency, at the exchange rate in effect at the end of the buyer and the Group no longer has control over the instrument. the reporting period. Income and expenses in a foreign operation are translated to SEK Financial expenses consist of interest expenses on borrowings, interest expenses on at an average exchange rate that constitutes an approximation of the exchange rates provisions, interest expenses on defined-benefit pension obligations, remeasurement that applied when the transactions occurred. Translation differences that arise from losses on financial assets measured at fair value via profit or loss, impairment of finan- currency translation of foreign operations are recognized in other comprehensive in- cial assets and losses on hedging instruments that are recognized in profit for the year. come and accumulated in a separate component in equity called the translation reserve. Borrowing costs are recognized in profit or loss using the effective interest method. When control of a foreign operation ceases, the accumulated translation differences Foreign exchange gains and losses are recognized net. attributable to the operation are realized, at which point they are reclassified from the The effective interest rate is the rate that makes the present value of all estimated translation reserve in equity to profit for the year. future payments or receipts during the expected fixed interest term equal to the carry- ing amount of the receivable or liability. The calculation includes all fees paid or received 12 Revenue by the contracting parties that are part of the effective interest rate, transaction costs 12.1 Sales of goods and rendering of services and all other premiums or discounts. Income from the sale of goods is recognized in profit for the year when the significant risks and benefits associated with ownership of the goods have been transferred to the buyer. Income from services is recognized in profit for the year based on the stage of completion at the end of the reporting period. Income is not recognized if it is probable that the future economic benefit will not accrue to the Group. Income is recognized at the fair value of the consideration that is received or is expected to be received, less any discounts.

86 | NOTES LKAB ANNUAL AND SUSTAINABILITY REPORT 2016 15 Taxes In accordance with IAS 39, LKAB has chosen not to include the interest component of Income tax consists of current tax and deferred tax. Income tax is recognized in profit forward exchange contracts in hedging relationships when applying hedge accounting for the year except when the underlying transaction is recognized in other compre- in the Group. Changes in the value of forward exchange contracts attributable to the hensive income or equity, in which case the associated tax effect is recognized in other interest component are instead recognized as financial income or expense since the comprehensive income or equity. interest component is considered to be financial in nature. Current tax is tax to be paid or received for the current year, applying the tax rates For option agreements, only the intrinsic value of the option as a hedging instrument that were set or for all practical purposes were set at the end of the reporting period, as is identified. Changes in an option’s time value are recognized in the income statement well as the adjustment of current tax attributable to prior periods. as described above. Deferred tax is calculated according to the balance sheet method, based on tempo- Cash and cash equivalents consist of cash on hand and demand deposits with banks rary differences arising between the carrying amount of assets and liabilities and their and similar institutions, and short-term liquid investments with maturities of three value for tax purposes. months or less from the date of acquisition that are subject to an insignificant risk of Temporary differences are not taken into consideration in consolidated goodwill, nor changes in value. for differences that arise on initial recognition of assets and liabilities that are not busi- 16.2.1 Fair value measurement ness combinations and which on the date of transaction do not affect either recognized Disclosures concerning financial assets and liabilities measured at fair value are based or taxable profit. Temporary differences attributable to participations in subsidiaries and on a fair value hierarchy with three levels. associated companies that are not expected to be reversed in the foreseeable future are Level 1: Quoted prices (unadjusted) on active markets for identical assets or liabili- not taken into consideration either. ties. The measurement of deferred tax is based on how the carrying amount of assets or Level 2: Inputs other than quoted market prices included within Level 1 that are liabilities is expected to be realized or settled. Deferred tax is calculated by applying the observable for the asset or liability, either directly (i.e. as prices) or indirectly (i.e. derived tax rates and tax regulations that were set or for all practical purposes were set at the from prices). end of the reporting period. Level 3: Inputs for the asset or liability that are not based on observable market data. Deferred tax assets related to deductible temporary differences and loss carryfor- wards are only recognized to the extent that it is probable they will be utilized. The value Interest-bearing instruments of deferred tax assets is reduced when it is no longer deemed probable that they can be The value of interest-bearing instruments is calculated using data from the inter- utilized. est-bearing securities market, obtained from Bloomberg. Any additional income tax arising from dividends is recognized when the dividend is Shares and alternative investments recognized as a liability. The value of these investments is calculated using data from the stock market or 16 Financial instruments received directly from brokers. Financial instruments recognized in the statement of financial position include assets Derivatives such as cash and cash equivalents, loans receivable, accounts receivable, financial The fair values ​​of derivative contracts are calculated using official quotations obtained investments and derivatives. Liabilities include trade payables, loans payable and from Bloomberg. derivatives. 16.3 Financial assets measured at fair value via profit or loss Classification of consolidated financial assets and liabilities is indicated in Note 34 This category consists of two sub-groups: financial assets held for trading and other Financial risks and risk management. Recognition of financial income and expense is financial assets that the company initially chose to place in this category (according to also discussed in the preceding Principle 14. the fair value option). Financial instruments in this category are measured regularly at 16.1 Recognition and derecognition in the statement of financial position fair value and changes in value are recognized in profit for the year. The first sub-group A financial asset or financial liability is recognized in the statement of financial position includes derivatives with a positive fair value, except for derivatives that are a designat- when the company becomes party to the contractual terms of the instrument. A receiv- ed and effective hedging instrument. The fair value option category includes financial able is recognized when the company has delivered and a contractual obligation for the instruments that, in accordance with management’s strategy, are held and appraised counterparty to pay exists, even if an invoice has not yet been sent. Accounts receivable based on fair value. are recognized in the statement of financial position when the invoice has been sent. 16.4 Loans and receivables Liabilities are recognized when the counterparty has delivered and there is a contrac- Loans and receivables are non-derivative financial assets with fixed or determinable tual obligation to pay, even if the invoice has not yet been received. Trade payables are payments that are not listed on an active market. These assets are measured at amor- recognized when an invoice is received. tized cost. Amortized cost is determined on the basis of the effective interest calculated A financial asset is derecognized from the statement of financial position when the on the date of acquisition. Receivables are recognized at the amount expected to be contractual rights are realized, expire or the company loses control over it. The same received; that is, less bad debts. applies to a portion of a financial asset. A financial liability is derecognized from the statement of financial position when the contractual obligation is fulfilled or otherwise 16.5 Available-for-sale financial assets extinguished. The same applies to a portion of a financial liability. The available-for-sale category includes financial assets that are not classified in any A financial asset and a financial liability are offset and the net amount is recognized other category or financial assets that the company initially classified in this category. in the statement of financial position only when there is a legally enforceable right to Holdings of shares and participations not recognized as subsidiaries or associated offset the amounts and there is an intention to settle the items on a net basis or to companies are recognized here. realize the asset and settle the liability. Assets in this category are measured regularly at fair value, with changes in value Acquisition and disposal of financial assets are recognized on the trade date, which is recognized in other comprehensive income and the accumulated changes in value in the date on which the company undertakes to acquire or dispose of the asset. a separate component of equity. Changes in value due to impairment, interest on debt instruments, dividend income and exchange differences on monetary items are recog- 16.2 Classification and measurement nized in profit for the year. On disposal of the asset the accumulated gain or loss previ- Financial instruments that are not derivatives are initially recognized at cost, cor- ously recognized in other comprehensive income is recognized in profit for the year. responding to the instrument’s fair value plus transaction costs. This applies to all Unlisted shares whose fair value cannot be reliably measured are measured at cost financial instruments except those classified as financial assets and liabilities carried at with regular impairment testing. fair value via profit or loss, which are recognized at fair value less transaction costs. A financial instrument is classified on initial recognition based on the purpose for which it 16.6 Financial liabilities measured at fair value via profit or loss was acquired. The classification determines how the financial instrument is measured This category consists of two sub-groups: financial liabilities held for trading and other after initial recognition as described below. financial liabilities that the company chose to place in this category (fair value option). Derivatives are initially recognized at fair value, meaning that transaction See the description above under Financial assets measured at fair value via profit or costs are charged to profit for the period. Following initial recognition, derivatives are loss. The first category includes the Group’s derivatives with a negative fair value, with recognized as described below. the exception of derivatives that are a designated and effective hedging instrument. If derivatives are used for hedge accounting and to the extent this is effective, chang- Changes in fair value are recognized in profit for the year. The company has no financial es in value of the derivative are recognized in the income statement at the same time liabilities in the fair value option category. and on the same line of the income statement as the hedged item. The value gain or loss 16.7 Other financial liabilities on the derivative is recognized as income or expense in operating profit or net financial Loans and other financial liabilities, such as trade payables, are included in this catego- income/expense, based on the purpose of the derivative and whether its use is related ry. Liabilities are measured at amortized cost. to an operating item or a financial item. In hedge accounting, the ineffective portion is recognized in the same manner as changes in the value of derivatives not designated for hedge accounting.

LKAB ANNUAL AND SUSTAINABILITY REPORT 2016 NOTES | 87 17 Derivatives and hedge accounting 18.6 Subsequent expenditures The Group’s derivatives have been acquired in order to financially hedge cash flow risks Subsequent expenditures are added to the cost only when it is probable that future that the Group is subject to: exchange rate exposure, changes in iron ore prices and economic benefits associated with the asset will flow to the company and the cost can changes in energy prices. be measured reliably. All other subsequent expenditures are recognized as expenses in Derivatives are initially recognized at fair value, which means that transaction costs the period in which they arise. are charged to profit for the period. Following initial recognition, derivatives are meas- A subsequent expenditure is added to the cost if the expenditure relates to the ured at fair value and changes in value are recognized as described below. An embed- replacement of identified components or parts thereof. In cases where a new compo- ded derivative is recognized separately unless it is closely related to the host contract. nent is created, the expenditure is also added to the cost. Any undepreciated carrying Hedge accounting is applied when the requirements for hedge accounting are met. amounts on replaced components, or parts thereof, are retired and expensed in conjunc- Under IAS 39, there must be a clear link to the hedged item. The hedge must also tion with the replacement. Repairs are expensed as incurred. effectively protect the hedged item; hedging must be documented and its effectiveness 18.7 Amortization principles measurable. Depreciation is on a straight-line basis over the asset’s estimated useful life; land is The Group’s derivatives to which hedge accounting is applied are classified as cash not depreciated. The Group applies component depreciation, which means that a compo- flow hedges of forecast transactions. The hedged flows can be both contracted and fore- nent’s estimated useful life forms the basis for depreciation. Facilities and equipment cast. Derivatives used to hedge highly probable future cash flows are recognized in the used in open-pit mines are normally depreciated over the lesser of expected life and the statement of financial position at fair value. Changes in value for the period are recog- life span of the mine to which they relate. nized in other comprehensive income and accumulated changes in value are recognized The following periods of use are applied to property, plant and equipment including in a separate component in equity (hedging reserve) until the hedged flow affects profit future remediation costs: for the year, at which point the hedging instrument’s cumulative changes in value are reclassified to profit for the year in conjunction with the hedged item’s effect on profit Properties used in operations, rental properties 15–100 years for the year. This means that gains and losses on hedges are recognized in profit for the Plant and machinery, open-pit mining Production-based year at the same time as gains and losses for the items that are hedged. Other plant and machinery 5–20 years 18 Property, plant and equipment Equipment, tools, fixtures and fittings 5–20 years 18.1 Owned assets Underground installations 12–20 years Property, plant and equipment is carried at cost less accumulated depreciation and any Surface mining facilities As ore is extracted impairment. Cost includes the purchase price and costs directly attributable to the asset Capitalized remediation costs As space for to put it in place in working order for use in accordance with the intended purpose. waste rock stockpile stockpile is utilized The cost of self-constructed non-current assets includes expenditures for materials, Capitalized remediation costs – other Estimated life of present produc- expenditures for employee benefits, and other fabrication costs directly attributable to tion structure. Reviewed once the asset where applicable. new main haulage levels are put Property, plant and equipment that consists of parts with different useful lives are into use. treated as separate components. The carrying amount of a property, plant and equipment item is derecognized from Properties used in operations are mainly classified as buildings, land improvements the statement of financial position when the asset is disposed of or retired. The gain or and land. Buildings and land improvements consist of several components that are loss arising from the disposal or retirement of an asset is the difference between the classified on the basis of function, such as roads, surfacing, service facilities, processing selling price and the asset’s carrying amount less direct selling expenses. Gains and plants, etc. losses are recognized as other operating income/expense. Rental properties consist of several components with varying useful lives. The main 18.2 Exploration and evaluation expenditures classifications are buildings and land. Buildings are divided into several components Greater knowledge of the extent of the iron ore deposits is necessary to secure access whose useful lives vary. to more ore and ensure the future development of operations. The orebody is surveyed The following main groups of components have been identified and form the basis and defined by means of exploration drilling, mainly via drifts adjacent to it. Ore deposit for depreciation of rental properties. exploration in both existing and future mining areas is expensed. This principle is also applied in the exploration of areas outside existing mines. Frames, foundations and interior walls 100 Evaluation of existing mineral assets is carried out to a lesser extent, mainly to pro- years vide a basis for a so-called mine plan for mineral assets, and this work is expensed. Water, sewage, electrical and heating systems 50 18.3 Underground facilities years Underground facilities from which iron ore is extracted can be divided into waste rock Exterior facades 40 mining (development phase) and iron ore mining (production phase). years Waste rock mining consists of work done to expose the orebody in conjunction with Windows 50 the construction of a new main haulage level, facilities pertaining to transport and years maintenance functions such as railways, roads, drifts, shafts, inclined drifts (a system of Interior finishing and appliances 15 access for vehicle traffic from surface level to the work site underground), and facilities years for service and electrical and air supply. Expenditures for facilities intended for use over a period of more than one year are capitalized in the statement of financial position. Depreciation methods, residual values and​​ useful lives are assessed at the end of each Depreciation occurs systematically over the life of the main haulage level concerned. year and adjusted as necessary. Iron ore mining mainly consists of development, cave drilling and loading, haulage 18.8 Urban transformation and hoisting of the ore. Expenditures for these activities have a useful life of at most one 18.8.1 Acquisition of properties year, which is why they are expensed as they are incurred. When property is acquired as part of urban transformation, the cost is divided into a 18.4 Open-pit mines building component and a mine component. The distinction is based on the assumption Iron ore mining above ground takes place in what are known as open-pit mines. Strip- that the building can be used for temporary rental for a limited period from acquisition ping is carried out to expose the orebody, and such things as moraine and barren rock until evacuation. The building component is calculated as the present value of the net are removed. This is called barren rock mining. cash flows from the rental. The mine component is defined as the property’s total cost During the development phase expenditures are capitalized as part of the cost of the less the building component. mine and depreciation occurs systematically over the life of the mine. The building component is expensed in the period in which the building is expected Expenditure on barren rock mining during the production phase that provide to be utilized. improved access to ore for future mining are recognized as assets and are depreciated The mine component is expensed immediately on acquisition of property inside the according to the production-based method. impact boundary as LKAB has already consumed the economic benefits of the property. 18.5 Remediation When property is acquired outside the impact boundary in an area designated for future Future expenditure on dismantling and removing assets and restoring sites or areas mining, the mine component is instead expensed when the impact boundary encroaches where they are located (remediation costs) as relates to ongoing operations are capital- upon the property in question so as to match the underlying production/consumption of ized. Capitalized amounts consist of the present value of estimated expenditures that the economic benefits. are simultaneously recognized as provisions. For a further description of urban transformation accounting principles, see Principle 28.1.1.

88 | NOTES LKAB ANNUAL AND SUSTAINABILITY REPORT 2016 18.8.2 Mine assets 20 Inventories Mine assets related to future mining are recognized for Kiruna. In cases where there is Inventories are measured at the lower of cost or net realizable value. The cost of inven- an agreement or a clear, constructive obligation that defines a commitment related to a tories is calculated using the first-in, first-out (FIFO) principle and includes expenditures future impact area, the provision is recognized according to a contract boundary. incurred in acquiring the inventory items and bringing them to their existing location The area between the contract boundary and the impact boundary constitutes an and condition. For finished goods and work in progress, cost includes an appropriate asset for future mining operations. The mine asset is expensed with respect to impact share of overheads based on normal operating capacity. boundary movement, that is, when properties, infrastructure etc. are encroached upon Net realisable value is the estimated selling price in the ordinary course of business, by the impact boundary. less estimated costs of completion and selling expenses.

18.8.3 Replacement properties 21 Impairments Two compensation options are offered to owners of rental properties and small houses: The Group’s recognized assets are assessed at the end of each reporting period to a replacement property equivalent to the existing property or financial compensa- determine whether there is any indication of impairment. IAS 36 is applied to the im- tion. For those choosing the replacement property option, all the costs of building the pairment of assets that are not dealt with by any other IAS standard. replacement property are recognized under property, plant and equipment. When the property is handed over this is offset against provisions for the commitment – see also 21.1 Impairment of property, plant and equipment, intangible assets and participations in Note 31. When the financial compensation option is chosen the compensation is offset subsidiaries against provisions for the commitment. If impairment is indicated, the recoverable amount of the asset is calculated. The recov- erable amount for goodwill is also calculated annually. If it is not possible to ascertain 19 Intangible assets essentially independent cash flows for an individual asset, the assets are grouped at 19.1 Goodwill the lowest level at which it is possible to identify essentially independent cash flows (a Goodwill is measured at cost less any accumulated impairment losses. Goodwill is al- so-called cash-generating unit). located to cash-generating units and is tested annually for impairment; see accounting The recoverable amount is the higher of fair value less selling expenses or value in principles in section 21.1. use. When calculating value in use, future cash flows are discounted using a discounting 19.2 Mining rights factor that reflects risk-free interest and the risks associated with the specific asset. Mining rights are measured at cost less accumulated amortization and any impair- An impairment loss is recognized when the carrying amount of an asset or ments. cash-generating unit exceeds its recoverable amount. Impairment losses are charged to the income statement. Once impairment has been identified for a cash-generating unit, 19.3 Research and development the impairment loss is initially allocated to goodwill, after which other assets in the unit Expenditures on research aimed at gaining new scientific or technical knowledge are are proportionally impaired. expensed as incurred. Expenditures on development, whereby research findings or other knowledge are 21.2 Impairment of financial assets applied to produce new or improved products or processes, are recognized as assets in At each reporting date, the company assesses whether there is objective evidence that the statement of financial position if the product or process is technically and commer- a financial asset or group of assets is impaired. Objective evidence means not only cially feasible and the company has sufficient resources to complete development and observable circumstances that have occurred and that have a negative effect on the then use or sell the intangible asset. The value includes directly attributable expendi- ability to recover the acquisition value, but also any significant or prolonged reduction tures such as goods and services and employee benefits. If the above criteria are not in the fair value of a financial investment that is classified as an available-for-sale met, the expenditures must be expensed. Because no such development expenditures financial asset. have met these criteria thus far, LKAB expenses all expenditures for development as Impairment of receivables is determined based on historical experience of customer incurred. losses on similar receivables. Impaired accounts receivable are recognized at the present value of expected future cash flows. Receivables close to their due date are not 19.4 Other intangible assets discounted. Other intangible assets such as software acquired by the Group are carried at cost less Upon impairment of an equity instrument classified as an available-for-sale financial accumulated amortization (see below) and impairment losses. asset, accumulated gains or losses previously recognized in equity are reclassified to 19.4.1 Emission allowances profit for the year via other comprehensive income. The amount of the accumulated loss LKAB participates in the EU’s system for trade in emission allowances, which grants that is reclassified from equity to profit for the year via other comprehensive income the right to emit carbon dioxide. Allowances are allocated across the European market. is the difference between the acquisition cost and the current fair value, less any impair- The emission allowances are recognized as intangible assets and deferred income on ment loss on the financial asset previously recognized in profit for the year. allocation, since the company has not qualified for any allowances at the time of issue. Impairment of available-for-sale financial assets is recognized in profit for the year Qualification is at the same rate as actual emissions, when a liability to deliver emis- under net financial income/expense. sion allowances also arises. The charge is reversed from deferred income to provision 21.3 Reversal of impairment for emission allowances. The liabilities are measured at the cost of allocated emission An impairment of assets included in the scope of IAS 36 is reversed if there is an allowances. The income is accrued against the cost it is intended to cover. indication that the impairment no longer exists and there has been a change in the When emission allowances are reported, an equivalent number of emission assumptions underlying the calculation of the recoverable value when the asset was allowances must be supplied. Thus the intangible non-current asset is exhausted and impaired. However, impairment of goodwill is never reversed. Impairment is reversed the provision for discharged emissions is settled. Where a liability to supply emission only to the extent that the asset’s carrying amount after reversal does not exceed the allowances exceeds the remaining allocation of emission allowances, the surplus carrying amount that would have been recognized, less amortization if appropriate, if no amounts are carried as a liability measured at the current market value of the number impairment had been recognized. of emission allowances necessary to settle the commitment. For information on Impairment losses on loans and accounts receivable are reversed if the previous amounts, see Note 30. reasons for impairment no longer exist and full payment from the customer is expected. 19.5 Subsequent expenditures Impairment of equity instruments classified as available-for-sale financial assets Subsequent expenditures on capitalized intangible assets are recognized as assets and previously recognized in profit for the year is reversed via other comprehensive in the statement of financial position only when they increase the future economic income instead of profit for the year. The impaired value is the value from which subse- benefits of the specific asset to which they relate. All other expenditures are expensed quent revaluations are made, which are recognized in other comprehensive income. as incurred. 22 Capital payments to shareholders 19.6 Amortization principles 22.1 Dividends Amortization is recognized in the income statement on a straight-line basis over the Dividends are recognized as liabilities once they have been approved at the Annual estimated useful life of intangible assets. Intangible assets that can be amortized are General Meeting. written off from the date they are available for use. The estimated useful lives are: 23 Earnings per share Mining rights 30–50 The calculation of earnings per share is based on consolidated profit for the year years attributable to the Parent Company shareholders and on the weighted average number of shares outstanding during the year. Customer-related intangible assets 3–5 years Software 5 years

An asset’s residual value and useful life are tested at the end of each reporting period and adjusted as necessary.

LKAB ANNUAL AND SUSTAINABILITY REPORT 2016 NOTES | 89 24 Employee benefts 25.1 Provisions for urban transformation 24.1 Defined-contribution pension plans See section 28.1.1 below. Defined-contribution pension plans are those for which the company’s obligation is 25.2 Provisions for remediation limited to the amount that it agrees to pay. In such cases the size of the employee’s See section 28.1.2 below. pension depends on the contributions the company pays to the plan or to an insurance company and the return on capital generated by the contributions. Consequently it is the 26 Contingent liabilities employee who bears the actuarial risk (that benefits will be lower than expected) and A disclosure concerning a contingent liability is made when there is a possible com- investment risk (that the invested assets will be insufficient to meet expected benefits). mitment arising from past events whose existence is confirmed only by one or more The company’s obligations for defined-contribution plans are recognized as an expense uncertain future events beyond the company’s control, or when there is a commitment in profit for the year as they are earned by the employees performing services for the that is not recognized as a liability or provision because it is not probable that an outflow company over a given period. of resources will be required or this cannot be measured with sufficient reliability.

24.2 Defined-benefit pension plans 27 Parent Company accounting principles Defined-benefit plans are plans for post-employment benefits other than defined-con- The Parent Company has prepared its annual report according to the Swedish Annual tribution plans. The Group’s net obligation in respect of defined-benefit pension plans Accounts Act (1995:1554) and the Swedish Financial Reporting Board’s recommenda- is calculated separately for each plan by estimating the amount of future benefit that tion RFR 2 Accounting for Legal Entities. Also applied are the Swedish Financial Re- employees have earned through their service in current and prior periods. This benefit porting Board’s recommendations for listed companies. RFR 2 states that in the annual is discounted to a present value. The discount rate is the rate at the end of the reporting report for the legal entity, the Parent Company shall apply all IFRS and interpretations period on a high-quality corporate bond, including mortgage bonds, with a maturity cor- adopted by the EU as far as possible within the framework of the Annual Accounts Act, responding to the Group’s pension obligations. When there is no viable market for such Pension Obligations Vesting Act and considering the relationship between accounting corporate bonds, the market rate for government bonds with a similar maturity is used and taxation. The recommendation specifies the exceptions from and additions to IFRS instead. The calculation is performed by a qualified actuary using the Projected Unit that must be made. Credit Method. The fair value of any plan assets are also calculated at the reporting date. The Group’s net obligation is the present value of the obligation, less the fair value of 27.1 Differences between Group and Parent Company accounting principles plan assets adjusted for any asset restrictions. The differences between Group and Parent Company accounting principles are detailed Revaluation effects consist of actuarial gains and losses, the difference between the below. The specified accounting principles for the Parent Company were applied con- actual return on plan assets and the amount included in net interest income and any sistently to all periods presented in the Parent Company’s financial statements. changes in the effects of asset restrictions (excluding interest included in net interest 27.2 Changed accounting principles in 2016 income). Actuarial gains and losses arise either because the actual outcome deviates Changes to RFR 2 have had no material effect on the Parent Company’s financial reports from previous assumptions or the assumptions change. Revaluation effects are recog- for 2016. nized in other comprehensive income. Unless otherwise stated below, the Parent Company’s accounting principles in 2016 When the calculation leads to an asset for the Group, the carrying amount of the as- changed in accordance with what is stated above for the Group. set is restricted to the lower of the surplus in the plan or the asset restriction calculated 27.3 Changes to RFR 2 that have not yet been applied using the discount rate. The asset restriction is the present value of the future economic The company management expects that changes to RFR 2 which have not yet come benefits in the form of reduced future contributions or a cash refund. In calculating the into effect will have no material effect on the Parent Company’s financial reports when present value of future reimbursements or payments, any minimum funding require- applied for the first time. ment is taken into account. Changes to or reductions in a defined-benefit plan are recognized on the earliest of 27.4 Classification and presentation the following dates: a) when the change in the plan or reduction occurs, or b) when the The Parent Company uses the terms income statement, balance sheet and cash flow company recognizes related restructuring costs and termination benefits. The changes/ statement for the reports that in the Group are called consolidated income statement, reductions are recognized immediately in profit for the year. statement of financial position and statement of cash flows respectively. The income The special employer’s contribution is part of the actuarial assumptions. Special statement and balance sheet for the Parent Company are presented in accordance with employer's contributions related to the difference between how the pension obligation the Annual Accounts Act, while the corresponding Group reports are based on IAS 1 is determined in a legal entity and in the Group are recognized as part of the net obli- Presentation of Financial Statements and IAS 7 Statement of Cash Flows. The most sig- gation. Provisions and receivables are not calculated to present value. In a legal entity, nificant differences from the consolidated statements relate primarily to recognition of the part of the special employer’s contribution that is calculated based on the Pension financial income and expenses, financial assets and equity, and the fact that provisions Obligations Vesting Act is recognized for simplicity’s sake as an accrued expense rather are recognized under a separate heading in the balance sheet. than as part of the net obligation/asset. 27.5 Subsidiaries and associated companies Net interest expense/income on the defined-benefit obligation/asset is recognized Participations in subsidiaries and associated companies are recognized in the Parent in profit for the year under net financial income/expense. Net interest income is based Company using the cost method. This means that transaction costs are included in the on the interest that arises when discounting the net obligation; that is, interest on the carrying amount of holdings in subsidiaries and associated companies. obligation, plan assets and the effect of any asset restrictions. Other components are 27.6 Financial instruments and hedge accounting recognized in operating profit. Owing to the relationship between accounting and taxation, the rules on financial 24.3 Short-term benefits instruments and hedge accounting in IAS 39 are not applied in the Parent Company as Short-term employee benefits are calculated without discounting and recognized as an a legal entity. expense when the related services are received. In the Parent Company, financial assets are measured at cost less any impairment A current liability is recognized for the expected cost of profit-sharing and bonus and financial current assets at the lower of cost or market. payments when the Group has a present legal or constructive obligation to make such Financial current assets are measured at the lower of cost or market. Interest-bear- payments as a result of services rendered by employees and the obligation can be ing securities, shares and alternative investments are measured at portfolio level. This estimated reliably. means that for instruments in the same portfolio, unrealized gains are offset against 24.4 Termination benefits unrealized losses. Excess losses are recognized as a reduction in interest income under Benefits associated with the termination of employment are expensed at the earlier of other interest income and similar items. Excess gains are not recognized. the date that the company can no longer withdraw the offer to the employee or the date Liabilities are measured at amortized cost. that the company recognizes restructuring costs. Derivatives used for hedging forecast cash flows to which hedge accounting is ap- plied are not carried in the balance sheet. Changes in value of derivatives are recognized 25 Provisions in the same period as the hedged cash flows. A provision differs from other liabilities because there is uncertainty about the date of Derivatives with a negative value and to which hedge accounting is not applied are payment or the amount required to settle the provision. A provision is recognized in the recognized as financial liabilities (other current liabilities) and measured at the amount statement of financial position when there is a present legal or constructive obligation most favourable to the company upon settlement or transfer of the obligation at the end as a result of a past event and it is probable that an outflow of economic resources will of the reporting period. be required to settle the obligation and a reliable estimate of the amount can be made. When hedging receivables in foreign currencies using forward exchange contracts, Provisions are made at the amount which is the best estimate of the expenditure the spot rate for the hedging date is used to measure the hedged receivable. The differ- required to settle the present obligation at the end of the reporting period. Where the ence between the forward and spot rates at the contract’s inception (forward premium) effect of payment timing is important, provisions are determined by discounting the is accrued over the term of the forward exchange contract. Accrued forward premiums expected future cash flow at a pre-tax rate that reflects current market assessments of are recognized as interest income or interest expense. the time value of money and, if appropriate, the risks specific to the liability.

90 | NOTES LKAB ANNUAL AND SUSTAINABILITY REPORT 2016 27.7 Financial guarantees LKAB has already had, and will continue to have, significant expenses related to The Parent Company’s financial guarantee agreements consist primarily of guarantees these urban transformations. For instance, LKAB will incur expenses for the acquisition that benefit subsidiaries. Financial guarantees mean that the company is committed of properties and municipal infrastructure such as electricity, water and sewage sys- to reimbursing the holder of a debt instrument for losses it incurs because a specified tems in the affected areas. The expenditures arise from LKAB’s mandatory obligation to debtor fails to make payment when due according to the contractual terms. The Parent compensate damage resulting from its mining activities. Company applies one of the easing rules permitted by the Financial Reporting Board Provisions for the damage caused by the deformations are made for damage already compared with the rules of IAS 39 in its recognition of financial guarantee agreements confirmed and damage not yet confirmed but that will occur a year or so later as a issued on behalf of subsidiaries. The Parent Company recognizes financial guarantees result of mining. as provisions in the balance sheet when the company has a commitment for which payment will probably be required to settle the commitment. LKAB recognizes a provision: 27.8 Anticipated dividends 1. When there is a present legal or constructive obligation towards a third party Anticipated dividends from subsidiaries are recognized in cases where the Parent 2. As a result of past events Company is solely entitled to decide on the size of the dividend and has decided on the 3. When it is expected to result in an outflow of economic resources from the company size of the dividend before publishing its financial statements. at settlement 4. When a reliable estimate of the amount can be made. 27.9 Operating segments The Parent Company does not report segments broken down in the same way and to In cases where there is an agreement or a clear, constructive obligation that defines a the same extent as the Group, but instead discloses the breakdown of net sales to the commitment related to a future impact area, the provision is recognized according to a Parent Company’s various business streams. contract boundary. In other cases, a commitment is only recognized when the so-called 27.10 Property, plant and equipment impact boundary encroaches on the property boundary or infrastructure. The impact With reference to RFR 2, IAS 16 (4), estimated future expenditures for dismantling and boundary is the boundary for impact-related compensation for mining carried out to removing assets and restoring sites or areas where they are located (remediation costs) date that has been defined by LKAB. in legal entities are not capitalized. Instead, the provision for these expenditures is made The impact boundary in Kiruna is based on the existing environmental conditions gradually over the useful life. boundary according to rulings from the environmental court. A two-year safety zone pe- 27.11 Intangible assets riod is added to cover movement that is expected to occur even if mining were to cease. 27.11.1 Research and development A further addition is made for what is known as the Mine City Park, whose conversion All research and development expenditures are recognized as expenses in the Parent period of about seven years will take it from urbanized area to park to industrial area. Company income statement. The impact boundary is moved each year to meet the spreading of ground defor- mations. The movement of the impact boundary is linked to deformation forecasts in 27.12 Employee benefits order to manage the effect of ground deformations not being continuous. Forecast 27.12.1 Defined-benefit plans movement according to the current deformation forecast is distributed equally over the Where a pension premium is paid to an insurance company, the Parent Company recog- period covered by the forecast. This is reconciled against updated forecasts of ground nizes a defined-benefit plan as a defined-contribution plan. deformations. The Parent Company applies principles other than those described in IAS 19 when The amount of the provision is calculated on the basis of objective valuation methods estimating defined-benefit plans. The Parent Company complies with the provisions of for each type of asset (residential properties, land, infrastructure, etc.) and a present the Pension Obligations Vesting Act and the regulations of the Financial Supervisory Au- value is assigned. thority since this is a prerequisite for tax deductibility. The most significant differences For the provisions recognized according to the contract boundary, the area between from IAS 19 are how the discount rate is determined, that estimation of the defined-ben- the contract boundary and the impact boundary is defined as a mine asset related to efit obligation is based on current salary levels without consideration of future salary in- future mining operations. creases and that all actuarial gains and losses are recognized in the income statement. All damages/compensation claims that are within the area delimited by the impact Pension obligations secured by transfer of funds to a pension fund are recognized boundary are calculated and recognized as an expense in the income statement, in light as a provision in the Parent Company only if the fair value of the fund assets is less of the fact that LKAB consumed the economic benefits that the mining generated. The than the amount of the obligations. No asset is recognized if the fund assets are greater impact boundary’s movement is expensed each year, either through expensing of the than the obligations. The value of the company’s obligations in respect of future pension mine asset or through an increase in provisions. payments is to be calculated in accordance with paragraph 2 above. In the case of Malmberget, the environmental conditions have been examined by the 27.13 Taxes Land and Environment Court but its ruling has not yet become legally effective. A new In the Parent Company balance sheet, untaxed reserves are recognized without dividing deformation forecast has been produced, resulting in additional provisions for eastern these into equity and deferred tax liabilities, in contrast to the Group. Similarly, the Par- Malmberget in addition to earlier provisions. ent Company does not allocate any part of appropriations to deferred tax in the income The impact will continue for many years ahead and there will be uncertainty regard- statement. ing geological consequences, assumptions about market values, demolition and waste 27.14 Group and shareholder contributions disposal costs, etc. Group contributions are recognized as appropriations. The uncertainty in the estimates made so far will decrease as the experience gained Shareholder contributions are recognized as an increase in the participations in is taken into account in future estimates. Group companies item by the donor. The recipient recognizes shareholder contributions Provisions for urban transformation at year-end amounted to MSEK 13,062 (12,234). directly in unrestricted equity. 28.1.2 Provisions for remediation Obligations for remediation, dismantling and decontamination as a result of mining 28 Signifcant estimates and assessments operations arise mainly as a result of legal environmental requirements. The Group The preparation of financial statements requires management and the Board of Direc- recognizes provisions for remediation costs for all legal and constructive obligations. tors to make assessments and assumptions that affect recognized assets, liabilities, Future expenditures for remediation are those resulting from closed operations and income and expenses and other information provided, such as contingent liabilities. ongoing operations. The company collaborates with regulatory authorities to devise Listed below are the estimates and assessments that are considered most important long-term plans for remediation of the mining areas. Provisions for ongoing operations for an understanding of the financial statements. Conditions for LKAB’s operations are based on these remediation plans. change gradually, which means that these assessments also change. The amount of the provision is calculated based on acreage and an assessment of 28.1 Provisions resulting from mining operations future expenditures based on present day technology and other circumstances. The 28.1.1 Provisions for urban transformation provision is assigned a present value. Future expenditures for closed operations are LKAB has extracted iron ore in Norrbotten for more than 120 years. The techniques used expensed so as to match underlying production/consumption of the economic benefits. in ore mining in underground mines leads to deformations in the form of fissures in the Future expenditures for ongoing operations are capitalized and are depreciated over ground where mining is conducted. The deformations are already or will become so their useful life. extensive that it is necessary to gradually move parts of Kiruna and Malmberget. Reviewing and updating of provisions is done as needed when the mine assets’ esti- Although there are many similarities between conditions in Kiruna and Malmberget, mated useful lives, costs, technical conditions, regulations or other conditions change. the geological conditions differ. In Kiruna there is a gradual spread of deformations The uncertainty in the estimates made so far will decrease as the experience gained with continuous fissuring, while in Malmberget there is widespread undermining of the is taken into account in future estimates. ground in the city centre. The deformations are a direct result of mining operations. Provisions for remediation at year-end amounted to MSEK 1,276 (1,254). For Malmberget it can be said that the impact area from the mining of several different orebodies has essentially encircled central Malmberget, which means that it is not able to function as a normal city centre.

LKAB ANNUAL AND SUSTAINABILITY REPORT 2016 NOTES | 91 28.2 Impairment testing of property, plant and equipment The Group reports significant values in the balance sheet in respect of property, plant NOTE 2 and equipment. Property, plant and equipment is tested for impairment in accordance with the accounting principles described in section 21.1 above. DISTRIBUTION OF REVENUE The recoverable amounts of cash-generating units are established by calculating val- Group Parent Company ue in use. The cash flow forecasts on which the values in use are calculated are based on estimates of future cash flow and assumptions concerning factors such as long-term MSEK 2016 2015 2016 2015 iron ore prices, the USD/SEK exchange rate and levels of capital expenditure. The calcu- Net sales: lation of value in use indicates a high level of sensitivity to changes in the assumptions. Sale of goods – iron ore 17,386 14,313 17,386 14,494 For 2016 the Group has recognized impairment losses of MSEK 1,192 (7,136), as Sale of goods – industrial minerals 1,521 1,533 described further in Note 9 Impairment of property, plant and equipment. Net sales iron ore hedging -2,733 -146 -2,754 -157 28.3 Useful life and depreciation method for property, plant and equipment Depreciation periods for main haulage levels, facilities and equipment in mines is Other 169 500 272 433 dependent on future ore extraction and the mine’s life span. It is essential that changes Total 16,343 16,200 14,904 14,770 in production and the ore base are reflected in the applied depreciation method and useful life, which is of particular importance when deciding on new main haulage levels. To achieve this, the useful lives and depreciation methods must be continuously reas- sessed. Changes in assessments could have a material impact on consolidated earnings NOTE 3 and financial position. The carrying amount of property, plant and equipment for operations at year-end SEGMENT REPORTING amounted to MSEK 32,076 (32,462). Depreciation for the year amounted to MSEK 2,746 (2,800). Segment information 28.4 Retirement benefits The Group’s business is divided into operating segments based on the parts of the Several assumptions are important components in the actuarial methods used to business monitored by the Group’s chief operating decision maker. This is known as a calculate pension provisions, which may have a significant impact on the recognized management approach. Group management follows up on the results of the operations net obligation and annual pension cost. The discount rate and expected return on plan and decides how resources are to be allocated based on the products that the Group assets are two critical assumptions used in the calculation of pension cost for the year produces and sells, and these operations form the Group’s operating segments. and the present value of pension obligations. Each operating segment is headed by a person with day-to-day responsibility for the These assumptions are assessed annually for each pension plan in each country. operations who regularly reports to Group management on the results of the operating The discount rate enables the measurement of future cash flows to present value segment’s performance and the resources needed. The Group’s internal reporting is on the measurement date. This rate must correspond to the yield on either high-quality structured so as to allow Group management to follow up on the operating segments’ corporate bonds including mortgage bonds or, if there is no viable market for such performance and results. bonds, government bonds. A lower discount rate increases the present value of the An operating segment’s results, assets and liabilities include items directly attribut- pension provision and the annual cost. able to that segment and items which can be allocated to that segment in a reasonable To determine the expected return on plan assets, LKAB considers the current and and reliable way. anticipated categories of the assets as well as historical and expected returns on the Intra-group prices between segments are based on the arm’s length principle; that is, various categories of assets. between parties that are independent of each other, well-informed and with an interest Several factors do not change as often, such as personnel turnover and retire- in completing transactions. ment age. For financial and other reasons, actual outcomes often differ from actuarial In the income statement, all items other than net financial income/expense and tax assumptions. expense have been allocated to operating segments. Assets that have been allocated Provisions for pensions at year-end amounted to MSEK 1,877 (1,607). are property, plant and equipment; other assets have not been allocated. As regards 28.5 Taxes liabilities, provisions for urban transformation and remediation have been allocated and Significant assessments are made to determine current tax assets and liabilities as well other liabilities have not been allocated. All tangible investments are included in the as deferred tax assets and liabilities. LKAB must assess the likelihood that deferred segments’ capital expenditures on property, plant and equipment. tax assets will be utilized to offset future taxable profits. Actual outcomes may differ from the estimates, for instance due to changed tax legislation or the outcome of final The Group comprises the following operating segments: reviews of tax returns by tax authorities and tax courts. A deferred tax liability (net) of MSEK -1,482 (-1,896) was recognized at year-end. The Northern Division. The Northern Division mines and processes iron ore products in corresponding amount for current tax is a net tax asset of MSEK 63 (62). Kiruna. The division produces both blast furnace pellets and pellets for steelmaking via direct reduction, known as DR pellets. 28.6 Disputes Southern Division. The Southern Division mines and processes iron ore products in LKAB is involved in a number of disputes and legal proceedings in the ordinary course Malmberget and Svappavaara. The division produces blast furnace pellets and fines. of business. Management consults with legal counsel on matters related to litigation Special Products. The Special Products Division encompasses LKAB Minerals, which and other experts both within and outside the company on matters concerning the or- sells minerals for industrial use, and LKAB Wassara, which sells drilling systems for dinary course of business. Management’s considered opinion is that neither the Parent the mining and construction industries. Company nor any subsidiary is currently involved in any legal or arbitration proceedings Other Segments. Other Segments covers supporting operations such as group-wide that are expected to have a material effect on the business, its financial position or functions (for HR, communications, finance and strategic R&D and exploration) and operational earnings. operations that take place in certain subsidiaries such as LKAB Berg och Betong. Other operating segments also include financial operations, including transactions and gains or losses relating to financial hedging for iron ore prices, currencies and the purchase of electricity.

The above new group structure and division into operating segments was implemented in 2016. From and including the fourth quarter 2016, the business is being managed and followed up according to the new structure. Comparative figures for 2015 have been restated according to the new segmentation.

92 | NOTES LKAB ANNUAL AND SUSTAINABILITY REPORT 2016

NOTE 3 SEGMENT REPORTING (CONT.)

Operating segment Group-related Group Division Division Special adjustments and North South Products Other Total eliminations Group MSEK 2016 2015 2016 2015 2016 2015 2016 2015 2016 2015 2016 2015 2016 2015 External income 10,301 8,519 6,998 5,860 1,542 1,556 -2,559 265 16,282 16,200 61 16,343 16,200 Internal income 75 87 164 138 56 63 1,744 1,839 2,039 2,127 -2,039 -2,127 Total income 10,376 8,606 7,162 5,998 1,598 1,619 -815 2,104 18,321 18,327 -1,978 -2,127 16,343 16,200

Operating proft/loss 1,164 -3,947 -278 -3,276 95 137 -2,680 -195 -1,699 -7,281 22 125 -1,677 -7,156 Net financial income/expense 613 -115 Proft/loss before tax -1,063 -7,271 Tax 85 1,585 Proft/loss for the year -978 -5,686

Significant non-cash items Depreciation of property, plant and equipment -1,264 -1,332 -782 -794 -33 -36 -667 -638 -2,746 -2,800 -2,746 -2,800 Impairment of property, plant and equipment -3,641 -1,192 -3,495 -1,192 -7,136 -1,192 -7,136 Costs for urban transformation provisions -1,727 -1,308 -379 -260 -2,106 -1,568 -2,106 -1,568

Assets 16,234 16,983 10,266 10,091 172 199 7,413 7,424 34,085 34,697 34,085 34,697 Unallocated assets 23,541 21,331 Total assets 57,626 56,028

Investments in property, plant and equipment 884 1,258 1,997 4,004 14 31 446 1,061 3,341 6,354 3,341 6,354

Liabilities 8,441 7,700 5,594 5,453 303 306 14,338 13,459 14,338 13,459 Unallocated liabilities 12,737 10,452 Total liabilities 27,075 23,911

1Refers to intra-group transactions and group-related adjustments, including those based on adjustment of the consolidated pension liability under IAS 19 and internal gains.

Geographic areas The vast majority of Group sales are made essentially from Sweden and, therefore, from Swedish companies. Nearly all of the Group’s products are made exclusively in Sweden. Capital expenditures have mainly been made in Sweden. The carrying amount of assets by country/region is based on where the assets are located, and the income for the Group is recognized based on where sales, production, delivery and invoicing occur, regardless of where the customers are located.

Sweden Rest of Europe Middle East & Asia Rest of world Group 2016 2015 2016 2015 2016 2015 2016 2015 MSEK External income 14,929 14,766 753 829 485 469 176 136 Property, plant and equipment 30,836 31,758 3,235 2,923 13 15 1 1 Investments in property, plant and equipment 3,053 5,824 286 529 2 1

Information about major customers Under IFRS 8, the company must disclose information about major customers. The LKAB Group has five major customers, each of which represents more than ten percent of Group sales. Sales to these customers accounted for 28 (28) percent, 19 (16) percent, 16 (12) percent, 13 (11) percent and 11 (10) percent of sales and are recognized in the Division North and Division South operating segments.

Division North Division South Other Segments Total Parent Company Parent Company 2016 2015 2016 2015 2016 2015 2016 2015 MSEK Net sales 10,376 8,606 7,162 5,998 -2,634 166 14,904 14,770

Europe Middle East & Asia Rest of world Parent Company Parent Company 2016 2015 2016 2015 2016 2015 2016 2015 MSEK Net sales by geographic market 9,983 10,301 4,252 3,862 669 607 14,904 14,770

LKAB ANNUAL AND SUSTAINABILITY REPORT 2016 NOTES | 93 NOTE 4 OTHER OPERATING INCOME Group Parent Company MSEK 2016 2015 2016 2015 Rental income, properties 179 184 Gain on sale of non-current assets 9 68 Exchange gain on receivables/liabilities related to operations 21 34 5 18 Insurance compensation 1 5 Rental and leasing income 1 Other 17 26 10 18 227 318 15 36

NOTE 5 OTHER OPERATING EXPENSES Group Parent Company MSEK 2016 2015 2016 2015 Property costs 133 143 Loss on sale of non-current assets 6 9 2 Exchange loss on receivables/liabilities related to operations 22 23 8 11 Insurance costs 59 145 Other 59 34 6 279 354 10 17

NOTE 6 EMPLOYEES, EMPLOYEE BENEFIT EXPENSES AND REMUNERATION OF SENIOR EXECUTIVES

Average number of em- Of whom Of whom Of whom Of whom ployees women men women men Parent Company 2016 2015 Sweden 3,219 20% 80% 3,366 20% 80% Parent Company total 3,219 20% 80% 3,366 20% 80%

Subsidiaries Sweden 515 20% 80% 553 18% 82% China 36 36% 64% 38 32% 68% Netherlands 28 32% 68% 29 28% 72% Norway 185 10% 90% 207 10% 90% United Kingdom 156 26% 74% 184 24% 76% Germany 19 47% 53% 20 50% 50% Other countries 66 17% 83% 66 20% 80% Subsidiaries total 1,005 20% 80% 1,097 19% 81%

Group total 4,224 20% 80% 4,463 20% 80%

Gender distribution in company management as at 31 December 2016 2016 2015 2015 Parent Company Percentage women Percentage men Percentage women Percentage men Board of Directors 27% 73% 27% 73% Other senior executives 25% 75% 33% 67%

Salaries and other remuneration of senior executives and other employees along with social costs in the Parent Company 2016 2015 Senior Senior Parent Company executives Other executives Other MSEK (19 persons) employees Total (22 persons) employees Total Salaries and other remuneration Sweden 22 1,700 1,722 65 1,737 1,802 Parent Company total 22 1,700 1,722 65 1,737 1,802 Social costs1 877 923 1Of which pension costs 347 392

94 | NOTES LKAB ANNUAL AND SUSTAINABILITY REPORT 2016 Remuneration of senior executives Principles for the remuneration of senior executives The President and other Group management executives are paid fixed salaries. Senior executives The salaries are pensionable. Senior executives refers to Board members, the President and other senior executives. Other senior executives refers to salaried employees who are members of Group President Jan Moström’s monthly salary was SEK 434,500. Retirement age for the management together with the President. President is 65. The President’s pension plan is a defined-contribution plan whereby Guidelines for the remuneration of senior executives LKAB makes a yearly provision of 30 percent of the President’s current fixed annual The remuneration of the Chairman of the Board and Board members is decided at the salary for a pension plan chosen by the President, which may include the ITP plan. Annual General Meeting, AGM. There are additional special fees for committee work. The portion of the premium allowance that is not used to cover premiums for the ITP For the remuneration of Group management, the AGM resolved to apply the most plan can be used by the President for a complementary pension plan. current government employment guidelines for persons in managerial positions The retirement age for other senior executives is 65. They have a defined-contribution and for incentive programmes for employees in state-owned enterprises. In 2016 pension plan to which LKAB allocates 30 percent of annual fixed salary. the government guidelines from April 2009 applied. New guidelines were adopted in Mutual notice of termination is six months for senior executives. Severance pay December 2016. Agreements concluded prior to the AGM on 27 April 2017 have equivalent to 18 monthly salaries is paid when notice of termination is given by the followed the government guidelines in place at the time. company. For further information, see the table Remuneration and other benefits to members of Group management in 2016. Preparation and decision-making processes for determining the remuneration of senior executives Remuneration terms for the President and salary-setting principles for Group manage- ment are prepared by a remuneration committee appointed by the Board of Directors. Four board members make up the committee. The Board takes decisions based on committee proposals. The Chairman of the Board approves the annual salary reviews of other Group management executives.

Remuneration and other benefits to the Board 2016 2015 SEK thousand Board fees Board fees Chairman of the Board Sten Jakobsson 600 570 Board member Leif Darner 263 167 Board member Maija Liisa Friman 263 250 Board member Eva Hamilton 263 167 Board member Lars-Åke Helgesson1 343 330 Board member Hanna Lagercrantz2 Board member Bjarne Moltke Hansen 180 Board member Ola Salmén1 220 Board member Hans Biörck 103 310 Board member Lars Pettersson 83 250 Board member Maud Olofsson 83 Total 2,320 2,127

1 The fee also includes remuneration for work on the Board’s audit committee and finance committee. 2 No board fees are paid to representatives of the Ministry of Enterprise and Innovation.

Remuneration and other benefits to members of Group management in 2016 Other Pension SEK thousand Basic salary benefits1 cost Total President Jan Moström 5,307 90 1,604 7,001 Senior Vice President Magnus Arnkvist 2,788 80 866 3,734 Senior Vice President Leif Boström 2,428 95 753 3,276 Senior Vice President Peter Hansson2 1,862 95 574 2,531 Senior Vice President Markus Petäjäniemi 2,747 129 843 3,719 Senior Vice President Stefan Romedahl3 2,263 166 735 3,164 Senior Vice President Grete Solvang Stoltz 2,174 93 658 2,926 Senior Vice President Åsa Sundqvist 2,679 11 798 3,488 Total 22,248 759 6,831 29,838

1 Other benefits include car, subsistence and life insurance benefits. 2 From 1 April 2016. 3 From 1 March 2016.

LKAB ANNUAL AND SUSTAINABILITY REPORT 2016 NOTES | 95 Remuneration and other benefits to members of Group management in 2015 Severance pay and termination Other Pension SEK thousand Basic salary benefits1 benefits2 cost3 Total President Jan Moström4 1,940 35 697 2,672 Senior Vice President Monica Bellgran 2,238 4,657 97 667 7,659 Senior Vice President Anders Furbeck 2,314 4,668 35 735 7,752 Senior Vice President Frank Hojem 1,653 3,469 84 518 5,724 Senior Vice President Katarina Holmgren 2,387 5,096 97 728 8,308 Senior Vice President Per-Erik Lindvall 2,697 5,593 98 827 9,215 Senior Vice President Markus Petäjäniemi 2,715 115 837 3,667 Senior Vice President Grete Solvang Stoltz 1,988 84 623 2,695 Senior Vice President Peter Schmid 2,391 5,081 175 732 8,379 Former President Lars-Eric Aaro5 3,080 7,323 44 916 11,363 Former Senior Vice President Anders Kitok6 1,377 4,113 27 469 5,986 Total 24,780 40,000 891 7,749 73,420

1 Severance pay, termination benefits, other premiums and pension expenses associated with termination of employment. 2 Other benefits include car, subsistence and life insurance benefits. 3 Pension cost excluding special employer’s contribution. 4 From 15 August 2015. 5 Until 15 August 2015 6 Until 15 August 2015

For additional information including post-employment benefits, see Note 29 Pensions.

NOTE 7 NOTE 9 AUDITORS’ FEES AND REIMBURSEMENTS IMPAIRMENT OF PROPERTY, PLANT AND EQUIPMENT

Group Parent Company Impairment losses on property, plant and equipment are split between cash-generating units within the Production North and Production South divisions as shown below. The MSEK 2016 2015 2016 2015 impairment losses do not affect other segments. Deloitte Group Parent Company Audit engagements 7 7 4 4 MSEK 2016 2015 2016 2015 Other auditing 0 0 Kiruna -3,642 -3,086 Tax consulting 1 1 1 1 Malmberget -1,725 -1,517 Other services 0 2 0 2 Svappavaara -1,192 -1,769 -1,184 -1,493 Effect on operating proft -1,192 -7,136 -1,184 -6,096 Other auditors Tax effect 262 1,570 260 1,341 Audit engagements 0 0 Effect on proft/loss for the year -930 -5,566 -924 -4,755

Audit engagements refer to statutory auditing of annual and consolidated financial The breakdown by asset type within property, plant and equipment is shown in Notes statements and bookkeeping as well as the Board’s and President’s administration of 15 and 16. the company, along with audits other reviews performed as agreed upon or contracted. LKAB’s assets are tested regularly for impairment and when there is an indication This includes other tasks that are incumbent on the company’s auditor to perform, that the assets have decreased in value. Due to the decision to mothball the open-pit as well as consultancy or other assistance occasioned by observations during such mine in Mertainen, which falls within the Southern Division, the individual assets for reviews or the performance of such other tasks. this mine have been separated from the cash-generating unit’s other assets and written down to fair value less costs to sell. The assets affected are primarily production assets such as crushers and mining machinery. NOTE 8 Fair value calculation: OPERATING EXPENSES BY TYPE The method and assumptions used to establish fair value are inputs that are not based on observable market data (level 3). Measurement of fair value has been based on Group Parent Company assessments of the market value of relevant production assets. These values may be MSEK 2016 2015 2016 2015 affected by how the iron ore market develops in the future. Employee benefit expenses 3,342 3,530 2,645 2,781 Materials, etc. 3,379 3,147 2,578 2,394 Energy 1,470 1,328 1,241 1,121 Transport 530 473 1,568 1,551 Provisions for urban transfor- 2,106 1,568 2,106 1,568 mation Depreciation, amortization and 3,947 9,953 3,397 8,247 impairment Other operating expenses 3,473 3,677 3,771 3,797 18,247 23,676 17,306 21,459

96 | NOTES LKAB ANNUAL AND SUSTAINABILITY REPORT 2016 Income from Other interest NOTE 10 other securities and income and similar receivables held as profit/loss items NET FINANCIAL INCOME/EXPENSE non-current assets Parent Company MSEK 2016 2015 2016 2015 Group Interest income, Group companies 49 51 22 21 MSEK 2016 2015 Interest income, other 171 71 Financial income Return on shares and alternative investments -2 115 Assets at fair value (fair value option) Income from options (net) 221 - Interest-bearing securities – net gain 163 68 Exchange rate fluctuations including foreign - Shares and alternative investments – net gain 142 143 exchange derivatives (net) 319 Assets at fair value (held for trading) 49 51 731 207 - Derivatives 215 8 Dividends on shares that are financial assets refers to holdings in SSAB. Return on plan assets 63 67 Interest income and similar profit/loss items includes return on interest-bearing securi- Other interest income 8 6 ties of MSEK 163 (68). Share of associated companies’ net profit 1 Interest expense and Exchange rate fluctuations including foreign exchange 307 Parent Company similar profit/loss items derivatives (net) MSEK 2016 2015 Total fnancial income 898 293 Interest expense, Group companies -1 -1 Financial expense Interest expense, interest-bearing liabilities -30 -22 Liabilities at fair value (held for trading) Interest expense, remediation costs -26 -23 - Derivatives -93 Interest expense, other -17 -2 Forward exchange contracts – interest component -49 -4 Interest expense, forward exchange -57 -8 Interest expense contracts - Interest-bearing liabilities -30 -22 Expense, options (net) -86 - Provision for remediation costs -33 -33 Fees for loan facility -16 -17 - Defined-benefit pension obligations -98 -111 Other financial expense -34 -29 - Other -17 -2 Exchange rate fluctuations including foreign Fees for loan facility -16 -17 exchange derivatives (net) -125 Other financial expense -35 -29 -181 -313 Share of associated companies’ net loss -7 Exchange rate changes refers mainly to remeasurement of receivables in foreign Exchange rate fluctuations including foreign exchange -97 currency. derivatives (net) Other financial expense refers primarily to transaction costs for derivatives and to Total fnancial expense -285 -408 banking and administration expenses. Net fnancial income/expense 613 -115

Exchange rate changes refers mainly to remeasurement of receivables in foreign currency. NOTE 11 Other financial expense refers primarily to transaction costs for derivatives and to APPROPRIATIONS banking and administration expenses. Income from participations Parent Company Parent Company in Group companies MSEK 2016 2015 MSEK 2016 2015 Difference between recognized depreciation/ amortization and depreciation/amortization according to plan: Dividend 255 0 Land and buildings 1 Capital gain on divestment of participations 2 Machinery and equipment -1,039 1,519 255 2

Group contribution received 318 230 Group contribution paid -31 -105 Total -752 1,645

Deferred tax on appropriations (excluding Group contributions) amounts to MSEK -229 (334). Deferred tax on appropriations is recognized only in the consolidated income statement.

LKAB ANNUAL AND SUSTAINABILITY REPORT 2016 NOTES | 97 Reconciliation of effective tax NOTE 12 Group TAXES MSEK 2016 (%) 2016 2015 (%) 2015 Proft/loss before tax -1,063 -7,271 Recognized in the income statement Tax as per effective tax rate Group for Parent Company 22.0% 234 22.0% 1,600 MSEK 2016 2015 Non-deductible expenses -0.3% -3 -0.1% -8 Current tax expense (-) Non-taxable income 0.2% 2 0.0% 3 Tax expense for the year -54 -47 Tax attributable to prior years -0.3% -3 -0.1% -8 Adjustment of tax attributable to prior years -3 -8 Standard interest on -57 -55 tax allocation reserve -0.9% -9 -0.3% -24 Deferred tax income (+) Tax effect, reclassification of Deferred tax on temporary differences 142 1,640 impairment losses -12.2% -130 142 1,640 Other -0.5% -6 0.3% 22 Total recognized Group tax 85 1,585 Recognized effective tax 8.0% 85 21.8% 1,585

Parent Company Parent Company MSEK 2016 2015 MSEK 2016 (%) 2016 2015 (%) 2015 Current tax expense (-) Proft/loss before tax -2,285 -5,061 Tax expense for the year Tax as per effective tax rate for Parent Company 22.0% 503 22.0% 1,113 Adjustment of tax attributable to prior years 0 -6 Non-deductible expenses 0.1% 2 0.0% 0 0 -6 Non-taxable income 2.5% 57 0.0% 0 Deferred tax income (+) Tax attributable to prior years 0.0% 0 -0.1% -6 Deferred tax on temporary differences 420 1,088 Standard interest on 420 1,088 tax allocation reserve -0.4% -9 -0.5% -24 Total recognized Parent Company tax 420 1,082 Tax effect, reclassification of impairment losses -5.7% -130 Other -0.1% -3 0.0% -1 Recognized effective tax 18.4% 420 21.4% 1,082

Tax attributable to other comprehensive income Group MSEK 2016 2015 Cash flow hedges 264 -119 Actuarial gains and losses 17 -38 281 -157

Recognized in the statement of fnancial position and the balance sheet

Recognized deferred tax assets and liabilities Deferred tax assets and liabilities are attributable to the following: Deferred Deferred Group tax asset tax liability Net MSEK 2016 2015 2016 2015 2016 2015 Property, plant and equipment 764 825 -2,365 -2,152 -1,601 -1,327 Current investments -59 -14 -59 -14 Tax allocation reserve 3 3 -1,994 -1,994 -1,991 -1,991 Contingency reserve -85 -85 -85 -85 Pension provisions 348 347 -27 -20 321 327 Provisions, urban transformation 1,124 991 1,124 991 Other provisions 72 70 72 70 Cash flow hedges 239 32 -7 -64 232 -32 Loss carryforwards 494 162 494 162 Other 14 7 -3 -4 11 3 Tax assets/liabilities 3,058 2,437 -4,540 -4,333 -1,482 -1,896 Offset -3,028 -2,418 3,028 2,418 Tax assets/liabilities, net 30 19 -1,512 -1,915 -1,482 -1,896

The loss carryforwards relate entirely to the Parent Company. There are no time limits on the utilization of the loss carryforwards.

98 | NOTES LKAB ANNUAL AND SUSTAINABILITY REPORT 2016 Deferred Deferred Parent Company tax asset tax liability Net MSEK 2016 2015 2016 2015 2016 2015 Property, plant and equipment 565 607 565 607 Pension provisions 142 153 142 153 Provisions, urban transformation 1,124 991 1,124 991 Loss carryforwards 494 163 494 163 Other 55 46 55 46 Tax assets/liabilities 2,380 1,960 2,380 1,960

Change in deferred tax in temporary differences and loss carryforwards

Balance at Recognized in Recognized in Other Balance at Group 1 Jan 2015 income statement other comprehensive changes 31 Dec 2015 MSEK income Property, plant and equipment -2,505 1,178 -1,327 Current investments -7 -7 -14 Tax allocation reserve -1,991 -1,991 Contingency reserve -93 8 -85 Pension provisions 352 13 -38 327 Provisions, urban transformation 689 302 991 Other provisions 50 20 70 Cash flow hedges 85 2 -119 -32 Loss carryforwards 26 136 162 Other 15 -12 3 -3,379 1,640 -157 -1,896

Balance at Recognized in Recognized in Other Balance at Group 1 Jan 2016 income statement other comprehensive changes 31 Dec 2016 MSEK income Property, plant and equipment -1,327 -274 -1,601 Current investments -14 -45 -59 Tax allocation reserve -1,991 -1,991 Contingency reserve -85 -85 Pension provisions 327 -23 17 321 Provisions, urban transformation 991 133 1,124 Other provisions 70 2 72 Cash flow hedges -32 264 232 Loss carryforwards 162 332 494 Other 3 17 -9 11 -1,896 142 281 -9 -1,482

Parent Company Balance at Recognized in Balance at MSEK 1 Jan 2015 income statement 31 Dec 2015 Property, plant and equipment -6 613 607 Pension provisions 149 4 153 Provisions, urban transformation 689 302 991 Loss carryforwards 163 163 Other 40 6 46 872 1,088 1,960

Parent Company Balance at Recognized in Balance at MSEK 1 Jan 2016 income statement 31 Dec 2016 Property, plant and equipment 607 -42 565 Pension provisions 153 -11 142 Provisions, urban transformation 991 133 1,124 Loss carryforwards 163 331 494 Other 46 9 55 1,960 420 2,380

LKAB ANNUAL AND SUSTAINABILITY REPORT 2016 NOTES | 99 Depreciation and impairment are included in the following lines of the income statement NOTE 13 Group EARNINGS PER SHARE MSEK 2016 2015 Cost of goods sold -1 -1 The number of shares amounted to 700,000 in both 2016 and 2015. Earnings attribut- able to Parent Company shareholders are MSEK -978 (-5,686) and earnings per share Of which impairment are thus SEK -1,397 (-8,123). There are no options or potential ordinary shares, so there -1 -1 is no dilution. Parent Company Mining MSEK rights Other Total NOTE 14 Cost of acquisition Opening balance, 1 Jan 2015 161 49 210 INTANGIBLE ASSETS Change in emission allowances 2 2 All of the Group’s intangible assets are acquired. Closing balance, 31 Dec 2015 161 51 212 Group Goodwill Mining Other Total MSEK rights Cost of acquisition Opening balance, 1 Jan 2016 161 51 212 Opening balance, 1 Jan 2015 228 277 76 581 Change in emission allowances 10 10 Change in emission allowances 2 2 Closing balance, 31 Dec 2016 161 61 222 Disposals and retirements -16 -3 -19 Exchange rate differences -3 1 -2 Depreciation Closing balance, 31 Dec 2015 212 274 76 562 Opening balance, 1 Jan 2015 -161 -13 -174 Closing balance, 31 Dec 2015 -161 -13 -174

Opening balance, 1 Jan 2016 212 274 76 562 Change in emission allowances 10 10 Opening balance, 1 Jan 2016 -161 -13 -174 Exchange rate differences -9 -2 -11 Closing balance, 31 Dec 2016 -161 -13 -174 Closing balance, 31 Dec 2016 203 272 86 561 Carrying amount

Depreciation At 1 Jan 2015 36 36 Opening balance, 1 Jan 2015 -5 -168 -40 -213 At 31 Dec 2015 38 38 Depreciation for the year -1 -1 Exchange rate differences 1 1 2 4 At 1 Jan 2016 38 38 Closing balance, 31 Dec 2015 -4 -168 -36 -208 At 31 Dec 2016 48 48

Opening balance, 1 Jan 2016 -4 -168 -36 -208 Impairment testing of cash-generating units containing goodwill The LKAB Minerals Ltd cash-generating unit, which forms parts of the segment Special Depreciation for the year -1 -1 Products, has substantial recognized goodwill value relative to the Group’s total recognized Disposals and retirements goodwill value. Exchange rate differences 1 1 Closing balance, 31 Dec 2016 -4 -168 -36 -208 MSEK 2016 2015 LKAB Minerals Ltd 104 116 Impairment Units without significant goodwill value, Opening balance, 1 Jan 2015 -47 -93 -140 combined 47 46 Exchange rate differences 1 1 151 162 Closing balance, 31 Dec 2015 -46 -93 -139 The cash-generating units’ recoverable amounts are based on the same important assumptions. Opening balance, 1 Jan 2016 -46 -93 -139 Impairment testing is based on measurement of value in use. This value is based on Exchange rate differences -2 cash flow forecasts for which the first three years are based on the three-year business plan determined by the management of the segment Special Products. The total length Closing balance, 31 Dec 2016 -48 -93 -141 of the forecast period corresponds to the useful life of the units’ most important assets. The cash flows forecast after the first three years were based on annual growth of 2–3 Carrying amount (2–3) percent, which corresponds to the long-term growth rate of the units’ markets. At 1 Jan 2015 176 16 36 228 The forecast cash flows were calculated to present value using an individual discount rate (WACC). The important assumptions in the three-year business plan are described At 31 Dec 2015 162 13 40 215 below.

At 1 Jan 2016 162 13 40 215 Important variables Method for estimating value At 31 Dec 2016 151 11 50 212 Market growth Demand for these products has historically followed economic

cycles. Expected market growth is based on a transition from the prevailing economic situation to the anticipated long-term growth. Employee benefit The forecast for employee benefit expenses is based on expected expenses inflation and certain real wage growth. The forecast agrees with previous experience.

The recoverable amount of the LKAB Minerals Ltd cash-generating unit exceeds the carrying amount by MSEK 4. The discount rate before tax is 12.95 (12.15) percent.

100 | NOTES LKAB ANNUAL AND SUSTAINABILITY REPORT 2016 NOTE 15 PROPERTY, PLANT AND EQUIPMENT FOR OPERATIONS

Plant Equipment Group Land Underground and tools, fixtures Construction MSEK and buildings installations machinery and fittings in progress Total Cost of acquisition Opening balance, 1 Jan 2015 8,963 6,478 31,485 7,055 10,028 64,009 Acquisitions 103 11 40 24 6,176 6,354 Capitalization of remediation 8 8 Reclassifications 232 1,132 -292 117 -1,184 5 Disposals and retirements -61 -12 -18 -419 -510 Exchange rate differences -183 -78 -14 -109 -384 Closing balance, 31 Dec 2015 9,062 7,621 31,143 7,164 14,492 69,482

Opening balance, 1 Jan 2016 9,062 7,621 31,143 7,164 14,492 69,482 Acquisitions 94 2 172 8 3,065 3,341 Capitalization of remediation 27 27 Reclassifications 1,047 -229 8,529 174 -9,529 -8 Disposals and retirements -51 -23 -253 -74 -9 -410 Exchange rate differences 139 60 12 115 326 Closing balance, 31 Dec 2016 10,318 7,371 39,651 7,284 8,134 72,758

Depreciation Opening balance, 1 Jan 2015 -3,370 -3,964 -15,317 -3,549 -26,200 Depreciation for the year -364 -313 -1,622 -501 -2,800 Reclassifications -18 26 -13 -5 Disposals and retirements 13 23 24 60 Exchange rate differences 77 41 9 127 Closing balance, 31 Dec 2015 -3,662 -4,251 -16,888 -4,017 -28,818

Opening balance, 1 Jan 2016 -3,662 -4,251 -16,888 -4,017 -28,818 Depreciation for the year -353 -204 -1,757 -432 -2,746 Reclassifications 139 36 -79 72 168 Disposals and retirements 11 23 227 73 334 Exchange rate differences -37 -31 -8 -76 Closing balance, 31 Dec 2016 -3,902 -4,396 -18,528 -4,312 -31,138

Impairment Opening balance, 1 Jan 2015 -544 -399 -497 -10 -158 -1,608 Impairment for the year -824 -490 -2,511 -551 -2,388 -6,764 Disposals and retirements 170 170 Closing balance, 31 Dec 2015 -1,368 -889 -3,008 -561 -2,376 -8,202

Opening balance, 1 Jan 2016 -1,368 -889 -3,008 -561 -2,376 -8,202 Impairment for the year -8 -1,184 -1,1921 Reclassifications -226 37 -843 -18 900 -150 Closing balance, 31 Dec 2016 -1,602 -852 -3,851 -579 -2,660 -9,544

Carrying amount 1 January 2015 5,049 2,115 15,671 3,496 9,870 36,201 31 December 2015 4,032 2,481 11,247 2,586 12,116 32,462

1 January 2016 4,032 2,481 11,247 2,586 12,116 32,462 31 December 2016 4,814 2,123 17,272 2,393 5,474 32,076

1 Impairment losses in the Group amount to MSEK 1,192 and relate to the Mertainen open-pit mine.

Capitalized remediation costs amount to MSEK 813 (785), while cumulative depreciation and impairment losses amount to MSEK -597 (-575). Of the net amount of MSEK 216 (210), MSEK 179 (171) is recognized as land and buildings and MSEK 37 (39) as plant and machinery.

LKAB ANNUAL AND SUSTAINABILITY REPORT 2016 NOTES | 101 Depreciation and impairment are included in the following lines of the income statement Group MSEK 2016 2015 Cost of goods sold -3,909 -9,489 Of which impairment -1,192 -6,731 Selling expenses -5 Administrative expenses -13 -16 Of which impairment -3 Research and development -8 -47 Of which impairment -30 Other operating expenses -8 -7 -3,938 -9,564

Plant Equipment Parent Company Land Underground and tools, fixtures Construction MSEK and buildings installations machinery and fittings in progress Total Cost of acquisition Opening balance, 1 Jan 2015 5,823 6,478 29,936 1,215 9,172 52,624 Acquisitions 131 11 15 9 5,651 5,817 Reclassifications 118 1,132 -321 68 -1,001 -4 Disposals and retirements -3 -3 -517 -523 Closing balance, 31 Dec 2015 6,072 7,621 29,627 1,289 13,305 57,914

Opening balance, 1 Jan 2016 6,072 7,621 29,627 1,289 13,305 57,914 Acquisitions 87 2 167 1 2,830 3,087 Reclassifications 984 -229 8,442 79 -9,272 4 Disposals and retirements -3 -23 -173 -4 -333 -536 Closing balance, 31 Dec 2016 7,140 7,371 38,063 1,365 6,530 60,469

Depreciation Opening balance, 1 Jan 2015 -2,274 -3,964 -14,443 -853 -21,534 Depreciation for the year -222 -313 -1,512 -104 -2,151 Reclassifications -18 26 -8 Disposals and retirements 2 4 6 Closing balance, 31 Dec 2015 -2,514 -4,251 -15,961 -953 -23,679

Opening balance, 1 Jan 2016 -2,514 -4,251 -15,961 -953 -23,679 Depreciation for the year -251 -204 -1,666 -92 -2,213 Reclassifications 136 36 -9 4 167 Disposals and retirements 2 23 171 4 200 Closing balance, 31 Dec 2016 -2,627 -4,396 -17,465 -1,037 -25,525

Impairment Opening balance, 1 Jan 2015 -543 -399 -496 -9 -158 -1,605 Impairment for the year -552 -490 -2,431 -58 -2,193 -5,724 Disposals and retirements 170 170 Closing balance, 31 Dec 2015 -1,095 -889 -2,927 -67 -2,181 -7,159

Opening balance, 1 Jan 2016 -1,095 -889 -2,927 -67 -2,181 -7,159 Impairment for the year -1,184 -1,184 Reclassifications -222 37 -840 -16 889 -152 Closing balance, 31 Dec 2016 -1,317 -852 -3,767 -83 -2,476 -8,495

Carrying amount 1 January 2015 3,006 2,115 14,997 353 9,014 29,485 31 December 2015 2,463 2,481 10,739 269 11,124 27,076

1 January 2016 2,463 2,481 10,739 269 11,124 27,076 31 December 2016 3,196 2,123 16,831 245 4,054 26,449

Total impairment losses in the Parent Company amount to MSEK 1,184 and relate to the Mertainen open-pit mine.

102 | NOTES LKAB ANNUAL AND SUSTAINABILITY REPORT 2016 Depreciation and impairment are included in the following lines of the income statement The balance sheet item includes the following assets:

Group and Parent Company Parent Company MSEK 31/12/2016 31/12/2015 MSEK 2016 2015 Mine asset 1,092 1,896 Cost of goods sold -3,385 -7,823 Replacement properties 503 179 Of which impairment -1,184 -5,691 Other property acquisitions 414 160 Administrative expenses -4 -5 2,009 2,235 Of which impairment -3 Research and development -8 -47 Regarding reporting of replacement properties refer to Note 1, Principle 18.8.3. See also Of which impairment -30 Note 31 for an overall picture of items associated with urban transformation. -3,397 -7,875 NOTE 17 NOTE 16 PARTICIPATIONS IN ASSOCIATED COMPANIES Group PROPERTY, PLANT AND EQUIPMENT FOR URBAN TRANSFORMATION Summary financial information for non-material holdings in associated companies, Group and Parent Company Buildings Construction Total based on amounts included in the consolidated financial statements, is detailed below. MSEK and land in progress MSEK 31/12/2016 31/12/2015 Cost of acquisition Carrying amount 38 45 Opening balance, 1 Jan 2015 3,303 169 3,472 Capitalization of mine asset 175 175 Group’s share of: Reassessment of mine asset -392 -392 Result for continuing operations -7 1 Reclassifications 173 10 183 Total comprehensive income -7 1 Closing balance, 31 Dec 2015 3,259 179 3,438

Parent Company Opening balance, 1 Jan 2016 3,259 179 3,438 Capitalization of mine asset 208 208 MSEK 31/12/2016 31/12/2015 Carrying amount 40 40 Acquisitions 285 285 Reclassifications -6 39 33 The holding refers to Norrskenet AB, corporate ID number 556537-7065, domiciled in Closing balance, 31 Dec 2016 3,461 503 3,964 Kiruna. The number of shares held is 2,500 which corresponds to 33.3 percent of the voting power and capital. Expensing Opening balance, 1 Jan 2015 -144 -144 NOTE 18 Expensing of mine asset and mine component -687 -687 HOLDINGS IN JOINT OPERATIONS Closing balance, 31 Dec 2015 -831 -831 Group Opening balance, 1 Jan 2016 -831 -831 The Group has a 50 percent co-ownership in the company Likya Minerals and its sub- sidiary Likya Minerals Export, whose main products are minerals with flame retardant Expensing of mine asset properties (UltraCarb). Likya operates out of Turkey. and mine component -740 -740 Likya is a separate company but co-ownership is still considered to be a joint opera- Closing balance, 31 Dec 2016 -1,571 -1,571 tion. The assessment is based on the fact that the co-owners have a commitment to buy all services that Likya provides and consequently finances Likya’s entire operation in Impairment order to settle its liabilities. Opening balance, 1 Jan 2015 80 percent of Likya’s sales relate to companies within the LKAB Group. Impairment for the year -372 -372 Closing balance, 31 Dec 2015 -372 -372 NOTE 19

Opening balance, 1 Jan 2016 -372 -372 RECEIVABLES FROM GROUP COMPANIES AND ASSOCIATED COMPANIES Reclassification -12 -12 Parent Company Closing balance, 31 Dec 2016 -384 -384 MSEK 31/12/2016 31/12/2015 Accumulated acquisition value Carrying amount Opening balance, 1 January 1,395 1,698 1 January 2015 3,159 169 3,328 Lending 442 31 December 2015 2,056 179 2,235 Amortization -185 -192 Conversion of loan into unconditional sharehold- 1 January 2016 2,056 179 2,235 er contribution -153 31 December 2016 1,506 503 2,009 Exchange rate fluctuation 105 -111 Closing balance, 31 December 1,604 1,395 Expensing and impairment are included in the following lines of the income statement Group and Parent Company Accumulated impairment MSEK 2016 2015 At beginning of year -153 -153 Cost of goods sold -740 -1,059 Reversed impairment 153 Of which impairment -372 Closing balance, 31 December 0 -153 -740 -1,059 Carrying amount at year-end 1,604 1,242

LKAB ANNUAL AND SUSTAINABILITY REPORT 2016 NOTES | 103 Parent Company NOTE 20 MSEK 31/12/2016 31/12/2015 FINANCIAL INVESTMENTS Non-current receivables Company-owned endowment insurance 110 107 Group MSEK 31/12/2016 31/12/2015 110 107 Financial investments held as Other current receivables non-current assets Receivables, collateral for derivatives 1,326 Shares and participations – available-for-sale 788 328 Receivables, credit institutions 868 536 assets Tax assets 102 71 Financial assets for funded pension obligations 308 253 Recoverable VAT 38 246 1,096 581 PRI balance 17 21 Financial investments held as current assets Tax account 0 82 Interest-bearing securities – initially measured Other 63 5 at fair value 7,775 7,111 2,414 961 Shares and alternative investments – initially measured at fair value 3,496 3,014 Parent Company Interest-bearing securities – held to maturity 100 MSEK 31/12/2016 31/12/2015 11,271 10,225 Non-current receivables Accumulated acquisition value Shares and participations mainly refers to shares in SSAB. The carrying amount of the At beginning of year 107 134 SSAB shares significantly exceeds the cost of acquisition. Change in value during the Amortization -42 year is recognized directly in other comprehensive income. Change in value of endowment insurance 3 15 Closing balance, 31 December 110 107 NOTE 21 OTHER NON-CURRENT SECURITIES NOTE 23 Parent Company INVENTORIES MSEK 31/12/2016 31/12/2015 Accumulated acquisition value Group MSEK 31/12/2016 31/12/2015 At beginning of year 131 129 Raw materials and consumables 1,802 1,907 Acquisitions 115 2 Work in progress 4 5 Closing balance, 31 December 246 131 Finished goods and goods for resale 1,030 1,003 2,836 2,915

Parent Company Parent Company MSEK 31/12/2016 31/12/2015 MSEK 31/12/2016 31/12/2015 Specification of other non-cur- Market Carrying Market value Carrying Raw materials and consumables 1,615 1,681 rent securities value or amount or equivalent amount equivalent Finished goods 718 596 SSAB 738 196 279 83 2,333 2,277 Other holdings 50 50 48 48 788 246 327 131 NOTE 24 Other holdings relate primarily to Vindln AB. ACCOUNTS RECEIVABLE Accounts receivable are recognized after taking into account consolidated bad debt losses for the year amounting to MSEK 13 (4). Regarding credit risks in accounts receiv- NOTE 22 able see Note 34. NON-CURRENT RECEIVABLES AND OTHER RECEIVABLES

Group MSEK 31/12/2016 31/12/2015 NOTE 25 Other receivables that are current assets PREPAID EXPENSES AND ACCRUED INCOME Receivables, collateral for derivatives 1,326 Group Parent Company Receivables, credit institutions 869 536 MSEK 31/12/2016 31/12/2015 31/12/2016 31/12/2015 Tax assets 97 77 Prepaid 21 39 16 34 Recoverable VAT 53 283 insurance premiums Derivatives 35 348 Prepaid option 2 48 Receivables from clients 26 28 premiums Tax account 21 85 Prepaid expenses, fair 663 663 PRI balance 18 21 value of derivatives Other 80 14 Accrued income, 44 167 44 167 iron ore derivatives 2,525 1,392 Other prepaid expenses 76 59 43 39 Other accrued income 11 17 1 8 815 282 769 296

104 | NOTES LKAB ANNUAL AND SUSTAINABILITY REPORT 2016 Parent Company NOTE 26 Restricted reserves Restricted reserves cannot be reduced through distribution of profits. EQUITY Statutory reserve Specification of equity reserves The purpose of the statutory reserve is to save a portion of net profit that is not used to MSEK 2016 2015 cover losses brought forward. Translation reserve Non-restricted equity Opening translation reserve -150 -65 Profit brought forward Translation differences for the year 67 -85 Comprises the previous year’s non-restricted equity after any distribution of profits. Closing translation reserve -83 -150 Together with profit for the year, it comprises non-restricted equity; that is, the amount that is available as a dividend to shareholders.

Fair value reserve Opening fair value reserve 197 481 Available-for-sale financial assets: NOTE 27 Revaluation recognized directly against 345 -284 INTEREST-BEARING LIABILITIES other comprehensive income Group Closing fair value reserve 542 197 MSEK 2016 2015 Non-current liabilities Hedge reserve Issued corporate bonds 2,984 1,996 Opening hedge reserve 105 -316 Other bond financing 250 Cash flow hedges 3,234 1,996 Recognized directly in other comprehensive income -969 126 Current liabilities Transferred to the income statement -232 414 Issued commercial papers 800 1,000 Tax attributable to revaluations for the year 264 -119 Liability, repurchase agreements 1,071 Closing hedge reserve -832 105 1,871 1,000

Terms and payback periods Total reserves MSEK 2016 2015 Opening reserves 152 100 Maturity Interest Nom. Recog. Nom. Recog. Change in reserves for the year: amount value value value Translation reserve 67 -85 Bonds – Fair value reserve 345 -284 fixed interest 2019 1.125% 1,600 1,597 1,600 1,596 Hedge reserve -937 421 2021 1.60% 1,000 996 Closing reserves -373 152 2022 1.1425% 250 250 Bonds 3-month Share capital – variable interest 2019 STIBOR 391 391 400 400 As at 31 December 2016, the registered share capital comprised 700,000 (700,000) -0.10 – ordinary shares. The share capital consists of only one type of share and all shares have Commercial papers 2016 -0.15% 800 800 1,000 1,000 equal rights. Liability, repurchase Holders of ordinary shares are entitled to a dividend that is determined in due agreements 2017 1,071 1,071 course, and each share entitles the holder to one vote at the AGM. The quota value is Total interest- SEK 1,000 per share. bearing liabilities 5,112 5,105 3,000 2,996

Translation reserve Financial liabilities are classified as other financial liabilities and are measured at amor- The translation reserve covers all exchange rate differences that arise in translating the tized cost using the effective interest method. financial statements of foreign entities whose financial statements were prepared in currencies other than the Group’s reporting currency. The Parent Company and Group For more information about the company’s exposure to interest rate risk, see Note 34. present their financial statements in SEK.

Fair value reserve Available-for-sale financial assets NOTE 28 The fair value reserve includes the accumulated net change in the fair value of availa- ble-for-sale financial assets up until the assets are derecognized from the statement of LIABILITIES TO CREDIT INSTITUTIONS financial position. Any impairment is recognized in the income statement. Parent Company Hedge reserve MSEK 2016 2015 The hedge reserve includes the effective portion of the accumulated net change in the Non-current liabilities fair value of cash flow hedging instruments attributable to hedging transactions that Issued corporate bonds 2,984 1,996 have not yet occurred. Other bond financing 250 Dividend 3,234 1,996 The Board proposes to the AGM that no dividend is paid to the owner. The AGM will be Current liabilities held on 27 April 2017. Issued commercial papers 800 1,000 The dividend proposed by the Board is in line with the decisions made at the AGM for the Liability, repurchase agreements 1,071 past two years. 1,871 1,000

Of liabilities, MSEK 250 mature later than five years after the end of the reporting period.

LKAB ANNUAL AND SUSTAINABILITY REPORT 2016 NOTES | 105 Changes in the present value of obligations for defined benefit plans NOTE 29 Group PENSIONS MSEK 2016 2015 Obligation for defined-benefit plans as at 1 January 3,983 4,183 Defined-benefit pension plans Benefits paid -212 -212 Group Cost of service, current period 91 119 MSEK 2016 2015 Past service cost -45 Present value of unfunded obligations 710 716 Interest expense 98 111 Present value of wholly or partially funded obligations 3,416 3,267 Remeasurements: Total present value of obligations 4,126 3,983 - Actuarial gains and losses on 0 Fair value of plan assets -2,557 -2,376 changed demographic assumptions Present value of net obligations 1,569 1,607 - Actuarial gains and losses on 255 -130 changed financial assumptions Effect of limitation rule for net assets - Actuarial gains and losses on -76 -31 Net amount in statement of fnancial position 1,569 1,607 experience-based adjustments Other changes 39 -23

The net amount is recognized in the following Exchange rate differences on items in the statement of financial position: obligation and recognized actuarial loss -7 -34 Financial investments -308 -253 Obligation for defned-beneft plans 4,126 3,983 as at 31 December Provisions for pensions, non-current liabilities 1,877 1,860 Net amount in statement of fnancial position 1,569 1,607 The present value of the Swedish portion of the obliga- tion is divided between the plans’ members as follows: Defned-beneft pension plans - Active members 50 (55) percent Most of LKAB’s pension plans for employees in Sweden are defined-benefit plans, which - Paid-up policy holders 9 (7) percent means that LKAB guarantees pensions based on a percentage of salary. Pension provi- sions in Sweden are secured by the company via accrued provisions, of which most are - Retirees 41 (38) percent secured through credit insurance from FPG (Försäkringsbolaget PRI Pensionsgaranti). In 2013 an internal company pension fund was started for vested defined-benefit pension plans. Promises of future retirement before the age of 65 are to a certain degree contin- Changes in fair value of plan assets gent upon working underground and are secured by the company via accrued provisions Group without credit insurance. MSEK 2016 2015 Commitments for retirement pensions and survivor benefits for salaried employees Changes in fair value of plan assets at 1 January 2,376 2,317 in Sweden are secured through insurance policies from Alecta. According to a statement Contributions 38 61 from the Swedish Financial Reporting Board, UFR 10, this is a defined-benefit plan that Benefits paid -47 -54 involves several employers. The company has not had access to such information as is necessary for recognizing this commitment as a defined-benefit plan. The ITP2 pension Return 63 67 plan insured via Alecta is therefore recognized as a defined-contribution plan. The Actuarial gain (+)/loss (-) 101 14 premium for the defined-benefit retirement and survivors’ pension is individually calcu- Other -2 lated and depends on factors such as salary, previously earned pension and expected Exchange rate differences on remaining years of service. Alecta’s surplus can be distributed to the policyholders and/ obligation and recognized actuarial loss 26 -27 or the insured parties. At the end of 2016, Alecta’s collective reserve surplus amounted to 148 (153) percent, which is within the normal spread of 125–155 percent stated in Fair value of plan assets at 31 December 2,557 2,376 Alecta’s consolidation policy for these insurance policies. The premium to Alecta is determined by assumptions about interest rates, longevity, operating expenses and yield tax, and is calculated so that constant payment of premi- Plan assets consist of the following ums until the retirement date is sufficient for the entire target benefit, which is based on the insured’s current pensionable salary and which must be earned. Group There is no set of fixed rules for how deficits that may arise should be handled, but MSEK 2016 2015 losses should primarily be covered by Alecta’s collective solvency capital and thus will Shares 801 678 not lead to increased expenses through higher contractual premiums. There are also no Interest-bearing assets including bonds 1,143 1,095 rules for how any surplus or deficit should be distributed when plans are terminated or Alternative investments 613 603 a company withdraws from the plan. In Norway, the UK and Germany, LKAB has defined-benefit pension plans as a com- 2,557 2,376 plement to local social insurance. In the UK pensions are secured via a company-man- aged pension fund and in Germany via internal accrued provisions combined with credit Cost recognized in profit for the year insurance. In Norway pensions are secured via a combination of a company-managed pension fund, internal accrued provisions and credit insurance. Group MSEK 2016 2015 Current service cost 91 119 Past service cost -45 - Interest expense on obligation 98 111 Return on plan assets -63 -67 Total net cost in income statement 81 163

106 | NOTES LKAB ANNUAL AND SUSTAINABILITY REPORT 2016 Cost is recognized on the following lines of the income statement: Net liability recognized in balance sheet Group Parent Company MSEK 2016 2015 MSEK 31/12/2016 31/12/2015 Cost of goods sold 46 118 + Present value of obligation (calculated according to Swedish principles) as relates to wholly or partially Financial income (recognized in net financial income/ -63 -67 funded pension plans 1,082 1,055 expense) - Fair value at end of period for specifically separated Financial expense (recognized in net financial income/ 98 111 assets (in pension funds and corresponding) -1,117 -1,046 expense) = Surplus in pension fund or the like 81 162 (-)/net obligation (+) -35 9 Of which, recognized in the Parent Company balance sheet 27 26 Cost recognized in other comprehensive income + Present value of obligations (calculated according to Group Swedish principles) for unfunded pension plans 510 561 MSEK 2016 2015 = Net recognized for pension obligations 537 587 Remeasurements: Actuarial gains (-) and losses (+) 179 -160 Changes in net liability Difference between actual return and return according to discount rate on plan assets -101 -14 Parent Company MSEK 31/12/2016 31/12/2015 Net recognized in other comprehensive income 78 -174 Net liabilities at start of year for 587 587 Assumptions for defined-benefit obligations. The most significant actuarial assumptions pension provisions at the end of the reporting period assessed for each country but expressed as weighted + Cost of company-managed pension scheme 77 110 averages are given below. excluding taxes as recognized in the income statement Group Percent 2016 2015 - Pension payments -127 -109 Discount rate as at 31 December 2.2 2.7 +/- Other -1 Return on plan assets as at 31 December 537 587 2.2 2.7 Future salary increase 2.6 2.7 Fair value of assets in trust by main category Employee turnover 3.5 3.5 Parent Company Future pension increase 2.0 2.1 MSEK 31/12/2016 31/12/2015 Shares 300 283 Assumptions about future mortality are based on published statistics and mortality rates. The average life expectancy of an individual retiring at age 65 is 23 years for men Bonds 423 410 and 25 years for women. Other interest-bearing assets 394 329 The actual return on plan assets for 2016 was 6.4 (3.4) percent. Other assets 24 Sensitivity analysis 1,117 1,046 The following table presents possible changes in actuarial assumptions at year-end, other assumptions being unchanged, and how these would affect the defined-benefit obligation. The calculation of the change in pension commitments only includes the Costs relating to pensions Swedish commitments, which represent around 50 percent of Group commitments. Parent Company MSEK 2016 2015 Group Increase in Decrease in Company-managed pension schemes MSEK assumption​​ assumption Cost 77 110 + (decrease)/- (increase) in debt Cost of company-managed pension schemes 77 110 Discount rate (0.5% change) 137 -122 Pension through insurance policy Expected mortality (1-year change) -50 50 Insurance premiums 190 225 Future salary increase (0.5% change) -84 72 Subtotal 267 335 Future pension increase (0.5% change) -80 73 Special employer’s contribution on pension costs 79 89 Cost of credit insurance, At 31/12/2016 the weighted average duration of the obligation was 16.4 (16.4) years. administrative expenses, other 1 6 Recognized net cost attributable to pensions 347 430 Historical information

Group Net pension cost is recognized on the following lines of the income statement: MSEK 2016 2015 2014 2013 2012 Parent Company Present value of defined- MSEK 2016 2015 benefit obligations 4,126 3,983 4,183 3,791 3,822 Cost of goods sold 347 430 Fair value of 347 430 plan assets -2,557 -2,376 -2,317 -2,181 -1,101 Net obligations 1,569 1,607 1,866 1,610 2,721

The Group estimates that MSEK 43 will be paid in 2017 to funded and unfunded defined-benefit plans and MSEK 26 is expected to be paid in 2017 to the defined-benefit plans that are recognized as defined-contribution plans.

LKAB ANNUAL AND SUSTAINABILITY REPORT 2016 NOTES | 107 Assumptions for defined-benefit obligations The most significant actuarial assumptions at the end of the reporting period (expressed as weighted averages) NOTE 30 Parent Company PROVISIONS Percent 2016 2015 Discount rate as at Group 31 December 3.8 3.8 MSEK 31/12/2016 31/12/2015 Provisions

Defned-contribution pension plans Urban transformation 13,062 12,234 In Sweden, the Group has defined-contribution pension plans for employees that are Emission allowances for carbon dioxide 37 44 fully paid by the companies. Remediation costs 1,276 1,254 Outside of Sweden, there are defined-contribution plans that are financed partly by Other 16 32 the subsidiaries and partly by employee contributions. Payments into these plans are made regularly in accordance with the terms of each Total 14,391 13,564 plan.

Parent Company Group Parent Company MSEK 31/12/2016 31/12/2015 MSEK 2016 2015 2016 2015 Provisions Costs for defined- Urban transformation 13,062 12,234 contribution pension plans 224 264 187 224 Emission allowances for carbon dioxide 37 44 In 2016 retirement solutions were paid out through insurance plans in the amount of Remediation costs 933 924 MSEK – (24). Other 17 Total 14,032 13,219

Group Urban Emission Remediation Other MSEK transformation allowances costs provisions Total Opening balance, 1 Jan 2015 11,683 37 1,127 141 12,988 Provisions for the year 656 94 750 Reassessment of previous years’ provisions -51 -14 -65 Utilized provisions -291 -95 -386 Interest adjustment on liabilities for the year 33 33 Inflation increase for the year 58 58 Reclassification 179 179 Emissions for the year 46 46 Settlement of previous years’ emissions -39 -39 Closing balance, 31 Dec 2015 12,234 44 1,254 32 13,564 Less: expenditures for replacement properties -179 -179 Closing balance, 31 Dec 2015 (net) 12,055 44 1,254 32 13,385 Of which to be paid out in 2016 1,283 44 89 19 1,435 Of which to be paid out 2017–2023 7,956 327 13 8,296 Of which to be paid out after 2023 2,816 838 3,654

Opening balance, 1 Jan 2016 12,234 44 1,254 32 13,564 Provisions for the year 989 28 1,017 Reassessment of previous years’ provisions 520 520 Utilized provisions -750 -39 -16 -805 Interest adjustment on liabilities for the year 33 33 Inflation increase for the year 69 69 Emissions for the year 34 34 Settlement of previous years’ emissions -41 -41 Closing balance, 31 Dec 2016 13,062 37 1,276 16 14,391 Less: expenditures for replacement properties -503 -503 Closing balance, 31 Dec 2016 (net) 12,559 37 1,276 16 13,888 Of which to be paid out in 2017 3,148 37 94 3,279 Of which to be paid out 2018-2024 9,411 296 16 9,723 Of which to be paid out after 2024 886 886

Expenditures for replacement properties refers to expenses incurred which are reported as property, plant and equipment – see Note 16. The provisions and the property, plant and equipment item are offset when the replacement property is handed over. For an overall picture of items related to urban transformation refer to Note 31.

108 | NOTES LKAB ANNUAL AND SUSTAINABILITY REPORT 2016 Parent Company Urban transfor- Remediation Other MSEK mation Emission allowances costs provisions Total Opening balance, 1 Jan 2015 11,683 37 800 112 12,632 Provisions for the year 656 101 757 Reassessment of previous years’ provisions -51 -51 Utilized provisions -291 -95 -386 Interest adjustment on liabilities for the year 23 23 Inflation increase for the year 58 58 Reclassification 179 179 Emissions for the year 46 46 Settlement of previous years’ emissions -39 -39 Closing balance, 31 Dec 2015 12,234 44 924 17 13,219 Less: expenditures for replacement properties -179 -179 Closing balance, 31 Dec 2015 (net) 12,055 44 924 17 13,040 Of which to be paid out in 2016 1,283 44 89 17 1,433 Of which to be paid out 2017–2023 7,956 260 8,216 Of which to be paid out after 2023 2,816 575 3,391

Opening balance, 1 Jan 2016 12,234 44 924 17 13,219 Provisions for the year 989 22 1,011 Reassessment of previous years’ provisions 520 520 Utilized provisions -750 -39 -17 -806 Interest adjustment on liabilities for the year 26 26 Inflation increase for the year 69 69 Emissions for the year 34 34 Settlement of previous years’ emissions -41 -41 Closing balance, 31 Dec 2016 13,062 37 933 14,032 Less: expenditures for replacement properties -503 -503 Closing balance, 31 Dec 2016 (net) 12,559 37 933 13,529 Of which to be paid out in 2017 3,148 37 94 3,279 Of which to be paid out 2018-2024 9411 233 9,644 Of which to be paid out after 2024 606 606

Provisions for urban transformation NOTE 31 Provisions are recognized on the following lines of the balance sheet: URBAN TRANSFORMATION Group and Parent Company MSEK 31/12/2016 31/12/2015 LKAB has already had, and will continue to have, significant costs related to urban Current liabilities 3,148 1,283 transformation. Provisions for urban transformation are recognized in accordance with the criteria of IAS 37. Non-current liabilities 9,914 10,951 In order to finance future urban transformation payments, funds are allocated in 13,062 12,234 accordance with the current board-approved financing policy. The purpose of such asset management is to ensure LKAB’s ability to pay and that the return on allocated funds Since 2006 LKAB has paid out MSEK 4,621 in respect of previous years’ provisions. will cover inflation over time. Pay-outs in 2016 amount to MSEK 1,035. There will also be subsequent requirements arising from future mining. LKAB regu- Net cost of urban transformation larly assesses these future requirements. The assessments are subject to considerable The company’s net cost consists of the following components: uncertainty. At the end of the reporting period, LKAB determined that the Group’s actual Group and Parent Company short- and long-term capital commitments for urban transformation are significant. MSEK 2016 2015 The recognized provision for urban transformation does not include LKAB’s own Costs for urban transformation, current period -1,578 -1,218 need to replace properties affected by urban transformation. New capital expenditure of MSEK 670 has been approved for replacement of the company’s own properties and Effect of changed assumptions and assessments -528 -350 relocation of existing properties. Impairment of mine asset -372 -2,106 -1,940 Property, plant and equipment for urban transformation The balance sheet item includes the following assets: Due to the current level of interest rates, provisions for urban transformation are not Group and Parent Company discounted and hence no interest expense is recognized. MSEK 31/12/2016 31/12/2015 Mine asset 1,092 1,896 The net cost of urban transformation is recognized on the following line of the income Replacement properties 503 179 statement: Other property acquisitions 414 160 Group and Parent Company MSEK 2016 2015 2,009 2,235 Cost of goods sold -2,106 -1,940 Replacement properties refers to expenditures for the construction of replacement -2,106 -1,940 properties for those property owners who have chosen this option. Commitments for replacement properties are recognized as a provision until handover of the replacement property. At this point, the provision is offset against expenditures for the replacement property.

LKAB ANNUAL AND SUSTAINABILITY REPORT 2016 NOTES | 109 NOTE 32 ACCRUED EXPENSES AND DEFERRED INCOME

Group Parent Company MSEK 31/12/2016 31/12/2015 31/12/2016 31/12/2015 Electric power 9 58 49 Payroll and employee benefit expenses 539 684 463 601 Forward exchange contracts – interest discount 22 7 Accrued trade payables 349 282 294 226 Deferred income, iron ore derivatives 554 554 Deferred income, fair value of derivatives 433 433 Other 108 103 70 30 1,559 1,560 1,403 1,346

NOTE 33 VALUATION OF FINANCIAL ASSETS AND LIABILITIES AT FAIR VALUE AND CATEGORIZATION

Classifcation and fair value and level of measurement hierarchy The following is a summary of the fair values ​​of consolidated financial assets and liabilities with a breakdown by measurement category. Information is also provided about to which fair value level the respective financial assets and liabilities belong.

Carrying amount Fair value Availble- Held Initially Loans for-sale Group 2016 for identified at Hedging and financial Other MSEK Note trading fair value instruments receivables assets liabilities Total Level 1 Level 2 Total Financial assets measured at fair value Shares, financial assets 20 738 738 738 738 Shares and alternative investments, short-term holding 20 3,496 3,496 3,496 3,496 Interest-bearing, short-term holding 20 7,775 7,775 7,775 7,775 Interest-bearing (cash and cash equivalents) 40 100 100 100 100 Derivatives for hedging 22 36 36 36 36 36 11,371 738 12,145 Financial assets not measured at fair value Shares, financial assets 20 50 50 Accounts receivable 2,094 2,094 Other receivables 22 2,318 2,318 Accrued income 25 54 54 Cash and bank balances (cash and cash equivalents) 40 2,524 2,524 6,990 50 7,040 Financial liabilities measured at fair value Other derivatives for hedging 17 1,136 1,153 911 242 1,153 17 1,136 1,153 Financial liabilities not measured at fair value Issued commercial papers 27 800 800 Liability, repurchase agreements 27 1,071 1,071 Issued bond loans 27 2,984 2,984 3,007 3,007 Other bond financing 27 250 250 Trade payables 1,283 1,283 Other liabilities 87 87 Accrued expenses 32 1,335 1,335 7,810 7,810

110 | NOTES LKAB ANNUAL AND SUSTAINABILITY REPORT 2016 Carrying amount Fair value Available- Held Initially Investments Loans for-sale Group 2015 for identified at Hedging held to and financial Other MSEK Note trading fair value instruments maturity receivables assets liabilities Total Level 1 Level 2 Total Financial assets measured at fair value Shares, financial assets 20 279 279 279 279 Shares and alternative investments, short-term holding 20 3,014 3,014 3,014 3,014 Interest-bearing, short-term holding 20 7,111 7,111 7,111 7,111 Interest-bearing (cash and cash equiva- 40 lents) 1,787 1,787 1,787 1,787 Derivatives for hedging 22 54 294 348 244 104 348 54 11,912 294 279 12,539 Financial assets not measured at fair value Shares, financial assets 20 49 49 Interest-bearing, short-term holding 20 100 100 100 100 Loans 22 0 0 Accounts receivable 1,320 1,320 Other receivables 22 599 599 Accrued income 25 184 184 Cash and bank balances (cash and cash 40 equivalents) 2,548 2,548 100 4,651 49 4,800 Financial liabilities measured at fair value Other derivatives for hedging 27 147 174 174 174 27 147 174 Financial liabilities not measured at fair value Issued commercial papers 27 1,000 1,000 Issued bond loans 27 1,996 1,996 1,960 1,960 Trade payables 1,573 1,573 Other liabilities 121 121 Accrued expenses 32 1,324 1,324 6,014 6,014

Shares, financial assets not recognized at fair value refers to unlisted holdings, mainly in VindIn AB. Fair value cannot be reliably estimated as there is no quoted market price in an active market. The shares are instead measured at cost and are tested regularly for impairment. For issued commercial papers and repo liabilities, the carrying amount represents a reasonable approximation of fair value because of the short time to maturity. The carrying amount of accounts receivable, other receivables, accrued income, cash and cash equivalents, trade payables, other liabilities and accrued expenses represent a reasonable approximation of fair value. No transfers have been made between Levels 1 and 2.

Parent Company The following table provides information about the financial assets and liabilities of the Parent Company where there are differences between fair value and cost. For other assets and liabilities of the Parent Company the carrying amount is estimated to be a reasonable approximation of fair value; see information about the Group above. Regarding fair value measurement please refer to the description above for the Group.

LKAB ANNUAL AND SUSTAINABILITY REPORT 2016 NOTES | 111 Carrying amount Fair value Available- Initially Loans for-sale Parent Company 2016 Held for identified at Hedging and financial Other MSEK trading fair value instruments receivables assets liabilities Total Level 1 Level 2 Total Shares, financial assets 196 196 738 738 Current investments 11,114 11,114 11,371 11,371 Forward exchange contracts for hedging1 -22 -59 -81 -187 -187 Other derivatives2 -16 -16 -911 -19 -930 Issued bond loans -2,984 -2,984 -3,007 -3,007 -16 11,114 -22 -59 196 -2,984 8,239

Carrying amount Fair value Available- Initially Loans for-sale Parent Company 2015 Held for identified at Hedging and financial Other MSEK trading fair value instruments receivables assets liabilities Total Level 1 Level 2 Total Shares, financial assets 82 82 279 279 Current investments 11,800 11,800 11,912 11,912 Forward exchange contracts for hedging1 -7 16 9 41 41 Other derivatives2 17 3 20 244 -111 133 Issued bond loans -1,996 -1,996 -1,960 -1,960 17 11,800 -4 16 82 -1,996 9,915

1 Carrying amount refers to accrued forward premium and measurement of accounts receivable at the forward rate. 2 Carrying amount refers to accrued option premium and also negative values for derivatives to which hedge accounting is not applied.

Price risk of iron ore products NOTE 34 Price volatility in the global iron ore market makes LKAB’s prices change substantially in both the long and short terms. The price of iron ore products in USD is dependent on FINANCIAL RISKS AND RISK MANAGEMENT future expected prices for LKAB’s products, which in turn are dependent on the global commodity price and the global pricing mechanism for iron ore. Framework for fnancial risk management Price risk for iron ore products is hedged using generally available commodity The Group’s activities expose it to a variety of financial risks. LKAB’s financial risk derivatives. management is regulated by a finance policy established by the Board. The finance The fair value of derivatives related to price risk of iron ore products amounted to policy provides a framework of guidelines and rules in the form of risk mandates and MSEK -889 (282) at 31 December 2016, of which MSEK 22 (306) was recognized as limits for financial activities. The LKAB Treasury Centre is the company’s central treasury assets and MSEK -911 (24) as liabilities. Hedge accounting is applied to derivatives with function, which manages the Group’s overall financial risk and is also the Group a value of MSEK -911 (253). In 2016 MSEK -253 (26) was transferred from the hedging treasury. The Board’s finance committee is responsible for continuously monitoring the reserve via other comprehensive income to profit for the year as part of net sales. management of financial risks, objectives of risk exposure, administration, credit limits, The fair value of derivatives is expected to be recognized in profit for the year in 2017. limits and reporting procedures, as well as checking that all this is done in accordance with the finance policy. Currency risks The Group’s aim is that financing activities will at all times support the business plan The Group is exposed to various types of currency risks. The main exposure stems from adopted and ensure that financial risks are identified, quantified and managed. Group sales of iron ore where market pricing is in USD. This currency risk in forecast In February 2017 a revised finance policy was adopted. The description below relates and contracted payment flows is called transaction exposure. to the finace policy that applied in 2016. Currency risks are also found in the translation of foreign subsidiaries’ assets and liabilities to the Parent Company’s functional currency, known as translation exposure. Cash flow risk in SEK Transaction exposure The LKAB Group is exposed to a variety of cash flow risks which can be subject to The finance policy governs the framework for hedging; see the Price risk for iron ore positive or negative covariance. LKAB’s main cash flow risk in SEK is related to iron ore products section above. Hedging of transaction exposure in USD is done with derivative product sales in the Parent Company. Cash flow risk means that fluctuations in the glob- contracts that are generally available on the currency market, primarily forward al iron ore price and exchange rates between USD and SEK can together have a negative exchange contracts. impact on the company’s income statement, balance sheet and/or cash flow. Another The Group’s transaction exposure in USD in 2016 amounted to MUSD 1,860 (1,759). significant cash flow risk is energy price risk. The fair value of forward exchange contracts amounted to MSEK -187 (41) as at 31 The finance policy describes procedures and regulations for identifying and reporting December 2016. In 2016 MSEK -29 (387) was transferred from the hedging reserve via total consolidated cash flow risk and the frameworks within which hedging of cash flow other comprehensive income to profit for the year as part of net sales. risks should or may occur. All cash flows exposed to market prices are taken into consid- The fair value of currency derivatives is expected to be recognized in profit for the eration and account is also taken of historical covariance between different exposures. year in 2017. The finance policy establishes frameworks for hedging cash flow risk, which includes For other companies within the Group transaction exposure arises principally a hedging period and a maximum degree of hedging during that period. The flows are through the purchase of raw materials in foreign currencies. Each subsidiary is respon- normally hedged against a rolling forecast 12–18 months into the future with a maxi- sible for its currency exposure and all forward cover occurs through the LKAB Treasury mum hedging degree of between 100 percent down to 60 percent. It is possible to hedge Centre. for longer periods following specific decisions. Hedging is done through a combination The Group’s transaction exposure in other currencies amounts to MNOK 330 (478), of hedging strategies, agreements and financial contracts. MEUR 64 (85) and MCNY 17 (30). The Group classifies its derivatives that are used for cash flow hedging of forecast transactions in accordance with the regulations of IAS 39. Hedge accounting is applied Translation exposure when the requirements for hedge accounting are met; see Note 1 Significant accounting LKAB does not normally hedge its translation exposure. The foreign subsidiaries within principles, Principle 17 Derivatives and hedge accounting. At 31 December 2016, 18 (31) the Group operate mainly in their local currencies and investments as well as financing percent of the total cash flow forecast in SEK for 2017 (2016) was hedged. are mainly carried out in the local currency in order to reduce translation exposure. For sensitivity analyzes concerning cash flow risks, please refer to the Administra- Consolidated net foreign assets are divided into the following currencies (millions of tion Report. local currency).

112 | NOTES LKAB ANNUAL AND SUSTAINABILITY REPORT 2016 Currency 2016 2015 Credit risks in financial activities The financial activities of the Group entail exposure to credit risks. This is primarily EUR 9 11 counterparty risks in conjunction with receivables from banks and other counterparties GBP 31 36 involved in the purchase of financial investments. USD 5 3 The finance policy contains special counterparty rules stating the maximum credit DKK 225 223 exposure for various counterparties and for each designated asset portfolio. The Inter- national Swaps and Derivatives Association’s (ISDA) master agreement is used with all NOK 943 884 counterparties in derivative transactions. CNY 18 17 The Group has no assets that have fallen due or have been impaired that resulted HKD 27 95 in credit losses. LKAB has not experienced any credit losses in short-term investments TRL 18 15 over the past five years. Credit risks in accounts receivable Consolidated profit for the year includes foreign exchange rate differences of MSEK -193 Commercial credit risks are a natural part of the LKAB Group’s business and normally (-602) in operating profit and MSEK 307 (-97) in net financial income/expense. arise from the sale of goods and services. Commercial credit risks are related to the customer’s or counterparty’s solvency; that is, their credit standing, the amount of credit Energy price risk granted and the credit period. Commodity price risk refers to the change in the price of input goods and its impact on The Group’s finance policy contains a regulatory framework for credit rating that earnings. It is mainly changes in energy prices that constitute a large commodity price defines the criteria for evaluating new and existing customers from a credit perspective. risk for the LKAB Group. The Group’s energy costs make up 8 (8) percent of operating The framework includes approval processes, credit limits and monitoring procedures. costs before impairment. Each customer is risk-classified from both a financial and a sustainability perspective. Hedging of electricity prices occurs through indexed prices and through relevant The average collection period on accounts receivable was 31 (33) days in 2016. financial contracts in the electricity market for purchase at variable prices. Based on historical data, LKAB estimates that no impairment of accounts receivable The fair value of derivatives related to electricity price risk amounted to MSEK -38 that are not yet due is necessary as of the end of the reporting period. The majority of (-147) at 31/12/2016. In 2016 MSEK 50 (1) was transferred from the hedging reserve via outstanding accounts receivable comprise customers with a good credit standing that other comprehensive income to profit for the year as part of operating expenses. are known to the Group. The fair value of derivatives is expected to be recognized in profit for the year at Offsetting and similar contracts MSEK 11 in 2017 and MSEK -49 over the 2018–2020 period. Counterparty risk in derivative contracts is reduced through netting agreements; that is, netting of positive and negative values in​​ all derivative contracts with one and the Interest rate risk and share price risk same counterparty. For exchange-traded derivatives there are clearing agreements that Interest rate risk refers to how the return on an interest-bearing asset is affected include netting. For all other counterparties in derivative transactions there are netting by a change in interest rates. The level of interest rate risk is affected by changes in agreements (ISDA) supplemented by agreements on surety for net exposures (Credit interest rates and by the asset’s sensitivity to interest rates (duration). LKAB is mainly Support Annex or CSA agreements). exposed to interest rate risk with regard to short-term investments and cash and cash The clearing agreements and ISDA agreements do not meet the criteria for offsetting equivalents. in the statement of financial position. Under the master agreements, the parties may The LKAB Group’s total assets are allocated to three portfolios: liquidity portfolio, only settle their exposures net (that is, assets are offset against liabilities) in cases of urban transformation portfolio and pension portfolio. The finance policy governs the severe credit events. maximum average duration in each asset portfolio. The frameworks are set in relation The information in the following table shows financial assets and liabilities that are to each portfolio’s commitment or purpose and in relation to a range of risk measures subject to a legally binding master netting agreement or similar agreement that is not and restrictions. offset in the balance sheet. The Parent Company’s interest-bearing investments amounted to MSEK 7,875 (8,898) at the end of December 2016. The average duration was 938 (587) days. The Group’s policy also contains guidelines/directives for debt management where Related amounts that are not offset the duration targets relate to directives for the net debt/equity ratio. Consolidated bor- Financial Net amount Financial rowing amounted to MSEK 4,034 (2,996) at 31 December 2016. The fixed interest term Group assets/ in statement instruments for financial liabilities is 1,059 (797) days. 2016 liabilities, Offset of financial that are not Collateral Net MSEK gross amounts position offset provided amount Credit risks Financial assets LKAB’s credit risks are primarily associated with accounts receivable, derivatives and Derivatives 61 -25 36 -36 0 short-term investments. Financial liabilities Maximum credit risk exposure Derivatives -1,178 25 -1,153 36 1,461 348 MSEK 2016 2015 Total -1,117 0 -1,117 0 1,461 348

Derivatives 36 348 Related amounts that are not offset Interest-bearing instruments, short-term holding 7,775 7,211 Financial Net amount Financial Interest-bearing instruments, short-term holding Group assets/ in statement instruments (portion of cash and cash equivalents) 100 1,787 2015 liabilities, Offset of financial that are not Collateral Net Accounts receivable and other current receivables 4,412 1,919 MSEK gross amounts position offset provided amount Accrued income 54 184 Financial assets Total 12,377 11,449 Derivatives 419 -71 348 -33 315 Financial liabilities Derivatives -245 71 -174 33 461 320 Total 174 174 0 635

LKAB ANNUAL AND SUSTAINABILITY REPORT 2016 NOTES | 113 Liquidity risks Credit facilities Utilized Liquidity risk is the risk that the LKAB Group cannot meet its commitments due to lack Nominal (nominal) Available of liquidity or the inability to raise external loans for operating activities. Mining legis- Certificate programme, maturing 2017 5,000 800 4,200 lation and consequent requirements for urban transformation in the Swedish orefields Bond programme 7,000 4,009 place special demands on liquidity. The Group’s finance policy defines liquidity targets for the purpose of managing the Group’s short- and long-term commitments. Maturing 2019 1,991 Available funds as at 31 December 2016 are shown below. All credit facilities are Maturing 2021 1,000 subject to 100 percent retention of title. Other bond financing 250 250 Credit facility 5,000 5,000 Total 17,250 4,041 13,209 Cash and cash equivalents (excluding pledged 2,503 assets) Total available funds 15,712

Maturity structure of financial liabilities – undiscounted cash flows 2016 2015 Group 3 months– 3 months– MSEK Total <1 month 1–3 months 1 year 1–5 years >5 years Total <1 month 1-3 months 1 year 1–5 years >5 years Certificates 800 200 600 1,000 600 400 Liability, repurchase agreements 1,071 1,071 Bond loans 3,234 2,984 250 1,996 1,996 Derivatives 1,153 266 434 404 49 174 5 21 51 97 Trade payables 852 726 10 116 1,131 941 6 184 Other liabilities and accrued expenses 1,188 699 155 334 754 272 100 382 Total 8,298 2,962 1,199 854 3,033 250 5,055 1,818 527 617 2,093

The consolidated maturity structure of trade payables, other liabilities and accrued expenses are considered to resemble the Parent Company’s in all material respects. The above information is taken from the Parent Company.

Maturity structure of financial assets – undiscounted cash flows 2016 2015 Group 1–3 3 months 1–3 3 months MSEK Total <1 month months –1 year 1-5 years >5 years Total <1 month months –1 year 1-5 years >5 years Interest-bearing securities 7,875 781 348 6,635 111 8,898 1,564 600 2,131 4,366 237 Derivatives 36 26 10 348 24 118 206 Accounts receivable 2,586 1,931 655 1,320 934 386 Total 10,497 1,957 1,446 348 6,635 111 10,566 2,522 1,104 2,337 4,366 237

The Group’s maturity structure is considered to resemble the Parent Company’s in all material respects. The information in the maturity structure for interest-bearing securities refers to the Parent Company.

Asset management The capital structure target is a net debt/equity ratio of 0–20 percent. The net debt/ LKAB’s financial risk management is regulated by a finance policy approved by the equity ratio is defined as the net of interest-bearing liabilities and provisions as well Board. The Board’s finance committee is responsible for continuously monitoring the as interest-bearing assets, divided by equity. The net debt/equity ratio was 20.7 (10.0) management of financial risks, objectives of risk exposure, administration, credit limits, percent at the end of the reporting period. limits and reporting procedures, as well as checking that all this is done in accordance The Group’s profitability target is a return on equity of 12%. The return for 2016 was with the finance policy. negative (negative). LKAB defines its managed assets as equity in the Group excluding unrealized LKAB has a dividend policy in which the dividend to the owner in the long term shall changes in the value of derivatives that are recognized directly in equity. Assets under constitute 30 to 50 percent of earnings after tax and be adjusted to an average earnings management amounted to SEK 31.4 (32.0) billion at the end of the reporting period. level over a business cycle. No dividend is proposed for the 2016 financial year. According to the Board’s finance policy, the Group’s financial objective is to have a No changes were made to the Group’s asset management during the year. good capital structure and financial stability, thereby providing a basis for continued LKAB Försäkring AB is the only company in the Group that has a statutory capital development of business activities and future societal changes. The Board’s ambition is requirement of EUR 3,200,000, which corresponded to MSEK 31 (29) at the end of the to maintain a balance between high returns and the advantages and security offered by reporting period. a sound capital structure.

114 | NOTES LKAB ANNUAL AND SUSTAINABILITY REPORT 2016 NOTE 35 NOTE 37 INVESTMENT COMMITMENTS RELATED PARTIES At year-end, the Group had contractual commitments to acquire property, plant and equipment. The commitments are forecast at MSEK 1,521 (2,461), of which MSEK 960 Relationships with related parties The Group is under the controlling influence of the Swedish state. In addition to the (2,380) is expected to be settled in the following financial year. Major projects include close relationships that the Parent Company has with its subsidiaries (see Note 38), increasing capacity in Svappavaara and a new main haulage level in Kiruna (KUJ 1365). the Group also has close relationships with Vattenfall AB and the Swedish Transport The Parent Company’s commitments are forecast at MSEK 1,426 (2,219), of which Administration. MSEK 865 (2,138) is expected to be settled in 2017. Parent Company Relationships with related parties Purchase NOTE 36 Sale of of goods Liabilities to goods to Interest from related Related party PLEDGED ASSETS AND CONTINGENT LIABILITIES related and divi- related parties, receivables, MSEK Year parties dends (net) parties 31 December 31 December Group Parent Company Subsidiaries 2016 209 326 3492 1,298 2,805 MSEK 31/12/2016 31/12/2015 31/12/2016 31/12/2015 Subsidiaries 2015 227 71 3,517 1,170 2,566 Pledged assets As pledged assets for Transactions with related parties are priced on market terms. Of related party receiva- own liabilities and provisions bles, 1,604 (1,242) are loans receivable. Company-owned LKAB’s mining has impacted the existing railway infrastructure and made it impossi- endowment insurance 110 107 110 107 ble for facilities to remain in their present location. LKAB is compensating the Transport Deposit of cash and cash Administration for expenditures incurred in conjunction with construction of the new equivalents 121 159 121 159 railway infrastructure. Purchases from the Transport Administration amounted to MSEK Collateral provided, 55 (53). derivatives 1,465 461 1,465 461 For remuneration paid to the Board of Directors and senior executives, see Note 6. Pledged assets, bonds 1,071 1,071 Total pledged assets 2,767 727 2,767 727 NOTE 38 Contingent liabilities Guarantees, FPG/PRI 17 15 14 14 GROUP COMPANIES Guarantees, GP plan 6 7 5 4 Parent Company Guarantee commitments, MSEK 31/12/2016 31/12/2015 Swedish Tax Agency 76 76 76 76 Accumulated acquisition value Surety given for subsid- At beginning of year 1,892 1,781 iaries 49 57 Reclassification -25 -45 Collateral, Disposal -1 remediation 47 54 72 88 Capital contributions 261 157 Other 3 40 Closing balance, 31 December 2,128 1,892 Total contingent liabilities 149 192 216 240 Accumulated impairment Company-owned endowment insurance is intended to cover pension commitments for At beginning of year -8 -13 the President, former President and members of Group management under the old de- Reclassification 5 fined-benefit pension scheme. The value of endowment insurance changes concurrently with payment of premiums/pension disbursements and changes in market value. Closing balance, 31 December -8 -8 Deposits of cash and cash equivalents are intended to cover future expenditures for remediation measures and other restoration measures at mines after mining activities Carrying amount at year-end 2,120 1,884 cease. Collateral provided, derivatives refers to security provided for outstanding hedging Reclassification in 2016 refers to the acquisition cost of land that was reclassified as positions, mainly hedging of iron ore prices. Buildings and land upon transfer of the properties to the Parent Company. Reclas- Pledged assets, bonds refers to security for short-term financing in the form of sification in 2015 refers to the reclassification of participations in Norrskenet AB as repurchase agreements. Participations in associated companies. Guarantees for PRI Pensionstjänst and the mine plan corresponded to 2% of commit- ments at the end of the reporting period. The PRI commitment relates to ITP2 premiums for salaried employees and vested obligations for collectively affiliated employees in the mine plan.

LKAB ANNUAL AND SUSTAINABILITY REPORT 2016 NOTES | 115 Specification of the Parent Company’s and Group’s holdings of shares in Group companies The following table does not include dormant Group companies.

Number Share in % Share in % 31/12/2016 31/12/2015 Subsidiary / Corporate ID number / Domicile of shares 2016 2015 Carrying amount Carrying amount Swedish subsidiaries Gällivare Mark AB / 556917-5333 / Gällivare 500 100 100 0 25 LKAB Fastigheter AB / 556009-8849 / Kiruna 5,000 100 100 57 44 LKAB Wassara AB / 556331-8566 / Stockholm 20,000 100 100 19 19 LKAB Berg & Betong AB / 556074-8237 / Kiruna 24,000 100 100 469 281 LKAB Nät AB / 556059-9796 / Kiruna 10 100 100 7 5 LKAB Minerals AB / 556223-1786 / Luleå 1,600,000 100 100 382 382 LKAB Försäkring AB / 516406-0187 / Luleå 10,000 100 100 159 100 LKAB Malmtrafik AB / 556031-4808 / Kiruna 208,000 100 100 252 252

Foreign subsidiaries LKAB Norge AS / 918 400 184 / Narvik, Norway 300,000 100 100 763 763 LKAB S.A. / 403 455 761 / Brussels, Belgium 100 100 100 0 0 LKAB Schwedenerz GmbH / HRB 718 / Essen, Germany 100 100 100 2 2 LKAB Trading (Shanghai) Co., Ltd. / Shanghai, China 100 100 10 10

Indirect holdings via subsidiary LKAB Minerals AB LKAB Minerals B.V. / 24236591 / Breda, Netherlands 100 100 LKAB Minerals Inc / 02-0551509 / Cincinnati, Ohio, USA 100 100 LKAB Minerals GmbH / HRB 16692 / Essen, Germany 100 100 LKAB Minerals Asia Pacific Ltd / 876455 / Hong Kong, China 100 100 LKAB Minerals OY / 1934671-4 / Helsinki, Finland 100 100 LKAB Minerals AS / A/S277716 / Nuuk, Greenland 100 100 LKAB Minerals Tianjin Minerals Co / 70051551-5 / Dongli District Tianjin, China 100 100 LKAB Minerals Limited / 04621769 / Derby, UK 100 100 LKAB Minerals Richmond Ltd / 03057111 / Derby, UK 100 100

Indirect holdings via subsidiary LKAB Berg & Betong AB LKAB Mekaniska AB / 556013-3059 / Kiruna 100 100 LKAB Kimit AB / 556190-6115 / Kiruna 100 100

Indirect holdings via subsidiary LKAB Malmtrafik AB LKAB Malmtrafikk AS / 974 644 991 / Narvik, Norway 100 100 Parent Company total 2,120 1,884

NOTE 39 NOTE 40 UNTAXED RESERVES SPECIFICATIONS FOR STATEMENT OF CASH FLOWS

Parent Company Cash and cash equivalents – Group MSEK 31/12/2016 31/12/2015 MSEK 31/12/2016 31/12/2015 Accumulated depreciation in excess of plan: The following subcomponents are included in cash and cash equivalents: Land and buildings Cash and bank balances 2,524 2,548 Opening balance, 1 January 3 4 Current investments, on a par with Excess depreciation dissolved -1 cash and cash equivalents1 100 1,787 Closing balance, 31 December 3 3 Total in statement of fnancial position and statement of cash flows 2,624 4,335 Machinery and equipment Opening balance, 1 January 7,553 9,072 Cash and cash equivalents – Parent Company Dissolution/depreciation in excess of plan for the 1,039 -1,519 MSEK 31/12/2016 31/12/2015 year The following subcomponents are included in cash Closing balance, 31 December 8,592 7,553 and cash equivalents: Cash and bank balances 2,124 2,338 Tax allocation reserve Current investments, on a par with cash and cash Provision for taxation 2012 3,600 3,600 equivalents1 100 1,787 Provision for taxation 2013 2,960 2,960 Total in balance sheet and statement of cash flows 2,224 4,126 Provision for taxation 2014 1,858 1,858 Provision for taxation 2015 650 650 1 Cash and cash equivalents include current investments (interest-bearing securities) that were classified as cash and cash equivalents based on the following: Closing balance, 31 December 9,068 9,068 • They have an insignificant risk of fluctuations in value • They can be easily converted to cash • They have a maximum maturity of three months from date of acquisition. Total untaxed reserves 17,663 16,624

116 | NOTES LKAB ANNUAL AND SUSTAINABILITY REPORT 2016 Shares and alternative investments NOTE 42 MSEK 31/12/2016 31/12/2015 PROPOSED APPROPRIATION OF EARNINGS Opening balance 2,902 2,090 The Board and the President propose that the MSEK 14,160 in unappropriated Acquisitions 1,404 1,823 earnings, of which MSEK 1,865 represents profit for the year, be allocated as Disposal -1,067 -1,011 follows: 3,239 2,902 Carried forward MSEK 14,160 Interest paid and dividend received Total MSEK 14,160 Group Parent Company MSEK 2016 2015 2016 2015 Dividend received 256 0 Interest received 8 6 78 77 NOTE 43 Interest paid -47 -24 -48 -25 KEY RATIOS – DISCLOSURES -39 -18 286 52 Alternative key ratios Adjustments for items not included in cash flow The company also presents certain non-IFRS financial benchmarks and key Group Parent Company ratios in the interim report. The management considers this supplementary MSEK 2016 2015 2016 2015 information to be important if readers of this report are to obtain an under­ standing of the company’s financial position and performance. Depreciation 2,746 2,800 2,213 2,151 Impairment 1,192 7,136 1,184 6,096 Defnitions Exchange differences -274 131 -201 -22 Return on equity: Profit after tax as a percentage of average Earnings from sale and equity (rolling 12-month figures). retirement of property, plant and equipment Underlying operating profit: Operating profit excluding costs for urban -3 129 2 196 transformation provisions and impairment of Change in other receiv- property, plant and equipment. ables/ 83 -231 -10 28 liabilities, derivatives Operating cash flow: Cash flow from operating activities and investing activities relating to property, plant and equip- Provisions for pensions -115 -101 -47 25 ment. Provision for urban Net financial indebtedness: Interest-bearing liabilities less interest-bearing transformation 2,106 1,568 2,106 1,568 assets. Other provisions 26 113 41 132 Net debt/equity ratio: Net financial indebtedness divided by equity. Other non-cash Operating assets: Intangible fixed assets, Property plant and items 19 14 -21 -5 equipment, Inventories, Accounts receivable 5,780 11,559 5,267 10,169 and Other receivables. Growth in net sales: Change in net sales as a percentage of the Change in working capital previous year’s net sales. Working capital in 2016 was negatively impacted by an increased level of capital tied Operating margin: Operating profit as a percentage of net sales. up in pledged assets for outstanding hedging positions and for accounts receivable. Consolidated working capital was encumbered by MSEK 653 (-527) related to the Profit margin: Net financial income/expense as a percentage change in the hedging reserve recognized in consolidated equity and by MSEK 83 (-231) of net sales for the year. in respect of derivatives. The amounts did not affect the consolidated cash flow and Return on total capital Profit after financial income/expense + financial therefore are not included in the change in working capital in the statement of cash flows. expense as a percentage of net sales. Return on Group Parent Company operating assets: Operating profit as a percentage of average Tax paid operating assets. MSEK 2016 2015 2016 2015 Equity/assets ratio: Equity as a percentage of total assets. Tax expense in income statement 85 1,585 421 1,082 Change in tax Reconciliation assets/liabilities -1 -260 -31 -282 Underlying operating proft Adjustment for MSEK 2016 2015 deferred tax -142 -1,640 -421 -1,088 Operating profit/loss -1,677 -7,156 -58 -315 -31 -288 Less: Costs for urban transformation provisions 2,106 1,568 NOTE 41 Impairment of property, plant and equipment 1,192 7,136 Underlying operating proft 1,621 1,548

EVENTS AFTER THE CLOSING DATE Operating cash flow There are no significant events after the closing date to report. Reconciliation of operating cash flow is provided in the consolidated statement of cash flows on page 79.

LKAB ANNUAL AND SUSTAINABILITY REPORT 2016 NOTES | 117 THE BOARD’S ATTESTATION The Board of Directors and the President attest that the Annual ments in the Parent Company’s and the Group’s operations, financial Report was prepared in accordance with generally accepted position and earnings and describes significant risks and uncertainties accounting principles in Sweden and that the consolidated financial faced by the Parent Company and the companies included in the Group. statements were prepared in accordance with international finan­cial reporting standards as referred to in Regulation Proposed appropriation of earnings 1606/2002/EC of the European Parliament and of the Council of 19 The Board and the President propose that the MSEK 14,160 in July 2002 on the application of international accounting standards. unappropriated earnings, of which MSEK 1,865 represents profit The Annual Report and the consolidated financial statements for the year, be allocated as follows: give a fair presentation of the Parent Company’s and the Group’s financial position and earnings. The Administration Report for the Carried forward MSEK 14,160 Parent Company and the Group provides a fair review of develop- Total MSEK 14,160

Luleå, 21 March 2017

Sten Jakobsson Chairman of the Board

Ola Salmén Leif Darner Maija-Liisa Friman Board member Board member Board member

Eva Hamilton Lars-Åke Helgesson Hanna Lagercrantz Board member Board member Board member

Bjarne Moltke Hansen Stefan Fagerkull Tomas Strömberg Board member Employee representative Employee representative

Jan Thelin Jan Moström Employee representative President and CEO

As stated above, the Annual Report, consolidated financial statements and sustainability report were approved for publication by the Board of Directors on 21 March 2017. The consolidated income statement, consolidated statement of comprehensive income and statement of financial position and the Parent Company’s income statement and balance sheet are subject to approval at the Annual General Meeting on 27 April 2017.

Our audit report was issued on 21 March 2017.

Deloitte AB

Peter Ekberg Authorized Public Accountant

118 | THE BOARD’S ATTESTATION LKAB ANNUAL AND SUSTAINABILITY REPORT 2016 AUDITOR’S REPORT requires good practices to ensure that revenues are recognized To the general meeting of the shareholders of Luossavaara- at agreed prices adjusted for the effects from hedging and that Kiirunavaara AB (publ) corporate identity number 556001-5835 revenues are recognized in the correct period. For the group’s accounting principles for revenue recognition please refer to note 1 section 12.1.1. For the group’s revenues by REPORT ON THE ANNUAL ACCOUNTS AND geographical area please refer to note 3 and revenues disaggrega- CONSOLIDATED ACCOUNTS ted on all types of revenue please refer to note 2.

Opinions Our audit procedures We have audited the annual accounts and consolidated accounts of Our audit procedures included, but were not limited to: Luossavaara-Kiirunavaara AB (publ) for the financial year 2016-01-01 • review of the group’s accounting policies for revenue recognition - 2016-12-31. The annual accounts and consolidated accounts of for compliance with IFRS, the company are included on pages 2-3, 20-21, 38-40, 44-47, 50-54 • evaluating the group’s internal controls for recognizing revenues and 72-118 in this document. at appropriate prices and in the correct accounting period, In our opinion, the annual accounts have been prepared in • on a sample basis testing of sales transactions against sales con- accordance with the Annual Accounts Act and present fairly, in all tracts, invoices and shipping documents to assess that revenues material respects, the financial position of parent company as of have been recognized at appropriate prices and in the correct 31 December 2016 and its financial performance and cash flow for accounting period. the year then ended in accordance with the Annual Accounts Act. The consolidated accounts have been prepared in accordance with Valuation of intangible and tangible assets the Annual Accounts Act and present fairly, in all material respects, The group’s intangible and tangible assets represent significant the financial position of the group as of 31 December 2016 and amounts. Impairment testing of these assets is based on produc- its financial performance and cash flow for the year then ended tion plans, which in turn are based on assumptions about future in accordance with International Financial Reporting Standards iron ore prices, USD/SEK exchange rate and capital expenditure (IFRS), as adopted by the EU, and the Annual Accounts Act. The levels. Especially changes in market prices for iron ore and USD/ statutory administration report is consistent with the other parts of SEK exchange rate have a significant impact on the group’s future the annual accounts and consolidated accounts. cash flows and thus the estimated recoverable value of intangible We therefore recommend that the general meeting of sharehol- and tangible assets and any impairment. During the year the Board ders adopts the income statement and balance sheet for the parent decided to mothball the open-pit mine in Mertainen. Impairment company and the group. test for tangible assets attributable to Mertainen was based on fair value less costs of disposal. Basis for Opinions For the group’s principles to prepare impairment tests for intan- We conducted our audit in accordance with International Standards gible and tangible assets please refer to note 1 section 21.1.1 and on Auditing (ISA) and generally accepted auditing standards in for significant assumptions applied in the impairment tests, please Sweden. Our responsibilities under those standards are further refer to note 9. described in the Auditor’s Responsibilities section. We are inde- pendent of the parent company and the group in accordance with Our audit procedures professional ethics for accountants in Sweden and have otherwi- Our audit procedures included, but were not limited to: se fulfilled our ethical responsibilities in accordance with these • review of the group’s process and principles for impairment requirements. reviews for compliance with IFRS, We believe that the audit evidence we have obtained is sufficient • evaluation of key assumptions such as estimated life of mines, and appropriate to provide a basis for our opinions. production plans, iron ore prices, USD/SEK exchange rate and the sensitivity to any changes in these assumptions, and Key Audit Matters • evaluation of significant assumptions used to assess fair value Key audit matters of the audit are those matters that, in our pro- less costs of disposal for assets attributable to the open-pit mine fessional judgment, were of most significance in our audit of the in Mertainen. annual accounts and consolidated accounts of the current period. These matters were addressed in the context of our audit of, and in Provisions for urban transformation forming our opinion thereon, the annual accounts and consolidated The group has significant obligations due to deformations in the accounts as a whole, but we do not provide a separate opinion on ground caused by the mining operations. The deformations are al- these matters. ready or will become so extensive that it is necessary to gradually move parts of Kiruna and Malmberget. The group has an obligation Recognition of revenues from sales of iron ore products at the by law to compensate damage resulting from its mining activities. appropriate price and in the correct period The Group therefore recognizes significant provisions for urban The group’s sales of iron ore products are to a large extent priced transformation in Kiruna and Malmberget as the obligations arise. in US dollars. Prices are determined using a variable price model Provisions for these obligations are dependent on geological conse- based on the spot price where quarterly prices are determined quences, estimates of damage and compensation claims from after the end of the quarter. This means that revenues during the affected parties, future inflation and discount rates. Changes in quarter is based on a preliminary price which is adjusted at the these estimates and assumptions could have a significant impact end of the quarter. Contractual prices are hedged for variations in on the group’s earnings and financial position iron ore prices and currency exchange rates. Taken together, this

LKAB ANNUAL AND SUSTAINABILITY REPORT 2016 AUDITOR’S REPORT | 119 For the group’s accounting principles for urban transformation Responsibilities of the Board of Directors and the Managing Director please refer to note 1 section 28.1.1 and note 30 and 31 for the The Board of Directors and the Managing Director are responsible group’s urban transformation provisions. for the preparation of the annual accounts and consolidated ac- counts and that they give a fair presentation in accordance with the Our audit procedures Annual Accounts Act and, concerning the consolidated accounts, in Our audit procedures included, but were not limited to: accordance with IFRS as adopted by the EU. The Board of Directors • review that the group has adopted principles and guidelines for and the Managing Director are also responsible for such internal compensating affected parties and that they are applied uniformly control as they determine is necessary to enable the preparation and consistently over time, of annual accounts and consolidated accounts that are free from • review that the group has a clear governance framework for the material misstatement, whether due to fraud or error. payment of compensation to affected parties including internal In preparing the annual accounts and consolidated accounts, controls for approval and that these are monitored and reported the Board of Directors and the Managing Director are responsible accurately, for the assessment of the company’s and the group’s ability to • review of the group’s procedures to identify obligations and continue as a going concern. They disclose, as applicable, matters assess the extent of the obligations including the assumptions related to going concern and using the going concern basis of made and accounting. The going concern basis of accounting is however not • review of accounting policy and calculations for urban transfor- applied if the Board of Directors and the Managing Director intends mation provisions for compliance with IFRS. to liquidate the company, to cease operations, or have no realistic Accounting and valuation of fnancial instruments alternative but to do so. The group is exposed to changes in among other iron ore prices, Auditor’s responsibility currency exchange rates, energy prices and interest rates. To redu- Our objectives are to obtain reasonable assurance about whether ce its exposure in sales commitments the group uses various types the annual accounts and consolidated accounts as a whole are free of financial instruments, including derivatives. The accounting for from material misstatement, whether due to fraud or error, and to financial instruments is complex and may have significant impact issue an auditor’s report that includes our opinions. Reasonable on the group’s earnings and financial position. assurance is a high level of assurance, but is not a guarantee that For the group’s financial risks and management of these risks an audit conducted in accordance with ISAs and generally accepted please refer to page 53-54 and note 34, refer to note 1 section auditing standards in Sweden will always detect a material missta- 15 and 16 for the group’s principles for the valuation of financial tement when it exists. Misstatements can arise from fraud or error instruments, including financial derivatives and hedge accounting. and are considered material if, individually or in the aggregate, they Our audit procedures could reasonably be expected to influence the economic decisions Our audit procedures included, but were not limited to: of users taken on the basis of these annual accounts and consoli- • review of the group’s financial policy and hedging strategies, dated accounts. • evaluation of the group’s internal controls within the treasury function, As part of an audit in accordance with ISAs, we exercise professio- • review of hedging activities on a sample basis to ensure that the- nal judgment and maintain professional skepticism throughout the se have been properly authorized and accounted for in accordan- audit. We also: ce with IFRS, and • Identify and assess the risks of material misstatement of the • review of the relevance of market data and methodologies used annual accounts and consolidated accounts, whether due to to determine valuation of financial instruments. fraud or error, design and perform audit procedures responsive to those risks, and obtain audit evidence that is sufficient and Other information than the annual accounts and consolidated accounts appropriate to provide a basis for our opinions. The risk of not This document also contains other information than the annual detecting a material misstatement resulting from fraud is higher accounts and consolidated accounts and is found on pages 4-37, than for one resulting from error, as fraud may involve collusion, 41-43, 48-49 and 55-71. The Board of Directors and the Managing forgery, intentional omissions, misrepresentations, or the override Director are responsible for this other information. of internal control. Our opinion on the annual accounts and consolidated accounts • Obtain an understanding of the company’s internal control does not cover this other information and we do not express any relevant to our audit in order to design audit procedures that form of assurance conclusion regarding this other information. are appropriate in the circumstances, but not for the purpose In connection with our audit of the annual accounts and conso- of expressing an opinion on the effectiveness of the company’s lidated accounts, our responsibility is to read the information internal control. identified above and consider whether the information is materially • Evaluate the appropriateness of accounting policies used and the inconsistent with the annual accounts and consolidated accounts. reasonableness of accounting estimates and related disclosures In this procedure we also take into account our knowledge other- made by the Board of Directors and the Managing Director. wise obtained in the audit and assess whether the information • Conclude on the appropriateness of the Board of Directors’ and otherwise appears to be materially misstated. the Managing Director’s use of the going concern basis of accoun- If we, based on the work performed concerning this informa- ting in preparing the annual accounts and consolidated accounts. tion, conclude that there is a material misstatement of this other We also draw a conclusion, based on the audit evidence obtained, information, we are required to report that fact. We have nothing to as to whether any material uncertainty exists related to events or report in this regard. conditions that may cast significant doubt on the company’s and

120 | AUDITOR’S REPORT LKAB ANNUAL AND SUSTAINABILITY REPORT 2016 the group’s ability to continue as a going concern. If we conclude des among other things continuous assessment of the company’s that a material uncertainty exists, we are required to draw atten- and the group’s financial situation and ensuring that the company’s tion in our auditor’s report to the related disclosures in the annual organization is designed so that the accounting, management of accounts and consolidated accounts or, if such disclosures are assets and the company’s financial affairs otherwise are controlled inadequate, to modify our opinion about the annual accounts and in a reassuring manner. The Managing Director shall manage the consolidated accounts. Our conclusions are based on the audit ongoing administration according to the Board of Directors’ guideli- evidence obtained up to the date of our auditor’s report. However, nes and instructions and among other matters take measures that future events or conditions may cause a company and a group to are necessary to fulfill the company’s accounting in accordance cease to continue as a going concern. with law and handle the management of assets in a reassuring • Evaluate the overall presentation, structure and content of the an- manner. nual accounts and consolidated accounts, including the disclosu- Auditor’s responsibility res, and whether the annual accounts and consolidated accounts Our objective concerning the audit of the administration, and represent the underlying transactions and events in a manner thereby our opinion about discharge from liability, is to obtain audit that achieves fair presentation. evidence to assess with a reasonable degree of assurance whether • Obtain sufficient and appropriate audit evidence regarding the any member of the Board of Directors or the Managing Director in financial information of the entities or business activities within any material respect: the group to express an opinion on the consolidated accounts. We • has undertaken any action or been guilty of any omission which are responsible for the direction, supervision and performance of can give rise to liability to the company, or the group audit. We remain solely responsible for our opinions. • in any other way has acted in contravention of the Companies Act, the Annual Accounts Act or the Articles of Association. We must inform the Board of Directors of, among other matters, the planned scope and timing of the audit. We must also inform of Our objective concerning the audit of the proposed appropriations significant audit findings during our audit, including any significant of the company’s profit or loss, and thereby our opinion about this, deficiencies in internal control that we identified. is to assess with reasonable degree of assurance whether the proposal is in accordance with the Companies Act. REPORT ON OTHER LEGAL AND REGULATORY REQUIREMENTS Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with generally Opinions accepted auditing standards in Sweden will always detect actions In addition to our audit of the annual accounts and consolidated or omissions that can give rise to liability to the company, or that accounts, we have also audited the administration of the Board of the proposed appropriations of the company’s profit or loss are not Directors and the Managing Director of Luossavaara-Kiirunavaara in accordance with the Companies Act. AB (publ) for the financial year 2016-01-01 - 2016-12-31 and the As part of an audit in accordance with generally accepted proposed appropriations of the company’s profit or loss. auditing standards in Sweden, we exercise professional judgment We recommend to the general meeting of shareholders that the and maintain professional scepticism throughout the audit. The ex- profit to be appropriated in accordance with the proposal on page amination of the administration and the proposed appropriations of 99 and that the members of the Board of Directors and the Mana- the company’s profit or loss is based primarily on the audit of the ging Director be discharged from liability for the financial year. accounts. Additional audit procedures performed are based on our professional judgment with starting point in risk and materiality. Basis for Opinions This means that we focus the examination on such actions, areas We conducted the audit in accordance with generally accepted and relationships that are material for the operations and where auditing standards in Sweden. Our responsibilities under those deviations and violations would have particular importance for the standards are further described in the Auditor’s Responsibilities company’s situation. We examine and test decisions undertaken, section. We are independent of the parent company and the group support for decisions, actions taken and other circumstances that in accordance with professional ethics for accountants in Sweden are relevant to our opinion concerning discharge from liability. As a and have otherwise fulfilled our ethical responsibilities in accor- basis for our opinion on the Board of Directors’ proposed appro- dance with these requirements. priations of the company’s profit or loss we examined whether the We believe that the audit evidence we have obtained is sufficient proposal is in accordance with the Companies Act. and appropriate to provide a basis for our opinions.

Responsibilities of the Board of Directors and the Managing Stockholm, March 21 2017 Director The Board of Directors is responsible for the proposal for appropri- Deloitte AB ations of the company’s profit or loss. At the proposal of a dividend, this includes an assessment of whether the dividend is justifiable considering the requirements which the company’s and the group’s type of operations, size and risks place on the size of the parent company’s and the group’s equity, consolidation requirements, liquidity and position in general. Peter Ekberg The Board of Directors is responsible for the company’s organi- Authorized Public Accountant zation and the administration of the company’s affairs. This inclu-

LKAB ANNUAL AND SUSTAINABILITY REPORT 2016 AUDITOR’S REPORT | 121 MINERAL RESERVES AND MINERAL RESOURCES

Mineral reserves and mineral resources are the basis of a mining company’s operations and their determination requires successful exploration. In addition to exploration, mining costs and ore prices are important factors which influence the size of mineral reserves and mineral resources. Exploration takes place in areas adjacent to existing mines and in new areas.

With airborne geophysical surveys large areas with potential mineralizations can be mapped within a short period of time.

122 | MINERAL RESERVES AND MINERAL RESOURCES LKAB ANNUAL AND SUSTAINABILITY REPORT 2016 LKAB’s exploration efforts during the past 10 years Kiruna Quantity, Mt have resulted in considerable increases in both 800 40 700 mineral resources and mineral reserves, above all, 600 30 in the operating open-pit mines of the Svappavaara 500 400 20 field. Focus will now be placed on improving the basis 300 200 10 for production planning and increasing knowledge 100 0 0 of the mineral resources in existing open-pit mines 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 and underground mines prior to decisions with Malmberget respect to future main levels. Quantity, Mt 400 20 350 300 15 250 MINERAL RESERVES AND MINERAL RESOURCES 2016 200 10 Each year LKAB presents a summary of its mineral resources and 150 mineral reserves. Estimates and summaries are made in accordance 100 5 50 with recommendations from the Swedish minerals and metals trade 0 0 association SveMin. 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 Gruvberget Kiruna Quantity, Mt The exploitation concession Kiirunavaara K No. 5 has been granted 60 3 and 70 Mt previously measured or indicated mineral resources has 50 therefore been upgraded to proven mineral reserves. The mineral 40 2 resource has been reduced after critical review of previous estimates. 30 20 1 Malmberget 10 0 0 There have been minor changes in mineral reserves and mineral 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 resources. The first ore estimates after test drilling at greater depth have been made and the drill-hole spacing analysis shows only inferred Leveäniemi Quantity, Mt mineral resources. 200 4

Gruvberget magnetite 150 3

The mineral reserve is decreasing as mining progresses and the open 100 2 pit will be mined out during 2017. The mineral resource consists partly of a mineralization accessible via a southerly extension of the existing 50 1 open pit and partly of a mineralization under the open pit. In estimating 0 0 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 the mineral resource, underground sublevel caving has been assumed. Mertainen Leveäniemi Quantity, Mt The geological model, block model and production block model have 400 350 been revised during the year. This has resulted in marginal changes 300 in both mineral reserves and mineral resources, and in grades that 250 correspond better with yields. 200 150 100 Mertainen 50 0 A decision to mothball Mertainen has been taken; therefore, no 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 mineral reserve is reported. Further supplementary core drilling and subsequent modelling indicate an increase in the mineral resource. Gruvberget hematit Quantity, Mt 30 Gruvberget hematite 25 No investigative work with respect to mineral reserves or mineral 20 resources has been conducted during the year. An acceptable process 15 concept is lacking. 10 5 Summary 0 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 LKAB’s mineral reserves, which amount to more than one billion tonnes, have increased by a quantity corresponding to just over one year’s production volume. Mineral resources have increased by Proven/Probable Mineral Reserve Measured/Indicated Mineral Resource Inferred Mineral Resource Production about the same amount.

LKAB ANNUAL AND SUSTAINABILITY REPORT 2016 MINERAL RESERVES AND MINERAL RESOURCES | 123 MINERAL RESERVES AS OF 31 DECEMBER 2016 (TO SORTING PLANT)

Quantity, Mt Percent, Fe DEFINITIONS 2016 2015 2016 2015 Classifcation Kiruna Mineral resources and mineral reserves are estimated separately Proven 620 491 46.2 47.1 and divided into different categories. LKAB’s mineral reserves are Probable 94 153 42.6 44.5 not included in the mineral resources. When mineral resources are Malmberget upgraded to mineral reserves, the quantity is subtracted from Proven 335 346 42.6 42.5 mineral resources. Probable 34 32 42.2 41.4 A mineral resource is a concentration or occurrence of material of Gruvberget intrinsic economic interest in or on the earth’s crust in such form, Proven 1 3 55.2 50.3 quality and quantity that there are reasonable prospects for eventual Probable 0 – 53.9 – economic extraction. Mineral reserves are subtracted from that part Leveäniemi of measured or indicated mineral resources that can be mined once Proven 93 89 47.0 48.5 the company’s profitability requirements have been met, while Probable 21 24 36.0 43.0 considering factors such as the quantity of waste rock mixed with mined ore, ore losses and yields. MINERAL RESOURCES BESIDES MINERAL RESERVES AS OF 31 DECEMBER 2016 (TO SORTING PLANT) Inferred mineral resources

Quantity, Mt Percent, Fe Inferred mineral resource is that part of a mineral resource for which 2016 2015 2016 2015 tonnage, grade and mineral content can be estimated with a low level Kiruna of confidence. It is inferred from geological evidence and assumed Measured 2 12 4.4 48.3 but not verified geological/or grade continuity. It is based on Indicated 159 217 45.4 45.8 information gathered through appropriate techniques from locations Inferred 37 83 40.3 44.2 such as outcrops, trenches, pits, workings and drill holes. This Malmberget information may be of limited or uncertain quality and reliability. Measured 6 – 42.8 – Indicated 112 109 42.6 43.2 Indicated mineral resources Inferred 180 149 43.1 42.7 Indicated mineral resources are mineral resources for which Gruvberget magnetite estimates of contained metal, grade and tonnage have been made Measured 25 12 44.2 55.0 at a reasonable level of confidence. It is indicated from geological Indicated 27 10 43.3 53.3 evidence and assumed but not verified geological/or grade continuity. Inferred 29 12 41.5 50.9 It is based on information gathered through appropriate techniques Leveäniemi for prospecting, sampling and testing. However, the data points are Measured 114 91 45.4 46.3 too sparsely or inappropriately distributed to ascertain the continuity Indicated 75 87 41.8 40.8 of the geology and/or grade. Inferred 51 34 37.1 38.7 Mertainen Measured mineral resources Measured 66 38 35.1 36.8 Measured resources are mineral resources for which tonnage, shape, Indicated 111 101 37.5 37.4 grade and mineral content can be estimated with a high level of Inferred 103 75 33.2 32.0 confidence. It is based on information gathered through appropriate Gruvberget hematite techniques for prospecting, sampling and testing. The data points are Measured 9 9 55.0 55.0 sufficiently dense to verify the continuity of the geology and/or grade. Indicated 5 5 52.6 52.6 Inferred 28 28 53.9 53.9 Probable mineral reserves A probable mineral reserve is the part of indicated, and in some circumstances, measured mineral resources, that can be mined and processed in an economically viable fashion, based on the company’s mining engineering and feasibility studies.

Proven mineral reserves A proven mineral reserve is the part of measured mineral resources that can be mined and processed in an economically viable fashion, based on the company’s mining engineering and feasibility studies.

124 | MINERAL RESERVES AND MINERAL RESOURCES LKAB ANNUAL AND SUSTAINABILITY REPORT 2016 Basis for estimates Ore losses LKAB has the requisite environmental permits and exploitation Depending on the mining method employed, orebody geometry concessions for all mines currently operated by the company. and other technical factors, some sections of the ore must be left Mineral resources are protected by exploitation concessions or in the mine. In the mineral reserves estimates these factors, based exploration permits. Estimates are made on the basis of the on the probable mining methods and current knowledge at the following factors: time of estimation, have been taken into consideration.

Metal prices Standards, codes and recommendations Mineral resources and mineral reserves provide a basis for the LKAB’s mineral reserves and mineral resources have been estimated company’s long-term planning and will be mined for many years and compiled in accordance with recommendations from the Swedish to come. Therefore, a planning price is used, which is an expected trade association for mining and metals companies, SveMin, the average price for iron ore and currencies over the coming business so-called FRB standard. This is an independent set of recommen- cycle. dations but it is based on the International Template for the Public Reporting of Exploration Results, Mineral Resources and Mineral Density Reserves, July 2006, produced by the Committee for Mineral Reserves For iron ores, which are LKAB’s mineral resources and mineral International Reporting Standards (CRIRSCO) in an effort to harmonize reserves, an equation based on the content or the ores is used. international reporting practice. The FRB standard therefore complies The calculation is verified with density measurements. In other with international recommendations such as the Australasian cases, tests/measurements are done for the different ores or Institute of Mining and Metallurgy’s JORC Code and CIM Standards minerals which affect the density. on Mineral Resources and Mineral Reserves, Definitions and Guidelines, which corresponds to sections of the Ontario Securities Dilution Commission’s (OSC) National Instrument 43-101, which stipulates In mining, a certain quantity of waste rock is mixed with the mined how mineral reserves and mineral resources are to be reported. ore. This varies in degree depending on mining method, orebody Mineral reserves and mineral resources compiled and presented geometry and other geological factors. LKAB systematically in this report have been reviewed and approved by Håkan Selldén, monitors the quantity of waste rock mixed with mined ore and Mineral Rights Specialist, LKAB. Håkan Selldén is a Qualified this data is included in all estimates of mineral reserves. Person accredited by SveMin.

March 2017 Håkan Selldén Qualified Person accredited by SveMin

LKAB ANNUAL AND SUSTAINABILITY REPORT 2016 MINERAL RESERVES AND MINERAL RESOURCES | 125 TEN-YEAR OVERVIEW

INCOME STATEMENTS (SEK MILLION) 2016 2015 2014 2013 2012 2011 2010 2009 2008 2007 Net sales 16,343 16,200 20,615 23,873 26,971 31,122 28,533 11,558 23,128 16,385 Cost of goods sold -17,116 -22,280 -18,781 -14,994 -15,183 -15,190 -15,276 -10,029 -12,166 -9,509 Gross profit -773 -6,080 1,834 8,879 11,788 15,932 13,257 1,529 10,962 6,876 Selling expenses -143 -165 -152 -148 -249 -223 -213 -202 -200 -178 Administrative expenses -464 -512 -596 -648 -608 -640 -451 -377 -448 -344 Research and development expenses -245 -365 -451 -360 -283 -328 -213 -237 -258 -217 Other operating income/expenses -52 -35 -66 -84 -59 -35 -68 -54 271 11 Operating profit -1,677 -7,156 570 7,639 10,589 14,705 12,312 659 10,327 6,148 Financial income 898 293 519 611 733 503 418 705 575 572 Financial expenses -285 -408 -495 -482 -345 -407 -349 -172 -513 -376 Profit before tax -1,063 -7,271 594 7,768 10,977 14,801 12,381 1,192 10,389 6,344 Tax 85 1,585 -247 -1,736 -2,224 -3,842 -3,275 -473 -2,748 -1,665 Profit for the year -978 -5,686 347 6,032 8,753 10,960 9,106 719 7,641 4,679 Attributable to: Parent company shareholders -978 -5,686 347 6,032 8,753 10,960 9,106 719 7,641 4,679 Planned depreciation on property, plant and equipment 2,746 2,800 2,865 2,432 1,952 1,891 1,821 1,812 1,452 1,168 BALANCE SHEETS (SEK MILLION) Intangible fixed assets 212 215 229 257 277 269 321 310 428 329 Property, plant and equipment 34,085 34,697 39,529 33,759 30,315 26,285 23,087 21,551 19,893 16,702 Financial fixed assets 1,164 646 1,018 1,197 1,120 1,124 1,675 1,827 1,094 2,416 Total fixed assets 35,461 35,558 40,775 35,213 31,712 27,679 25,083 23,688 21,415 19,447 Inventories 2,836 2,915 2,253 2,611 2,493 2,449 2,074 2,301 2,715 1,635 Accounts receivable 2,094 1,320 1,908 3,291 3,060 4,593 3,395 2,276 1,946 1,922 Other receivables 3,340 1,674 1,037 1,210 2,007 808 1,515 1,095 612 685 Cash & cash equivalents and current investments 13,895 14,561 16,861 15,497 18,672 18,201 14,562 6,195 9,643 5,991 Total current assets 22,165 20,470 22,359 22,609 26,232 26,051 21,546 11,867 14,916 10,233 Total assets 57,626 56,028 63,133 57,822 57,944 53,730 46,629 35,555 36,331 29,680 Total operating assets 42,567 40,820 45,254 41,128 38,151 34,405 30,392 27,533 25,594 21,273 Equity1 30,551 32,116 37,756 41,472 41,085 37,335 32,951 25,375 25,218 22,251 Non-current liabilities 17 ,740 17,900 18,402 11,670 12,485 11,933 9,555 7,512 6,836 4,963 Current liabilities 9,335 6,011 6,976 4,680 4,374 4,462 4,123 2,668 4,275 2,466 Total equity and liabilities 57,626 56,028 63,135 57,822 57,944 53,730 46,629 35,555 36,329 29,680 CASH FLOW ANALYSES Cash flow before payment of urban transformation and pension funds and changes in working capital 4 659 3 995 7 265 10 599 10 700 14 038 13 951 2 931 11 545 7 200 Urban transformation payments2 -1 035 -291 -1 354 -295 -407 -382 NA NA NA NA Payment to pension funds -55 -10 -881 Changes in working capital -3 043 162 1 624 -866 980 92 -1 184 -43 -1 201 -124 Cash flow from operating activities 526 3 856 7 535 8 557 11 273 13 748 12 767 2 888 10 344 7 076 Investment in existing activities -3 341 -6 354 -5 491 -6 141 -5 808 -5 126 -3 973 -3 543 -4 682 -5 968 Disposal 53 150 28 18 6 17 97 73 6 14 Operating cash flow -2 762 -2 348 2 072 2 434 5 471 8 639 8 891 -582 5 668 1 122 Acquisition of companies and intangible assets -17 -13 0 -16 -35 Acquisition / disposals in current investments -1 046 1 279 -703 2 434 -3 729 -2 990 -2 952 308 296 -381 Change financial assets -113 78 -92 -11 -66 178 Cash flow after investments -3 921 -991 1 369 4 759 1 742 5 649 5 915 -340 5 948 884 Borrowing 2 114 108 2 793 -43 Dividend -139 -3 500 -5 500 -5 000 -5 000 -500 -2 800 -2 000 -2 000 Cash flow for the year -1 807 -1 022 662 -741 -3 258 649 5 415 -3 140 3 948 -1 159 Deliveries, Mt 27,0 24,2 26,0 25,5 26,3 25,7 26,0 18,7 22,7 25,1 Deliveries pellets, % 84,0 83,9 83,2 82,8 83,6 81,7 80,1 76,5 79,0 71,3 KEY FIGURES FOR THE GROUP Net sales, SEK million 16 343 16 200 20 615 23 873 26 971 31 122 28 533 11 558 23 128 16 385 Growth in net sales, % 0,9 -21,4 -13,6 -11,5 -13,3 9,1 146,9 -50,0 41,2 12,1 Operating margin, % -10,3 -44,2 2,8 32,0 39,3 47,2 43,2 5,7 44,7 37,5 Profit margin, % -6,5 -44,9 2,9 32,5 40,7 47,6 43,3 10,3 44,9 38,7 Return on total capital, % -1,4 -11,5 1,8 14,3 20,3 30,3 31,0 3,8 33,0 24,2 Return on equity, % -3,1 -16,3 0,9 14,7 22,2 30,9 31,5 2,8 32,2 22,6 Return on operating assets, % -4,0 -16,6 1,4 19,3 29,2 45,4 42,4 2,5 49 32 Equity/assets ratio, % 53,0 57,3 59,8 71,7 70,9 69,5 70,7 71,4 69,4 75,0 Average number of employees 4 224 4 463 4 539 4 427 4 357 4 191 4 030 3 778 4 086 3 885

1 Adjustment 2011 for changed reporting (net) of remediation Definitions expenses. Operating assets: Tangible and intangible fixed assets, Inventories, Accounts receivable, Other receivables. Non-financial assets, cash 2 Reported on own row of cash flow analysis from 2011. & cash equivalents and current investments. Operating liabilities: Total liabilities reduced by deferred tax in untaxed reserves, deferred tax liabilities and non-current liabilities. Growth in net sales: Change in net sales as a percentage of the previous year’s net sales. Operating margin: Operating profit as a percentage of net sales. Profit margin: Profit after financial items as a percentage of the year’s net sales. Return on total capital: Profit after financial items + financial expenses as a percentage of average balance total. Return on equity: Profit for the year according to the income statement as a percentage of average equity. Return on operating assets: Operating profit as a percentage of average operating assets. Equity/assets ratio: Equity as a percentage of total assets.

126 | TEN-YEAR OVERVIEW LKAB ANNUAL AND SUSTAINABILITY REPORT 2016 TERMS AND DEFINITIONS

ARBITRARY ACT: A case in which an employee who knowingly breaches the terms of PELLETIZING: Process whereby slurry is mixed with binder and rolled together into an employment contract is subject to legal action. “green” balls. The balls are sintered in a pelletizing plant. The finished product is pellets. BARREN ROCK: Barren rock is a collective term for waste rock surrounding an ore. PERFORMANCE IN IRONMAKING: LKAB’s promise to customers. BLAST FURNACE PELLETS: Iron ore pellets that are reduced to crude iron in a steelworks blast furnace. SEISMIC EVENT: Rock tremor, earthquake.

BENCH MINING: A method for mining ore in open-pit mines. SINTERING: Heating of fine-grained ore (fines) until it starts to melt. The ore is then fused (sintered) into lumps (sinter) that can be used in a blast furnace. CONCENTRATION: Beneficiation of finely ground ore by separation into a concentrate of iron ore powder with very high purity, so-called slurry. SORTING: Rough sorting, crushing and screening to separate waste rock and increase the iron concentration of the ore. CORRUPTION: The abuse of entrusted power by an employee for private gain. VALUES: LKAB’s values: Committed, Innovative and Responsible. CRUDE ORE: Designation for input to ore processing plants. WASTE GENERATED IN OPERATIONS: Material that is landfilled; in LKAB’s case, CRUDE IRON/HOT METAL: Molten iron from a blast furnace that is subsequently consisting largely of rock that is not ore. refined in a steelworks. WASTE ROCK: Waste rock is collective term for the rock that is not ore. CRUSHED ORE: The untreated ore broken loose from the deposit. MINERALS DEFORMATION ZONE: Ground area affected by subsidence due, for example, to mining. Deformation zone boundaries are defined at the point where seismic HEMATITE: Mineral, iron ore (Fe2O3), also known as bloodstone, with non-magnetic instruments first indicate disturbance. properties.

DIRECT REDUCTION PELLETS: DR pellets, iron ore pellets adapted for reduction MICA: A mineral that is used in a variety of applications, including reinforcement and with natural gas to DRI, which is used to produce steel in an electric arc furnace. thermal insulation in plastics and as a decorative material in ceramics. DRI, direct reduced iron: (Sponge iron). Input material for steelmaking in an electric arc furnace. HUNTITE: Mineral that can be used for example as halogen-free flame-retardant additive in plastics and cable. GRI: Global Reporting Initiative, international guidelines for sustainability reporting. MAGNETITE: Mineral, magnetic iron ore (Fe3O4), also known as black ore which, HOT-ROLLED COIL (HRC): One of the most common flat steel products, in refined form, is used for iron and steelmaking. Other applications for magnetite manufactured in large volumes and in varying widths and thicknesses. include water purification, noise and vibration dampening and as ballast in high- density concrete. INDICATORS: Quantifiable key values as defined by the GRI sustainability areas Economy, Environment, and Society. OLIVINE: A mineral that is used as an additive in the manufacture of blast furnace pellets. LANDFILL: Area in which materials such as tailings or waste rock are stored indefinitely. UNITS AND ABBREVIATIONS

LARGE-SCALE SUBLEVEL CAVING: A cost-effective method for mining ore g: Gram underground. GWh: Gigawatt hour kg: Kilogram MAIN LEVEL: Main haulage level in an underground mine from which ore is kt: Kilotonne transported to surface level via skip hoists. kWh: Kilowatt hour m3: Cubic metre ORE: A mineral that is deemed profitable to mine. mg: Milligram mg/m3 NDG: Milligram per normal cubic metre dry gas ORE YIELD: The ratio between the recovered crude ore and the theoretical quantity MSEK: Million Swedish kronor of intact ore in the ground. Mt: Million tonne TJ: Terajoule TWh: Terawatt hour

LKAB ANNUAL AND SUSTAINABILITY REPORT 2016 TERMS AND DEFINITIONS | 127 INFORMATION

AGM FINANCIAL INFORMATION LKAB ADDRESSES

DATE INTERIM REPORTS LKAB LKAB’s Annual General Meeting will 27 April Group Head Office be held on 27 April 2017, at 3.00 p.m. Interim Report, 1st Quarter 2017 Box 952 in Luleå, Sweden. SE-971 28 Luleå, Sweden 15 August Tel +46 771 760 000 Interim Report, 2nd Quarter 2017 PARTICIPANTS Fax +46 771 760 001 The AGM is open to the public. 27 October [email protected] Interim Report, 3rd Quarter 2017 Jan Moström, President and CEO NOTICE TO ATTEND Notice to attend the AGM, financial February 2018 Further addresses available at information and other information, is Interim Report, 4th Quarter 2017, LKAB’s website, lkab.com. available on LKAB’s website, lkab.com. together with Year End Report 2017

Printed financial information may be CONTACTS ordered by e-mail at [email protected]. Please direct any questions regarding LKAB’s financial information to A printed version of the Annual and Peter Hansson, Senior Vice President, Sustainability Report will be availabe Finance and/or Jan Moström, President from 27 April 2017. and CEO Please direct any questions regarding LKAB’s Sustainability Report to Grete Solvang Stoltz, Senior Vice President, HR and Sustainability

128 | INFORMATION LKAB ANNUAL AND SUSTAINABILITY REPORT 2016 LKAB’s competitiveness is based on the capacity to deliver high-quality iron ore products to customers with high product requirements.

Björn Åström - General Manager, Projects.

LKAB’s Annual and Sustainability Report 2016 is produced by LKAB in cooperation with Rippler Communications and Berger & Pihl. Translation: Språkbolaget. Photos: Fredric Alm and Runar Guðmundsson, Alm & ME, Tonje Rønnevig and LKAB. Printing: Lule Grafi ska. 129 2016 ANNUAL AND SUSTAINABILITY REPORT

LKAB, BOX 952, SE-971 28 LULEÅ, SWEDEN | PHONE +46 771 760 000 | WWW.LKAB.COM