Annual Report and 2009 Accounts Annual Report EuroChem
The global population grows by 75 million each year. The world needs feeding.
It starts here.
Registered office EuroChem Mineral and Chemical Company, OJSC Address: 53 ulitsa Dubininskaya, bld. 6, Moscow 115054 Tel: +7(495) 795 2527 Fax: +7(495) 795 2532 E-mail: [email protected] Annual Report and Accounts 2009 Contents EuroChem – Our world Overview of our business our of Overview 01 2009 highlights 02 Our market drivers 04 Our operations 06 Our strategy 07 Strategic objectives 08 EuroChem at a glance 10 The global industry – peer comparison 12 EuroChem history 14 EuroChem timeline 2009-2010 15 Chairman’s statement 16 Q&A with our CEO Performance Business segment performance 18 Nitrogen 20 Phosphates 21 Potash 22 Distribution 24 Management discussion and analysis 30 Key financial and non-financial data 32 Risk management Corporate governance 34 Our governance 40 Our responsibilities Financial statements 43 IFRS Consolidated financial statements and Independent auditor’s report
82 Main production subsidiaries 83 Contact information 84 Forward-looking statements This Report has been printed to environmental management system ISO 14001 standards by a printer which is Forest Stewardship Council (FSC) chain of custody-certified. All inks used are vegetable-based. This paper is environmentally friendly ECF (elemental chlorine-free) and wood-free with a high content of selected pre-consumer recycled material. The mill is fully FSC-certified. The paper is also completely bio-degradable and recyclable.
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Designed and produced by The College www.thecollege.uk.com The challenges facing agriculture on a global scale remain unchanged: emerging market expansion is leading to changing diets, population growth means arable land per capita is declining and new sources of demand like biofuels create even greater pressure to produce more crops every year. The world needs feeding. Agriculture must unlock the potential to grow.
It starts here. EuroChem is one of the top 10 global producers and suppliers of mineral fertilizers. We help the agricultural industry grow the crops needed to produce more food, fibres and alternative fuels. Solutions to global challenges…
Population Arable land Changing diets
Population growth is one of the core There is a limited amount of land Years of economic growth, especially challenges facing the global food that is suitable to be used in feeding in emerging markets, have led to system. The world’s population is the world’s growing population. dietary changes that have increased growing at a rate of around 75 million Between 1961 and 2007, global food consumption per capita and people per year according to the population increased 115%. Arable consumption of increasingly resource- World Bank. Agricultural producers land increased just 10% during that intensive foods like meat. The World must continue to increase output same period – one acre of land fed Economic Forum projects that food and efficiency to keep up. 2.4 people in 1961, while that same demand will grow 70-90% by 2050. acre must feed 4.7 people today. More than 25% of the increase in grain demand will be due to changes in diet rather than population growth.
…are our opportunities
We are the 10th largest producer in the global mineral fertilizer industry by nutrient capacity. But we have embarked on far bigger plans. There are huge opportunities for us as we aim to become a top five global player in all three market segments: nitrogen, phosphate and potash. In a commodity business our competitive advantage is to remain highly cost-competitive through vertical integration, investing in efficiency, product flexibility and securing access to lower-cost resources. Emerging markets Alternative fuels Soil fertility
The per capita gross national incomes Biofuels account for a small but Arable land also needs fertile soil to (GNI – in PPP dollars) of Brazil, rapidly growing share of consumption grow the crops that are in demand. Russia, India and China combined of the world’s food resources. Since Nitrogen, phosphate and potash rose by 119% between 1998 and 2001, total corn production has fertilizers help make arable land more 2008. US per capita GNI in the same increased rapidly (from 9.5 billion fertile and therefore more productive. period rose by 33%. This growth is bushels to 13 billion bushels in 2007) helping to drive the dietary changes and the share of corn used for and increase consumption, and will ethanol has jumped from 7% to 24%. continue to demand more from the According to recent projections, world’s food system. 30% of the US maize harvest could be used for ethanol by 2010.
Today we produce a full range of nitrogen, phosphate and complex fertilizer products that help the agricultural industry meet the challenges of tomorrow’s world. In 2009 we added granulated urea and CAN to our product mix. By 2014 we plan to be a significant producer in the potash segment as well. We keep investing in growth and improvement because...... the world needs fertilizers. It starts here. EuroChem.
The key to growth In 2009 the world consumed 99.8 MMT of nitrogen nutrient (N) in fertilizers; this is set to rise to 110.6 MMT by 2014. Sources: IFA, BSC, Fertecon, EuroChem estimates.
In 2009 we produced 2.3 MMT of N nutrient and this is set to rise to 2.4 MMT by 2014. The key to growth: our currently planned investment for nitrogen for 2010-2014 is around US$ 800m, mostly in new products and removal of bottlenecks. Why is nitrogen important for growth?
Key facts • Nitrogen is a primary building block • The nitrogen market is the most for all life. Without nitrogen crops competitive of the three fertilizer cannot produce sufficient amino segments, given the relative acids, proteins and enzymes abundance of natural gas in the • Nitrogen plays a critical role in world – access to low-cost natural protein formation and is a major gas is a key competitive advantage component of chlorophyll • The highly competitive nature of • Nitrogen is a naturally occurring this market makes nitrogen fertilizer element in air prices relatively volatile • Farmers need a steady supply of • Production lead time for new nitrogen fertilizer capacity is Ammonia production facilities nitrogen fertilizers to ensure high- at Novomoskovskiy Azot. quality crop growth and yield three years • Natural gas and atmospheric nitrogen are converted into ammonia, which is the primary raw material for nitrogen fertilizers
Our strategy for the nitrogen segment
Strategy Achievements in 2009 Revenue contribution 2009 • Ensuring energy efficiency • Commissioned Russia’s first improvements and removal granulated urea shop (Urea-3) (2008: 46%) of bottlenecks, leading to lower at Novomoskovskiy Azot with 48% costs at both plants through nameplate capacity of 2,000 incremental investment tonnes/day in December 2009 • Achieving product flexibility in • Launched CAN shop at order to maximize profit margins Novomoskovskiy Azot with through alignment of production nameplate capacity of to market conditions 420 KMT p.a. in October 2009 • Ensuring best possible access • Construction of Russia’s first to attractive markets (i.e. markets melamine shop at Nevinnomysskiy EBITDA contribution 2009 where EuroChem is most Azot with 50 KMT p.a. capacity competitive on a “cash cost on track for launch in 2011 delivered to” basis) 56% (2008: 54%) • Upgrade of Urea-4 shop to further • Securing access to competitively expand granulated urea capacity priced natural gas on track for launch in 2010 Global position in ammonia capacity MMT p.a.
Yara 7.7 CF Industries + Terra 6.9 PotashCorp 3.5 Agrium 3.3 Togliattiazot 3.2 EuroChem 2.8 Urea production facilities at Nevinnomysskiy Azot. SAFCO 2.3 IFFCO 2.2
Sources: IFA, BSC, company data.
Our current capacity in MMT p.a. Novomoskovskiy Nevinnomysskiy Azot Azot Total Ammonia 1.63 1.16 2.79 Urea 1.04 0.86 1.90 AN 1.29 1.31 2.60 Corn UAN 0.43 1.02 1.45 Corn is one of the most CAN 0.42 – 0.42 nitrogen-intensive crops. Methanol 0.34 0.13 0.47 Acetic acid – 0.17 0.17
SWOT analysis
Strengths Weaknesses • Diversified customer base • Age of equipment results in relatively high • Economies of scale due to vertical integration maintenance costs and restricts maximum efficiency improvements • Low-cost production mainly due to relatively low, albeit gradually rising, natural gas prices • Transportation costs are relatively high at Novomoskovskiy Azot due to location • Broad and expanding product range allowing margin maximization • Convenient logistics and proximity to transport hubs (for Nevinnomysskiy Azot) • Secure long-term supply of gas
Opportunities Threats • Large-scale project: construction of significant • Import trade barriers exist in several target new ammonia capacity with access to low-cost markets natural gas • Falling/low natural gas prices increase relative • New product initiatives add flexibility and margin competitiveness of previously marginal and (e.g. compound fertilizers and low-density unprofitable producers (increase in competitive ammonium nitrate) supply) • Further incremental efficiency improvements • Gradual domestic increase in gas and energy are still possible at both plants costs may happen regardless of external natural • Domestic Russian and CIS market potential gas and energy price dynamics • Reduction/elimination of import tariff barriers • New ammonia capacity in low-cost gas regions in key target markets (e.g. the Middle East) may unfavourably alter the supply – demand balance in the sector 6th largest global player in nitrogen fertilizer production by ammonia capacity In 2009 the world consumed
34.6 MMT of P2O5 in phosphate fertilizers; this is set to rise to 42.7 MMT by 2014. Sources: IFA, BSC, Fertecon, EuroChem estimates.
In 2009 we produced
0.9 MMT of P2O5 in phosphate fertilizers and this is set to rise to 1.2 MMT by 2014. The key to growth: our currently planned investment in phosphates and apatite mining 2010-2014 is over US$ 600m Why are phosphates important for growth?
Key facts • Crops need phosphate to stimulate • Phosphate deposits are relatively root development and protect rare, with large deposits against drought concentrated in North Africa, • Phosphorus plays a vital role in China, the CIS and North America energy transfer, photosynthesis, • Phosphate ore, produced by nutrient transport, sugar mining apatite and phosphate metabolism, plant genetics, rock, is the key ingredient for cell division and as a structural phosphate fertilizers. Other component of plants important ingredients include • Crops with adequate phosphorus ammonia and sulphur show steady vigorous growth and • Production lead time for new Soy The soybean plant has earlier maturity. Earlier-maturing phosphate mines and processing been used in Chinese crops are less susceptible to plants is three to four years agriculture for over 5,000 years. Today the summer drought, disease infection, top three producers frost and harvest damage of soybeans are the United States, Brazil and Argentina.
Our strategy for the phosphate segment
Strategy Achievements in 2009 • Increase supply of raw materials • Invested in new turbine generators (phosphate rock, apatite) to re-capture steam produced in sulphuric acid production process • Grow capacity to increase the to improve energy efficiency of benefits of economies of scale Phosphorit plant • Improve cost efficiency through • Launched DAP production at energy-saving technologies Phosphorit plant • Planned phosphate fertilizer line at EuroChem-BMU plant will have capability to process phosphate rock from mine at Kara Tau deposit in Kazakhstan
4th largest global producer of phosphate fertilizer by MAP/DAP capacity MAP+DAP capacity global ranking MMT p.a.
Mosaic 10.2 OCP 2.6 Phosagro 2.5 EuroChem 2.2 CF Industries 2.0 PotashCorp 1.9 Lifosa sulphuric acid plant HRS unit. GCT 1.1 Agrium 1.1
Sources: IFA, company data.
Capacity in MMT p.a. Kovdorskiy EuroChem- Nevinnomysskiy GOK Lifosa Phosphorit BMU Azot Total Apatite 2.70 0 0 0 0 2.70 MAP, DAP, NP 0 0.98 0.74 0.51 0 2.23 NPK 0 0 0 0.06 0.44 0.50 Ammonia storage at EuroChem-BMU phosphate plant. Feed phosphates 0 0.08 0.22 0 0 0.30 Total 2.70 1.06 0.96 0.57 0.44
SWOT analysis Revenue contribution 2009
Strengths Weaknesses • Own supply of apatite accessible through • Transportation costs for Kovdor apatite are open-pit mining, with high P O content (2008: 44%) 2 5 relatively high for Lifosa and EuroChem-BMU 40% • Plants are located close to sea ports and • Relatively high maintenance costs and restrictions close to their target markets (Europe and on maximum efficiency improvements due Russia/CIS) to age of equipment • Lifosa is an EU-based plant hence no import tariffs in Europe • Absence of ecologically harmful substances in apatite (cadmium), which is particularly important for exports to Europe
Opportunities Threats • Securing access to phosphate ore in Kazakhstan • New capacity coming online (e.g. Ma’adden would remove limitation on growing fertilizer project in Saudi Arabia, Bayovar project in Brazil) production capacity could unfavourably alter the supply – demand EBITDA contribution 2009 • Further efficiency improvements are still possible, balance in the sector and/or compress the mostly at EuroChem-BMU and Phosphorit normally higher margins enjoyed by integrated producers like EuroChem • Large-scale project: construction of phosphate and compound fertilizer plant in Kazakhstan 27% (2008: 45%) In 2009 the world consumed 21.9 MMT of K2O in fertilizers, this is set to rise to 35.4 MMT by 2014. Sources: IFA, BSC, Fertecon, EuroChem estimates.
EuroChem’s strategy is to be a significant global potash producer by 2014, with an annual capacity of 2.3 MMT p.a. (c. 1.4 MMT p.a. of nutrient) after completing the first phase of our Gremyachinskoe greenfield project, increasing to up to 7.7 MMT p.a. (c. 4.6 MMT p.a. of nutrient) upon completion of phase II of Gremyachinskoe and phases I and II of the Verkhnekamskoe project. The key to growth: our currently planned investment in potash to 2014 is around US$ 3.2bn. This will make us one of the only fertilizer producers in the world with a significant presence in all three of the major nutrient segments, and one of the top five fertilizer producers globally by total nutrient capacity. Why is potash important for growth?
Key facts • Potash is known as the quality • Potash reserves are rare, and just nutrient: used as a fertilizer, it helps three countries, Canada, Russia crops to improve water retention, and Belarus, account for 85% of yield, nutrient value, taste, colour, the world’s known economically texture and disease resistance viable potash reserves • Potash is primarily mined from • Lead time for potash greenfield deposits located deep underground projects is typically longer than • Potash producer margins are for other fertilizers: from five to historically significantly higher seven years than those of N and P producers
Our strategy in potash
EuroChem ranks among the top five In 2008 and 2009 EuroChem fertilizer companies in the world by acquired a significant stake reserves. Our strategy is to start in a leading global potash and salt 2013 potash production in 2013, reaching producer, K+S AG. This has given planned start for EuroChem potash an annual capacity of 2.3 MMT p.a. us economic exposure to the potash production at after completing the first phase of sector before our own projects Gremyachinskoe development of the Gremyachinskoe come online, and we are reviewing deposit deposit. our strategic options with this investment. As of 15 March 2010, Through a brownfield expansion the combined stake in K+S AG held of the Gremyachinskoe deposit we by EuroChem and its parent company plan to double capacity to 4.6 MMT was over 15%. 5th p.a., then we plan to add an additional largest global player 1.7 and 1.4 MMT p.a. of capacity by proved and probable through two phases of development potash reserves of the Verkhnekamskoe deposit, resulting in a total annual capacity of 7.7 MMT p.a. Top 10 potash producers 2009 by capacity By 2018, EuroChem MMT p.a. of Kcl 2009 currently plans Potash Corp (Canada) 11.01 Mosaic (USA/Canada) 10.81 to operate over 8% Belaruskaliy (Belarus) 8.99 of global potash Silvinit (Russia) 5.70 Uralkali (Russia) 5.55 capacity. K+S AG (Germany) 5.20 Dead Sea Works Ltd (Israel) 3.95 QSL Industry Group (China) 2.20 Agrium (Canada) 2.10 Arab Potash Co. (Jordan) 2.10
Work at Verkhnekamokoye Sources: BSC, company data. potash deposit.
Sunflower Application of potassium fertilizers can help increase yield and oil content in sunflowers.
SWOT analysis
Strengths Weaknesses • Vast reserves (est. 3.2bn tonnes*): number • Limited in-house experience in mining may five globally lead to higher costs due to the need to engage • Close location of Gremyachinskoe deposit subcontractors for planning and construction to Black Sea ports of mines and processing facilities • High nutrient content in reserves in Gremyachinskoe deposit (average 30.8% Kcl) • Both deposits – Gremyachinskoe and Verkhnekamskoe – are located in areas with existing infrastructure • Preliminary calculations place EuroChem among leaders on cash cost delivered to key markets curve • Own transhipment terminal
Opportunities Threats • Become one of the leading players in potash, • A significant reduction in EuroChem’s operating with up to 7.7 MMT p.a. production capacity cash flows due to a sustained period of low • Cooperate with established potash players fertilizer prices in potash projects in Russia and abroad • Large number of announced greenfield and • Use advanced technology for shaft sinking brownfield capacity expansions could increase and enrichment, resulting in lower cash cost competition on the supply side in the long term per tonne of production and result in lower margins available to EuroChem
* A+B+C1 according to Russian reserves classification. In 2009 the Russian grain crop was 97 MMT, the second-highest level in 16 years. Source: RF GosKomStat.
In 2009 we provided farmers in Russia and the CIS with agronomics consulting, third-party seeds and crop protection products, and sold 1.64 MMT of our fertilizers through owned and independent distributors in Russia and CIS, 25% more than in 2008. The key to growth: we aim to more than double our sales volumes through our distribution network in 2010-2014. How will our sales and distribution network help us grow?
Key facts • We expect long-term growth • We sell yield, not fertilizers through in Russian and CIS agricultural our network, providing agronomics markets after underinvestment advisory services and third-party in the sector during the previous seeds and crop protection products two decades, during which fertilizer in addition to EuroChem’s own application fell 90% fertilizers • Our distributors buy products from our plants and other producers, and sell at a margin to customers
Wheat is Russia’s Number 1 crop: in 2009 Russia produced 61.7 MMT of wheat, up 7.9% year-on-year.
Our strategy for distribution
Strategy Achievements in 2009 Revenue for 2009* • “Sell yield, not fertilizers” – we take • Increased sales volumes in Russia an advisory approach to farmers, by 20% and in CIS by 42% helping them to increase yields RUR 5,390m • Opened six new outlets through a range of methods, rather than just boost their fertilizer EBITDA for 2009* consumption • Contribute to the recovery of RUR 22.4m efficient and effective agriculture in Russia and the CIS, and benefit from the agricultural recovery in this region • Better balance sales with a strong foothold in our home market, which helps to mitigate the effects of trade barriers if and when they arise
* From own distribution centres only. Where we operate Owned Owned by independent distributors
SWOT analysis
Strengths Weaknesses • Good coverage of most important agricultural • Lack of presence in certain important agricultural areas of Russia and Ukraine areas (mostly in Ukraine) • Agrochemical expertise and sale of high-quality seeds and crop protection items • Brand associated with quality and reliability; good brand recognition • High storage capacity
Opportunities Threats • Improve coverage of Southern and • Further price regulation in Russia leading Central Russia and Ukraine to margin erosion for the domestic sales • Launch sales of new products that • Intensified competition from the other players only EuroChem produces in Russia, such as PhosAgro, UralChem, Acron e.g. granulated urea • Currency and credit risks in Ukraine; credit risks • Establish presence in Belarus and Kazakhstan in Russia
39 owned and independent distribution centres in 24 Russian and Ukrainian cities How EuroChem unlocks growth
Overall nutrient production 2014 in N, P and K, MMT p.a.: 4.8
2009 3.3
2004 2.8
• Potash development projects on track to create value and new jobs • Enhanced vertical integration throughout value chain • Ongoing investments in efficiency to reduce energy usage, transportation costs and emissions • Strong balance sheet and cash generation • Unique access to cost-competitive raw materials, including phosphate and potash segments • Highly competitive production and transportation costs • Strong corporate governance, award-winning environmental and social responsibility programmes Overview of our business 01 112,174 60 39 2.21 44,297 18,818 27,889 8,051 18,702
56 6,401 30 44 73,821 73,577 16,174 22 22,415 (RUR m) 7,609 11,075 16,516 0.57 Annual Report and Accounts 2009 EUROCHEM
848 -0.11 in potash projects Net profit (RUR m) 2008 2007 2008 2007 2008 2007 2008 2007 2009 Capex 2009 EBITDA (RUR m) 2009 Capex (RUR m total) 2009 2009 Gross margin (%) 2009 EBITDA margin (%) 2009 Net debt/EBITDA ratio Sales (RUR m) 2009 2008 2007 2008 2007 2008 2007 2008 2007
The key to growth key The Ongoing delivery of strategic goals: delivery Ongoing and CAN launched Azot Novomoskovskiy production urea (firstgranulated Russia)in projects greenfield potash of Construction on track: housing and other infrastructure infrastructure other and housing track: on detailed and initiated sinking shaft completed, underway facility enrichment for engineering aimed programme expenditure Capital efficiency increased and segments new at significant of event the in flexible remains disruptions market sheet:Strong balance 2009 finished EuroChem 36.5bnwith RUR a net debt/ of net and debt 2.21 of ratio EBITDA bothby confirmedmid-2009 rating credit BB Ratings Fitch and Standard & Poor’s
• • EuroChem positive about the future. about positive • • • been a turbulent and challenging year but we are are we but year challenging and turbulent a been better integration of production processes. 2009 has has 2009 processes. production of integration better in new production facilities, improved efficiency and and efficiency improved facilities, production new in 2014 that envisages investments of around US$ 4.6bn US$ 4.6bn around of investments envisages that 2014 EuroChem has adopted a development strategy to to strategy development a adopted has EuroChem European and top ten global producers in the sector. sector. the in producers global ten top and European fertilizers in Russia. It ranks among the top three three top the among ranks It Russia. in fertilizers EuroChem is the largest manufacturer of mineral mineral of manufacturer largest the is EuroChem
31 Aug 2009 M&A CF announces offer for expires Terra and extended; commences CFbeen not is annual hold to Terra compel to litigation meeting 29 Sep 2009 M&A Odesskiy Priportoviy Zavod (OPZ) cancelled then completed, privatisation by Ukranian judge 1 Nov 2009 M&A $40.50 to offer Terra increases CF $32.00 cash in including share per shareand of CF 0.1034 stock 1.2 MMT1.2 of finished productin 2009. This increased volatility at the end of 2009, of end the at volatility increased This began farmers by purchases fertilizer when with combined This, levels. normal to returning suppliers, key several at interruptions production led to a nearly 50% increase the in price of $280-290 from FOBin fertilizers phosphate by $450higher 2009 to FOBand December likewise prices fertilizer Nitrogen 2010. January and November in strength significant showed December 2009 and into 2010. debt and crisis economic global the Despite market freeze, Russian Federation fertilizer use increased 5% to 2.38 MMT of nutrient 2009 in according to the RF Ministry of Agriculture. distribution growing a has which EuroChem, significantly CIS,saw the and Russia in network increasing market, Russian the on growth faster fertilizer sales 20% by MMT from to 1.0 • • •
17 Jun 200917 Potash in price potash reduces K+S AG 435 Euro/tonto Europe (approximately $600/ton) Jul10 2009 Potash BPC agrees potash price for India at $460/ton (Canpotex follows July) on 24 5 Aug 2009 M&A exchange fixed to offer increases CF ratio of 0.465 per CF Industries share 25 Aug 2009 M&A proposal latest CF’s rejects Board Terra’s of 0.465 exchange ratio Extraordinarily tight credit markets in 2009 in markets credit tight Extraordinarily markets American Latin key several affected purchases fertilizer Argentina: and Brazil like debt on dependent were countries these in and India like markets Subsidized financing. high purchase to continued however, Pakistan, volumes of fertilizers. drivers volumes and price primary the of One unprecedented of after-effect the 2009 was in price increases 2008. in The entire supply chain ground to a halt as the financial crisis worsened distributors and importers 2008.Traders, late in goods of full warehouses with caught were purchased at record-high prices, but with no to due Whether buy. to able or willing one these need, financial simple or policies stop-loss year, the throughout liquidated were supplies as prices were driven lower. At the same new time, purchases did not follow chain supply the left which liquidation, stock the largely empty the by fall of 2009. Demand • • •
9 Mar 2009 M&A TRA for offer to increases CF 0.4129-0.4539 or $27.50/share CF shares per TRA share 23 Mar 2009 M&A TRA for offer to increases CF $30.50/share 0.4129-0.4539 or CF shares per TRA share 27 Mar 2009 M&A for bid portion of cash AGUincreases $35.00; to CF remains AGUshare 1 May 200911 M&A for bid portion of cash AGUincreases $40.00; to CF remains AGUshare 1
). 5 O 2 0) 2008 in to 2 production is estimated estimated is production sales remained stable, Annual Report and Accounts 2009
producers attempted to hold prices prices hold to attempted producers
EUROCHEM EUROCHEM 21.7 MMT of nutrient21.7 2009. in the of nature consolidated highly the While for volatile less prices made market potash for price average the and year the of most $636/mt. 2009 was of majority the However, prices lower at selling began producers several eventually prices and 2009, of end the toward contract major a BPCsigned when out bottomed with China for $350/mt CFR. 33.2 MMT of nutrient (K Potash contributed which year, the throughout high to a significant declinein production from increasing from 99.1 MMT of nutrient (N) nutrient MMT of in 99.1 from increasing 2008 to 99.8 MMT of nutrient 2009 in despite the economic disruptions. Stable application this of characteristic is fertilizers nitrogen of segment. fertilizer Phosphate decreasedto have year on year 5.4% by to 35.3 MMT of nutrient (P Nitrogenfertilizer Industry timeline 15 Jan 200915 M&A (CF) Industries CF unsolicited launches (TRA) Terra for offer $20.00/share, for TRA per share shares CF 0.4235 or 25 Feb 2009 M&A Agrium (AGU) submits unsolicited bid to CF for $72.00/share, or 1 AGU share AGUshare $72.00/share, 1 for CFor to and $31.70 in cash per CF share 4 Mar 2009 Potash Brazil in price potash BPCreduces to $750/ton • • 02 • entrants and further and consolidation. entrants • supply side, the industry saw both new new both the industry saw side, supply The basics • prevailed and demand recovered. On the On recovered. demand and prevailed fundamentals of our industry gradually industry our gradually of fundamentals 2009 got off to a weak start but the strong strong the but start weak a to off got 2009 Our market drivers market Our
Overview of our business Overview of our business 03 2009
Rice Feb 2010
Urea (Nitrogen) Soybean DAP (Phosphate) Corn Feb 2010 Nitrogen MHTLAUM Complex Trinidad launches MMT 1.5 p.a. of new UAN production capacity Mar 2010 M&A Terra for offer new a makes CF valued at $47.40/share. Yara offer, its increase to declines agreement the breaks Terra withdraws Agrium Yara. with offer CF for is on CF. track acquisition secure to of Terra MOP (Potash) Wheat
Fertilizer prices Fertilizer Rice, Wheat, Soybean and Corn prices Soybean Wheat, Rice, Source: CBOT. Source: 2000 Jan 2009 Sources: Fertecon, FMB. Fertecon, Sources:
0 8 4 0
20 16 12 $/bushel 850 600 450 300 $/tonne 150 Annual Report and Accounts 2009 EUROCHEM
appear to to appear 29 Jan 2010 M&A Vale agreement to acquire stake Yara in Fosfertil 3 Feb 2010 Potash Brazil for prices potash BPCraises to $410/ton Feb 201011 M&A Vale agreement to acquire Mosaic stake in Fosfertil Feb15 2010 M&A acquire to agreement announces Yara forTerra in cash $41.10/share Brazil, China and India and China Brazil, entered, or have have Major or new playersentered, announced the fertilizer plans to enter, market, possibly driven the by understanding that anhave increased interest ensuring in access to fertilizer production through national companies cushion to and security” “food ensure help to the of repeat a from producers agricultural their price increases seen 2008. in the long-term fundamentals of growing food food growing of fundamentals long-term the demand remain unchanged. prices fertilizer in rise unprecedented the After 2008,in the governments of several key importers Looking ahead: • • •
14 Jan 201014 M&A CF withdraws offer to acquire Terra 20 Jan 2010 Potash (BHP) BHP to Billiton plan approves spend $240m on Jansen project 27 Jan 2010 M&A stake Bunge acquire to agreement Vale in phosphate producer Fosfertil 28 Jan 2010 M&A Athabasca acquire to BHPagreement Potash
Prices for several key inputs to phosphate acid sulphuric and sulphur like fertilizers declined significantlyin 2009; prices for other the On declined. also rock phosphate input key the gas, natural for prices input hand, Russian for increased fertilizers, nitrogen for policy its continued Gazprom as producers, prices gas domestic increasing gradually of to European netback equivalent. in drop precipitous a to led crisis the While for gas natural of price the prices, fertilizer Ukrainian and Eastern European nitrogen fertilizer producers, which are among the not did globally, producers highest-cost decline significant a to led this decrease; them made and volumes production their in for price floor the set that producers swing the nitrogen fertilizer market. Ammonia exports from Ukraine declined from 1.4 MMT 1.4 from declined Ukraine from exports 2008in to just 0.35 MMT 2009. in For Q1 2010, GazpromFor 2010, Q1 has set the natural gas price for Ukraine at $9.45/mmbtu, prices than higher significantly is which thein US and on European spot markets. 5 Nov 2009 M&A offer final” and “best makes Agrium cash in $45.00 of share CF per for share Agrium one plus 20 Nov 2009 M&A elected Directors nominated 3 CF’s Boardto Terra 25 Nov2009 Rights Offering K+S AG announces Capital Increase 22 Dec 2009 Potash BPC signs potash contract with China for supply at $350/ton Key inputs • • Our operations
Overview of our business our of Overview Our operations span from the Kola peninsula in the north to the Black Sea in the south and from Siberia to the Baltics. We are a vertically integrated company with mining, fertilizer production, logistics and distribution facilities and infrastructure in Russia, Ukraine, Estonia and Lithuania.
1. Novomoskovskiy Azot 2. Nevinnomysskiy Azot 3. EuroChem-BMU Commissioned 1933 Commissioned 1962 Commissioned 1977 Acquired by EuroChem 2002 Acquired by EuroChem 2002 Acquired by EuroChem 2002
Key products and capacity (MMT p.a.) Key products and capacity (MMT p.a.) Key products and capacity (MMT p.a.) Ammonia 1.63 Ammonia 1.16 MAP, NP 0.51 Urea 1.04 Urea 0.86 Ammonium Nitrate 1.29 Ammonium Nitrate 1.31 UAN 0.43 UAN 1.02 CAN 0.42 NPK 0.44
4. Phosphorit 5. Lifosa 6. Kovdorskiy GOK Commissioned 1933 Commissioned 1963 Commissioned 1975 Acquired by EuroChem 2002 Acquired by EuroChem 2005 Acquired by EuroChem 2002
Key products and capacity (MMT p.a.) Key products and capacity (MMT p.a.) Key products and capacity (MMT p.a.) MAP, DAP, NP 0.74 DAP 0.98 Apatite 2.70 Feed phosphates 0.22 Feed phosphates 0.08 Iron Ore 5.70 Baddeleyite 8.85 KMT p.a.
04 EUROCHEM Annual Report and Accounts 2009 Overview of our business 3 05 3.7 0.6 0.6
8 Annual Report and Accounts 2009 EUROCHEM 12. Klaipeda12. bulk terminal 9. Tuapse transhipment9. Tuapse terminal Long term contract Transhipment capacity (MMT p.a.) Dry fertilizers Inert goods Liquid fertilizers Transhipment capacity (MMT p.a.) Dry fertilizers 1.7 3.1 3.1 1.4 1.4 1.5 1.5 7 2008 4.4bn 2 3 9 1
11 6 4
10
11. Murmansk bulk terminal terminal bulk Murmansk 11. 8. Verkhnekamskoe potash projectpotash Verkhnekamskoe 8. Transhipment capacity (MMT p.a.) Ore Iron License obtained (MMTCapacity p.a.) Phase I II Phase Total Capex to date RUR 5 4.6 4.6 2.3 2.3 12 0.80 0.80 0.20 2005 13.7bn
Nitrogen Phosphate Potash Terminal Head office 10. Sillamae10. transhipment terminal 7. Gremyachinskoe potash projectpotash Gremyachinskoe 7. Capex to date RUR Where operate we Transhipment capacity (MMT p.a.) Methanol Other chemical products Capacity (MMTCapacity p.a.) Phase I Phase II Total License obtained Our strategy
Overview of our business our of Overview EuroChem has a well defined strategy which we are implementing rigorously and which is delivering positive results. Set out below is a summary of our key strategic goals as they relate to our overall corporate objectives and our business segments.
Nitrogen Phosphate/mining Potash > Increase gas efficiency > Increase own resource base > Gain economic exposure via K+S AG > Continuously optimise product > Increase production > Start own production in 2013 mix to maximize margin > Improve efficiency
t K n n e o w m 1. Become top five global player t l s by revenue and volume in all e e three fertilizer markets by d v g
n growing faster than the market e I through investment in growth and M&A 2. Maintain/increase cost advantage through vertical integration and investment in efficiency
Efficiency
Logistics Distribution Governance/social > Increase cost advantage to > Focus on building own > Adhere to best practice in EuroChem through own port distribution network “selling corporate governance and facilities, freight/rail stock yield, not fertilizers” in Russia, social responsibility including management Ukraine, Belarus and Kazakhstan ecological aspects
06 EUROCHEM Annual Report and Accounts 2009 Overview of our business 07
Annual Report and Accounts 2009 EUROCHEM a relatively undeveloped competitive environment for industrial and transport services. By integrating more of these services into our business, we have over thehave means of manufacturing and particularly is This products. our distributing beneficialin a market such as Russia, with advantage. cost our increase and maintain can of competitiveness cost the monitor continually We portfolio product our manage and products, our all so that we focus most of our energy on those products that are most competitive and where our cost advantage can be maintained or enhanced. Objective 2 competitiveness industry, fertilizer mineral the In products delivering of cost the on depends mainly due is advantage cost Our markets. key to model: business integrated vertically our to largely otherin words, the ownership and control we 2 cost our increase and Maintain competition our over advantage and integration vertical through investment efficiency in improvements.
1 of potash in 2013. We are well under way to to way under well are We 2013. in potash of to licenses the acquired having this, achieving in deposits potash major two developing begin region Volgograd the in Gremyachinskoe – Russia Perm. near Verkhnekamskoe partsof and three all in presence a having that believe We prices The us. for value great unlocks markets of our products and the raw materials needed Become a top-five global player player global top-five a Become all in profitability and volume by segments market fertilizer three potash. and phosphate nitrogen, – Objective 1 Reaching the top five in all threefertilizer key in capacity our boost to us require will groups build or buy through phosphate and nitrogen initiatives, as as well start our own production poses which volatile, very be can them make to over risk that spreading By flow. cash to risk a increase can we groups, product main three all allows turn in which capacity, debt and equity our advantage take to flexibility the maintain to us when opportunities investment attractive of they arise.
five years: the delivery of two key objectives over the next next the over objectives key two of delivery the social environment. We aim to succeed through through succeed to aim We environment. social including customers, employees and our wider wider our and employees customers, including to its shareholders and other stakeholders, stakeholders, other and shareholders its to EuroChem’s fundamental goal is to deliver value value deliver to is goal fundamental EuroChem’s Strategic objectives 55.9
40.0 39.6 producer of acetic acid and World ranking nutrient by World capacity 6 and continue investment in efficiency and product flexibility. complex more (primarily products synthesis Organic processing of nitrogen products) are used as raw materialsthe in chemical, construction and other industries. Our main products are methanol from Novomoskovskiy Azot and acetic acid from Nevinnomysskiy Azot. EuroChem is the only granulated urea in Russia. (RUR bn)2007-2009 revenue Segment (including sales to other segments) 2009 Group to contribution Revenue 48% What do we Nitrogen Novomoskovskiy at fertilizers nitrogen produce We Azot and Nevinnomysskiy Azot, which can produce a combined 2.8 MMT of ammonia per year. EuroChem is a leading low-cost producer because we have to access inexpensive raw materials 2009 2008 2007 1% 5% 5% 12% 21% 24% 32%
9.1 3.7 0.5 3.5 17.8 15.3 23.6 RUR bn %
Our logistics infrastructure includes shipping facilities and rail stock rail and facilities shipping includes infrastructure logistics Our : AnnualReportAccounts and 2009
Asia Europe North America Russia and CIS Latin America Africa Australasia
EUROCHEM n n n n n n n Logistics 08 The benefits from logistics and sales & trading are reflected in the results of all our business segments: business our all of results the in reflected are trading & sales and logistics benefits from The Revenues by region 2009 region by Revenues
We have mining, logistics and retail assets that enable assets retail enable that and logistics mining, have We integration. vertical through value us to maximize Russia: two in own plants sector we the nitrogen In Azot. We Azot Nevinnomysskiy and Novomoskovskiy provides which Kovdor, in facility mining apatite an own plants: fertilizer phosphate our for material raw the key as well as Russia, in Phosphorit and EuroChem-BMU Lithuania. in Lifosa EuroChem at a glance a at EuroChem
Overview of our business Overview of our business 09 5,395 5,280
1,360 Affirmed withdrawnthen and by S&P EuroChem’s at request March on 19 2010. Annual Report and Accounts 2009 EUROCHEM Segment revenue (RUR m) (including sales to other segments) Revenue contribution to Group 2009 7.3% 10th 10th global fertilizer producer by nutrient content BB S&P and Ratings Fitch from rating Credit GAMMA 6+ score governance corporate Russian from S&P* * Distribution sellWe our own products through a distribution network of 39 outlets in Russia and Ukraine, of which eight are owned by us. Our approach is to “sell yield, not fertilizers” offering clients a range of agrochemical advisory services and related products. 2009 2008 2007 EBITDA 22.4m RUR
(Volgograd) content 4-5% 4 (Perm) (byreserves) Phase I (capacity of 2.3 MMT p.a.): production to start in 2013 MMT p.a.): 4.6 to (capacityII doubled Phase production to start in 2015 (including date to expenditure RUR13.7bn license cost) (in the range of 23.4-40.9%); NaCI content 57-61%; 57-61%; content NaCI 23.4-40.9%); of range the (in CaS0MgCl content 0.10-0.15%; License acquired in 2005 at state auction 30.8% content average KCI content: nutrient High Phase II: capacity MMT increased p.a. by 1.4 MMTfor total p.a. of 3.1 • • • Potash Potash * A+B+C1+C2+P1 according to Russian reserves classification. rankingWorld 5 Verkhnekamskoe deposit deposit Verkhnekamskoe • License acquired in 2008 at state auction • Purchase price of RUR 4.1bn • Reserves: tonnes* 1.5bn • Depth of ca. 500 meters 29% to 24% from ranges content KCl • • Phase I: capacity MMT p.a. of 1.7 • With the commissioning of our potash mine and production facilities, planned EuroChem for 2013, will become one of only three major global fertilizer producers operating all in three segments. deposit Gremyachinskoe • • Purchase price of RUR 3.0bn • Reserves and resources: tonnes* 1.9bn • Depth meters of 1,000-1,200 •
52.0
31.1 29.7
2009 2008 2007 Our sales arm includes trading offices in Zug, Switzerland and Tampa, Florida Tampa, and Switzerland Zug, in offices trading includes arm sales Our & Trading: Sales
World ranking nutrient by World capacity 5 40% Revenue contribution to Group 2009 Segment revenue 2007-2009 (RUR bn) (including sales to other segments) Phosphate apatite integrated: fully is segment phosphate Our from the Kovdorskiy GOK mining facility supplies our three phosphate plants, Lifosa, Phosphorit and EuroChem-BMU, which can produce a combined 2.2 MMT of MAP and DAP per year. In addition to supplying nearly all the apatite for our phosphor plants, Kovdorskiy GOK produces only the is and annually, ore iron MMT of 5.7 to up baddeleyite mineral the where world the in place is produced (up to 8.9 KMT per year).
1,900 1,404 1,200 924 895 695 682 642 553 204 42 3 2 1 Between EuroChem now and 2014 plans to the in world the of rest the than faster grow in while segments, potash and phosphate flexibility product on focus to plan we nitrogen investments Our bottlenecks. of removal and ourin potash greenfield projects justare one of the keys to growth. In phosphates, focus we will materials raw of supply own our increasing on economies achieve to capacity new building and of scale at our Russian plants. Among Russian fertilizer producers, we are not only the largest, but also one of the most most the of one also but largest, the only not around invested we 2007-2009 In efficient. US$ into existing and 1.9bn new capacity. Year ended 30 Sep 2009. Year ended 30 Nov 2009. year ended 30 Jun 2009. Mosaic PotashCorp K+S AG K+S CF Industries Terra Acron Agrium Israel Chemicals Uralkali EuroChem Yara 1 2 3 • • Operating cash flow US$ flow cash Operating m 5.20 23.94 4.1% 2.1% 1.6% 1,504 2.4% 3.2% 5.5% 2.2% 1H 20081H 28.2% 1,415
1,223
10 year10 CAGR 1,124
1.52 5.27 24.13 884
823 1-3Q 2008 709 1.2 1.2 2.4 4.8 2014 42.7 35.4 572 110.6 2.5% 521 188.7 413 1.32 6.48 27.27 4Q 2008 182
1.47 5.57 0.1 2008 0.9 2.3 3.3 24.86 21.9 2009 34.6 99.8 2.1% 156.3 3 2 1
K+S AG K+S Uralkali Agrium CF Industries Terra Acron Mosaic Israel Chemicals Yara EuroChem PotashCorp EBITDA* US$ m EBITDA* 33.07 1H 20091H
0.1 1.9 0.8 2.8 9,788 2004 36.7 89.8 25.8 1.8% 9,328 152.3 1.36 6.47 32.48 9M 2009 5,651
4,968 1.39 6.28 4,554 2009 31.72 3,977 2,608 2,319 1,753 1,581 1,104 Annual Report and Accounts 2009
3 2
1
5 5 O O EUROCHEM EUROCHEM O O 2 2 2 2 P P K Total EuroChemTotal N 10 Sources: IFA, Fertecon, BSC, EuroChem estimates. Production in nutrient content, MMT p.a. N Exchange rates Sales US$Sales m is underpinned by vertical integration, access integration, vertical by underpinned is investments ongoing materials, raw to low-cost production best-in-class a and efficiency, in Gremyachinskoe our cost for shipping and project.potash Our strong position among our global peers global our among strong position Our The global industry – peer comparison peer – industry global The Total worldTotal EuroChem market share RUR/USD average K EUR/USD average NOK/USD average EuroChem K+S AG K+S PotashCorp CF Industries Terra Acron Israel Chemicals Uralkali Agrium Mosaic Yara
Overview of our business Overview of our business 11 13.2 ) 5 0 2 0) 2 11.1 Ammonia (N) Acid (P Phos Potash (K 6.7 6.6 5.7 Global rankings 2009 rankings Global 10th (MMTcapacity Nutrientp.a.) 8th Sales (US$ m) 9th EBITDA (US$ m) Annual Report and Accounts 2009 EUROCHEM 4.6
4.4 4.2 s s s s ’ ’ ’ ’ m m m m 3.8 e e e e share share share share h h h h 3.4 3.3 3.2 5.51% C C C C 0.09% 3.58% 3.28% 3.90% 2.89% 2.28% o o o o 41.23% 27.26% 13.27% 13.54% 12.06% 18.68% 23.94% r r r r u u u u 2.3 E E E E 1.3
0.11 0.14 0.10 0.74 0.47 0.47 0.01 0.03 0.04 0.00 0.24 0.24 0.36 0.23 EuroChem EuroChem EuroChem EuroChem
1.49 1.09 1.92 0.75 2.05 2.03 0.86 0.35 0.33 0.54 3.54 5.50 10.38 14.33 Total market Total market Total market Total market K+S AG K+S Belaruskaliy OCP Israel Chemicals EuroChem Uralkali PhosAgro Acron Mosaic Yara Agrium Sources: BS, IFA, Fertecon. IFA, BS, Sources: PotashCorp Terra CF Industries + Silvinit Ranking by nutrient capacity, MMT p.a. MMT capacity, nutrient by Ranking
5 5 5 5 O O O O 2 2 2 2 O O O O 2 2 2 2 1,764
mln tnmln of N mln tnmln of N tnmln of N tnmln of N mln tnmln of K tnmln of K mln tnmln of K mln tnmln of K mln tnmln of P mln tnmln of P tnmln of P mln tnmln of P
798 679 590 429 381 313 247 236 165 134
3 2
1 Depreciation & Amortization. Depreciation& Acquisitions of Property, Plant, Equipment and intangible assets. EBITDA as reported, otherwise Operating Income + K+S AG K+S EuroChem Uralkali Agrium Acron Terra Mosaic Yara Israel Chemicals CF Industries Phosphates Phosphates Phosphates Potash Potash Potash K N,Total P, PotashCorp Phosphates Sources: IFA, Fertecon, BSC, EuroChem estimates. Nitrogen Nitrogen
Nitrogen Nitrogen Data on sales in million tonnes of nutrients ** * Capex** US$ m Potash Total N, P, K N,Total P, Russia and CIS
CIS ex-Russia Russia
Europe EuroChem history 2001-2008 Overview of our business our of Overview
2001 2002 > EuroChem established as a holding > Acquires controlling stakes in current Russian company for a number of legal entities assets: Nitrogen plants Novomoskovskiy Azot owned by its shareholders and Nevinnomysskiy Azot; phosphate plants Phosphorit and Belorechinskiye Minudobreniya (BMU); iron ore and apatite mine Kovdorskiy GOK
2005 2006 > Acquires Lifosa phosphate plant from > Begins construction of Tuapse transhipment shareholders terminal > Acquires license to mine Gremyachinskoe > Successful syndication of US$ 350m potash deposit in the Volgograd region at 40-month loan nominated best deal a public auction. The site has 1.15bn tonnes of of the year by Global Trade Review and reserves and 0.72bn tonnes of resources (P1) Trade Finance magazines
12 EUROCHEM Annual Report and Accounts 2009 Overview of our business 13
Annual Report and Accounts 2009 EUROCHEM
Receives first corporate credit ratings (BB-) ratings credit corporate first Receives S&P and Fitch from syndicated US$ 1.5bn four-year, a Attracts year” the of “deal numerous wins that loan awards the mine to a license Acquires the in deposit potash Verkhnekamskoe site The auction. public a at region Perm sylvinite* of tonnes 1.5bn of reserves has construction for contracts Signs Gremyachinskoe at shafts mine of potash deposit BB to upgraded rating Credit S&P and Fitch by Large-scale upgrade of ammonia ammonia of upgrade Large-scale Novomoskovskiy at launched production steam and gas reduces sharply Azot consumption A+B+C1+C2+P1 according to Russian A+B+C1+C2+P1Russian to according reservesclassification. * * 2008 > > > > > 2004 >
Acquires a terminal in the Murmansk Murmansk the in terminal a Acquires merchant port Debt capital market debut with with debut market capital Debt US$ 300m Eurobond issue issue US$Eurobond 300m Series of upgrades and overhauls overhauls and upgrades of Series BMUat plant Acquires Mosaic Ukraine and Mosaic Mosaic and Ukraine Mosaic Acquires Krasnodar distributors
> > > 2007
> 2003 EuroChem timeline 2009-2010 Overview of our business our of Overview
FEB JUNE SEPT > EuroChem corporate charity > Standard & Poor’s affirms > Fitch Ratings affirms EuroChem’s programme named best in EuroChem’s BB credit rating BB credit rating chemicals sector, eight best in > Construction of railroad branch line > EuroChem’s Russian assets Russia, by PwC and Vedomosti to site of future Gremyachinskoe receive certification under the newspaper potash deposit processing plant ISO 9001:2008 (quality), launched ISO 14001:2004 (environment), and OHSAS 18001:2007 (professional health and safety) international standards OCT NOV DEC > EuroChem receives award from > EuroChem and parent company > EuroChem launches first Oracle for most innovative MCC Holding Ltd participate in granulated urea production facility implementation of business K+S AG capital increase pro-rata in Russia with nameplate capacity intelligence system to their shareholdings of 2,000 tonnes of granulated > EuroChem launches CAN production urea per day facility at Novomoskovskiy Azot, with nameplate capacity of 420 KMT p.a. > EuroChem Board of Directors member George Cardona appointed to Supervisory Board of K+S AG FEB > 2010: EuroChem is one of three finalists in EMEA for Gartner Business Intelligence Excellence Award > 2010: The first EuroChem employees and their families move into newly-constructed employee housing for workers at Gremyachinskoe potash deposit
14 EUROCHEM Annual Report and Accounts 2009 Overview of our business 15 Annual Report and Accounts 2009 EUROCHEM Looking ahead, there are undoubtedly still rough are we but term, near the in with dealt be to spots global The future. the about optimistic cautiously economy is showing signs of recovery and our year. difficult a following stabilizing are markets Last year we promised our stakeholders that, to power “the had EuroChem crisis, the despite 2009 of end the reaching by delivered We grow”. long-term our with sound, financially profitable, The track. on execution and unchanged strategy starts it and starts now, growth of round next withhere, EuroChem. Andrey Melnichenko Andrey Chairman of the Board of Directors
We have gained economic exposure to the potash potash the to exposure economic gained have We operations own our launch we before even sector our of sign a As K+SAG. in stake our through belief the in long-term outlook for the company, both EuroChem and its parent company MCC November the support to decided Ltd Holding show will Time K+SAG. by issue 2009rights strategic closer to leads shareholding our whether cooperation between EuroChem and K+S AG. business our in progress strategic to addition In segments, we continued to strengthen the 2009. in company our govern that institutions EuroChem’s raise to been has objective Our would that level a to governance corporate international traded publicly a of expected be company and we believe this has largely been any declared has company the before – achieved forward, Going public. become to plans specific focus to continue will Directors of Board the the and execution strategy of oversight on control and management our of development systems. takeWe pride position EuroChem’s in as corporate our citizen: corporate responsible a the named was programme responsibility social best the in Russian chemical sector 2009, in and we continued to invest the in health and where communities the and workers our of safety indicators environmental and safety Key live. they accidents, fewer toward trend their maintained use. energy efficient more and emissions lower These are not only priorities from a competitive long-term the to key also are but standpoint, the of part a as business our of sustainability Russianeconomy.
The key value driver for EuroChem, however, however, EuroChem, for driver value key The segment. potash the into entry planned our is the of one become to positioned well are We starting cost-efficiency by potash in leaders global the over volumes production by and 2013, in the in volatility term Short years. seven/eight next potash market has no bearing on the pace of this from overcapacity of threat the and investment, position EuroChem’s by offset be will entrants new as a cost leader. These investments, and the investments that that investments the and investments, These beenwe have making since 2002, put EuroChem becoming of goal strategic its achieve to track on a top-fiveglobal fertilizer producernutrientby years. five next the within profitability and capacity the countering by goal this achieve to plan We gas (primarily costs domestic rising of effects phosphate and nitrogen the tariffs) in railway and new efficiency, increased through businesses logistics enhanced and products value-added channels distribution developing by and operations targetin markets of Russia, the CIS, Europe and the Americas. As we entered 2009, we knew that we would face face would we that knew we 2009, entered we As positioned, well was EuroChem year. challenging a was and period difficult this navigate to however, market changing the in flexible remain to able more sold and produced company the conditions: lower 2008.While in did it 2009 than in fertilizers prices drove financialindicators EuroChem lower, 2009, in roubles 11.1bn of profit a earned roubles 17.5bn of flow cash operating generated the in invest to continued importantly, most and, into growth and business existing its of efficiency 2009 in expenditure capital Total segments. new roubles, broadlywas with line 18.7bn in 2008. Chairman’s statement Chairman’s
What will the eventual liberalization liberalization eventual the will What for prices domestic Russian of EuroChem’s for mean gas natural nitrogen in leader cost a as position fertilizers? The nitrogen fertilizers market is highly competitive in still” stand to “run constantly must we and other to relative cost-efficiency our of terms been has EuroChem Fortunately, producers. we – formed was company the since “running” nitrogen our into RUR 20.6bn over invested have has which of much years, five last the in plants capacity. and efficiency the improving toward gone continue will we that believe we time, same the At to enjoy a significant cost advantage over when even producers: Ukrainian and European will prices gas natural domestic liberalized, fully will we meaning netbacks, European to equal be in users end than gas contract for less pay still those regions. which By based 2015, on press this for deadline current the be to appears reports installed have already will we liberalisation, price new and significantly more efficient equipment on several of our lines, and we expect to maintain maintain to expect we and lines, our of several on of two-thirds least at over advantage cost our producers.global What is your outlook for 2010 after after 2010 for outlook your is What that difficulties unprecedented the your and economy, global the 2009? in faced industry, will that challenges global fundamental The continue to demand more from the agriculture crisis: economic the despite remain, industry increased demand for food due to growing fuels, alternative and diets changing populations, capita. per land arable shrinking with combined decrease may fertilizers some of application While financiallyin challengingyears, theagriculture removed nutrients the replenish must industry significant face or harvest each with soil the from declines productivity. in taken have We a conservative approach our in the that believe we because 2010 for planning The yet. recovered fully not has economy global last quarter of 2009 and first months of 2010 volumes, fertilizer of terms in promising been have price significant seen have we and however, for prices Currently, levels. pre-2008 to recovery the for forecast our above are products major all outlook conservative our maintain will we but year, significant more shows economy global the until signs of a sustained recovery.
Annual Report and Accounts 2009
EUROCHEM EUROCHEM 16 Because of EuroChem’s sound fundamentals, fundamentals, sound EuroChem’s of Because long-term our on focused stay to able were we nitrogen new two launched we goals: strategic production efficient more on products fertilizer the at shafts mine sinking began and lines made We deposit. potash Gremyachinskoe progress toward greater vertical integration and optimization of logistics, completing the Tuapse transhipment terminal, which reach will full continued EuroChem And year. this capacity think we that markets the of one in expansion home growth:our for potential greatest the holds opened CIS.EuroChem’s the and Russia of market new retail outlets and distribution centres that but small the in growth strong to contributed promising segment crop of protection fertilizer, make to continued we but easy, not 2009was to key the EuroChem make that investments industry. fertilizer the in growth in 2009 than in the preceding year. Profit and and Profit year. preceding the in 2009 than in significantly were numbers Loss and Profit other S&P and Fitch both but year, on year lower stability financial overall EuroChem’s confirmed rating credit BB our affirmed agencies both when to continued we that fact The 2009. mid- in us help will that projects important in invest further as served future the into long grow to confirmation of our financial strength. and agronomics consulting. How would you summarize summarize you would How performanceEuroChem’s 2009? in very 2009 was market fertilizer global the For 2008 collapsed in prices record-high challenging: and remained at low levels until the very end of recovery. a of signs see to began we when 2009, we prices, to due partly time, same the At produced and sold a higher volume of fertilizers Q&A with our CEO CEO our Q&Awith
Overview of our business Overview of our business 17
Annual Report and Accounts 2009 EUROCHEM DmitryStrezhnev Chief Executive Officer the in IPO an considering you Are near future? highly is story EuroChem’s that believe We get we and shareholders, potential for attractive not are we Although time. the all question this managementa public company, regularly meets with investors and analysts; the company has takennumerous steps transparencyourimproveto you and years; few past the during disclosure and ambitious our With 2010. in changes more see will plans to enter the potash segment as a major investments significant to addition in player, global nitrogenin and phosphate to maintain or improve our competitive positions, we are constantly financing for options numerous our reviewing options these of one Naturally, projects. these Given shares. of offering public initial an is creditEuroChem’s capacity and current capex plans over the next fiveyears, one could draw the conclusion that the possibility of an IPO at high. is period this during point some What are EuroChem’s plans for for plans EuroChem’s are What AG? K+S in stake its potash of producer global leading a is K+SAG Germany. in exchanges stock all on listed is that significant be could there believe we While strategic benefits fromnumber a of potential shares these view also we cooperation, of forms as a significant stabilizer to our balance sheet. Liquidity of the shares gives us financial flexibility; hand, other the on stake, our of size large the the develop to opportunity strategic a also is if further, companies our between relations cooperation such of forms attractive mutually bemay found.
Beyond our own cash flow, we will finance our finance will we flow, cash own our Beyond combination a by either budget capex significant depend would (this debt new equity, new of by driven turn in is which capacity debt our on attractive an at and necessary if and, profitability) price, disposal of investments which we have EuroChem continue will to generate a strong cash support to fertilizers needs world the because flow the deliver can we and food for demand growing the despite 2009, In cost. competitive a at product unprecedented market disruptions, operating cash that believe therefore We 17.5bn. RUR was flow financed be will capex planned our of half over ourby own cash flows. Nearly half of our capital US$ total a 4.6bn of US$ out 2.0bn expenditure, completion toward go will years, five next the over of Phase I of the Gremyachinskoe potash mine and otherpotash projects. The remainder of this on primarily focused be will capex planned nitrogen our at efficiency and capacity increasing is capex While plants. fertilizer phosphate and important also is it EuroChem, for priority top a budget capex total the 80% of around that note to is development-related,through 2014 as distinct relatively is it hence maintenance, do” “must from flexible and could potentially be delayed, should the to losses no or little with arise, need the current business. on the balance sheet. How will you finance your intensive intensive your finance you will How five next the over programme capex years?
% 12 17 19 24 24 2008 2009 39.42 36.58
3 1 9 5 1 18 19 20 28 2008 37.12 40.01 2009 The share of sales sales of share The the and Russia in helped CISincreased, growing our by network. distribution 2007 32.5 38.0
41.10 36.73
2006 37.16 40.00
2009 2005
36.91 39.80
Asia Europe Latin America North America % Russia and CIS Africa Australasia
2004 n n n n Our share of sales to Asia increased 2009 in due and agriculture of support government active to Sales India. like countries in subsidies fertilizer own our as increased CISalso the and Russia in sales increased successfully network distribution volumes 2009. in At the same North time, natural as significantly dropped sales American level a to fell producers American for prices gas producers than competitive more them made that shipping products long distances. lines production new in investments Through CAN), and urea (2009:granulated launched flexibility. product increase to able been have we to sought have we strategy our with line In like products higher-margin of sales increase CAN, urea and complex fertilizers, as opposed to Investments ammonia. like products low-margin efficiency improve to taken measures other and tonnes in 20% increase a by represented are 281 from employee per produced ammonia of 2008in to 337 2009. in Nitrogen sales by region (including sales to other segments) n n n 42.36 36.55
2003
42.15 37.38 Average of 50 plants globally Nevinnomysskiy Azot* Most efficient plant out of 50 plantsglobally Gas consumption per one tonne of ammonia, mmbtu/tonne Novomoskovskiy Azot* * Based on actual annual average caloric content of gas supplied to plants. Source: Integer research. Sales volumes for urea and ammonium nitrate nitrate ammonium and urea for volumes Sales increased 29% by and year 24% on year respectively 2009, in but this was countered of average an by lower were that prices by significantly effect price The year. on 60%year which segment, this for revenues impacted from RUR 200939.6bn 29% to in declined RUR 200840.0bn) (2007: in RUR 55.9bn Nitrogen segments. other to sales including in RUR 23.9bn from 61% EBITDA fell segment RUR2009 14.5bn). (2007: in RUR 20089.3bn to Lower sales volumes organic in synthesis nitrogen the in reported also are which products, segment, also affected the result, but these volumes of portion small a only represent products revenues. and EBITDA fell declined, fertilizers for prices While to due largely revenues than rate faster a at sales of cost overall EuroChem’s that fact the gas, natural 6.8%. for Expenses only decreased producing for material raw a as used is which in RUR 9.3bn to 18.5% by increased fertilizers, discussion a 2008.For in RUR 7.8bn from 2009, EuroChem’s on prices gas natural of impact the of aimed capex Through 25. page see business, gas natural reducing and efficiency improving at made successfully have we consumption, gas of amount the on improvements incremental illustrated is which ammonia, of tonne per used thein table below: 2009 in improved segment this in volumes Sales “holidays” take to likely least are farmers because fertilizer the (notapplying fertilizers nitrogen from the in remaining nutrients on relying year, a for soil). Nitrogen is the key fertilizer for growth Nitrogen and mass crops, in and is also the fastest to be soil. the from depleted Annual Report and Accounts 2009
EUROCHEM EUROCHEM 18 Segmental revenues (bothSegmental revenues value) are shown and volume of intra- inclusive gross, i.e. Reconciliation sales. segment to revenue segmental of shown is revenues external 23. page on In 2009 we have decreased decreased have we 2009 In of reportablethe number four to segments business Potash, Phosphate, (Nitrogen, better to order in Distribution) the with disclosure the align business. our manage we way segment business nitrogen The was what includes also now reported2008 our in report as whereas segment, organics the now segment phosphates the previously was what includes reported mining. as Business segment results segment Business
Performance Performance
% 15 15 24 21 19 2008
7
7 8 3 9 8 8 5 4 % 11 25 30 2009 Product flexibility flexibility Product enables us to adapt demand. changing to
2009
Ammonium Nitrate Ammonia Methanol Urea UAN Complex Other Acetic Acid
Annual Report and Accounts 2009 EUROCHEM n n Nitrogen sales by product (including sales to other segments) n
n n n n n – – – 7% 5pp 9pp 17% (1%) (7%) 22% 51% 26% 59% 20% 40% (8%) (6%) (9%) (9%) 75% 64% 37pp 10pp (11%) (17%) (12%) (15%) (18%) Change 2007-2008
3.5 241 0.13 1.03 1.63 1.26 2007 61% 0.46 0.39 8.52 52% 32% 36% 0.161 12.74 2.316 15.85 1.665 1.063 14.52 0.496 39.99 2.602 24.51 24.36 (11.77) (15.48) 10,811
3% 8% 8% 6% 8% (3%) (9%) 17% 18% 24% 19% 27% 20% 29% (47%) (27%) (27%) (23%) (39%) (29%) (17pp) (30%) (19pp) (61%) (48%) (57pp) (64%) (20pp) Change 2008-2009
281 1.17 0.12 2.17 0.14 7.01 7.02 1.51 1.48 2008 0.62 2.57 0.46 0.92 0.93 0.38 85% 66% 43% 40% 19.18 9,146 37.07 55.92 23.87 26.20 22.28 (14.79) (18.85)
0 337 0.17 0.14 7.92 1.51 1.83 1.80 2009 6.79 3.72 2.79 9.31 0.67 0.32 0.64 0.68 0.23 2.3 24% 28% 20% 49% 27.93 19.28 24.21 39.58 8,285
(11.36) (20.30)
Acetic acid ammonia of Tonnes produced per employee Ammonium Nitrate UAN Methanol Methanol Acetic acid Sales, incl. sales to other segments (MMT) Ammonia Urea Revenue (including sales Nitrogen segment Nitrogen to other segments) Cost of sales Gross profit Production(MMT) Ammonia RUR bn,or as indicated UAN Other expenses Staff ROCE Urea Ammonium Nitrate EBIT EBITDA Total capital capital Total employed Fixed assets Gross profit margin EBIT margin CAPEX Net working capital EBITDA margin
8 3 4 1 3 1 % 21 59 1% 2% 8% 3% 3% (7%) (6%) 14% 2008 24% 78% 55% 92% 26% 17pp 25% 12pp 20pp 49pp (17%) (14%) (10%) (33%) 753% 143% Change 232% 284% 2007-2008
7 4 1 3 1 1 % 57 26 2009
4.2 3.2 11.7 0.10 51% 7.45 2007 5.24 0.87 47% 0.03 0.09 5.44 0.86 2.50 0.84 0.84 25% 28% 8.44 (7.70) 1,133 15.15 8,417 15.88 29.65 (14.50)
)
3% 8% 6% 2009 0% (7% (2%) (5%) (8%)
15% 19% 22% 26%
(14%) (16%) (47%) (21%) (21%) (40%) (58%) (18pp) (81pp) (78%) (85%) (25pp) (28pp) (60%) Change 2008-2009 MAP, DAPMAP, Iron ore Feed phosphates group Others Apatite Apatite Baddeleyite NP Complex fertilizers
n Phosphate sales by product (including sales to other segments) n n n n n n n
7 1 2 % 41 21 28 5.7 3.0 2008 0.13 0.16 14.0 0.76 0.72 0.79 5.42 2008 4.69 0.27 0.63 37% 2.56 57% 39% 96% 20.15 7,860 19.75 1,228 18.99 52.02 29.83 (22.19) (10.84)
5 4 1 % 23 32 35 2009
9% 0.72 2009 0.07 0.07 5.57 0.67 2.51 0.95 0.96 5.58 0.22 4.55 4.43 2.65 14% 2.94 15% 39% (9.13) 31.12 19.47 7,492 12.07 14.93 1,305
(19.06) 2009
Latin America Europe Russia and CIS Africa Asia North America
NP, NPK NP, Apatite Iron ore DAP output of Tonnes per employee EBIT margin Sales, incl. sales to other segments (MMT) Capex NPK NP, EBITDA margin Iron ore MAP MAP DAP EBITDA Gross profit margin Net working capital Fixed assets capital Total employed Apatite Production (MMT) ROCE EBIT Staff Other expenses n n
n Phosphate sales by region (including sales to other segments) to other segments) Phosphate segment Phosphate Revenue (including sales Cost of sales Gross profit RUR bn or as indicated n n n
Annual Report and Accounts 2009
EUROCHEM EUROCHEM 20 Volumes forVolumes by-product iron a mining ore, at phosphate of producer competitive a are We vertically our of combination a to due fertilizers raw high-quality model, business integrated material from Kovdorskiy GOK, relative proximity for CISaccounted the and Russia in Sales a larger portion of segment revenues, as our As with the nitrogen segment, the driving factor which prices, was segment phosphate the in 2008.Sales in 2009 than in 65%lower were EBITDA and segments) other to sales (including 40.2% by declined segment phosphates the in RUR 4.4bn and RUR 31.1bn to 78.0% and respectively (2008 sales: RUR 52.0bn, EBITDA EBITDA: RUR sales: 21.7bn, 2007 RUR20.1bn; increased volumes RUR 8.44bn). DAPproduction significantly as a result of an overhaul at Phosphorit that enabled us to produce either MAP MAP result a as (and lines same the DAPon or volumes decreased). Combined MAP and DAP KMT in 1,632 at higher were levels production 2009 than 2008 in (1,508 KMT), but were slightly KMT producedlower than 2007. the in 1,710 increased mine, apatite GOK Kovdorskiy our significantly on the back of continued strong demand from China. Apatite sulphur. of cost lower and markets key to supplies complex mining GOK Kovdorskiy our from our by consumed material raw the of all nearly EBITDA our in Nonetheless plants. phosphate this segment was impacted rising by rail tariffs Kovdor from apatite transport we as Russia in in EuroChem-BMU to Russia of north far the in southern Russia Sulphur rail. by prices were on 2009:in expenditures lower significantly 78.3% and 73.1% fell acid sulphuric and sulphur 2008. to compared respectively increased and grew network distribution own which sales, Asian 2009. in year on year sales sales of portion high abnormally an for accounted prices and demand high extremely to 2008 due in 2009 in fell thatin year, relative to 2008, but demand, as levels 2007 triple nearly still were supported state by subsidies, that in region remainedrelatively high. Phosphates Business segment results continued results segment Business
Performance Performance 21 Future Verkhnekamskoe Future productionpotash Annual Report and Accounts 2009 EUROCHEM Future Gremyachinskoe productionpotash
Tuapse Ust-Luga
During 2009 EuroChem and its parent company company parent its and 2009 EuroChem During leading the in stake combined their increased George and K+SAG, producer potash German appointed was Director, EuroChem a Cardona, to the K+S supervisory board. Our investment facilitate to potential strategic both has K+SAG in cooperation of forms possible of number a between our two companies. segment, potash the to entrants new While including international players mining like significant a represent Vale, and BHPBilliton threat to the current status quo, EuroChem EuroChem quo, status current the to threat the of end efficient most the at be to aims be to it allowing curve, cost production potash market new the in best-positioned the among the of portion significant a if even situation planned new capacity does come in online the foreseeable future. future. foreseeable the expectWe that low transportation costs from our Gremyachinskoe potash development to our among rank us help will Tuapse in terminal bulk the cost leaders the in potash segment.
Gremachinskoe proximity vs. to Tuapse Perm to Baltics Potash While we report potash as a separate segment, segment, separate a as potash report we While manufacture to capacity our developing are we begun already have We nutrient. this supply and sinking the mineshafts that operate will as part The market downturn in 2009 did not force force not 2009 did in downturn market The us to stop or even significantly slow our capital segment potash the in programme expenditure investment our prices, potash current at even and, highly a remains deposit Gremyachinskoe the in viable and attractive project. of phase I of the Gremyachinskoe deposit, which, annual initial an have will completed, once social the on Work KCl. MMT of 2.3 of capacity infrastructure to support the new enterprise the Volgakali, of employees underway: well also is project, this for responsible subsidiary EuroChem alreadyhave received the keys to new houses the serving district new the up make will that Gremyachinskoe and mine processing centre. – – 3pp (4pp) (3pp) 29% 29pp (14%) 147% 125% (50%) 144% 278% 288% 960% Change 409% (267%) (421%) 1186% 1000% 2007-2008
– – 72 5% 4% 8% 0.11 1.36 2007 0.09 0.07 0.06 (1.25) (25%) (0.05) (0.33) (0.24) 0.014 0.019 0.087 0.001
5% 2% (1pp) (1pp) 15% 97% (3pp) (5pp) 65% (18%) (10%) (47%) (22%) (53%) 175% (24%) (36%) 179% (59%) Change (123%) 2008-2009
1% 1% 4% 162 11% 2008 0.77 0.05 0.55 5.28 0.22 0.03 0.06 0.56 (4.72) 0.112 (0.53) 0.180 0.011 0.047 0.006
8% 0% 0% 017 187 2009 0.02 0.02 0.49 5.39 0.20 0.29 0.43
(0.01) (0.01) (4.97) 0.140 0.140 (0.43) 0. 0.018 0.018 0.092 0.306
Net working capital Fixed assets MAP CAPEX NP and NPK Total capital capital Total employed UAN Urea Ammonium Nitrate EBITDA margin Staff Sales (MMT) (top 5) ROCE EBITDA Gross profit margin EBIT margin EBIT Cost of sales Gross profit Other expenses to other segments) Distribution Revenue (including sales RUR bn,or as indicated 5.4 0.587 0.072 5.3 0.055 0.356 0.022 1.4 Annual Report and Accounts 2009 0.121
EUROCHEM EUROCHEM 22 EBITDA, RUR bn Revenue, RUR bn Sales volumes via own distribution distribution own via volumes Sales network, MMT EuroChem’s distribution network consists of of consists network distribution EuroChem’s 39 outlets cities key agricultural in 24 in districts are eight which of out Ukraine, and Russia of owned EuroChem by and the rest are exclusive these of strategy The products. our of distributors buy they fertilizers: not yield, sell to is centres producers, other and plants our from products while customers, to margin a at sell and help to services advisory providing simultaneously of range full a using by more produce farmers seeds, fertilizers and crop protection products. Distribution saw revenue growth in 2009, although although 2009, in growth revenue saw Distribution our of portion modest relatively a represents still it overall sales. Sales increased 2.2% year on year 2009 in RUR 20085.4bn to in RUR 5.3bn from RUREBITDA 2009 was RUR in 1.4bn). (2007: earlier year a RUR 59%54.8m from down 22.4m, in RUR 2008-200972.3m). (2007: decline The EBITDA was driven primarily the by price effect, while the 2007-2008 decline was due to a Russian the of value the in decline significant period. the Hryvna during Ukrainian and rouble Segment fertilizer volumes continueto rise, 2009 KMT vs. 587 for 65%to increasing 356 KMT 2008 in (2007: KMT) 121 sales in Fertilizer EuroChem. by owned outlets the through owned both CISthrough the and Russia in sales 25% by increased distributors independent and MMT) product of 1.2 MMT (Russia only: 1.64 to 2009in MMT from 1.31 (Russia MMT) only: 1.0 2008. in product of Distribution Business segment results continued results segment Business 2009 2008 2007 2009 2008 2007 2009 2008 2007
Performance Performance Financial statements
l 5 7 – a 13 55 n 23 r 112 210 215 163 273 487 489 459 503 390 664 448 ,112 e sales t 1,100 1,374 1,614 1,490 1,234 1,665 1,843 4,688 5,579 x 13 11,967 E
- – – – – – – – – – – – a (7) r (11) (42) (17) (18) t (10) (16) (33) (59) (28) (95) (192) (102) n (781) (446) (302) (295) I group sales group
1 1 – – – – – – – – – – – – – – – – – 11 21 66 63 185 101 106 325 229 Other
1 6 – – – – – – – – – – – – 11 13 13 17 18 47 29 92 112 151 126 587 356 306 Annual Report and Accounts 2009 EUROCHEM Distribution
5 2 7 – – – – – – – – – – – 18 52 29 116 210 215 163 273 7,701 1,386 6,708 1,668 4,688 5,579 Phosphates
– – – – – – – – – – – – – 16 616 341 492 920 349 369 643 665 1,168 1,479 1,512 1,830 5,023 5,377 Nitrogen
NP MAP, DAPMAP, CAN Ammonia Urea UAN AN Ammonia Urea UAN CAN AN NP MAP, DAPMAP, Feed phosphates group Complex fertilizers group Apatiteconcentrate
Organic synthesis products Phosphates Iron ore concentrate
Baddeleyite concentrate Baddeleyite
2008 Nitrogenfertilizers Reconciliation of segment and external sales volumes (KMT) Nitrogenfertilizers 2009
Organic synthesis products Feed phosphates group
Phosphates Complex fertilizers group Apatite concentrate Iron ore concentrate Baddeleyite concentrate
Logistics International sales International Logistics is not a reportable business segment, segment, business reportable a not is Logistics vertically our of part important an represents but integrated business model and makes an competitiveness. our to contribution important portfacilities three include assets logistics Our terminal liquid Sillamae Terminal, Bulk (Murmansk transhipmentand Tuapse terminal), long-term facilities rail own our and ships cargo on leases The locomotives). 45 and stock rail (ca.7,000 logistics our from extract we that benefits financial the of costs in themselves manifest assets reportablesegments. Similar to Logistics, our International sales sales International our Logistics, to Similar business reportable a not is infrastructure fully-owned our includes it Currently segment. Swiss-based trader GmbH EuroChem Trading 2009),responsible of is end which the staffat (19 NorthAmerica, CISand outside sales global for and a US-based trading EuroChem company, for staff), (four USA Corp. responsible Trading are companies These sales. NorthAmerican product our of sales the for responsible primarily these of costs and revenues and globally companies are attributed to the Nitrogen and segments. Phosphate 12.9 7.4 7.3 12.8 7.1 11.8 excl. Iron ore External sales volumes (top products) 12 MMT Total 2009 2008 2007 2009 2008 2007
7% 6% 0% 274 274 274 274 11% 2007 15% Other 10% 49% RUR m 1,355 2,829
29,651 39,986 73,821 % of total
2008/2007 2007 52
RUR m 3,716 2,051 2,401 4,989 3,391 16,064 32,664 Other (692) (692) 75% 40% 52% % chg (1%) 2009/2008 10% 290% 25% 69% 29% 48% 36% (137%) % chg
(6042%)
Price effect
2008 5% 6% 9% 14,462 28,753 43,214 (7%) 11% 14% 61% 2008/2007 2008 % of total
RUR m 5,280 (1,042) 52,016 55,920 112,174 Price effect RUR m 5,014 4,078 (16,714) (16,714) 2,381 2,559 6,446 (23,268) (39,982) (3,090) 27,078 44,466 2009/2008
2% (1%) (1%) (7%) effect 13% (19%) % chg % chg (24%) (34%) (40%) (30%) (29%) Volume 142% (1,910) (1,910) (5,135) (3,226) (167%)
2008/2007
5% 5% 6% 8% 2009 11% 15% 49% 2009 330 effect % of total 1,747 1,747 Volume 2,077
2009/2008 5,395 RUR m 31,124 (2,519) 73,577 39,577
3,522 4,620 6,362 RUR m 2,063 2,363 2,065 41,440 20,445 Annual Report and Accounts 2009
EUROCHEM EUROCHEM Cost of sales structure, 2007-2009 Cost of sales and gross margin RUR 200832.7bn). (2007: in RUR 44.5bn from RUR 41.4bn to 7% 2009 by in decreased sales of Cost This decline was lower than the 34% decline revenues in as major items the in cost structure did not decline at the same rates relative to the drop fertilizer in prices, and some in cases increased. For example, energy costs increased to RUR 13% 4.6bn due to incremental increases Russian in Federation electricity rates. This resulted a lower in gross margin of 44% for 2009 versus 60.4% 2008 in and 55.8% The cost of sales 2007. in structure is illustrated the in table below: Other* Total Other sales 24 Total Energy Depreciationplantsof and equipment Materials and components Nitrogen Phosphates Labour
The key revenue driver across segments all 2009 in was the precipitous drop prices in across productall 3. page on available are dynamics price the illustrating 2008.Graphs Q4 in began that categories pickedVolumes up following initial weakness at the beginning of 2009 as prices reached their lowest levels, firstnitrogenin in phosphates and then, laterin theyear, as well. Overall, the company did not ore) iron (excluding sales external 2008,with Q4 in seen slowdowns production of kind the experience returning to normalized, 2007 levels. Revenue drivers – volume, prices * Including revenue from segment “other” and elimination of internal sales. Nitrogen Revenue structure, 2007-2009 Analysis of the income statement income the of Analysis Revenues Drivensharp by price declines fromthe record highs reached 2008, in our consolidated revenues revenue: 2008 (2007 in consolidated RUR 112.2bn from RUR 200973.6bn to 34%in by declined RUR 73.8bn). The revenue contributions of all the by major segments of our business beenhave discussed previous in sections (pages 18-23). Below provide we a summary of how segment revenues developedhave over the past three years. Phosphates Distribution Management discussion and analysis and discussion Management
Total change
Utilities and fuel in revenues (RUR m) Changes in work work in Changes and progress in finished goods Other costs Total
Performance Performance
25 521 785 356 2007 1,034 3,422 3,489 6,456
971 2008 1,155 7,806 7,048 1,050 4,091 4,958
955 340 2009 4,741 1,039 1,448 2,671 9,250
2009
Natural gas Sulphur Apatite Potassiumchloride Ammonia Goods for resale Other
Annual Report and Accounts 2009 EUROCHEM Structure of materials and and Structurematerials of components2009 n n n n n n n 52 20 65 65 43
6.7 6.7 (28) (62) 147 147 215 215 275 264
Ukrainian Ukrainian producers producers
– 10 65 65 48 (14) 9.2 186 261 233 296 340 346 East- 10.5 (143) European European producers producers
9 – – 52 5 20 95 55 63 4.7 4.7 Azot Azot 150 150 105 247 202 Gas prices in Russia are liberalized Gas prices in Russia are liberalized Nevinnomysskiy Novomoskovskiy
52 20 65 65 43 6.7 6.7 (95) (68) 147 147 215 215 275 264 Ukrainian Ukrainian producers producers
– 10 65 65 48 9.2 (54) 186 261 233 296 340 346 East- 10.5 (176) European European producers producers
– – Current gas prices Current gas prices 52 62 59 20 93 98 65 55 63 2.9 3.0 Azot Azot 169 207
Nevinnomysskiy Nevinnomysskiy Novomoskovskiy , , , , 3 3
Gas cost Other production costs
EuroChem's cost advantage delivered to plant delivered to plant Transportation costs
Source: EuroChem estimates. Price per mmbtu, delivered to plant
Price per mmbtu, delivered to plant
While natural gas prices in Russia continue to increase incrementally, we continue to enjoy a significant significant a enjoy to continue we incrementally, increase to continue Russia in prices gas natural While cost advantage over competitors countries in and regions with higher gas prices (Ukraine, Eastern Europe). Under the current price liberalization plans of the Russian government, which remain a topic US$)in are figures (all nitrogen competitivenessin Maintaining Prilled urea, delivered to Brazil cost Materials and components accounted for just under half of our cost of sales. While expenditures on natural gas increased 18.7%, by mostly due to price increases 2009, in this was offset more by than 70% decreases the in prices of sulphur and sulphuric acid, leading todecrease a for of this 24.5% a and fertilizers nitrogen all for basis the – ammonia produce to input key the is gas Natural item. cost component of phosphate Sulphur and fertilizer. sulphuric acid are both inputs key for phosphate fertilizers. cost but Europe, from prices netback to equal be will prices gas domestic debate, internal significant of advantages are expected to remain for Russian gas consumers virtue by of savings on transportation costs and the duty levied on natural gas exports, as illustrated below: Import duty (Europe) Total Gas cost Other production costs Price per m 1,000 Price per m 1,000 Transportation costs EuroChem's cost advantage Total Prilled urea, delivered to Europe cost
4% 3% 6% 0% 12% 15% 52% 45% 88% 29% 46% 100% 100% 100% % of total 2007 – 59 90 217 195 386 683 RUR m 1,620 1,567 1,323 2,036 3,494 17,121 15,085 – – 9% (8%) 15% 18% 27% 26% 68% 36% (17%) (75%) (104%) (244%) % chg
– – – – 9% (4%) 11% 12% 42% 77% 53% 100% 100% 100% 2008 % of total (27) 276 327 325 444 (419) (130) 1,714 RUR m 1,349 2,871 2,572 3,209 17,839 23,282 – – 2% 2% (7%) (3%) 54% 23% (12%) % chg (21%) (25%) (92%) 167%
– – – – 1% 6% 3% 14% 42% 85% 49% 2009 100% 100% 100% % of total
– 87
251 203 222 206 679)
(225) ( 1,374 1,594 3,261 RUR m 2,504 15,663 18,389 Annual Report and Accounts 2009
EUROCHEM EUROCHEM Other operating operating Other (income)/expenses, net Audit, consulting consulting Audit, and legal 26 Transportation
General and administrative (G&A) expenses increased slightly 2009 in to RUR 3.26bn vs. RUR 3.21bn 2009RUR (2008: 2007: 325m; in of RUR 225m of expense income operating other earned EuroChem balances, cash of translation on gains exchange foreign to entirely almost due RUR 1,323m) of expense payables and receivables denominated foreign in weakening currencies of the Rouble following a 27.6% Distribution, general and administrative and other operating expenses Distribution costs declined 2009 in 21% to RUR (2008: 18.4bn RUR This 23.3bn; RUR 2007: 17.1bn). significantly declined rates freight sea as costs, transportation in decrease 12% a to due primarily was and less product was sold on CFR and CIF terms. As a result, transportation costs 2009 in 12% by fell compared to 2008. Effective 1 February 2009, the Russian government cancelled export duties on apatite. of exports on duties export cancelled 2009 it May 1 effective and fertilizers, complex and nitrogen As a result of the cancellation of these export duties, which had been introduced April in 2008, this distribution cost item 92% fell 2009 in compared to 2008. 2008 in (2007: RUR 3.49bn). While nearly items all this in category other than depreciation and amortization decreased relative to 2008, the increase was driven the by creation of provisions for provisions. of reversal the from benefited 2008 result the while 2009, in receivables of impairment and other receivablesTrade and related provisions are discussed further below. to the US dollar (average rate 2008 vs. average rate 2009). Export duties distribution Other costs Subtotal Distribution Labour exchange Foreign (gain)/loss Subtotal operating Othernet (income)/expenses continued analysis and discussion Management Provisionforimpairment of receivables of Other G&A expenses
Sponsorships (Reversal of provision)/ provision for tax risks Subtotal G&A
Performance Performance 27 Annual Report and Accounts 2009 EUROCHEM
26% 30%
2007
19,220 73,821 RUR m/% 2009 profit Op.
10,712
9 pp Other 52% % chg 10 pp 10 113% 4,498
2008 Ch.WP&FG -5,398 36% 39%
40,890 112,174 RUR m/% D&A -54
Transportation (74%) % chg (34%) (17 pp)(17 (21 pp) 2,525
2009 Personnel
473 15% 22%
10,712 73,577 Material RUR m/%
6,374 Other sales Other
-692 Sales prices Sales
-39,982 Sales volume & mix & volume Sales
2,077
Op. profit 2008 profit Op. Increase Decrease 40,890 Revenues Operating profit margin Operating profit
Operating profit and operating margin decrease 26%)the 2008 as in 36% from (2007: 15% to fell 2009 for margin profit operating Our revenues in significantly outpaced the decreases we were able in to achieve cost of sales and other 30%). 2008 (2007: 39% in 2009 from 22%for to declined also EBITDA Our margin expenses. EBITDA margin In addition to financeincome, EuroChem received gross dividendincome amounting to RUR2,168m Taxation 20.1%), (2008: 2007: 19.2% 24.2%; 2009 was for taxrate effective consolidated company’s The virtually equivalent to the statutory profit tax ratein Russia where most of the company’s assets are located, which was reduced to 20% as of 1 January 2009 from previously. 24% of the US$ syndicated 1.5bn pre-export facility obtained October in 2008. make We monthly repayments facility. this on from K+S AG May in 2009. Finance income and costs Our financeincome improved as the effects of the rouble depreciation subsided during 2009.We booked 2008.in 3,766m RUR of loss a to compared 2009, in 749m RUR of gain exchange foreign financial a – currency foreign in denominated liabilities, and assets financial of translation from income is This loans, deposits with banks and borrowings. Interest expense increased 58% year on year as a result The following diagram analyses positive and negative influences of various components on our operating profitin 2009 relative to 2008.
13 18 21
1,130
1,879 RUR m 6,218 3,739 5,628 6,758 6,367 9,566 2007
16,324
5% (6%) 87% 67% 59% 80% 53% % chg (15%) 163%
2008
15 10 41 3,184 RUR m 1,794 7,094 4,988 5,300 11,183 17,886 10,613 24,980
(36%) % chg (24%) (24%) (32%) (23%) (28%) (28%) (28%) (30%)
2009
11 12 28 2,151 8,105 7,630 1,373 3,207 4,032 5,405 RUR m 17,886 12,481
Annual Report and Accounts 2009
EUROCHEM EUROCHEM 28 Trade receivables Trade Incl finished goods Inventories
Balance sheet Working capital RUR 20089.6bn).(2007: in RUR 17.9bn from RUR 12.5bn to decreased capital working 2009 net In This is mainly due to decreases inventories in (minus 28%), trade receivables (minus 32%) and other receivables and current assets (minus 28%). Following the global fertilizer market slowdown buy to reluctance resulting the and volatility price unprecedented by 2008-Q12009Q4 caused in on the demand side, we were able to reduce inventories once product started moving Other again. receivables decreased, reimbursements, largely due to VAT which was largely a result of the more disciplined approach to the relevant document collection process. continued analysis and discussion Management Other receivables and current assets Subtotal This helped us reduce finished goods days down to 28 from 41 in 2009 (2007: 21). At the same time, time, same the At 21). 2009 in (2007: 41 from 28 to down days goods finished reduce us helped This we maintained tighter sales terms with predominantly prepayment or letters of credit confirmedby a financialinstitution with a credit profile acceptable to us; trade debtordays increasedslightly to 2009 in a year earlier from11 (2007:10 18). Tightening of credit terms extended to our counterparties was an important step thatwe took heading into the market turbulence of 2009, when we saw trade receivables identified impairedas increase to RUR 349m from 165mRUR at the end of 2008 (2007: RUR 904m). Management takes a conservative approach to creating provisions, and is taking measuresto recover a portion of this impairment as the market situation stabilises 2010. in Trade payables Trade Other accounts payable and current liabilities Subtotal Trade debtors,Trade days creditors,Trade days Finished goods, days Net working capital
Performance Performance 29 Annual Report and Accounts 2009 EUROCHEM
945 (7%) 2007 56% (0.11) 7,273
4,689
(2,521)
15,428 12,907 22,081 38,033
2008 0.57 16% 30% 9,093 8,454 34,419 51,966 26,707 25,259 44,297 60,227
2009 2.21 18% 34% 8,725 47,772 16,516 11,228 12,491 26,556 36,545 72,436
Fixed-rate debt as % of total debt Net debt/EBITDA ratio Bonds issued As a matter of policy, we restrict our net debt/rolling 12 months’ EBITDA to 2.5 times. At the end of the the of end the At times. EBITDA 2.5 to months’ 12 debt/rolling net our restrict we policy, of matter a As ratio this expect We debt/EBITDA net 2.21. a of and RUR 36.5bn ratio of position debt net a had we year, BB/BBB a for level comfortable a be to believe we which 2010, throughout level similar a at remain to rating given the liquid structure of our balance sheet. Shareholders’equity EBITDA As the financial marketsin Russia and abroad are showing signs of normalizationagainst the backdrop of substantial global liquidity, the pricing for the company’s debt has gradually returned to normal after a brief spike observed late in 2008 to early 2009. Gearing ratio (net debt/net debt + shareholders’ equity) Bank borrowings – non-current debt Total Cash and cash equivalents Net debt RUR m or as indicated Bank borrowings – current Net debt position and capital management capital and position debt Net The company finances its operations through a combination of fixed rate and floating rate debt. Floating monthly equal with 2012, September due facility loan syndicated US$ the 1.5bn by represented is debt amortization starting April 2009. Fixed rate debt is represented US$-denominated by senior notes with During the year of 2009, the company did not pay dividends to our shareholders. The excess of investment outflows over the inflows from operations was financed predominantly predominantly financed was operations from inflows the over outflows investment of excess The 2008. October in raised facility finance pre-export US$ the 1.5bn by Cash flow analysis flow Cash Cash flowin 2009 was significantly affected by lower prices for our products. Operating cash flow for 2009 compared to RUR was RUR 26.8bn but was 17.5bn, a year still earlier, higher than 2007: RUR Free cash 16.8bn. flow was negative at RUR9.5bn due to 18.6bnRURin capital expenditure (development of Gremyachinskoe potash deposit, construction of the new CAN and granulated urea capacity at Novomoskovskiy Azot and the new melamine production at Nevinnomysskiy Azot and construction bulk terminal). of Tuapse Another important factor was the purchase of 10,752,292 ordinary shares of K+S Group from MCC Holding Ltd for RUR and an additional 19.6bn, 1,499,297 2009, December In 2009. April and January between RUR 2.3bn for market open the on shares issue rights a through K+SGroup of shares ordinary 2,982,252 additional an acquired EuroChem for RUR 3.5bn paid cash. in Further detail purchases on EuroChem’s and sales of K+SAG shares is available the in consolidated IFRS financial statements that are part of this annual report. Additionally, due March the in company 2012. a coupon raised a EUR of 7.875% 85m margin loan secured shares by K+S in AG, with an interest rate of three-month Euribor + 2.0%. 8 – 11 13 18 21 32 52 86 65 257 392 949 586 290 22% 56% 26% (271) 30% 2007 1,710 7,775 7,609 1,031 1,597 1,631 1,262 2,735 9,567 5,438 4,920 3,668 3,560 (1,323) (1,893) (1,256) (2,521) (2,010) (4,059) 16,174 (4,989) (3,494) (9,465) 41,158 40,100 10,790 (17,121) 14,947 18,850 13,421 22,415 15,284 29,651 19,220 25.577 33,001 16,840 39,986 55,889 73,821 22,081 20,234 22,897 (11,100) (10,170) (32,664) 24.5462
7 – 15 10 41 29 116 210 616 273 492 920 349 25% 36% 60% 39% ,889 (325) (345) 2008 1,168 1,914 1,479 1,268 1,386 4,460 4,688 2,359 9,284 3,090 4,044 3,282) 11,157 (8,891) (3,766) 17,886 (6,809) (3,209) (6,446) 18,818 64,414 (8,788) 67,707 61,037 18,031 52,016 13,439 10,456 21,526 27 26,755 83,799 25,258 28,829 36,780 43,726 55,920 33,565 40,890 44,297 (11,899) (19,807) 112,174 (24,592) (2 (35,543) (44,466) 24.8553 29.3804
5 – 11 12 18 16 52 28 749 215 163 341 225 369 665 643 15% 15% 44% 22% ,545 ,507) 2009 1,512 1,724 2,212 1,093 1,668 1,830 1,834 2,243 4,623 5,579 9,032 5,803 (7,876) 31,124 (3,261) (2,065) (2,629) (6,362) 73,195 12,916 10,712 17,539 11,075 (9 18,702 12,481 32,137 16,516 13,705 10,926 13,689 99,662 39,577 20,484 49,948 20,034 36 73,577 (11,194) (17,608) (13,870) (27,045) (18,389) (15,549) (41,440) 31.7231 30.2442
7 2 – – 13 15 47 27 59 44 116 412 131 247 748 163 231 255 460 435 41% 34% 63% (749) 43% (624) (279) (289) (695) 1q08 9,711 9,109 1,575 3,215 1,779 2,782 9,733 1,306 6,071 8,707 5,793 5,982 3,395 (1,510) (4,513) (5,241) (3,316) (3,725) (2,473) (4,622) 11,120 16,114 11,180 11,472 (3,084) (3,486) 11,939 11,047 (9,598) 25,713 18,297 12,944 10,464 35,639 48,883 22,244 23.5156 24.2601
6 2 – (9) 17 16 61 87 28 38 43 43 (91) 131 127 163 422 326 288 262 388 31% 64% 39% 42% (701) (856) (386) 2q08 3,513 6,715 1,465 1,396 1,588 9,820 2,231 2,839 5,896 6,806 9,302 3,809 (1,612) (6,011) (7,396) 41,513 (6,327) (5,323) (2,660) (3,060) 11,857 (6,289) 11,788 (3,687) (3,587) 22,160 12,617 30,123 54,618 11,963 16,491 12,669 13,206 12,679 19,202 22,057 (10,920) 23.4573 23.62793
2 – 13 15 15 35 58 43 147 101 122 122 275 275 481 395 265 384 433 44% 64% 47% 30% (402) (879) 3q08 1,312 3,513 2,472 1,306 2,670 5,271 4,777 2,228 2,546 3,849 (7,175) (7,193) (7,301) (1,423) (3,143) (7,270) (1,026) (3,716) 17,136 11,150 (6,517) 17,933 17,458 (3,860) 45,711 11,847 17,893 21,751 18,217 14,867 12,622 30,616 15,708 10,253 18,500 60,533 24,943 38,942 (10,847) (13,999) 23.5156 24.2462
2 1 2 9 – 15 10 41 31 75 83 9% 127 152 146 143 103 373 347 681 798 295 680 358 43% 13% (11%) (855) (880) 4q08 6,128 1,731 1, 2,169 7,447 1,268 5,791 3,431 1,502 4,460 3,542 2,359 3,840 2,687 2,281 (5,141) (1,901) (5,791) (2,613) (1,967) (3,867) (3,823) 17,886 64,414 11,269 12,726 (2,070) 17,396 61,037 (9,949) 13,439 21,526 19,581 32,693 25,258 (17,530) (14,843) 27.2672 29.3804
6 4 1 1 – 12 10 78 36 80 65 34 (9%) 150 162 145 787 378 705 402 489 45% 23% (815) 28% (357) (205) (932) (690) 1q09 5,110 5,174 5,744 1,578 5,024 1,300 1,290 2,581 5,542 2,458 8,085 5,207 8,622 5,400 4,456 (1,825) (3,100) (4,524) (4,827) (1,735) (2,682) (1,530) (5,629) 13,519 58,128 84,154 47,294 10,607 10,250 19,252 23,080 20,030 (20,181) (15,007) (13,240) (10,630) 34.0134 33.9308
7 2 1 – – 11 76 21 79 32 62 39 174 132 156 441 391 366 10% 45% 43% 28% (352) (987) (585) (696) (660) 2q09 7,319 1,315 9,718 4,316 1,766 1,099 1,463 7,389 2,513 7,666 1,855 2,061 2,459 6,093 4,549 3,332 4,786 8,376 4,063 4,431 2,436 (1,429) (1,995) (3,671) (1,931) 15,173 (2,372) (4,654) 10,190 (3,334) (3,880) 11,987 67,585 17,220 (9,555) 94,788 40,240 20,057 32.2145 31.2904
9 2 – – 17 13 13 28 91 39 45 46 519 179 106 106 721 323 206 363 482 17% 12% 17% 43% (719) (521) (797) (649) 3q09 1,742 1,241 5,011 3,136 8,513 1,437 3,374 1,936 1,556 4,409 2,725 2,364 9,306 4,906 4,055 8,025 3,490 3,344 3,258 2,206 2,944 (1,012) (3,124) (1,483) (4,578) 20,111 (3,438) 11,495 (3,950) 12,210 35,512 13,550 18,775 68,458 92,848 (10,750) 31.3276 30.0922
8 3 2 – 11 12 15 41 87 28 28 79 35 44 114 187 123 134 577 381 405 356 433 340 12% 12% 17% 43% (950) (640) 4q09 7,207 1,772 3,195 2,212 2,163 1,937 2,624 1,093 7,825 5,771 4,867 5,803 2,255 4,561 3,024 2,803 2,283 (4,951) (1,626) (3,016) (4,633) (4,236) (4,220) (3,998) 73,195 12,481 (3,868) 10,926 12,232 10,303 18,330 99,662 20,034 36,545 (10,504) 29.4729 30.2442
* ) s e n n o t
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s l a i Annual Report and Accounts 2009 r e t a
m
s w e a t
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Feed phosphates Apatite NP Service Sales, admin and other
Logistics Complex fertilizers Urea Baddeleyite Iron ore Organic synthesis products MAP, DAPMAP, Ammonia
AN
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Including labour costs Including changes in work in progress and finished goods Including other materials and components Including gas and energy
Including: revenues from exports to non-CIS markets Including: revenues from exports to CIS markets
Including: revenues from sales of 3rd party products Phosphates (including sales to other segments) Nitrogen (including sales to other segments) Other (including sales to other segments) Elimination EUROCHEM EUROCHEM r o n AnnualBusinessthesegmental reconciled segment results in are external23 salessection.withvolumes annual page on volumes Information on employee numbers is provided as the average for the period starting from January 1 of the reported year through the last day of the quarter indicated. t i i h
Trade accountsTrade receivable, days
Accounts payable, days Net Working capital Finished goods, days Permanent employees (aug. for period)**
Average RUR/US$ exchange rate for the period Sales volumes, including sales to other segments Capital expenditure on PP&E and intangible assets Net debt (borrowings less current cash and cash equivalents) Net (decrease)/increase in cash and cash equivalents Cash flows from operating activities Effect of exchange rates Non-current assets Gross cash flow Cash flows from investing activities M End of period RUR/US$ exchange rate Total equity Other cash from operations Free cash flow Cash flows from financing activities
N
Financial income and expense, net
P
Financial foreign exchange gains/(losses) Pre-tax profit Taxation
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Operating profit Operating % profit margin, Distribution costs Net profit after tax G&A expenses Other operating income/expense, net Net % profit margin, Operating profit before depreciation and amortisation EBITDA EBITDA margin, % Gross % profit margin, Gross profit
Cost of sales
* ** 30
in RUR m Key financial and non-financial data non-financial and financial Key
Revenues
Performance Performance 8 – 11 13 18 21 32 52 86 65 31 257 392 949 586 290 22% 26% 56% (271) 30% 2007 1,710 7,775 7,609 1,031 1,597 1,631 1,262 2,735 9,567 5,438 4,920 3,668 3,560 (1,323) (1,893) (1,256) (2,521) (2,010) (4,059) 16,174 (4,989) (3,494) (9,465) 41,158 40,100 10,790 (17,121) 14,947 18,850 13,421 22,415 15,284 29,651 19,220 25.577 33,001 16,840 39,986 55,889 73,821 22,081 20,234 22,897 (11,100) (10,170) (32,664) 24.5462
7 – 15 10 41 29 116 210 616 273 492 920 349 25% 36% 60% 39% ,889 (325) (345) 2008 1,168 1,914 1,479 1,268 1,386 4,460 4,688 2,359 9,284 4,044 3,090 3,282) 11,157 (8,891) (3,766) 17,886 (6,809) (3,209) (6,446) 18,818 64,414 (8,788) 67,707 61,037 18,031 52,016 13,439 10,456 21,526 27 26,755 83,799 25,258 28,829 36,780 43,726 55,920 33,565 40,890 44,297 (11,899) (19,807) 112,174 (24,592) (2 (35,543) (44,466) 24.8553 29.3804 Annual Report and Accounts 2009 EUROCHEM
5 – 11 12 18 16 52 28 749 215 163 341 225 369 665 643 15% 15% 44% 22% ,545 ,507) 2009 1,512 1,724 2,212 1,093 1,668 1,830 1,834 2,243 5,579 4,623 9,032 5,803 (7,876) 31,124 (3,261) (2,629) (2,065) (6,362) 73,195 12,916 10,712 17,539 11,075 (9 18,702 12,481 16,516 32,137 13,705 10,926 13,689 99,662 39,577 20,484 49,948 20,034 36 73,577 (11,194) (17,608) (13,870) (27,045) (18,389) (15,549) (41,440) 31.7231 30.2442
7 2 – – 13 15 47 27 59 44 116 412 131 247 748 163 231 255 435 460 41% 34% 63% (749) 43% (624) (279) (289) (695) 1q08 9,711 9,109 1,575 3,215 1,779 2,782 1,306 9,733 6,071 8,707 5,793 5,982 3,395 (1,510) (4,513) (5,241) (3,316) (3,725) (2,473) (4,622) 11,120 16,114 11,180 11,472 (3,084) (3,486) 11,939 11,047 (9,598) 25,713 18,297 12,944 10,464 35,639 48,883 22,244 23.5156 24.2601
6 2 – (9) 17 16 61 28 87 38 43 43 (91) 131 127 163 422 326 262 288 388 31% 64% 39% 42% (701) (856) (386) 2q08 3,513 6,715 1,465 1,396 1,588 9,820 2,231 2,839 5,896 6,806 9,302 3,809 (1,612) (6,011) (7,396) 41,513 (6,327) (5,323) (2,660) (3,060) 11,857 (6,289) 11,788 (3,687) (3,587) 22,160 12,617 30,123 54,618 11,963 12,669 16,491 13,206 12,679 19,202 22,057 (10,920) 23.4573 23.62793
2 – 13 15 15 35 58 43 147 101 122 122 275 275 481 395 265 384 433 44% 64% 47% 30% (402) (879) 3q08 1,312 3,513 2,472 1,306 2,670 5,271 4,777 2,228 2,546 3,849 (7,175) (7,193) (7,301) (1,423) (3,143) (7,270) (1,026) (3,716) 17,136 11,150 (6,517) 17,933 17,458 (3,860) 45,711 11,847 17,893 21,751 18,217 14,867 12,622 15,708 30,616 10,253 18,500 60,533 24,943 38,942 (10,847) (13,999) 23.5156 24.2462
2 1 2 9 – 15 10 41 31 75 83 9% 127 152 146 143 103 373 347 681 798 295 680 358 43% 13% (11%) (855) (880) 4q08 6,128 1,731 2,169 1, 7,447 1,268 5,791 3,431 1,502 4,460 3,542 2,359 3,840 2,687 2,281 (5,141) (1,901) (5,791) (2,613) (1,967) (3,867) (3,823) 17,886 64,414 11,269 (2,070) 12,726 17,396 61,037 (9,949) 13,439 21,526 19,581 32,693 25,258 (17,530) (14,843) 27.2672 29.3804
6 4 1 1 – 12 10 78 36 65 80 34 (9%) 150 162 145 787 378 705 402 489 45% 23% 28% (815) (357) (205) (932) (690) 1q09 5,110 5,174 5,744 1,578 5,024 1,300 1,290 2,581 5,542 2,458 8,085 5,207 8,622 5,400 4,456 (1,825) (3,100) (4,524) (4,827) (1,735) (2,682) (1,530) (5,629) 13,519 58,128 84,154 47,294 10,607 10,250 19,252 23,080 20,030 (20,181) (15,007) (13,240) (10,630) 34.0134 33.9308
7 2 1 – – 11 76 21 79 32 62 39 174 132 156 441 391 366 10% 45% 43% 28% (352) (987) (585) (696) (660) 2q09 7,319 1,315 9,718 4,316 1,766 1,463 1,099 7,389 2,513 7,666 1,855 2,459 2,061 6,093 4,549 4,786 3,332 8,376 4,063 4,431 2,436 (1,429) (1,995) (3,671) (1,931) 15,173 (2,372) (4,654) 10,190 (3,334) (3,880) 11,987 67,585 17,220 (9,555) 94,788 40,240 20,057 32.2145 31.2904
9 2 – – 17 13 13 28 91 39 46 45 519 179 106 106 721 323 206 363 482 17% 12% 17% 43% (719) (521) (797) (649) 3q09 1,742 1,241 5,011 3,136 8,513 1,437 3,374 1,936 1,556 4,409 2,725 2,364 9,306 4,906 4,055 8,025 3,490 3,344 3,258 2,206 2,944 (1,012) (3,124) (1,483) (4,578) 20,111 (3,438) 11,495 (3,950) 12,210 35,512 13,550 18,775 68,458 92,848 (10,750) 31.3276 30.0922
8 3 2 – 11 12 15 41 87 28 28 79 35 44 114 187 123 134 577 381 405 356 433 340 12% 12% 17% 43% (950) (640) 4q09 7,207 1,772 3,195 2,212 2,163 1,937 2,624 1,093 7,825 5,771 4,867 5,803 2,255 4,561 3,024 2,803 2,283 (4,951) (1,626) (3,016) (4,236) (4,633) (4,220) (3,998) 73,195 12,481 (3,868) 10,926 12,232 10,303 18,330 99,662 20,034 36,545 (10,504) 29.4729 30.2442
* ) s e n n o t
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0 0 0 ‘ (
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s w e a t
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n l h e a p r g s e o Production Feed phosphates NP Apatite
Sales, admin and other Service
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Ammonia AN
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Including other materials and components Including labour costs Including changes in work in progress and finished goods Including gas and energy
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Trade accountsTrade receivable, days
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P
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Cost of sales
* ** in RUR m
Revenues
While While
Reduced Reduced We have a sizeable capital capital sizeable a have We Unfavourable industry structure. wholesale large-scale and supply Fragmented fertilizer of margins the reduce distributors volatility. price fertilizer increase and producers will sector the in competitors of Consolidation possibly move EuroChemfurther up the global by addressed are risks Such curve. cost reduce that measures various implementing our production and delivery costs. Decrease/stagnationdemand. in world’s the feeding for vital are fertilizers may that factors some are there population, stagnate to demand fertilizer global cause factors include may These decrease. even or such as global change, climate expansion of genetically modified crops, less resource- and biofuels, on spending less diets, intensive Such programmes. subsidy fertilizer in changes decrease long-term a to lead could factors seek We fertilizers. for demand global the in to mitigate this risk through product flexibility and entering by new markets with high fertilizer adapt to us allow which potential, consumption our product mix tochanging needs across different markets. feedstockdisparity. Declining phosphate and gas natural for disparity price the of rest the and EuroChem between rock world reduces some of our competitive through risk this manage We advantages. business integrated vertically a apply to seeking model wherever possible and diversifying our production portfolio. Unfavourable other costs disparity. Faster rail as such costs domestic other of growth RUR/US$ labour, exchange electricity, tariffs, rate, export duties etc. relative to the rest competitiveness. our reduces world the of mitigateWe this risk reducing by production costs, developing more optimal logistics and evaluate also We outlets. market diversifying help may which strategies hedging various us reduce this risk. Results of investment decisions. Misguided investment decisions could lead to incorrect allocation of resources and eventual losses. robust a implementing by risk this mitigate We which process, decision investment project carefully evaluates market trends and all alternatives. available CAPEXfinancing. expenditure programme of over US$ 4.5bn over not may programme This years. five next the expected company’s the of out financed fully be require may it hence flows, cash operating cash own our than other financing of sources sources such secure to inability Our flows. of financing at a competitive costmight have programme. investment our on effect negative a • • • • • •
New fertilizer Development of effective methods for for methods effective of Development risks. financial of evaluation quantitative approachesTraditional using historical data to adequate not are analysis) (VAR,correlation alternative An risks. potential evaluate correctly method for analysing financial risksinvolves stress-testing and developing appropriate hedging strategies financial to eliminate threats to our business. business by reporting risk of Implementation segment as dictated our by corporate risk of process The standards. management discussed is risks key and ongoing managing below. involve that processes business of Optimization on focus will we 2010 In risk. unnecessary creating a map of the Company’s business processes, paying special attention to areas where different processes interact, which gaps, information of source a frequently is incompatibilities and other sources of risk. risk Our market. potash the on effect similar a securing on focuses area this in management our lowering materials, raw low-cost to access energy-saving installing costs, production own technologies and optimization of logistics. New capacity additions. capacity New natural low with regions in capacities production increased to lead (MiddleEast) could costs gas competition the in nitrogen segment; in additions capacity new significant phosphates, negative have could Bayovar) (Ma’adden, the in balance supply/demand the on impacts global from potash, in players new segment; of governments the to conglomerates mining major potash-importing countries, could have Plansfor 2010 implementing on focus will ahead year The several important elements of risk management: • • • Our approach to risks classifyWe risks into three key categories: fourth A risks. operational and financial strategic, not do which risks, reputational is risks of class arise on a stand-alone basis but result may from Reputational categories. risk main three the of any to due category separate a as viewed are risks their potential influence on the business and the tools available to manage them. Below we discuss the key business risks that strategies, mitigation with along faces, EuroChem qualification of system the with accordance in of discussion detailed more A above. described some of our financial and operating risks is also audited the to 31 and 30 Notes in included IFRS financial statements, which are part of this annual report. annual Our strategic risks •
Annual Report and Accounts 2009
EUROCHEM EUROCHEM 32 2009achievements systemic a of importance the recognise We approach to risk management our in business; risk its systematize to began 2009 EuroChem In changes structural with began This management. desk management risk a of creation the and is officer risk The Department. Finance our in methodological a developing for responsible platform for systematic risk management, participants between cooperation facilitating risks classifying and identifying process, the in measure to process reporting a creating and the success of our risk management. Risk management does not seek to entirely entirely to seek not does management Risk remove of all the possible sources of losses to our business. Indeed, conducting any business level certain a bear company the that requires acceptable an achieve to is goal Our risk. of our to risks potential the between balance taking by gains potential the and business and analysed, be must Risks risks. these on tools the with equipped be must employees context, this In risks. these manage to needed analysing is management risk of aspect key the possible sources of profit with a view to whether most and, justified is involved risk the not or importantly,manageable. understand risks, analyse and identify to is aim our and risks different between connections the risks manage to necessary tools the provide organisation-wide.
We use risk management management risk use We us assist to means a as business our achieving in and strategic both – goals risk Successful operational. timely means management and risks of identification management of development these reduce to solutions levels. to acceptable risks Risk Risk management report
Performance Performance 33 Other operational risks. monitor We and possible include which risks, other manage investment of risks assets, physical of losses (construction/installation management project of lack logistics, risk), non-optimal works license) (including legal coverage, insurance risks. Annual Report and Accounts 2009 EUROCHEM • Our reputational risks assets, valuable most our of one is reputation Our which and profits increase to us enables which and media Mass protected. carefully be must highly is company any that mean communications risks. reputational of influence the to exposed Reputational risks arise from any one or any combination of the other risks listed above. inability the as seen is reputation our to Damage to adequately manage risks the by While company. processes certain affect may risk individual every an always is there units, business certain or element of reputational risk involved. Moreover, may risks numerous of aspects reputational the initial the than company the to threat a of more be communications accurate and Timely involved. risks risk, reputational to mitigants important are and addition in to existing public relations and new a added we functions, relations government 2009. in desk relations investor maintaining of importance the understand fully We our reputation, and seek to monitor and mitigate of risk the minimize to above discussed risks the reputational risks arising.
We The major risk Equipment failure or or failure Equipment Documentation for for Documentation Losses due to exposure EuroChem seeks to build its business business its build to seeks EuroChem to a limited group of customers, short-term short-term customers, of group limited a to by risk this mitigate We etc. contracts of nature diversifying our customer base and expanding our finished goods storage capacity. factors include redundant or insufficient insufficient or redundant include factors control, process of lack a to due purchases on data quality poor and planning, inadequate existing inventories. Our risk management is purchase of evaluation quality regular at aimed counterparty of improvements planning, implementation and procedures compliance risk the minimizes that solution software a of of human error. sales. Sub-optimal a series of strict requirements for potential potential for requirements strict of series a services. and goods of suppliers purchases. Sub-optimal Financial covenants. Financial loan agreements, including our Eurobonds facility, loan syndicated finance pre-trade and contain certain covenants that dictate we maintain certain ratios, such as net debt/ by risk the mitigates EBITDA. company The place in is process internal an that ensuring including compliance, covenant monitoring for an early warning system. Other financialcontinuously we risks that costs material risk, credit include monitor taxrisks. material and interruption. Business could mines or plants our of one at breakdowns lead to a significant decreasein production. risks of category this mitigate to seek We and maintenance of programme a through of programme long-term a and repairs, capital capital investments and renovations. In addition conduct we renovations, and maintenance to regular personnel training to develop the skills and knowledge necessary to operate plant insurance interruption Business equipment. is also available if necessary. environment.safety and Health, including HSE procedures, our review regularly situations. emergency to apply which those management, quality for ISOcertifications Our environmental management and health & safety systems robust the demonstrate management place in we have tomitigate such risks. processes such in that a way fraud risks are internal company’s the Additionally, minimized. activities the monitors regularly service audit conducted are Purchases units. operating its of through a tender process, which includes • • • • Our operational risks • • • F r a u d .
As the largest largest the As Short-term liquidity risks could could risks liquidity Short-term This risk is mitigated by ensuring that the the that ensuring by mitigated is risk This and robust remains creditworthiness company’s financing many as disposal our at have we that years. five next the over possible as alternatives Other strategiccontinuously are risks that evaluated us by include regulatory risks and the risk of trade barriers. Product price risks. Declines fertilizer in to leads factors of array wide a to due prices by risks these mitigate We sales. in decline a are and costs, production reduce to seeking natural for derivatives materials raw considering gas and chemical fertilizers. investments. Financial shareholder K+S in AG, we are potentially K+S AG of value the in declines to exposed not chosen has EuroChem stage, this At shares. that given derivatives through risk this hedge to gain to was investment the of objective the economic exposure to potash. Foreign currency portion risk.significant A export from come revenues EuroChem’s of company’s The dollars. US in denominated sales expenses, other than servicing its dollar- in entirely almost are debt, denominated may rates dollar/rouble in Changes roubles. our on effects negative or positive have in objective Our burden. debt and profitability of volatility the minimize to is risk this managing fluctuations from arising flows cash EuroChem’s have we so do To rates. exchange foreign in instruments derivative of variety a to access option and contracts currency forward as such strategies. perform We regular evaluation of the for opted have we now of As risk. at flow cash a “natural hedge” which matches the dominant currency of our revenues with that of our borrowings (the US dollar). Interest rate risk. EuroChem is exposed to majority the that fact the to due risk rate interest of its loans floating have interest rates tied to its evaluates constantly company The Libor. use the and rates interest variable to exposure we year-end the of As swaps. rate interest of chose to leave the bulk of our borrowings at a floating rate given the outlook for US dollar dollar US for outlook the given rate floating a interest rates. Liquidityrisk. sales. in drop sudden a of event the in arise uncommitted and committed both have We credit lines with banks to offset liquidity gap, liquidity sharp A be. need if shortfalls if not covered such by credit lines or other through compensated be could alternatives, constantly We investments. liquid of sale a we ensure to levels capital working monitor maintain a comfortable level of liquid assets. • Our financial risks • • • • • Our governance
What matters to us Applying our experience • Be in a position to hold management The quality and character of the members accountable. As this Board has directly When it comes to governance, of the Board of Directors are crucial to sound taken decisions affecting most of the current what matters is how it works governance. management execution activity, it knows in practice. Having the right what was intended and agreed. It has also We have in place a Board that has now been been involved in agreeing both short-term structures and processes stable for three years. This means that our and long-term senior management targets, in place is only part of the Directors have had time to: annual budgets and strategic plans. This story: we aim to make sure • Build a good knowledge of our business direct, first-hand knowledge means the and industry. They have been involved Directors are in a better position to assess our governance helps us run in management briefings and strategic management’s approach and its performance. the business successfully decision-making covering all of our production and safely. activity, major investment projects and This stability is crucial to good governance and development of our distribution network. They we aim to maintain the current Directors as the To be effective, our Board of Directors have set management targets based on a good core of our Board for the foreseeable future. needs to: understanding of the drivers of our business and helped management explain our operations It has also enabled us to benefit more fully and strategic plans externally. The Directors from our Directors’ experience. We expect our its exper have also visited several operating units. non-executive Directors, while assiduously ply ienc Ap e • Develop good communication channels maintaining their independence, to help us both B with management. Good information flows have a clear strategic direction and also oversee ip e h w s and dialogue between the non-executive the strengthening of our internal operations. r e l e l Directors and management is essential. Corporate governance So for them it is not just a question of attending d i n a f e Working together over the past two years, this Board meetings. We need them to use their o l
r
m is now firmly grounded on a basis of trust and
w experience to help us make solid progress across
o e
h d understanding. This has not necessarily been many aspects of our work. We believe that the S easy and is still developing – it would be naïve way they step up to the mark is key in achieving
A to suggest that it is easy for non-executive governance that is increasingly strong in practice, e c c t n Directors and management to establish an easy not just in form. w e it lu working relationship in any business culture. But h nf in d i information flows are good and management depe an ndence prefer to be open and provide full information. Our task is now to help management understand better the Directors’ needs so that the timeliness In this section we are going to set out of regular reporting to the Board can be how this works. Then we will explain: improved further and the amount of detail can be reduced so that the key issues are more • what structures and processes we immediately clear. have in place • what these structures have actually done during the year • how we are planning to improve our governance further.
34 EUROCHEM Annual Report and Accounts 2009 Performance Corporate governance 35 has been CEO of EuroChem EuroChem of CEO been has as a leading adviser on on adviser leading a as Annual Report and Accounts 2009 EUROCHEM Vladimir Stolin,Vladimir and motivation management, resource human the particular in guiding been has development, reward executive EuroChem’s of development the of Chairman As strategy. HR and schemes Committee, Personnel & Governance Corporate he has provided an expert response to and incentivisation on proposals management and founder the is He management. risk people advising company Russian leading a of Chairman development. personnel on DmitryStrezhnev shares EuroChem’s of 5% owns He 2004. since in experience of wealth a gained Dmitry and industrial Russian large of management the holding EuroChem, joining before companies Bus Likinskiy the at positions executive manufacturer auto the Plant, Manufacturing GAZ and a number of other smaller companies. CVsFull are provided Appendix in 1.
Second row from left: Richard Sheath Keith Jackson AdriaenssenCharles brings a detailed knowledge is focusing on giving guidance guidance giving on focusing is Top rowTop from left: CardonaGeorge NikolayPilipenko AndreyMelnichenko DmitryStrezhnev VladimirStolin the current financial management team and he he and team management financial current the challenge. insightful provide to positioned well is SheathRichard risk of development their in management to management and internal control. As Chairman Nikolay Pilipenko Nikolay operationsof EuroChem’s and financial management, having been Finance Director until December 2008. He not may be fully independent but his past knowledge and experience from working at ABB is helpful to overseeing also is he Committee, Audit the of well as reporting external in improvements as giving advice on strengthening EuroChem’s extensive has He governance. corporate risk and governance corporate in experience management, heading up a boutique governance consultancy which advises many leading companies on the effectiveness of their expertise particular has he structures; governance riskin governanceand audit committees. with partner management risk former As PricewaterhouseCoopers, he has a good here based been having Russia of knowledge for six years.
is particularly active in in active particularly is has been Chairman Chairman been has is guiding the development development the guiding is is helping to ensure the the ensure to helping is Andrey Melnichenko Andrey Keith Jackson Keith management financial our of development as as well bringing focus to health & safety and year 32 a had has He issues. environmental mining international major the with career was Keith plc. American Anglo company, Chairman of Cleveland Potash Ltd, one of the companies, producing potash European three SA, Petrosur of director finance as served has and Most company. fertilizer urea Argentine an Minerals, Industrial Anglo CFOof was he recently a division which included Copebras, a significant Brazilian fertilizer company. He is well positioned to do this as the former former the as this do to positioned well is He Head of Strategy at HSBC Group. of our strategic and investment analysis. As ensures he Committee, Strategy the of Chairman analysing to taken is approach rigorous a that options the through thinking options, strategic and risks, and presenting them to the Board. George Cardona George Charles Adriaenssen Charles reward executive around issues oversee helping Interbrew of director a was He development. and has Charles diplomat, former (nowInbev). A consultant a is and Russia of knowledge good a affairs. public and governance corporate on of the Board since 2007 and was first appointed appointed first was and 2007 since Board the of involved was He 2004. in Directors of Board the to 2007 since and EuroChem of creation the in a company that holds Andrey’s business interests Limited Public Holding MCC of 95% owned has Andrey company. parent (Cyprus),EuroChem’s has played a significant rolein building some of corporations, private successful most Russia’s and Coal Siberian the MDMBank, including (SUEK) Company Energy TMK. Andrey’s and broad both is business Russian of knowledge bureau the on sits also currently he and deep, and of the management board of the Russian Union Entrepreneurs. and Industrialists of
Showing leadership Showing company the that ensure to aim we Board, a As has clear direction both strategically and organization. an as developing is it how in strategy EuroChem’s years two past the Over has become clearer and the Board is confident explained and out set be now can this that effectively to external stakeholders, management show to aiming also are We employees. and stands EuroChem what out setting in leadership is it where communities the in role social its for: and management its of behaviour the operating, employees toward each other and outside parties, behaviour business appropriate ensuring in and legal and business with compliance through are standards some that recognise We norms. require may and others than achieve to easier also we but – time takes that change cultural in play to role a has Board the that recognise During standards. communicating and setting extend to steps further taking be will we 2010 ensure to and Ethics of Code our of reach the that it is well-understood. non-executive its expects EuroChem Furthermore, the out setting by leadership show to directors direction of the company’s continuous improvement, part in with an to eye ensuring that EuroChem is well-positioned to meet the debt and capital international the of expectations board the by done often is work This markets. Committee Strategy the example, For committees. develop to management with working been has better analysis of the portfolio of capital Governance Corporate the projects; investment and Personnel Committee has been setting out its expectations around executive reward systems Committee Audit the evaluation; performance and risk of strengthening the on focusing been has identification and mapping risks to controls. EuroChem aims to achieve international standards across its operations and sees its non-executive directors as playing an important role that in push.
CFO and brings a wealth of knowledge to the the to knowledge of wealth a brings CFOand Advisor is Cardona, George other, the and Board formally not are they Although Chairman. the to are they that view Board’s the is it independent, robustly mindset, in independent consistently questioning management and providing the proposals to challenge of amount necessary performance. and as role major a play committees board The time The directors. independent the for forums with directors the provides committee in spent more in oversight exercise to opportunity ample challenge. specific more provide to and detail A key oversight role is that played the by Audit Committee ensuring in the objectivity and to information reported externally of accuracy help strengthen trust thein company’s reporting Corporate the of role The systems. control and equally is Committee Personnel & Governance listed a yet not is EuroChem While important. forward pushed has Committee the company, governance, transparent at aimed process a sound reward systems and planning management Committee Strategy The succession. director and and proposals management that ensure helps considered thoroughly are analyses investment before they are presented to the full Board. As the Board generally aims to act on the basis basis the on act to aims generally Board the As have directors non-executive the consensus, of that sees Chairman the If influence. definite a a consensus is lacking, management are asked for proposal their reconsider to or information further as usually Board, The it. withdraw possibly or a result of committee discussions, can also make investigate to management of requests specific issues or to consider developing a new approach. for management ask infrequently, not also, They projects development or investment on updates responsible the question actively will and CFO The accountable. them hold to managers attends meetings, all giving the directors ample opportunity to seekexplanations or information. excluding directors non-executive six the of Four Board) eight-strong the of (half Chairman, the are fully independent. One of the other two, Nikolai Pilipenko, was formerly the EuroChem
In the meeting, meeting, the In Outside the board board the Outside Between meetings, meetings, Between Annual Report and Accounts 2009 The non-executive directors visit visit directors non-executive The
EUROCHEM EUROCHEM directors receive flash reports with month end end month reportswith flash receive directors the to online access full have They figures. also They stage. any at accounts management sell-side on updates frequent receive regularly the and company our of coverage analyst global industry. at least In September one site a year. 2009 they given were and Azot Novomoskovskiy visited This plant. the of tour and presentation full a Gremyachinskoe our of site the to visit a year potash deposit operation is scheduled. Interiminformation. take place regularly across all aspects of of aspects all across regularly place take management activity including investment analysis, risk management, security and HR. visits. Site this information is supplemented by additional additional by supplemented is information this times, at CFOand, or CEO the from comments member Board Management the from responsible. discussions. Informal senior with meet to able are directors meetings managers on any issue. These discussions Board and committee meetings. minimum A All year. every held are meetings board six of record attendance exemplary an have directors directors the that important is it believe we – face. to face issues discuss and together meet is it unless phone by meetings avoid to aim We abouta specific issue that cannot be delayed. Directors receive, in advance, board papers which provide full details on the discussion. under issue with generally recognized international practices and are even more stringent than national standards. A member’s independent status is confirmed by the Board of Directors when he is elected. Independent directors must inform the Corporate Secretary of any changes to their status, including any events that may have an impact on their independent status, and any conflicts of interest that may arise during their directorships. Director independence Director directors. non-executive are which of seven members, eight and structure one-tier a has Board The At present, four of the Board’s members hold independent status, which means that they are independent of the company’s officers, affiliates, and major counterparties. Other than their directorships, they do not decisions. their of objectivity the influence potentially could that company the with relations any have The criteria for independent status are set out in the Board of Directors Regulations, which are aligned Acting with independence and influencing and information to access free have directors Our meetings committee and board In management. Board wide-ranging. and open is discussion the with hours 6 to 4 from last typically meetings than rather discussion to given time this of much non-executive The presentation. management directors are free to express their views on any with constantly so do and point any at subject encouragement from the Chairman. • 36 • • Being well informed be to need Directors the job, good a do To well-informed. achieve this We through: • • Our governance continued governance Our
Corporate governance Corporate governance 37
The auditors’ review of quarterly financial year-end At detail. in discussed was statements were statements financial audited year full the to detail particular in discussed and reviewed reporting company’s the with compliance ensure reporting plans, IFRS.audit The and standards discussed were disclosures financial and risks prior to the start of the interim audit work and considered again during the approval of the year financial end statements. Monthly management accounts were discussed quarterly the of review the that ensure help to and year end statements were based on a good understanding of financial performance at all times during the year. Overseeing the development of the risk in improvements and function management reporting on risks, risk mitigation and controls putting currently is committee The assurance. of development the on emphasis considerable the risk management processes. position to taken be to steps the Considering international an on listing for company the controls of development including exchange, anti-trust regulations, trading insider to relating rules, public and regulatory disclosures and externalreporting. approving audit, internal with interaction Regular its plans, discussing its findings and overseeing formally was effectiveness Its development. its reviewed through a survey of stakeholders as well as the committee. This particular focus on internal audit development continue will during 2010. Annual Report and Accounts 2009 EUROCHEM terms of reference to reflect the focus on risk risk on focus the reflect to reference of terms management. of review formal a undertook committee The assessment an involved This effectiveness. its management by completed was that questionnaire as committee the with contact regular have who we result a As members. committee the as well agenda the in improvements make to looking are structure and management reports. good a 2009 gives during work committee’s The Its responsibilities. and activity its of indication work has included: • • • • • development the drive to continuing as well As of risk management and internal audit functions, to how at look also will committee the 2010 in ensure that the company’s Code of Conduct is ethics sound in reflected and embedded properly and a strong control culture. integrity and reliability of the information disclosed disclosed information the of reliability and integrity aboutthe During company. 2009 it has and management risk on focused increasingly the of development the overseeing actively now is risk management structure and processes. Committee Audit the reviewed Board 2009 the In Regulations and expanded the Committee’s
.
The Audit Committee Audit The independent two has Committee Audit The director, non-executive one and members Board regarded formally not is who Pilipenko, Nikolai the as served previously he as independent as that believe We Director. Financial company’s the mix of a majority of independent members accounting, financial in experienced are who is management risk and reporting international additional the by effectively very complemented operations company’s the of knowledge in-depth Pilipenko. Mr. by committee the to brought joint-presence six held Committee the 2009, In call. conference by meetings three and meetings attended are meetings committee rule, a As of Head the CFO, the auditors, external the by Internal Audit, and the Corporate Secretary. The Committee holds discussions with the PricewaterhouseCoopers, auditors, external twice a year without the presence of management. one-to-one regular has chairman committee The either Audit Internal of Head the with meetings audit discuss to or meetings for preparation in is Committee the meetings, Between findings. Director, Financial the with contact regular in Management Risk the Audit, Internal of Head the desk and the Corporate Secretary. oversee to is function primary Committee’s The the as well as reports, financial of quality the
More detailed information about the Board’s responsibilities can be found in the company Charter and the Board of Directors Regulation published on the company’s website http://www.eurochem.ru/internet/24 The Board of Directors works in line with a forward agenda that is updated twice Its per year. schedule necessary, where and discussion substantive requiring issues and meetings joint-presence six includes additional meetings are held either by conference for procedural call or, issues, by absentee vote. The Corporate Secretary oversees all preparations for Board and Committee meetings. All of the English, and Russian both in prepared are Committees Board the and Directors of Board the for paperwork and synchronized interpretation is provided at meetings. These efforts allow each director to expresshis own opinion in his preferred language. The General Director and the Corporate Secretary work together The Company takes out Directors & Officers Liability cover. Reflecting the requirements of Russian the law, Board of Directors is elected annually by the GM for a term June 2009, On 18 of one year. the EuroChem GM re-elected all of the members of the Board of Directors for a new term. The Board of Directors appoints the General Director and the members of the Management Board and determines the length of their terms. These executive bodies report directly to the Board of Directors. For more information about the executive team, see Attachment 1 to this report, available online at www.eurochem.ru The Board considers all issues that are referred to it by law and the company Charter. This includes taking key decisions for the manufacturing companies and exercising oversight down through the holding’s vertical management structure. More about the Board’s key decisions in 2009 can be found on page 38. to ensure that papers are prepared in due time for meetings. As a rule, papers are submitted five business meeting. a before days Our governance structure The company’s highest-ranking governance body is the General Shareholders Meeting (GM). The Board of Directors reports directly to the GM. The primary focus of the Board itself is company strategy; it oversees strategy implementation and setting out the company’s investment policy The Board CommitteesThe Board in work oversight Detailed undertakenis areas specific committees. Board’s the by helps delegation this While thorough, is oversight ensure is it that recognises Board the ultimately that Board the full The retains responsibility. back report Committees issues thatto on the Board brought be to need feel they attention or to the Board’s level. the at board decided for each The Regulations on found be can Committee website. our
During the year, a series of meetings were held held were meetings of series a year, the During the help to managers senior unit operating with understanding direct more better, a get committee companies operating our of each at situation the of more need that areas the identify better to and attention. A metrics-based system has helped the regional our at situation the monitor Committee the 2009, November in Starting facilities. reporting process was automated using one 2010, In system. information Group-wide a adjust to be will tasks key Committee’s the of to made changes the of view in strategy HR the conditions changing the and strategies business on regional labour markets. to attention close pays also Committee The to tied is This managers. key for remuneration the and plans individual of implementation the Committee’s The results. operational company’s cycle: a on based planned are activities top and system incentives the example, for management’s targets for the coming year are the as time same the at year the of end the at set budgeting process and after adjustments have target Individual strategies. business to made been February from assessed are results achievement year reporting the following year the in April to result, a As reported. been have results the once to approach systemic a uses Committee the remuneration management that Board the assure incentivisation management and adequate is appropriate. is The Committee has considered social projects that the company is working on the in regions in employees for life of quality the improve to order residents. other region’s the for and factories its of its meets it sure make to keen is EuroChem area. this in commitments the organizes Committee the year, Every exercise. appraisal performance Board’s involves appraisal the for used method The provided answers detailed and survey, a Board for basis the form directors the by on based made decisions and discussion conclusions. the The Committee also assists the Corporate Secretary with issues related to the development practices. governance corporate of
eachfactory. and focused in particular on the HR management management HR the on particular in focused and Overpolicy. several years considerable progress international establishing toward made been has part important an and governance of standards standards these that ensure to is role its of are maintained. In the wake of the economic crisis, considerable employees key retaining to paid was attention workforce, our of core the protecting to also and into taking protection social increasing including the to response Our conditions. crisis the account workforce involved inevitably however, also, crisis committee the and costs, reduce to optimization while plans management’s supported actively also consideringthe people-related risks at The Corporate Governance and and Governance Corporate The CommitteePersonnel Personnel and Governance Corporate The which of all members, three has Committee the 2009, During directors. independent are Committee held eight joint-presence meetings
. Annual Report and Accounts 2009
EUROCHEM EUROCHEM The Board has also been keeping under review the further steps required to prepare the company for With access to raw materials a critical competitive the factor, Board looked to expand its resource base through participation in competitive bidding processes for licenses to develop new deposits. Applications Kazakhstan. in Basin Tau Kara the in deposits phosphorus three for submitted and considered were EuroChem strives to meet at all times the requirements of the National Code of Corporate Conduct (issued by out set requirements the with complies fully and Commission) Market Securities Federal Russian the by company to changes of number a made it year the During listings. securities for exchanges stock Russian regulations and practices to tighten compliance. More information about compliance with the provisions Operating results were constantly reviewed against the backdrop of market prices and demand fluctuations; the Board sought to ensure that the company’sinvestment appetite andexpenditures were in line with meeting its covenant obligations. Alternative options for financing major projects and partnership opportunities were examined for a number of projects. Committee, Audit the from oversight With exchange. stock international an on offering public initial an expectations, investor and regulator with line in being as well as that, ensuring been has management company. listed internationally an for required those are reporting and processes management its of the Code of Corporate Conduct can be found in Attachment 1 to this Annual report, which is available on our website www.eurochem.ru In part this entailed regular review with management of the cost base and measures to be taken to optimise costs both in the short term and medium term. The Board also reviewed in detail the company’s investment portfolio and prioritised the future investment projects taking into account the demands of active projects and the availability of financing. This included a review of projects aimed at providing the company with a strategic advantage in the long-term (such as developing the Gremyachinskoe and Verkhnekamskoe potash deposits), generating increased revenues in the short term (such as producing melamine at Nevinnomysskiy Azot and granulated urea at Novomoskovskiy Azot) or reducing raw material and energy costs. The Board’s focus in 2009 The Board’s focus duringthe yearwas determined to a great extent by its response to the economic crisis as its impact became increasingly felt during the final quarter of 2008. 38 During 2009, the Committee’s primary task was was task primary Committee’s the 2009, During programme. investment capital the of review the Revenue generation from investments in the was production expanding and developing current lowering with along focus of area key production costs. The Strategy Committee company’s the of all in strategies revised reviewed potash. and phosphorus, nitrogen, lines: business and sales logistics, in initiatives Management in considered were production and distribution, particular detail. The Committee has established The StrategyCommittee The members, two has Committee Strategy The held It directors. non-executive are which of both General the with year the during meetings six Committee The attendance. CFOin and Director recommends to the Board the overall strategy business individual for strategies Company, the of joint acquisitions, expenditure, capital lines, ventures and licenses. development post-crisis for foundation strong a long-term and base cost reduced a on based materials raw in particularly positioning, strategic and distribution. Our governance continued governance Our
Corporate governance Corporate governance – – – – – – No No No No No No 39 Yes Yes Yes 5 (1) 5 (1) 5 (1) 2008 Strategy Strategy 153.92 Committee Committee 3,668,328 (14,124,419) 10,456,091 No No No No No Yes Yes Yes
–
– – – – – – – – – – Personnel Corporate Committee 8 (0) 7 (0) 6 (0) 8 (0) 2009 Governance & Corporate Personnel No No No No No Committee Yes Yes Yes Audit Governance & Committee
– – – – – No No No No Yes Yes Yes Yes 5 (3) 6 (3) 6 (3) Audit 6 (3) Committee Independent by the Board) (as determined Annual Report and Accounts 2009 EUROCHEM
5
1.1 2.8 2.8 2.8 2.8 2.5 3.8 Board** on the 5 (8) 6 (9) 6 (9) 5 (9) 6 (9) 6 (9) 6 (9) 6 (9) 6 (9) Board
No of years
Position
Non-executive Director, Board Chairman Company General Director Non-executive Director, Chairman of the Strategy Strategy the of Chairman Committee Non-executive Director Non-executive Director, Chairman of the & Governance Corporate Personnel Committee Non-executive Director, Chairman of the Audit Committee Non-executive Director Non-executive Director*
Appointed in February 2009. As of 31 March 2010. Parentheses indicate the additional number of meetings that were held phone by or absentia. in N. Pilipenko K. Jackson R. Sheath V. Stolin V. C. Adriaenssen G. Cardona D. StrezhnevD. Dividends declared during the year Name 2009 in meetings at Attendance A. Melnichenko * ** Dividends payable at 1 January A. Melnichenko Dividends declared and paid during the years 2008 and 2009 were as follows: RUR ‘000
Dividends per share declared during the year Dividends payable at December 31 Dividends paid during the year
Director composition Board D. StrezhnevD. G. Cardona
C. Adriaenssen V. Stolin V.
R. Sheath
K. Jackson N. Pilipenko
The total remuneration paid to members of the the of members to paid remuneration total The Board the on work their for Directors of Board and Board Committees 2009 in amounted to Dividends recommendations prepares Directors of Board The long the account into taking payments dividend for interests and company the of development term pre-crisis the in profits High shareholders. the of pay to recommendation a in resulted period deteriorating of onset the With dividends. interim company in drop a and conditions economic commitment a with and profits, and revenues to need the and strategy term long the and to Board the programme, investment our support into profits company’s the re-invest to decided the with line in was position This development. understood is and policy dividend company’s and accepted the by shareholders. The history of dividend payments and the company’s Dividend Governance Corporate the in found be can Policy section published on the company’s website. Remuneration remuneration member Board concerning Issues of Meeting General the to referred are Shareholders. The criteria for determining Board procedures payment and remuneration member of compensation and remuneration both for expenses are set out the in Board Member is Remuneration Regulations. Remuneration membership for account to adjusted and fixed and Committees Board in chairmanships and performing the duties of the Chairman of the Board of Directors. expenses Compensated RURthousand. 39,838 amounted to RUR thousand. 1,259
Ensure a competitive remuneration package package remuneration competitive a Ensure the in industry the for average the above (10% same region) Ensure that staff costs rise with line in productivity Maintain a lean and effective structure by empowering and layers management minimising and decision-making with management lower responsibility our people motivated and productive and retain retain and productive and motivated people our in investing by this do We staff. best very the and remuneration fair providing safety, and health key six Our performance. outstanding incentivising objectives for human resources management are: • Increase staff quality • Improve employee productivity • • • Create continuity through succession planning • Our operations have economic and environmental environmental and economic have operations Our impacts on the communities which in they are that ensuring to committed are we and located, these of sustainability the supports EuroChem social corporate its though communities responsibility (CSR) and charity programmes, (HSE) environmental and safety health, management. resources human and performance Performance Environmental involves fertilizers chemical of Production our Since impacts. and risks environmental to worked has EuroChem formed, was company impact our reduce and risks these manage better 42 page on tables The environment. the on demonstrate the results of these ongoing efforts and investments, with continued year on year discharge effluent consumption, energy in declines year a despite 2009, in air the into emissions and production. fertilizer in increase year on 2009 was in achievement important Another Environmental for ISOcertification of receipt Management (ISO 14001:2004), and Quality (ISO head 9001:2008). Management EuroChem’s received Russia in plants its of all officeand 2009. December and November in certification Lifosa, Lithuania, in plant fertilizer phosphate Our 2003in certifications of set same the received 2007. and resourcesmanagement Human In with line our values, we pursue a fair employment This philosophy. helps us to keep
in Russia) Nevinnomysskiy Azot: Best social Stavropol in employees for protection territory OHSAS 18001:2007 professional Best corporate charity programme in in programme charity corporate Best among 8th sector, chemicals Russian all Russian companies responsibility social corporate Best programme in Russian chemicals sector 2008 annual report named best in Russian industrial sector S&Pgovernance 6+GAMMA corporate score (3rd among rated companies health and safety certification at all of our plants Lost time injury rate among lowest in Russia and globally Resources Natural of Minister Russian EuroChem’s recognizes Ecology and best as programme environmental in Russia (2008) ISO 14001:2004 environmental all at certification management of our plants Annual Report and Accounts 2009
EUROCHEM EUROCHEM The environment The Our employees Transparency and and Transparency CorporateGovernance Our communitiesOur
40 Our responsibilities
Corporate governance Corporate governance
41
and our in CSR Report. Our support for schools and We sponsor We a wide array of sporting Education: universities the in regions where we operate includes funding to or build renovate school and university chemistry labs, materials and equipment for ongoing lessons these in labs, select at conferences scientific sponsoring and universities; regional and employees our for competitions and events is focus particular a with communities, local the and youth both supports EuroChem hockey. on number a through clubs hockey professional and equipment providing including methods, of and financial other and time, ice uniforms, of needs the on depending support material the club; and Corporate giving and grants:2006 Since Sustainable for Fund the with partnered have we (FSD), Development independent, an fund Russian non-profit and nongovernmental community and regional promote to created sustainable development through concrete and social environmental, addressing projects Federation. Russian the across issues economic United the and EuroChem from support With States Agency for International Development, in programme grant a FSDorganized and environmental support to Nevinnomyssk Further city. the in programmes health public information about this programme is available on FSD’s website http://www.fund-sd.ru/english/ eurochem/index.htm Annual Report and Accounts 2009 EUROCHEM Corporate Social Responsibility Social Corporate implementWe one of the leading corporate social responsibility programmes the in Russian second the for recognized fact a sector, chemicals Charity Corporate Russian the in row a in year Vedomosti, by 2008 survey Research Forum. Donors’ and PricewaterhouseCoopers, following the on focuses CSR programme Our three areas: • • S p o r t : • CSR in Report annual an publishes EuroChem G3, Initiative Reporting Global the with accordance AA1000 APS and Global Compact standards. social our of publication following year Every report, we hold public discussions about our CSR report andCSR programmes the in communities where we operate. The latest report is available Russianin and English on our website www.eurochem.ru.
Occupational health and safety and health Occupational best-in-class achieve to aims EuroChem occupational health and safety standards. We compliance a as just not management safety view social our of component priority top a as but issue, responsibility and human resources strategy. managing in achievement our of recognition As received Russia in plants our of all OHSAS issues, (OHSAS Safety and Health ISOOccupational 18001:2007) certificationin 2009. our at incidents of number efforts the our to Due into investments to due declined, steadily has sites mandatory facilities, production of maintenance training for technical personnel, implementation of the Industrial Control System and improvement fatal no had We System. HSE Management our of this maintain to is aim our 2009 and in accidents situation.Injuries resulting absence in from work in in 37 2008 and in 32 from down 26, to 2009fell This further2007. improved our Lost Time Injury per work from absence in resulting (injuries Rate is LTIR EuroChem’s 0.96. to worked) hours million surveys on based average, industry the below well the by provided regularly performance safety of International Fertilizers Industry Association (IFA).
a significant share of variable remuneration remuneration variable of share significant a depending on personal and company 2008, in 32% 2007, (37% in performance 2009: 20%) middle and top for programme bonus A Management the on based is This management. By Objective system of performance appraisal based employees other for bonus annual An results corporate on An employee benefit plan, which contains contains which plan, benefit employee An • • • place in been has scheme remuneration new This sites production our of all staffat production for since 2008. Staffmotivation function to designed is system staffmotivation Our improving to approach holistic a of part as non-financial and financial through efficiency aspects: three has system This incentives. • As technology has advanced we have steadily steadily have we advanced has technology As plants, our at staffnumbers optimise to able been staff management/production a maintaining while 17%/83%.same the At approximately of ratio stafftime, turnover at production sites has year a 5.7% from 2009, in 2.6% to declined monthly Average 2007. in 7.3% and earlier, though 2009, in rise to continued remuneration While years. previous in than lower rate a at to continued employee per output production due year on year fell employee per sales increase, 2008-2009, in fluctuations price extreme the to though were at a higher level than 2007.
3.7 2.6 1.17 -2.3 18.1 2009 2009 2009 2009 2009 2009 2009 2009 2009 2009 2009 2009 2009 87.5 27.8 0.93 (52.3) 62.78 789.8 101.5 16.8% 29,790 2100.1 7,424.0 1,980.0 4 9,404.0 9,404.0 8,666.5
1.25 2008 5.7 5.2
32.1 1.07 24.2 2008 2008 2008 2008 2008 2008 2008 2008 2008 2008 2008 2008 28.4 88.2 109.0 17.1% 246.2 966.9 335.2 3261.5 25 220 3.1 9,047.3 6,547.5 3,081.2 9,628.7 9,628.7 9,628.7 1.25 1.69 1.69 2007 – 7.3 3.1 41.8 1.42 29.1 1.01 1.81 10.6 2007 2007 2007 2007 2007 2007 2007 2007 2007 2007 2007 2007 26.7 2006 607.4 120.8 106.5 16.8% 3541.3 20 305 7,330.0 4,591.6 7,288.2 7,288.2 7,288.2 2,696.6
1.61 1.94 2005 –
44.1 31.3 31.2 15.3 10.2 2006 2006 2006 2006 2006 2006 2006 2006 2006 2006 2006 2006 0.97 2.02 125.1 5 163.8 584.7 16.8% 16 025 16 3895.6 6,588.1 6,588.1 6,588.1 4,084.6 6,544.0 2,503.5 2.13 1.40 2004 continued
1.79 2005 2005 2005 2005 2005 2003 2.44 6.98 33.9 181.3 120.9 534.2 4036.5
1.75
2002 2.81 4.35
2004 2004 2004 2004 2004 33.6 181.1 120.6 343.5 3914.3 1.76 2001 4.35
Annual Report and Accounts 2009
3 3 EUROCHEM EUROCHEM
Capitalised in all captions Includedcaptions labour in costsall in of statement of comprehensive income
Included other in (income)/expenses Lost time injury rate (injuries per hours million worked*) Growth rate % EuroChem 42 Total staffTotal costs RUR m * As per IFA methodology 1600 working hours per person per year were used. IFA consumption m kWh Energy consumption expenditures Effluent discharge m m Non-recyclewater KMT p.a. Emissions into air m m Fixed RUB m Environmentalprotection Russia Variable Sales per employee RUR m staffTotal costs RUR m Management/total staff ratio Average monthly remuneration remuneration monthly Average per employee RUR/month Production output per employee ‘000 tonnes Staff turnover at production units % Our responsibilities Growth ratio %
Corporate governance EuroChem Group International Financial Reporting Standards Consolidated Financial Statements and Independent Auditor’s Report 31 December 2009
Contents Page Independent auditor’s report 44 Consolidated statement of financial position as at 31 December 2009 45 Consolidated statement of comprehensive income for the year ended 31 December 2009 46 Consolidated statement of cash flows for the year ended 31 December 2009 47 Consolidated statement of changes in equity for the year ended 31 December 2009 48
Notes to the consolidated financial statements 1 The EuroChem Group and its operations 49 2 Basis of presentation and significant accounting policies 49 3 Critical accounting estimates and judgements in applying accounting policies 55 4 Adoption of new or revised standards and interpretations 55 5 Statement of cash flows 57 6 Segment information 58 7 Property, plant and equipment 60 8 Goodwill 62 9 Intangible assets 63 10 Available-for-sale investments 63 11 Exploration rights 64 12 Originated loans 64 13 Inventories 65 14 Trade receivables, prepayments, other receivables and other current assets 65 15 Cash and cash equivalents 66 16 Trading investments 67 17 Equity 67 18 Bank borrowings 67 19 Bonds issued 69 20 Trade payables, other accounts payable and accrued expenses 69 21 Sales 70 22 Cost of sales 70 23 Distribution costs 71 24 General and administrative expenses 71 25 Other operating income and expenses 71 26 Income tax 72 27 Earnings per share 73 28 Balances and transactions with related parties 73 29 Non-current assets held for sale 74 30 Contingencies, commitments and operating risks 75 31 Financial and capital risk management 76 32 Fair value of financial instruments 81 33 Subsequent events 81
Annual Report and Accounts 2009 EUROCHEM 43 ZAO PricewaterhouseCoopers Audit White Square Office Center 10 Butyrsky Val Moscow, Russia, 125047 Telephone +7 (495) 967 6000 Fax +7 (495) 967 6001 www.pwc.ru Independent auditor’s report
To the Shareholders and Board of Directors of EuroChem Group
1 We have audited the accompanying consolidated financial statements of open joint stock company Mineral Chemical Company “EuroChem” (the “Company”) and its subsidiaries (the “Group”) which comprise the consolidated statement of financial position as at 31 December 2009 and the consolidated statement of comprehensive income, consolidated statement of cash flows and consolidated statement of changes in equity for the year then ended and a summary of significant accounting policies and other explanatory notes.
Management’s responsibility for the Financial Statements 2 Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with International Financial Reporting Standards. This responsibility includes: designing, implementing and maintaining internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error; selecting and applying appropriate accounting policies; and making accounting estimates that are reasonable in the circumstances.
Auditor’s responsibility 3 Our responsibility is to express an opinion on these consolidated financial statements based on our audit. We conducted our audit in accordance with International Standards on Auditing. Those Standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance whether the financial statements are free from material misstatement.
4 An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor’s judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity’s preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the financial statements.
5 We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.
Opinion 6 In our opinion, the accompanying consolidated financial statements present fairly, in all material respects, the financial position of the Group as of 31 December 2009, and its financial performance and its cash flows for the year then ended in accordance with International Financial Reporting Standards. Financial statements
Moscow, Russian Federation 19 March 2009
44 EUROCHEM Annual Report and Accounts 2009 Consolidated statement of financial position as at 31 December 2009 (all amounts are presented in thousands of Russian Roubles, unless otherwise stated)
31 December 31 December Note 2009 2008 ASSETS Non-current assets Property, plant and equipment 7 56,382,417 41,197,799 Exploration rights 11 7,271,496 7,163,276 Goodwill 8 204,866 204,866 Intangible assets 9 427,457 537,568 Restricted cash 15 179,115 30,053 Available-for-sale investments 10 33,619,657 13,899,438 Other non-current assets 29 247,893 – Deferred tax assets 26 1,328,848 1,380,972 Total non-current assets 99,661,749 64,413,972 Current assets Inventories 13 8,105,067 11,182,594 Trade receivables 14 2,151,240 3,184,371 Prepayments, other receivables and other current assets 14 7,630,102 10,612,755 Originated loans 12, 28 – 5,729,178 Trading investments 16 – 172,271 Restricted cash 15 551,086 481,912 Cash and cash equivalents 15 10,676,772 26,225,350 Total current assets 29,114,267 57,588,431 Assets of disposal group classified as held for sale – 273,071 TOTAL ASSETS 128,776,016 122,275,474 LIABILITIES AND EQUITY Equity Capital and reserves attributable to owners of the parent Share capital 17 6,800,000 6,800,000 Treasury shares 17 (7,760) ( 7,760 ) Retained earnings and other reserves 65,644,137 53,434,538 72,436,377 60,226,778 Non-controlling interests 758,683 809,874 Total equity 73,195,060 61,036,652 Non-current liabilities Bank borrowings 18 26,556,324 34,418,679 Financial statements Bonds issued 19 8,724,895 8,453,611 Other non-trade payables 430,393 305,101 Deferred income tax liabilities 26 1,972,782 1,842,981 Total non-current liabilities 37,684,394 45,020,372 Current liabilities Bank borrowings 18 12,491,434 9,093,277 Trade payables 20 1,373,488 1,793,635 Other accounts payable and accrued expenses 20 3,574,522 3,960,747 Income tax payable 108,465 720,690 Other taxes payable 348,653 618,990 Total current liabilities 17,896,562 16,187,339 Liabilities of disposal group classified as held for sale – 31,111 Total liabilities 55,580,956 61,238,822 TOTAL LIABILITIES AND EQUITY 128,776,016 122,275,474
Approved on behalf of the Board of Directors on 19 March 2010
D.S. Strezhnev A.A. Ilyin Chief Executive Officer Chief Financial Officer
The accompanying notes on pages 49 to 81 are an integral part of these consolidated financial statements.
Annual Report and Accounts 2009 EUROCHEM 45 Consolidated statement of comprehensive income for the year ended 31 December 2009 (all amounts are presented in thousands of Russian Roubles, unless otherwise stated)
Note 2009 2008 Sales 21 73,577,249 112,173,573 Cost of sales 22 (41,439,799) (44,466,467)
Gross profit 32,137,450 67,707,106
Distribution costs 23 (18,388,692) (23,282,491) General and administrative expenses 24 (3,261,398) (3,208,718) Other operating income/(expenses) 25 225,029 (325,410)
Operating profit 10,712,389 40,890,487
Dividend income 10 2,168,715 – Gain on disposal of non-current assets held for sale 29 358,878 310,493 Fair value gain/(loss) on trading investments 16 139,584 (395,160 ) Gain on disposal of available-for-sale investments 10 966,640 209,723 Financial foreign exchange gain/(loss) – net 748,903 (3,765,712) Interest income 399,724 653,967 Interest expense (1,983,587) (1,258,828) Other financial income 193,458 135,141
Profit before taxation 13,704,704 36,780,111
Income tax expense 26 (2,629,256) (8,891,388)
Net profit for the period 11,075,448 27,888,723
Other comprehensive income/(loss)
Currency translation differences, net of tax 364,188 1,390,347 Revaluation of available-for-sale investments 10 1,689,667 4,560,747 Disposal of available-for-sale investments – reclassification of revaluation to profit and loss 10 (966,640) (209,723) Financial statements Total other comprehensive income/(loss) for the period 1,087,215 5,741,371
Total comprehensive income for the period 12,162,663 33,630,094
Net profit for the period attributable to Owners of the parent 11,111,048 27,385,406 Non-controlling interests (35,600) 503,317 11,075,448 27,888,723
Total comprehensive income/(loss) attributable to Owners of the parent 12,189,656 33,042,804 Non-controlling interests (26,993) 587,290 12,162,663 33,630,094
Earnings per share – basic and diluted (in RR) 27 163.56 403.13
The accompanying notes on pages 49 to 81 are an integral part of these consolidated financial statements.
46 EUROCHEM Annual Report and Accounts 2009 Consolidated statement of cash flows for the year ended 31 December 2009 (all amounts are presented in thousands of Russian Roubles, unless otherwise stated)
Note 2009 2008 Operating profit 10,712,389 40,890,487 Income tax paid (1,767,696) (9,726,888) Operating profit less income tax paid 8,944,693 31,163,599 Depreciation and amortisation 24 2,976,353 2,942,655 Net loss on disposals and write-off of property, plant and equipment 262,098 393,009 Impairment of receivables and provision for obsolete and damaged inventories 192,265 (566,964) Other non-cash (income)/expenses 540,363 (367,356) Gross cash flow 5 12,915,772 33,564,943 Changes in operating assets and liabilities: Trade receivables 896,167 574,167 Advances to suppliers 20,612 (434,039) Other receivables 2,023,335 (2,544,418) Inventories 2,969,179 (5,447,656) Trade payables (251,884) 634,897 Advances from customers 735,336 (375,165) Other payables (1,280,751) 898,097 Other assets and liabilities (489,073) (115,360) Net cash – operating activities 17,538,693 26,755,466 Cash flows from investing activities Capital expenditure on property, plant and equipment and other intangible assets (18,593,560) (14,730,809) Purchase of exploration rights 11 (108,220) (4,087,166 ) Acquisition of interest in subsidiaries (4,255) (2,488,678) Acquisition of subsidiary, net of cash acquired (149,913) (416,862) Acquisition of available-for-sale investment 10 (25,405,127) (10,101,141) Proceeds from sale of property, plant and equipment 78,937 45,410 Proceeds from disposal of non-current assets held for sale 68,069 – Prepayment for non-current assets held for sale – 37,500 Proceeds from disposal of trading investments 16 311,855 – Proceeds from sale of available-for-sale investment 10 7,374,575 783,501 Proceeds from sale of derivatives 193,458 – Dividends received net of tax 2,060,279 – Financial statements Repayment of originated loans 12 6,568,110 – Originated loans 12 – (5,118,848) Interest received 560,572 533,896 Net cash – investing activities (27,045,220) (35,543,197) Free cash outflow 5 (9,506,527) (8,787,731) Cash flows from financing activities Proceeds from bank borrowings 18 9,843,054 47,399,732 Repayment of bank borrowings 18 (15,800,009) (13,995,282) Syndication fees paid (140,343) (1,106,969) Interest paid (1,778,824) – Repayment of bonds buyback – (142,439) Dividends paid 17 – (14,124,419) Net cash – financing activities (7,876,122) 18,030,623 Effect of exchange rate changes on cash and cash equivalents 1,834,071 1,913,968 Net increase/(decrease) in cash and cash equivalents (15,548,578) 11,156,860 Cash and cash equivalents at the beginning of the period 15 26,225,350 15,068,490 Cash and cash equivalents at the end of the period 15 10,676,772 26,225,350
The accompanying notes on pages 49 to 81 are an integral part of these consolidated financial statements.
Annual Report and Accounts 2009 EUROCHEM 47 Consolidated statement of changes in equity for the year ended 31 December 2009 (all amounts are presented in thousands of Russian Roubles, unless otherwise stated)
Attributable to owners of the parent Cumulative Revaluation of currency investments Non- Share Treasury translation available- Retained controlling Total capital shares differences for-sale earnings Total interests equity Balance at 1 January 2008 6,800,000 (7,760) 222,806 20,966 30,996,691 38,032,703 2,067,192 40,099,895 Comprehensive income Profit for the period – – – – 27,385,406 27,385,406 503,317 27,888,723
Other comprehensive income Currency translation differences – – 1,306,374 – – 1,306,374 83,973 1,390,347 Revaluation of investments available-for-sale – – – 4,560,747 – 4,560,747 – 4,560,747 Disposal of investments available-for-sale – – – (209,723) – (209,723) – (209,723) Total other comprehensive income – – 1,306,374 4,351,024 – 5,657,398 83,973 5,741,371 Total comprehensive income – – 1,306,374 4,351,024 27,385,406 33,042,804 587,290 33,630,094 Transactions with owners Dividends – – – – (10,456,091) (10,456,091) – (10,456,091) Acquisitions of subsidiaries – – – – – – 251,432 251,432 Acquisitions of additional interest in subsidiaries – – – – (392,638) (392,638) (2,096,040) (2,488,678) Total transactions with owners – – – – (10,848,729) (10,848,729) (1,844,608) (12,693,337) Balance at 31 December 2008 6,800,000 (7,760) 1,529,180 4,371,990 47,533,368 60,226,778 809,874 61,036,652
Balance at 1 January 2009 6,800,000 (7,760) 1,529,180 4,371,990 47,533,368 60,226,778 809,874 61,036,652 Comprehensive income Profit for the period – – – – 11,111,048 11,111,048 (35,600) 11,075,448
Other comprehensive income Currency translation differences – – 355,581 – – 355,581 8,607 364,188 Revaluation of investments available-for-sale – – – 1,689,667 – 1,689,667 – 1,689,667 Disposal of investments available-for-sale – – – (966,640) – (966,640) – (966,640) Total other comprehensive income – – 355,581 723,027 – 1,078,608 8,607 1,087,215 Total comprehensive income – – 355,581 723,027 11,111,048 12,189,656 (26,993) 12,162,663
Financial statements Transactions with owners Acquisitions of additional interest in subsidiaries – – – – 19,943 19,943 (24,198) (4,255) Total transactions with owners – – – – 19,943 19,943 (24,198) (4,255) Balance at 31 December 2009 6,800,000 (7,760) 1,884,761 5,095,017 58,664,359 72,436,377 758,683 73,195,060
The accompanying notes on pages 49 to 81 are an integral part of these consolidated financial statements.
48 EUROCHEM Annual Report and Accounts 2009 Notes to the consolidated financial statements for the year ended 31 December 2009 (all amounts are presented in thousands of Russian Roubles, unless otherwise stated)
1 The EuroChem Group and its operations EuroChem Group comprises the parent entity, Open Joint Stock Company Mineral Chemical Company “EuroChem” (the “Company”), and its subsidiaries (collectively the “Group” or “EuroChem Group”).
The Group’s principal activities include extracting minerals (iron ore, apatite and baddeleyite), producing fertilizers and their distribution in domestic and foreign markets. The Group manufactures a large number of products, the most significant of which is a wide range of mineral fertilizers (nitrogen and phosphate group).
A company that holds the business interests of Mr. Andrey Melnichenko owns 100% of Linea Limited registered in Bermuda, which in turn owns 95% of MCC Holding Public Company Limited (Cyprus). The remaining 5% is held by Mr. Dmitry Strezhnev, CEO of the Group. MCC Holding Public Company Limited (Cyprus) owns 99.9% of EuroChem.
The Group’s manufacturing facilities are primarily based in the Russian Federation with the exception of one entity, Lifosa AB, located in Lithuania.
The company was incorporated and domiciled in the Russian Federation on 27 August 2001 as a closed joint stock company. On 3 April 2006 the company changed its legal form to an open joint stock company. The Company has its registered office at:
Dubininskaya St. 53, bld. 6 Moscow, Russian Federation 2 Basis of presentation and significant accounting policies Basis of presentation. These consolidated financial statements have been prepared in accordance with International Financial Reporting Standards (“IFRS”) under the historical cost convention, as modified by available-for-sale and trading investments, which are accounted for at fair value. The principal accounting policies applied in the preparation of these consolidated financial statements are set out below. These policies have been consistently applied to all periods presented, unless otherwise stated (Note 4).
The company and its subsidiaries, registered on the territory of the Russian Federation, maintain their accounting records in Russian Roubles (“RR”) and prepare their statutory financial statements in accordance with the Federal Law on Accounting and Regulations on Accounting and Reporting adopted by the decree of the Ministry of Finance of the Russian Federation dated 29 July 1998. These consolidated financial statements are based on the statutory records, with adjustments and reclassifications recorded for the purpose of fair presentation in accordance with IFRS.
Functional currency. The functional currency for the Group’s subsidiaries located in Russia is the national currency of the Russian Federation, the Russian Rouble (“RR”). The Group has a subsidiary located in Lithuania, where the functional currency is the Lithuanian Lita, which is the currency of measurement in Lifosa AB’s financial statements. These have been translated into Russian Roubles, the presentation currency, at the applicable exchange rates as required by IAS 21 “The Effects of Changes in Foreign Exchange Rates” (“IAS 21”) for inclusion in these consolidated financial statements. Financial statements Translation from functional to presentation currency. These consolidated financial statements have been presented in Russian Roubles (“RR”), which management believes is the most useful currency to adopt for users of these consolidated financial statements. The results and financial position of each Group entity are translated into the presentation currency using the official exchange rate of the Central Bank of the Russian Federation (hereinafter “CBRF”) as follows:
(i) assets and liabilities for each balance sheet presented are translated at the closing rate at the date of that balance sheet; (ii) income and expenses for the statement of comprehensive income are translated at average exchange rates (unless this average is not a reasonable approximation of the cumulative effect of the rates prevailing on the transaction dates, in which case income and expenses are translated at the dates of the transactions); and (iii) all resulting exchange differences are recognised as currency translation differences in other comprehensive income.
Foreign currency translation. The functional currency of each of the Group’s consolidated entities is the currency of the primary economic environment in which the entity operates. Monetary assets and liabilities are translated into each entity’s functional currency at the official exchange rate of the CBRF at the respective balance sheet dates. Foreign exchange gains and losses resulting from the settlement of the transactions and from the translation of monetary assets and liabilities into each entity’s functional currency at year-end official exchange rates of the CBRF are recognised in profit and loss.
Translation differences on non-monetary financial assets and liabilities such as equities held at fair value through profit and loss are recognised in profit and loss as part of the fair value gain or loss. Translation differences on non-monetary financial assets such as equities classified as available-for-sale are recognised in other comprehensive income.
Annual Report and Accounts 2009 EUROCHEM 49 Notes to the consolidated financial statements continued for the year ended 31 December 2009 (all amounts are presented in thousands of Russian Roubles, unless otherwise stated)
2 Basis of presentation and significant accounting policies continued Foreign exchange gains and losses that relate to borrowings and deposits are presented in the statement of comprehensive income in a separate line “Financial foreign exchange gain/(loss) – net”. All other foreign exchange gains and losses are presented in the statement of comprehensive income within other operating income/(expenses).
Goodwill and fair value adjustments arising on the acquisition of a foreign entity are treated as assets and liabilities of the foreign entity and translated at the closing rate. When a subsidiary is disposed of through sale, liquidation, repayment of share capital or abandonment of all, or part of, that entity, the exchange differences recognised in other comprehensive income and accumulated in the separate component of equity are reclassified to profit and loss. In addition to RR, the Group enters into transactions in other currencies, such as the United States Dollar (“US$”) and the Euro.
Consolidated financial statements. Subsidiaries are those companies and other entities (including special purpose entities) in which the Group, directly or indirectly, has an interest of more than one-half of the voting rights or otherwise governs the financial and operating policies so as to obtain economic benefits. The existence and effect of potential voting rights that are presently exercisable or presently convertible are considered when assessing whether the Group controls another entity. Subsidiaries are consolidated from the date on which control is transferred to the Group (acquisition date) and are de-consolidated from the date that control ceases.
The purchase method of accounting is used to account for the acquisition of subsidiaries. The cost of an acquisition is measured at the fair value of the assets given up, equity instruments issued and liabilities incurred or assumed at the date of exchange, plus costs directly attributable to the acquisition. The date of exchange is the acquisition date where a business combination is achieved in a single transaction, and is the date of each share purchase where a business combination is achieved in stages by successive share purchases.
The excess of the cost of acquisition over the fair value of the net identifiable assets of the acquiree at each exchange transaction represents goodwill. The excess of the acquirer’s interest in the net fair value of the identifiable assets, liabilities and contingent liabilities acquired over cost (”negative goodwill”) is recognised immediately in profit and loss.
Identifiable assets acquired and liabilities and contingent liabilities assumed in a business combination are measured at their fair values at the acquisition date, irrespective of the extent of any non-controlling interest.
Intercompany transactions, balances and unrealised gains on transactions between Group companies are eliminated; unrealised losses are also eliminated unless the cost cannot be recovered. The company and all of its subsidiaries use uniform accounting policies consistent with the Group’s policies.
Non-controlling interest is that part of the net results and of the net assets of a subsidiary, including the fair value adjustments, which is attributable to interests which are not owned, directly or indirectly, by the company. Non-controlling interest forms a separate component of the Group’s equity.
Purchases of subsidiaries from parties under common control. Purchases of subsidiaries from parties under common control are accounted for using the pooling of interest method. Under this method the financial statements of the combined entity are presented as if the businesses had been Financial statements combined from the beginning of the earliest period presented. The assets and liabilities of the subsidiary transferred under common control are at the predecessor entity’s carrying amounts. Related goodwill inherent in the predecessor entity’s original acquisitions is also recorded in these financial statements. Any difference between the carrying amount of net assets, including the predecessor entity’s goodwill, and the consideration paid is accounted for in these consolidated financial statements as an adjustment to equity.
Purchases of non-controlling interests. The difference, if any, between the carrying amount of a non-controlling interest and the amount paid to acquire it is recorded in equity.
Property, plant and equipment. Property, plant and equipment are stated at cost, restated to the equivalent purchasing power of the Russian Rouble at 31 December 2002 for assets acquired prior to 1 January 2003, less accumulated depreciation and a provision for impairment, where required.
At each reporting date management assesses whether there is any indication of impairment of property, plant and equipment. If any such indication exists, management estimates the recoverable amount, which is determined as the higher of an asset’s fair value less costs to sell and its value in use. The carrying amount is reduced to the recoverable amount and the impairment loss is recognised in the profit and loss. An impairment loss recognised for an asset in prior years is reversed if there has been a change in the estimates used to determine the asset’s value in use or fair value less costs to sell.
Minor repair and maintenance costs are expensed when incurred. The cost of replacing major parts or components of property, plant and equipment items is capitalised and the replaced part is retired.
Gains and losses on disposals determined by comparing proceeds with carrying amount are recognised in the profit and loss.
50 EUROCHEM Annual Report and Accounts 2009 2 Basis of presentation and significant accounting policies continued Depreciation. Depreciation of property, plant and equipment is calculated using the straight-line method to allocate their cost to their residual values over their estimated useful lives: Useful lives in years Buildings and land improvements 15 to 80 Transfer devices 25 to 30 Machinery and equipment 6 to 30 Transport 5 to 25 Other items 3 to 8
The residual value of an asset is the estimated amount that the Group would currently obtain from disposing of the asset less the estimated costs of disposal, if the asset were already of the age and in the condition expected at the end of its useful life. The residual value of an asset is nil if the Group expects to use the asset until the end of its physical life. The assets’ residual values and useful lives are reviewed, and adjusted if appropriate, at each balance sheet date.
Remaining useful life of property, plant and equipment. Management assesses the remaining useful life of property, plant and equipment in accordance with the current technical conditions of assets and estimated period during which these assets will bring economic benefit to the Group.
Operating leases. Where the Group is a lessee in a lease which does not transfer substantially all the risks and rewards incidental to ownership from the lessor to the Group, the total lease payments are charged to profit and loss on a straight-line basis over the period of the lease.
When assets are leased out under an operating lease, the lease payments receivable are recognised as rental income on a straight-line basis over the lease term.
Goodwill. Goodwill represents the excess of the cost of an acquisition over the fair value of the acquirer’s share of the net identifiable assets, liabilities and contingent liabilities of the acquired subsidiary or associate at the date of exchange. Goodwill on acquisitions of subsidiaries is presented separately in the consolidated statement of financial position. Goodwill is carried at cost less accumulated impairment losses, if any. The Group tests goodwill for impairment at least annually and whenever there are indications that goodwill may be impaired. Goodwill is allocated to the acquirer’s cash-generating units, or groups of cash-generating units, that are expected to benefit from the synergies of the business combination.
Such units or group of units represent the lowest level at which the Group monitors goodwill and are not larger than an operating segment. Gains or losses on disposal of an operation within a cash-generating unit to which goodwill has been allocated include the carrying amount of goodwill associated with the operation disposed of, generally measured on the basis of the relative values of the operation disposed of and the portion of the cash-generating unit which is retained. Goodwill on acquisitions of associates is included in the investment in associates.
Other intangible assets. The Group’s other intangible assets have definite and indefinite useful lives and primarily include acquired land lease agreements
and capitalized computer software costs. Financial statements
Acquired computer software licenses, beneficial land and equipment lease agreements are capitalised on the basis of the costs incurred to acquire and bring them to use.
Intangible assets with definite useful lives are amortised using the straight-line method over their useful lives: Useful lives in years Land lease agreement 45 Equipment lease agreement 5 Software licences 5
Intangible assets with an indefinite useful life are not amortised. The Group tests such intangible assets for impairment at least annually and whenever there are indications that intangible assets may be impaired.
If impaired, the carrying amount of intangible assets is written down to the higher of value in use and fair value less cost to sell.
Annual Report and Accounts 2009 EUROCHEM 51 Notes to the consolidated financial statements continued for the year ended 31 December 2009 (all amounts are presented in thousands of Russian Roubles, unless otherwise stated)
2 Basis of presentation and significant accounting policies continued Exploration assets. Expenditures incurred in exploration activities (acquisition of rights to explore; topographical, geological, geochemical and geophysical studies; exploratory drilling; trenching; sampling; and activities in relation to evaluating the technical feasibility and commercial viability of extracting a mineral resource) are expensed unless they meet the definition of an asset. The Group recognises an asset when it is probable that economic benefits will flow to the Group as a result of the expenditure. In accordance with IFRS 6, Exploration for and Evaluation of Mineral Resources, exploration assets are measured applying the cost model described in IAS 16, Property, plant and equipment after initial recognition. Depreciation and amortisation are not calculated for exploration assets because the economic benefits that the assets represent are not consumed until the production phase. Exploration assets are tested for impairment when there are facts and circumstances that suggest that the carrying value of the asset may not be recoverable.
Classification of financial assets. The Group classifies its financial assets into the following measurement categories: (a) loans and receivables; (b) available-for-sale financial assets; (c) financial assets held to maturity and (d) financial assets at fair value through profit and loss. Financial assets at fair value through profit and loss have two subcategories: (i) assets designated as such upon initial recognition, and (ii) those classified as held for trading.
Financial assets held for trading are classified in this category if acquired principally for the purpose of selling in the short term. Trading investments are not reclassified out of this category even when the Group’s intentions subsequently change.
Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. They are included in the current assets, except for those with maturities greater than 12 months after the balance sheet date, which are classified as non-current assets.
“Held-to-maturity” classification includes quoted non-derivative financial assets with fixed or determinable payments and fixed maturities that the Group has both the intention and ability to hold to maturity. Management determines the classification of investment securities held to maturity at their initial recognition and reassesses the appropriateness of that classification at each balance sheet date. At 31 December 2009 and 2008 the Group did not have “held-to- maturity” investments.
All other financial assets are included in the available-for-sale category.
Initial recognition of financial instruments. Trading investments and derivatives are initially recorded at their fair value. All other financial assets and liabilities are initially recorded at their fair value plus transaction costs. Fair value at initial recognition is best evidenced by the transaction price. A gain or loss on initial recognition is only recorded if there is a difference between fair value and the transaction price which can be evidenced by other observable current market transactions in the same instrument or by a valuation technique whose inputs include only data from observable markets.
All purchases and sales of financial assets that require delivery within the time frame established by regulation or market convention (“regular way” purchases and sales) are recorded at their trade date, which is the date that the Group commits to deliver a financial asset. All other purchases are recognised when the entity becomes a party to the contractual provisions of the instrument.
Derecognition of financial assets. The Group derecognises financial assets when (i) the assets are redeemed or the rights to cash flows from the Financial statements assets have otherwise expired or (ii) the Group has transferred substantially all the risks and rewards of ownership of the assets or (iii) the Group has neither transferred nor retained substantially all risks and rewards of ownership but has not retained control. Control is retained if the counterparty does not have the practical ability to sell the asset in its entirety to an unrelated third party without needing to impose additional restrictions on the sale.
Available-for-sale investments. Available-for-sale investments are carried at fair value. Interest income on available-for-sale debt securities is calculated using the effective interest method and recognised in profit and loss. Dividends on available-for-sale equity instruments are recognised in profit and loss when the Group’s right to receive payment is established. All other elements of changes in the fair value are recognised in other comprehensive income and accumulated in equity until the investment is derecognised or impaired at which time the cumulative gain or loss is reclassified from equity to profit and loss.
Impairment losses are recognised in profit and loss when incurred as a result of one or more events (“loss events”) that occurred after the initial recognition of available-for-sale investments. A significant or prolonged decline in the fair value of an equity security below its cost is an indicator that it is impaired. The cumulative impairment loss – measured as the difference between the acquisition cost and the current fair value, less any impairment loss on that asset previously recognised in other comprehensive income – is reclassed from equity and recognised in profit and loss. Impairment losses on equity instruments are not reversed through profit and loss. If, in a subsequent period, the fair value of a debt instrument classified as available-for-sale increases and the increase can be objectively related to an event occurring after the impairment loss was recognised in profit and loss, the impairment loss is reversed through the current period’s profit and loss.
52 EUROCHEM Annual Report and Accounts 2009 2 Basis of presentation and significant accounting policies continued Income taxes. Income taxes have been provided for in the consolidated financial statements in accordance with tax legislation enacted or substantively enacted by the balance sheet date for each country where the Group subsidiaries are registered. The income tax charge comprises current tax and deferred tax and is recognised in the profit and loss unless it relates to transactions that are recognised, in the same or a different period, in other comprehensive income or directly in equity. The most significant Group subsidiaries are registered in Russia, where the corporate profit tax rate can range from 15.5% to 20%, depending on applicable rates set by regional authorities (2008: 24%).
Current tax is the amount expected to be paid to or recovered from the taxation authorities in respect of taxable profits or losses for the current and prior periods. Taxes, other than on income, are recorded within operating expenses.
Deferred income tax is provided using the balance sheet liability method for tax loss carry forwards and temporary differences arising between the tax bases of assets and liabilities and their carrying amounts for financial reporting purposes. In accordance with the initial recognition exemption, deferred taxes are not recorded for temporary differences on initial recognition of an asset or a liability in a transaction other than a business combination if the transaction, when initially recorded, affects neither accounting nor taxable profit. Deferred tax liabilities are not recorded for temporary differences on initial recognition of goodwill and subsequently for goodwill which is not deductible for tax purposes. Deferred tax balances are measured at tax rates enacted or substantively enacted at the balance sheet date which are expected to apply to the period when the temporary differences will reverse or the tax loss carry forwards will be utilised. Deferred tax assets and liabilities are netted only within the individual companies of the Group. Deferred tax assets for deductible temporary differences and tax loss carry forwards are recorded only to the extent that it is probable that future taxable profit will be available against which the deductions can be utilised.
Deferred income tax is provided on post-acquisition retained earnings of subsidiaries, except where the Group controls the subsidiary’s dividend policy and it is probable that the difference will not be reversed through dividends or otherwise in the foreseeable future.
Inventories. Inventories are recorded at the lower of cost and net realisable value. The cost of inventory is determined on the weighted average basis. The cost of finished goods and work in progress comprises raw material, direct labour, other direct costs and related production overheads (based on normal operating capacity) but excludes borrowing costs. Net realisable value is the estimated selling price in the ordinary course of business, less the cost of completion and selling expenses.
Trade and other receivables. Trade and other receivables are carried at amortised cost using the effective interest method. A provision for impairment of receivables is established when there is objective evidence that the Group will not be able to collect all amounts due according to the original terms of receivables. Significant financial difficulties of the debtor, probability that the debtor will enter bankruptcy and default or delinquency in payments are considered indicators that the trade and other receivables are impaired. The amount of the provision is the difference between the asset’s carrying amount and the present value of estimated future cash flows, discounted at the original effective interest rate. The carrying amount of the asset is reduced through the use of an allowance account, and the amount of the loss is recognised in the profit and loss. When a receivable is uncollectable, it is written off against the allowance account. Subsequent recoveries of amounts previously written off are credited in the profit and loss. Financial statements Cash and cash equivalents. Cash and cash equivalents include cash in hand, term deposits held with banks, and other short-term highly liquid investments with original maturities of three months or less and bank overdrafts. Cash and cash equivalents are carried at amortised cost using the effective interest method. Restricted balances are excluded from cash and cash equivalents for the purposes of the statement of cash flows. Balances restricted from being exchanged or used to settle a liability for at least twelve months after the balance sheet date are included in non-current assets.
Non-current assets classified as held for sale. Non-current assets and disposal groups (which may include both non-current and current assets) are classified in the statement of financial position as ”non-current assets held for sale” if their carrying amount will be recovered principally through a sale transaction within twelve months after the balance sheet date. Assets are reclassified when all of the following conditions are met: (a) the assets are available for immediate sale in their present condition; (b) the Group’s management has approved and initiated an active programme to locate a buyer; (c) the assets are actively marketed for a sale at a reasonable price; (d) the sale is expected to occur within one year and (e) it is unlikely that significant changes to the plan to sell will be made or that the plan will be withdrawn. Non-current assets or disposal groups classified as held for sale in the current period’s statement of financial position are not reclassified or represented in the comparative statement of financial position to reflect the classification at the end of the current period.
A disposal group is assets (current or non-current) to be disposed of, by sale or otherwise, together as a group in a single transaction, and liabilities directly associated with those assets that will be transferred in the transaction. Goodwill is included if the disposal group includes an operation within a cash-generating unit to which goodwill has been allocated on acquisition. Non-current assets are assets that include amounts expected to be recovered or collected more than twelve months after the balance sheet date. If reclassification is required, both the current and non-current portions of an asset are reclassified.
Held-for-sale assets or disposal groups as a whole are measured at the lower of their carrying amount and fair value less costs to sell. Held-for-sale property, plant and equipment are not depreciated. Reclassified non-current financial instruments and deferred taxes are not subject to the write-down to the lower of their carrying amount and fair value less costs to sell.
Liabilities directly associated with the disposal group that will be transferred in the disposal transaction are reclassified and presented separately in the statement of financial position.
Annual Report and Accounts 2009 EUROCHEM 53 Notes to the consolidated financial statements continued for the year ended 31 December 2009 (all amounts are presented in thousands of Russian Roubles, unless otherwise stated)
2 Basis of presentation and significant accounting policies continued Share capital. Ordinary shares are classified as equity. Incremental costs directly attributable to the issue of new shares are shown in equity as a deduction, net of tax, from the proceeds. Any excess of the fair value of consideration received over the par value of shares issued is presented in the notes as a share premium.
Treasury shares. Where any Group company purchases the company’s equity share capital, the consideration paid, including any directly attributable incremental costs (net of income taxes) is deducted from equity attributable to the Company’s equity holders until the shares are cancelled, reissued or disposed of. Where such shares are subsequently sold or reissued, any consideration received, net of any directly attributable incremental transaction costs and the related income tax effects, is included in equity attributable to the Company’s equity holders.
Dividends. Dividends are recognised as a liability and deducted from equity at the balance sheet date only if they are declared before or on the balance sheet date. Dividends are disclosed when they are proposed before the balance sheet date or proposed or declared after the balance sheet date but before the financial statements are authorised for issue.
Value-added tax. Output value-added tax (“VAT”) related to sales is payable to tax authorities on the earlier of (a) collection of the receivables from customers or (b) delivery of the goods or services to customers. Input VAT is generally recoverable against output VAT upon receipt of the VAT invoice. The tax authorities permit the settlement of VAT on a net basis. VAT related to sales and purchases is recognised in the balance sheet on a gross basis and disclosed separately as a current asset and liability, except for VAT related to certain assets under construction included within non-current assets. Where provision has been made for impairment of receivables, impairment loss is recorded for the gross amount of the debtor, including VAT.
Borrowings. Borrowings are initially recognised at fair value, net of transaction costs incurred, and are subsequently stated at amortised cost using the effective interest method. Borrowings are classified as current liabilities unless the Group has an unconditional obligation to settle the liability for more than 12 months after the balance sheet date.
Trade and other payables. Trade payables are accrued when the counterparty performed its obligations under the contract and are carried at amortised cost using the effective interest method.
Provisions for liabilities and charges. Provisions for liabilities and charges are recognised when the Group has a present legal or constructive obligation as a result of past events, it is probable that an outflow of resources will be required to settle the obligation, and a reliable estimate of the amount can be made. Where the Group expects a provision to be reimbursed, for example under an insurance contract, the reimbursement is recognised as a separate asset but only when the reimbursement is virtually certain.
Asset retirement obligations. The estimated costs of dismantling and removing an item of property, plant and equipment (asset retirement obligations) are added to the cost of an item of property, plant and equipment when incurred either when an item is acquired or as the item is used during a particular period for purposes other than to produce inventories during that period. Changes in the measurement of an existing asset retirement obligation that result from changes in the estimated timing or amount of the outflows, or from changes in the discount rate, adjust the cost of the related asset in the Financial statements current period.
Revenue recognition. Revenues from sales of goods are recognised at the point of transfer of risks and rewards of ownership of the goods, normally when the goods are shipped. If the Group agrees to transport goods to a specified location, revenue is recognised when the goods are passed to the customer at the destination point.
Revenues from the rendering of services are recognised in the period the services are provided. Sales are shown net of VAT and discounts. Revenues are measured at the fair value of the consideration received or receivable. Interest income is recognised on a time-proportion basis using the effective interest method.
Employee benefits. Wages, salaries, contributions to the Russian Federation state pension and social insurance funds, paid annual leave and sick leave, bonuses, and non-monetary benefits (such as health services, etc.) are accrued in the year in which the associated services are rendered by the employees of the Group.
Earnings per share. Earnings per share is determined by dividing the profit and loss attributable to equity holders of the company by the weighted average number of ordinary shares outstanding during the reporting year.
Segment reporting. A segment is a distinguishable component of the Group that is engaged either in providing products or services (operating segment). Segments whose sales or result are 10% or more of all the segments are reported separately. Segment reporting is prepared in a manner consistent with the internal reporting provided to the chief operating decision-maker.
54 EUROCHEM Annual Report and Accounts 2009 3 Critical accounting estimates and judgements in applying accounting policies The Group makes estimates and assumptions that affect the reported amounts of assets and liabilities within the next financial year. Estimates and judgements are continually evaluated and are based on management’s experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances. Management also makes certain judgements, apart from those involving estimations, in the process of applying the accounting policies. Judgements that have the most significant effect on the amounts recognised in the financial statements and estimates that can cause a significant adjustment to the carrying amount of assets and liabilities within the next financial year include:
Taxation. Judgements are required in determining current income tax liabilities (Note 26). The Group recognises liabilities for taxes based on estimates of whether additional taxes will be due. Where the final outcome of various tax matters is different from the amounts that were initially recorded, such differences will impact the current income tax and deferred taxes provision in the period in which such determination is made.
Deferred income tax recognition. The net deferred tax asset represents income taxes recoverable through future deductions from taxable profits and is recorded in the statement of financial position. Deferred income tax assets are recorded to the extent that realisation of the related tax benefit is probable. In determining future taxable profits and the amount of tax benefits that are probable in the future, management makes judgements and estimates based on the last three years’ taxable profits and expectations of future income that are believed to be reasonable under the circumstances (Note 26).
The Group has not recognised a deferred tax liability in respect of temporary differences associated with investments in subsidiaries to the amount of RR 667,166 thousand (2008: RR 113,164 thousand) as the Group controls the timing of the reversal of those temporary differences and does not expect to reverse them in the foreseeable future.
Related party transactions. The Group enters into transactions with its related parties in the normal course of business. These transactions are priced predominantly at market rates. IAS 39 requires initial recognition of financial instruments based on their fair values. Judgement is applied in determining whether transactions are priced at market or non-market interest rates where there is no active market for such transactions. Judgements are made by comparing prices for similar types of transactions with unrelated parties and performing effective interest rate analyses.
Export duties. Effective from 1 February 2009, the Government of the Russian Federation cancelled the duties on exports of nitrogen and complex fertilizers to countries outside the CIS Customs Union. Effective from 1 May 2009, the Government of the Russian Federation also cancelled the duties on exports of apatite to countries outside the CIS Customs Union. The duties, introduced in April 2008, were equal to 8.5% and 6.5% of the declared customs value of nitrogen and complex fertilizers and apatite, respectively. For the periods during which the duties applied, export sales were shown gross of the duties described above, which amounted to RR 222,493 thousand (2008: RR 2,870,983 thousand). In making this judgment the Group considered that these export duties in substance represented a cost for the Group, rather than a sales tax collected on behalf of government authorities.
Impairment test of property, plant and equipment. At 31 December 2009 the Group performed an impairment test of property, plant and equipment. The recoverable amount of each cash-generating unit (CGU) was determined based on value-in-use calculations. These calculations use cash flow projections based on financial budgets approved by management covering a five-year period and the expected market prices for key fertilizers for the same period according to the leading industry publications. The growth rates do not exceed the long-term average growth rate for the business sector of the Financial statements economy in which the CGU operates. The 14.0% discount rate (2008: 16.3%) used is pre-tax and reflects specific risks relating to the relevant CGUs. 4 Adoption of new or revised standards and interpretations The following new standards, amendments to standards and interpretations became effective for the Group from 1 January 2009:
• IFRS 8, Operating Segments (effective for annual periods beginning on or after 1 January 2009). IFRS 8 requires an entity to report financial and descriptive information about its operating segments. Segment information is presented on a similar basis to that used for internal reporting purposes in a manner consistent with the internal reporting provided to the chief operating decision-maker, who for the Group has been identified as the Management Board. The Group decided to early-adopt improvements to IFRS 8 issued in April 2009, which allow the Group not to disclose information about segment assets and liabilities in the financial statements, because such information is not regularly provided to the Management Board;
• IAS 23, Borrowing Costs (revised March 2007; effective for annual periods beginning on or after 1 January 2009). The main change to IAS 23 is the removal of the option of immediately recognising as an expense borrowing costs that relate to assets that take a substantial period of time to get ready for use or sale. An entity is, therefore, required to capitalise such borrowing costs as part of the cost of the asset. The revised standard applies to borrowing costs relating to qualifying assets for which the commencement date for capitalisation is on or after 1 January 2009. The effect on the Group’s consolidated financial statements was not material;
• IAS 1, Presentation of Financial Statements (revised September 2007; effective for annual periods beginning on or after 1 January 2009). The main change in IAS 1 is the replacement of the income statement by a statement of comprehensive income which also includes all non-owner changes in equity, such as the revaluation of available-for-sale financial assets. Alternatively, entities are allowed to present two statements: a separate income statement and a statement of comprehensive income. The revised IAS 1 also introduces a requirement to present a statement of financial position (balance sheet) at the beginning of the earliest comparative period whenever the entity restates comparatives due to reclassifications, changes in accounting policies, or corrections of errors. The Group has elected to present a statement of comprehensive income. These consolidated financial statements have been prepared under the revised requirements;
Annual Report and Accounts 2009 EUROCHEM 55 Notes to the consolidated financial statements continued for the year ended 31 December 2009 (all amounts are presented in thousands of Russian Roubles, unless otherwise stated)
4 Adoption of new or revised standards and interpretations continued • Improvements to International Financial Reporting Standards (issued in May 2008). In 2007, the International Accounting Standards Board decided to initiate an annual improvements project as a method of making necessary, but non-urgent, amendments to IFRS. The amendments consist of a mixture of substantive changes, clarifications, and changes in terminology in various standards. The substantive changes relate to the following areas: classification as held for sale under IFRS 5 in case of a loss of control over a subsidiary; the possibility of presentation of financial instruments held for trading as non-current under IAS 1; accounting for sale of IAS 16 assets which were previously held for rental and classification of the related cash flows under IAS 7 as cash flows from operating activities; the clarification of definition of a curtailment under IAS 19; accounting for below market interest rate government loans in accordance with IAS 20; making the definition of borrowing costs in IAS 23 consistent with the effective interest method; clarification of accounting for subsidiaries held for sale under IAS 27 and IFRS 5; reduction in the disclosure requirements relating to associates and joint ventures under IAS 28 and IAS 31; enhancement of disclosures required by IAS 36; clarification of accounting for advertising costs under IAS 38; amending the definition of the fair value through the profit and loss category to be consistent with hedge accounting under IAS 39; introduction of accounting for investment properties under construction in accordance with IAS 40; and reduction in restrictions over the manner of determining the fair value of biological assets under IAS 41. Further amendments made to IAS 8, 10, 18, 20, 29, 34, 40, 41 and to IFRS 7 represent terminology or editorial changes only, which the IASB believes have no or minimal effect on accounting. The improvements do not have a material effect on the Group’s consolidated financial statements;
• Improving Disclosures about Financial Instruments – Amendment to IFRS 7, Financial Instruments: Disclosures (issued in March 2009; effective for annual periods beginning on or after 1 January 2009). The amendment requires enhanced disclosures about fair value measurements and liquidity risk. In particular, the amendment requires disclosure of fair value measurements by level of a fair value measurement hierarchy. As the change in accounting policy only results in additional disclosures, there is no impact on earnings per share;
• Puttable Financial Instruments and Obligations Arising on Liquidation – IAS 32 and IAS 1 Amendment (effective for annual periods beginning on or after 1 January 2009). This amendment is not currently applicable to the Group as it has no such financial instruments;
• Vesting Conditions and Cancellations – Amendment to IFRS 2, Share-based Payment (issued in January 2008; effective for annual periods beginning on or after 1 January 2009). Amendment to IFRS 2, Share-based Payment is not currently applicable to the Group as it has no such payments;
• IFRIC 15, Agreements for the Construction of Real Estate (effective for annual periods beginning on or after 1 January 2009). IFRIC 15 is not relevant to the Group’s operations because it does not have any agreements for the construction of real estate;
• Cost of an Investment in a Subsidiary, Jointly Controlled Entity or Associate – IFRS 1 and IAS 27 Amendment (issued in May 2008; effective for annual periods beginning on or after 1 January 2009). This amendment does not impact the Group’s consolidated financial statements;
• IFRIC 13, Customer Loyalty Programmes (effective for annual periods beginning on or after 1 July 2008). IFRIC 13 is not relevant to the Group;
• IFRIC 16, Hedges of a Net Investment in a Foreign Operation (effective for annual periods beginning on or after 1 October 2008). IFRIC 16 is not relevant Financial statements to the Group.
A number of new standards, amendments to standards and interpretations are not yet effective as at 31 December 2009, and have not been early adopted:
• IFRS 1, First-time Adoption of International Financial Reporting Standards (following an amendment in December 2008, effective for the first IFRS financial statements for a period beginning on or after 1 July 2009);
• IAS 27, Consolidated and Separate Financial Statements (revised January 2008; effective for annual periods beginning on or after 1 July 2009). The Group is currently assessing the impact of the amended standard on its consolidated financial statements;
• IFRS 3, Business Combinations (revised January 2008; effective for business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after 1 July 2009). The Group is currently assessing the impact of the amended standard on its consolidated financial statements;
• IFRIC 17, Distribution of Non-Cash Assets to Owners (effective for annual periods beginning on or after 1 July 2009);
• Embedded Derivatives – Amendments to IFRIC 9 and IAS 39 (effective for annual periods ending on or after 30 June 2009);
• Eligible Hedged Items – Amendment to IAS 39, Financial Instruments: Recognition and Measurement (effective with retrospective application for annual periods beginning on or after 1 July 2009);
• IFRIC 18, Transfers of Assets from Customers (effective for annual periods beginning on or after 1 July 2009);
• The International Financial Reporting Standard for Small and Medium-sized Entities (issued in July 2009);
56 EUROCHEM Annual Report and Accounts 2009 4 Adoption of new or revised standards and interpretations continued • Improvements to International Financial Reporting Standards (issued in April 2009; amendments to IFRS 2, IAS 38, IFRIC 9 and IFRIC 16 are effective for annual periods beginning on or after 1 July 2009; amendments to IFRS 5, IAS 1, IAS 7, IAS 17, IAS 36 and IAS 39 are effective for annual periods beginning on or after 1 January 2010). The Group is currently assessing the impact of these improvements on its consolidated financial statements;
• Group Cash-settled Share-based Payment Transactions – Amendments to IFRS 2, Share-based Payment (effective for annual periods beginning on or after 1 January 2010);
• Additional Exemptions for First-time Adopters – Amendments to IFRS 1, First-time Adoption of IFRS (effective for annual periods beginning on or after 1 January 2010);
• Classification of Rights Issues – Amendment to IAS 32, Financial Instruments: Presentation (effective for annual periods beginning on or after 1 February 2010);
• IAS 24, Related Party Disclosures (amended November 2009, effective for annual periods beginning on or after 1 January 2011);
• IFRS 9, Financial Instruments (issued in November 2009, effective for annual periods beginning on or after 1 January 2013, with earlier application permitted). The Group is currently assessing the impact of the amended standard on its consolidated financial statements;
• IFRIC 19, Extinguishing Financial Liabilities with Equity Instruments (effective for annual periods beginning on or after 1 July 2010);
• Prepayments of a Minimum Funding Requirement – Amendment to IFRIC 14 (effective for annual periods beginning on or after 1 January 2011); and
• Limited Exemption from Comparative IFRS 7 Disclosures for First-time Adopters – Amendment to IFRS 1 (effective for annual periods beginning on or after 1 July 2010).
Unless otherwise described above, the new standards, amendments to standards and interpretations are not expected to significantly affect the Group’s consolidated financial statements. 5 Statement of cash flows In managing the business, management focuses on a number of cash flow measures including ‘gross cash flow’ and ‘free cash flow’. Gross cash flow refers to the operating profit after taxes and adjusted for items which are not of a cash nature, which have been charged or credited to the profit and loss. The gross cash flow is available to finance movements in operating assets and liabilities, investing and financing activities. The gross cash flow for the year ended 31 December 2009 was RR 12,915,772 thousand (2008: RR 33,564,943 thousand).
Free cash flows are the cash flows available to providers of finance of the business, be this debt or equity. The free cash outflow for the year ended Financial statements 31 December 2009 was RR 9,506,527 thousand (2008: RR 8,787,731 thousand).
Since these terms are not standard IFRS measures EuroChem Group’s definition of gross cash flow and free cash flow may differ from that of other companies.
Annual Report and Accounts 2009 EUROCHEM 57 Notes to the consolidated financial statements continued for the year ended 31 December 2009 (all amounts are presented in thousands of Russian Roubles, unless otherwise stated)
6 Segment information The Group is a vertically integrated company with operations spanning mining, fertilizer manufacturing, organic synthesis products, sales and distribution. The Group’s core business is fertilizers, with a wide product range including nitrogen and phosphate. On a monthly basis the Management Board reviews the financial reports of the Group, evaluates the operating results and allocates resources between the operating segments. Budgets and financial reports are prepared in a standard format according to the IFRS accounting policy adopted by the Group. Sales between segments are carried out on an arm’s length basis. The Management Board assesses the performance of the operating segments based on, among others, a measure of profit before taxation adjusted by interest expense, depreciation and amortization, financial foreign exchange gain or loss, other non-cash and extraordinary items, excluding net profit for the period attributed to non-controlling interests (EBITDA). Since this term is not a standard IFRS measure EuroChem Group’s definition of EBITDA may differ from that of other companies.
The development and approval of strategies, market situation analysis, the risk assessment, investment focus, technological process changes, goals and priorities are set and assessed in line with the segment structure of the Group:
• Nitrogen – the production and sale of nitrogen mineral fertilizers and organic synthesis products;
• Phosphates – the production and sale of phosphate mineral fertilizers and the extraction of ores to produce and subsequently sell baddeleyite and iron-ore concentrates;
• Potash – the development of several deposits of potassium salts (“potash”) under the licenses acquired by the Group with a view to start production and marketing of potassium fertilizers. No sales have been recorded to date in this segment;
• Distribution – retail sales of mineral fertilizers (including those not produced by the Group), seeds, crop protection items etc. via a number of retailers located within Russia and the CIS; and
• All other – certain logistics and service activities, central management, investment income and other items.
The segmental results for the year ended 31 December 2009 were as follows: External sales Internal sales Total sales EBITDA Nitrogen 35,441,252 4,135,932 39,577,184 9,314,223 Phosphates 29,601,687 1,522,511 31,124,198 4,427,044 Potash – – – (246,796) Distribution 5,389,809 5,127 5,394,936 22,400 Other 3,144,501 11,944,242 15,088,743 2,798,944 Elimination – (17,607,812) (17,607,812) 200,422 Total 73,577,249 – 73,577,249 16,516,237 Financial statements
The segmental results for the year ended 31 December 2008 were as follows: External sales Internal sales Total sales EBITDA Nitrogen 51,786,016 4,133,957 55,919,973 23,874,930 Phosphates 49,376,221 2,639,942 52,016,163 20,147,952 Potash – – – (175,766) Distribution 5,276,464 3,329 5,279,793 54,773 Other 5,734,872 17,814,579 23,549,451 824,169 Elimination – (24,591,807) (24,591,807) (429,135) Total 112,173,573 – 112,173,573 44,296,923
58 EUROCHEM Annual Report and Accounts 2009 6 Segment information continued A reconciliation of net income is provided as follows: Note 2009 2008 EBITDA 16,516,237 44,296,923 Depreciation and amortisation 24 (2,976,353) (2,942,655) Idle property, plant and equipment write-off (83,872) (313,131) Gain on disposal of non-current assets held for sale 358,878 310,493 Fair value gain/(loss) on trading investments – (395,160 ) Gain on disposal of available-for-sale investments 966,640 209,723 Financial foreign exchange gain/(loss) – net 748,903 (3,765,712) Interest expense (1,983,587) (1,258,828) Other financial income 193,458 135,141 Non-controlling interest (35,600) 503,317 Profit before taxation 13,704,704 36,780,111
Substantially all of the Group’s operating assets are located in the Russian Federation. Operating assets, located in foreign countries are mainly represented by assets of the Group’s production subsidiary Lifosa AB, located in Lithuania.
The analysis of non-current assets other than financial instruments and deferred tax assets by geographical locations was as follows: 2009 2008 Non-current assets, located in Russia 59,649,410 44,649,577 Non-current assets, located in foreign countries 4,636,826 4,453,932 Total 64,286,236 49,103,509
The analysis of Group sales by geographical area was: 2009 2008 Export 58,979,433 93,082,697 Domestic 14,597,816 19,090,876 Total sales 73,577,249 112,173,573
The analysis of Group sales by region was: 2009 2008 Russia 14,597,816 19,090,876 CIS 9,031,643 9,283,909 Financial statements Asia 17,761,986 28,934,266 Europe 15,285,533 25,067,773 Latin America 9,113,780 14,639,029 North America 3,729,779 11,223,182 Africa 3,539,876 2,906,228 Australasia 516,836 1,028,310 Total sales 73,577,249 112,173,573
The sales are allocated by regions based on the destination country. There were no individually material sales to countries, except for Russia in 2009 and 2008.
In 2009 and 2008 the Group had no external customers representing 10.0% or more of the Group’s revenue.
Annual Report and Accounts 2009 EUROCHEM 59 Notes to the consolidated financial statements continued for the year ended 31 December 2009 (all amounts are presented in thousands of Russian Roubles, unless otherwise stated)
7 Property, plant and equipment Movements in the carrying amount of property, plant and equipment were as follows:
Land and land Transfer Machinery and Assets under Buildings improvements devices equipment Transport Other construction Total Gross carrying value Balance at 1 January 2009 6,880,694 3,844,224 3,743,631 21,635,860 6,617,319 1,212,101 18,348,561 62,282,390 Additions and transfers from assets under construction 418,404 620,614 399,282 2,348,081 717,543 137,262 13,440,670 18,081,856 Acquisitions through business combinations 160,048 – – 15,567 – – – 175,615 Disposals (13,215) (5,806) (40,156) (154,770) (79,760) (41,361) (1,676) (336,744) Idle property, plant and equipment (write-off)/reversal of write-off (100,581) (41,816) (11,399) (73,602) (219) (593) 3,520 (224,690) Currency translation difference (Note 2) 44,096 (43,699) 22,494 66,738 4,022 3,127 (12,616) 84,162 Balance at 31 December 2009 7,389,446 4,373,517 4,113,852 23,837,874 7,258,905 1,310,536 31,778,459 80,062,589
Accumulated depreciation and impairment Balance at 1 January 2009 (2,186,047) (1,380,358) (2,155,364) (12,448,751) (2,307,609) (606,462) – (21,084,591) Charge for the year (309,759) (182,160) (199,554) (1,559,430) (506,979) (163,092) – (2,920,974) Disposals 1,685 590 38,104 114,319 75,457 24,879 – 255,034 Idle property, plant and equipment write-off 62,034 16,085 10,739 51,308 124 528 – 140,818 Currency translation difference (Note 2) (6,041) (14,408) (7,240) (38,428) (1,496) (2,846) – (70,459) Balance at 31 December 2009 (2,438,128) (1,560,251) (2,313,315) (13,880,982) (2,740,503) (746,993) – (23,680,172)
Net carrying value Balance at 1 January 2009 4,694,647 2,463,866 1,588,267 9,187,109 4,309,710 605,639 18,348,561 41,197,799 Balance at 31 December 2009 4,951,318 2,813,266 1,800,537 9,956,892 4,518,402 563,543 31,778,459 56,382,417
Financial statements
60 EUROCHEM Annual Report and Accounts 2009 7 Property, plant and equipment continued Land and land Transfer Machinery and Assets under Buildings improvements devices equipment Transport Other construction Total Gross carrying value Balance at 1 January 2008 6,181,150 3,107,161 3,615,980 20,056,160 5,470,011 864,776 7,634,622 46,929,860 Additions and transfers from assets under construction 352,238 525,431 81,629 1,531,080 1,131,409 363,182 10,748,107 14,733,076 Acquisitions through business combinations 347,481 177,575 44,697 63,428 1,539 14,451 575 649,746 Disposals (13,634) (6,236) (26,601) (85,641) (7,189) (41,117) (2,156) (182,574) Reclassification to non-current assets held for disposal (77,346) (52,855) (37,714) (149,435) (1,730) (4,242) (82,641) (405,963) Idle property, plant and equipment write-off (112,787) (43,238) (26,367) (136,820) (1,609) (5,564) (20,563) (346,948) Currency translation difference (Note 2) 203,592 136,386 92,007 357,088 24,888 20,615 70,617 905,193 Balance at 31 December 2008 6,880,694 3,844,224 3,743,631 21,635,860 6,617,319 1,212,101 18,348,561 62,282,390
Accumulated depreciation and impairment Balance at 1 January 2008 (1,963,363) (1,015,240) (2,054,680) (10,895,306) (1,840,914) (438,013) – (18,207,516) Charge for the year (236,635) (321,472) (152,742) (1,545,331) (457,789) (181,628) – (2,895,597) Disposals 880 2,239 22,002 49,286 2,639 25,650 – 102,696 Reclassification to non-current assets held for disposal 48,348 19,049 37,706 133,166 524 2,010 – 240,803 Idle property, plant and equipment write-off 380 908 23,886 6,972 83 1,588 – 33,817 Currency translation difference (Note 2) (35,657) (65,842) (31,536) (197,538) (12,152) (16,069) – (358,794) Balance at 31 December 2008 (2,186,047) (1,380,358) (2,155,364) (12,448,751) (2,307,609) (606,462) – (21,084,591)
Net carrying value Balance at 1 January 2008 4,217,787 2,091,921 1,561,300 9,160,854 3,629,097 426,763 7,634,622 28,722,344 Balance at 31 December 2008 4,694,647 2,463,866 1,588,267 9,187,109 4,309,710 605,639 18,348,561 41,197,799
The analysis of the Group’s assets under construction is as follows: Financial statements 2009 2008 Construction in progress 24,725,923 12,806,213 Mining development expenses 1,609,231 1,219,114 Advances given to construction companies and suppliers of property, plant and equipment 5,443,305 4,323,234 Total assets under construction 31,778,459 18,348,561
At 31 December 2009 the Group had no bank borrowings secured on property, plant and equipment (2008: net book value of RR 10,546 thousand and pledge value of RR 30,659 thousand).
The Group decided to mothball certain production equipment with a gross carrying value and accumulated depreciation of RR 224,690 thousand and RR 140,818 thousand, respectively, at 31 December 2009 (2008: gross carrying value of RR 346,948 thousand and accumulated depreciation of RR 33,817 thousand) and recognised a loss of RR 83,872 thousand in these consolidated financial statements (2008: RR 313,131 thousand) (Note 22).
At 31 December 2009 the Group incurred expenses of RR 1,609,231 thousand (2008: RR 1,219,114 thousand) directly related to the development of the Gremyachinskoe, Verkhnekamskoe, and Kovdorsky deposits. These expenses were capitalised in the statement of financial position in accordance with the Group accounting policy and included in the property, plant and equipment balance. There were no impairments and disposals of capitalised development, exploration and evaluation expenses during the year ended 31 December 2009. Generally, these expenses are paid in the period the services are provided.
Annual Report and Accounts 2009 EUROCHEM 61 Notes to the consolidated financial statements continued for the year ended 31 December 2009 (all amounts are presented in thousands of Russian Roubles, unless otherwise stated)
7 Property, plant and equipment continued The fair value of the fixed assets of the Group at 1 January 2009 as determined by American Appraisal (AAR), Inc. amounted to RR 96bn. The Group has not reflected the result of this valuation in these consolidated financial statements. Fair values were determined by the independent appraiser based on the depreciated replacement cost method. The replacement cost of buildings, constructions, machinery and equipment and transfer devices has been estimated based on technical characteristics, unit construction cost and construction estimates. The replacement cost of equipment was estimated based on data from current purchase contracts and price-lists of producers and trading companies. The economic obsolescence was estimated based on profitability test results for each cash-generating unit. The discount rate used in profitability testing varied from 13.3% to 18.8%. The forecast period was seven years for the majority of Group companies, except for Kovdorsky GOK, for which the forecast period was 14 years.
The assets transferred to the Group upon privatisation did not include the land on which a number of the Group’s factories and buildings, comprising the Group’s principal manufacturing facilities, are situated. In 2001 all companies located in the Russian Federation were granted the option to purchase this land upon application to the state registration body or to continue occupying this land under a rental agreement. The purchase price of the land is calculated by reference to the cadastral value applied for property taxes and certain coefficients which are determined by local state authorities. This purchase price may significantly differ from its market value. In accordance with Russian legislation the expiry date to exercise this option is 1 January 2012. As at 31 December 2009 all but one of the Group’s major Russia-based subsidiaries acquired the land on which their main production facilities are located. 8 Goodwill Movements in goodwill arising on the acquisition of subsidiaries are: 2009 2008 Carrying amount at 1 January 204,866 157,396 Acquisition of subsidiary – 47,470 Disposals – – Carrying amount at 31 December 204,866 204,866
Goodwill Impairment Test. Goodwill is allocated to cash-generating units (CGUs) which represent the lowest level within the Group at which the goodwill is monitored by management and which are not larger than a segment, as follows: 2009 2008 Murmansk Bulk Terminal 116,498 116,498 Agrokhimik 47,470 47,470 Tankchem 7,004 7,004 Other 33,894 33,894 Total carrying amount of goodwill 204,866 204,866
The recoverable amount of each CGU was determined based on value-in-use calculations. These calculations use cash flow projections based on financial
Financial statements budgets approved by management covering a five-year period.
The 14.0% discount rate used is pre-tax and reflects risks relating to the relevant CGUs (2008: 16.3%). The Group did not recognise any goodwill impairment at 31 December 2009 and 31 December 2008.
62 EUROCHEM Annual Report and Accounts 2009 9 Intangible assets Acquired software and licenses Other Total Cost at 1 January 2008 373,793 172,475 546,268 Accumulated amortisation (41,004) – (41,004) Carrying amount at 1 January 2008 332,789 172,475 505,264
Additions 35,935 1,127 37,062 Acquired through business combination – 47,772 47,772 Amortisation charge (54,498) (866) (55,364) Currency translation difference – 2,834 2,834
Cost at 31 December 2008 409,728 224,208 633,936 Accumulated amortisation (95,502) (866) (96,368) Carrying amount at 31 December 2008 314,226 223,342 537,568
Disposals cost (3,632) (14,458) (18,090) Accumulated amortisation on disposals – 511 511 Amortisation charge (83,453) (900) (84,353) Currency translation difference – (8,179) (8,179)
Cost at 31 December 2009 406,096 201,571 607,667 Accumulated amortisation (178,955) (1,255) (180,210) Carrying amount at 31 December 2009 227,141 200,316 427,457
The Group’s other intangible assets include different intangible assets which have definite and indefinite useful lives.
The Group’s intangible assets with indefinite useful lives mainly comprise an exclusive land lease agreement for the bulk-handling cargo dock in Murmansk with a carrying value of RR 148,974 thousand at 31 December 2009 (2008: RR 148,974 thousand).
The Group’s intangible assets with definite useful lives mainly comprise an exclusive land lease agreement for a plot of land in Kazakhstan with a carrying value of RR 42,474 thousand at 31 December 2009 (2008: RR 47,772 thousand), which will be amortised over the residual period not exceeding 41 years. Financial statements No impairment was recognised for these assets at 31 December 2009 and 31 December 2008. 10 Available-for-sale investments At 31 December 2009 available-for-sale investments comprised the shares of K+S Group, a German manufacturer of potassium-based fertilizers, and OJSC Sberbank.
Between January and April 2009 the Group acquired 10,752,292 ordinary shares of K+S Group from MCC Holding Public Company Limited (Cyprus) for RR 19,605,626 thousand paid in cash (Note 28) and 1,499,297 ordinary shares of K+S Group on the open market for RR 2,290,044 thousand. In December 2009 the Group acquired 2,982,252 ordinary shares of K+S Group through a rights issue for RR 3,509,457 thousand paid in cash.
Between September and December 2009 the Group sold 2,701,291 K+S Group shares to MCC Holding Public Company Limited (Cyprus) for RR 4,529,819 thousand (Note 28) and 1,554,731 K+S Group shares on the open market for RR 2,844,756 thousand and recognised a gain of RR 966,640 thousand in the profit and loss.
At 31 December 2009 the Group owned 19,366,595 shares, or 10.12% of the issued share capital (2008: 8,388,776 shares, or 5.08% of the issued share capital) of K+S Group with a fair value of RR 33,602,943 thousand (2008: RR 13,895,175 thousand) with reference to the share price quoted on the Xetra trading system. The accumulated increase in the fair value of the investment of RR 5,078,388 thousand was recognised in equity at 31 December 2009 (2008: RR 4,367,812 thousand).
In May 2009 the Group received dividend income from K+S Group of RR 2,168,715 thousand including withholding tax of RR 108,436 thousand.
At 31 December 2009 the shares of OJSC Sberbank were accounted for at a fair value of RR 16,714 thousand (2008: RR 4,263 thousand) with reference to the share price quoted on the Russian Trade System (“RTS”). There was an unrealised gain of RR 16,629 thousand relating to these investments recognised in equity at 31 December 2009 (2008: RR 4,178 thousand).
Annual Report and Accounts 2009 EUROCHEM 63 Notes to the consolidated financial statements continued for the year ended 31 December 2009 (all amounts are presented in thousands of Russian Roubles, unless otherwise stated)
10 Available-for-sale investments continued Movements in the carrying amounts of available-for-sale investments were: 2009 2008 At 1 January 13,899,438 21,051 Acquisition of available-for-sale investments 25,405,127 10,101,141 Revaluation of available-for-sale investments 1,689,667 4,560,747
Disposal of available-for-sale investments, including: – available-for-sale investments at cost (6,407,935) (573,778) – reclassification of revaluation to profit and loss (966,640) (209,723) At 31 December 33,619,657 13,899,438
Available-for-sale investments: 2009 2008 K+S Group ordinary shares 33,602,943 13,895,175 Sberbank ordinary shares 16,714 4,263 Total available-for-sale investments 33,619,657 13,899,438 11 Exploration rights At 31 December 2009 the exploration rights balance of RR 7,271,496 thousand (31 December 2008: RR 7,163,276 thousand) comprised the rights for exploration and production at the Gremyachinskoe potash deposit acquired in December 2005 and accounted for at a cost of RR 3,017,781 thousand, the Verhnekamskoe potash deposit acquired in March 2008 and accounted for at a cost of RR 4,087,166 thousand and the Kovdorsky apatite deposits acquired in April 2007 and March 2009 and accounted for at a cost of RR 58,329 thousand and RR 108,220 thousand, respectively.
The Group also obtained licenses for exploration and evaluation of the Darganovsky and Ravninny fields.
The Group holds, among other licenses, valid licenses for the exploration and development of potash and apatite deposits issued by the relevant government authorities of the Russian Federation. Under the terms of these licenses, the Group is required to comply with a number of conditions, including preparation of design documentation, commencement of construction of mining facilities and commencement of extraction of mineral resources by certain dates. If the Company fails to materially comply with the terms of the license agreements there are circumstances whereby the licenses can be revoked. The management of the Group believes that the Group faces no material regulatory risks in relation to the validity and operation of any of its licenses.
In accordance with the conditions of the license agreements for developing the potash deposits, the Group has the following major commitments:
Financial statements • to commence extraction of potash salt at the Gremyachinskoe potash deposit by 1 November 2014;
• to commence construction of an exploration complex at the Verkhnekamskoe potash deposit by 15 April 2012; and
• to commence extraction of potash salt at the Verkhnekamskoe potash deposit by 15 April 2014.
The Group has launched all necessary actions to carry forward the construction of the mining facilities. The management believes that each stage of the process will be completed according to the schedule. 12 Originated loans Note 2009 2008 Balance as at 1 January 5,729,178 – Origination of loan 28 – 5,118,848 Repayment of loan 28 (6,568,110) – Foreign exchange gain 838,932 610,330 Balance as at 31 December – 5,729,178
In October 2008 the Group provided MCC Holding Public Company Limited (Cyprus) with a US$ denominated, unsecured loan with an interest rate of 1 month Libor +2.5%. The loan was fully repaid in April 2009.
64 EUROCHEM Annual Report and Accounts 2009 13 Inventories Note 2009 2008 Materials 3,050,401 4,050,120 Work in progress 813,971 1,065,593 Finished goods 3,207,001 4,987,935 Catalysts 1,413,464 1,465,009 Less: provision for obsolete and damaged inventories 22 (379,770) (386,063) Total inventories 8,105,067 11,182,594
The Group wrote-off materials to their net realisable value and recognised a loss of RR 54,616 thousand (2008: RR 325,416 thousand) in the profit and loss. 14 Trade receivables, prepayments, other receivables and other current assets Note 2009 2008 Trade receivables Trade receivables denominated in RR 1,009,891 867,040 Trade receivables denominated in US$ 941,536 1,955,166 Trade receivables denominated in Euros 199,432 186,081 Trade receivables denominated in other currencies 225,165 296,379 Less: impairment provision (224,784) (120,295) Total trade receivables – financial assets 2,151,240 3,184,371
Prepayments, other receivables and other current assets Advances to suppliers 2,914,765 2,932,711 VAT recoverable and receivable 4,114,920 5,922,485 Income tax receivable 212,608 1,192,047 Other taxes receivable 25,847 64,134 Other receivables 321,112 379,698 Less: impairment provision (124,615) (44,212) Subtotal non-financial assets 7,464,637 10,446,863 Interest receivable 10,531 165,892 Other receivables 29 154,934 – Subtotal financial assets 165,465 165,892 Financial statements Total prepayments, other receivables and other current assets 7,630,102 10,612,755
Total trade receivables, prepayments, other receivables and other current assets 9,781,342 13,797,126 Including Financial assets 2,316,705 3,350,263 Non-financial assets 7,464,637 10,446,863
Management believes that the fair value of accounts receivable does not differ significantly from their carrying amounts.
As of 31 December 2009, accounts receivable, prepayments and other current assets of RR 349,399 thousand (2008: RR 164,507 thousand) were individually impaired and an impairment provision was recognised. The individually impaired receivables mainly relate to customers who started to experience financial difficulties due to the sharp worsening of the economic environment.
The ageing of these receivables is: 2009 2008 Less than 3 months 25,388 7,208 From 3 to 12 months 19,047 32,879 Over 12 months 304,964 124,420 Total gross amount of impaired trade receivables, prepayments, other receivables and other current assets 349,399 164,507
Annual Report and Accounts 2009 EUROCHEM 65 Notes to the consolidated financial statements continued for the year ended 31 December 2009 (all amounts are presented in thousands of Russian Roubles, unless otherwise stated)
14 Trade receivables, prepayments, other receivables and other current assets continued As of 31 December 2009, trade receivables of RR 599,795 thousand (2008: RR 971,128 thousand) were past due but not impaired. The ageing analysis of these trade receivables from past due date is: 2009 2008 Less than 3 months 407,396 562,103 From 3 to 12 months 152,406 394,513 Over 12 months 39,993 14,512 Trade accounts receivable past due not impaired 599,795 971,128
The movements in the provision for impairment of accounts receivable are: 2009 2008 Trade Other Trade Other Note receivables receivables receivables receivables As of 1 January 120,295 44,212 845,805 58,296 Provision charged 23, 24 200,086 112,917 37,409 2,032 Provision used (11,318) (812) (690,702) (14,870) Provision reversed 23, 24 (84,229) (30,216) (164,088) (1,246) Foreign exchange difference (50) (1,486) 91,871 – Total gross amount of impaired trade receivables, prepayments, other receivables and other current assets 224,784 124,615 120,295 44,212 15 Cash and cash equivalents 2009 2008 Cash on hand and bank balances denominated in RR 1,072,146 1,094,542 Bank balances denominated in US$ 1,993,965 1,859,365 Bank balances denominated in Euros 880,578 833,523 Balances denominated in other currencies 18,486 42,438 Term deposits denominated in RR 1,727,614 835,118 Term deposits denominated in US$ 2,594,479 20,048,393 Term deposits denominated in Euros 2,088,686 1,343,150 Term deposits denominated in other currencies 300,818 168,821 Total cash and cash equivalents 10,676,772 26,225,350 Current restricted cash 551,086 481,912 Financial statements Non-current restricted cash 179,115 30,053 Total restricted cash 730,201 511,965
Term deposits at 31 December 2009 and 31 December 2008 have various original maturities but could be withdrawn on request without any restrictions. All bank balances and term deposits are neither past due nor impaired. Analysis of the credit quality of bank balances and term deposits is as follows:
2009 2008 A to AAA rated** 7,523,781 17,027,631 BB- to BBB+ rated** 3,539,708 9,523,043 B- to B+ rated** 3,906 44,276 Unrated 337,584 139,416 Total* 11,404,979 26,734,366
* The rest of the balance sheet item ‘cash and cash equivalents’ is cash on hand. ** Based on the credit ratings of independent rating agencies Standard & Poor’s, Fitch Ratings and Moody’s Investors Services as at 27 January 2010.
At 31 December 2009 RR 551,086 (2008: RR 326,122 thousand) of the current restricted cash consists of cash held at banks to meet the next principal and interest payments. There were no letters of credit issued by the Group to its suppliers at 31 December 2009 (2008: RR 155,790 thousand).
At 31 December 2009 and 31 December 2008 non-current restricted cash of RR 179,115 thousand and RR 30,053 thousand, respectively, primarily consists of letters of credit for equipment procurement and a deposit against possible environmental obligations as required under statutory Lithuanian rules.
The fair value of cash and cash equivalents is equal to their carrying amount.
66 EUROCHEM Annual Report and Accounts 2009 16 Trading investments In June 2009 the Group sold 2.01% of the voting shares of OJSC MRSK “Center and Volga region” to a third party for RR 311,855 thousand and recognised a fair value gain of RR 139,584 thousand in the profit and loss. 17 Equity The nominal registered amount of the company’s issued share capital at 31 December 2009 is RR 6.8bn (2008: RR 6.8bn). The total authorised number of ordinary shares is 68 million shares (2008: 68 million) with a par value of RR 100 per share. All authorised shares have been issued and fully paid.
Number of Share Treasury ordinary shares capital shares Total At 31 December 2007 68,000,000 6,800,000 (7,760) 6,792,240 At 31 December 2008 68,000,000 6,800,000 (7,760) 6,792,240 At 31 December 2009 68,000,000 6,800,000 (7,760) 6,792,240
Treasury shares. LLC PG Phosphorit, a 100% subsidiary of the Group, held 68,000 ordinary shares of the company at 31 December 2009 (2008: 68,000 shares). These shares represent 0.1% of the company’s share capital and carry voting rights in the same proportion as other ordinary shares. The voting rights of ordinary shares of the company held by the entities within the Group are effectively controlled by the management of the Group.
Profit distribution. In accordance with Russian legislation, the company distributes profits as dividends or transfers them to reserves (fund accounts) on the basis of financial statements prepared in accordance with Russian Accounting Rules. The statutory accounting reports of the company are the basis for profit distribution and other appropriations. Russian legislation identifies the net statutory profit as the basis for distribution. For the year ended 31 December 2009, the net statutory profit of the company as reported in the published annual statutory accounting report was RR 30,234,442 thousand (2008: RR 18,462,526 thousand) and the closing balance of the accumulated profit including the net statutory profit totalled RR 53,709,147 thousand (2008: RR 22,971,954 thousand). However, this legislation and other statutory laws and regulations are open to legal interpretation in relation to the depletion of distributable reserves. Accordingly management believes that, at present, it would not be appropriate to disclose an amount for the distributable reserves in these consolidated financial statements.
Other reserves. As at 31 December 2009 other reserves in the statement of changes in equity comprised an accumulated net gain from currency translation differences of RR 1,884,761 thousand (2008: RR 1,529,180 thousand), an accumulated increase in the fair value of investments in the shares of K+S Group of RR 5,078,388 thousand (2008: RR 4,367,812 thousand) and an accumulated increase in the fair value of investments in the shares of OJSC Sberbank of RR 16,629 thousand (2008: RR 4,178 thousand) (Note 10).
Dividends. Dividends declared and paid during the year were as follows: 2009 2008 Dividends payable at 1 January – 3,668,328 Financial statements Dividends declared during the year – 10,456,091 Dividends paid during the year – (14,124,419) Dividends payable at 31 December – – Dividends per share declared during the year – RR 153.92
The total amount of dividends attributable to treasury shares have been eliminated. All dividends are declared and paid in Russian Roubles. 18 Bank borrowings 2009 2008 Balance as at 1 January 43,511,956 5,633,712 Bank loans received, denominated in US$ – 47,348,079 Bank loans received, denominated in Euros 9,811,419 – Bank loans received, denominated in RR 31,635 51,653 Bank loans repaid, denominated in US$ (9,755,831) (13,807,859) Bank loans repaid, denominated in Euros (5,993,656) (154,657) Bank loans repaid, denominated in RR (50,522) (32,766) Capitalisation and amortisation of bank borrowings syndication fees 66,255 (529,869) Foreign exchange loss 1,426,502 5,003,663 Balance as at 31 December 39,047,758 43,511,956
Annual Report and Accounts 2009 EUROCHEM 67 Notes to the consolidated financial statements continued for the year ended 31 December 2009 (all amounts are presented in thousands of Russian Roubles, unless otherwise stated)
18 Bank borrowings continued 2009 2008 Current bank borrowings Current portion of long-term bank loans in US$ 12,491,434 9,074,390 Bank loans, denominated in RR – 18,887 Total current bank borrowings 12,491,434 9,093,277
Non-current bank borrowings Long-term bank loans, denominated in US$ 35,390,620 43,493,069 Long-term bank loans, denominated in Euros 3,657,138 – Less: current portion of long-term bank loans in US$ (12,491,434) (9,074,390 ) Total non-current bank borrowings 26,556,324 34,418,679 Total bank borrowings 39,047,758 43,511,956
At 31 December 2009 and 31 December 2008 the fair value of borrowings was not materially different from their carrying amounts.
The Group has not entered into any hedging arrangements in respect of its foreign currency obligations or interest rate exposures.
Under the terms of loan agreements, the Group is required to comply with a number of covenants and restrictions, including the maintenance of certain financial ratios, financial indebtedness and cross-default provisions.
Interest rates A syndicated loan facility, which was obtained in October 2008 in the amount of US$ 1.5bn, bears a floating interest rate of 1 month Libor +1.8%. The outstanding amount at 31 December 2009 totalled US$ 1,186,047 thousand (2008: US$ 1,500,000 thousand). A loan denominated in Euros bears a floating interest rate of 3 month Euribor +2.0%.
Collaterals and pledges At 31 December 2009 collaterals comprised cash balances of RR 551,086 thousand (2008: RR 326,122 thousand) restricted by banks to secure the next principal and interest payments (Note 15).
A bank loan of RR 35,390,620 thousand and RR 43,493,069 thousand at 31 December 2009 and 31 December 2008, respectively, was collateralized by future export proceeds of the Group under sales contracts with certain customers, and a bank loan of RR 3,657,138 at 31 December 2009 was secured with K+S Group shares as collateral represented by 5,316,627 shares with a fair value of RR 9,224,869 thousand with reference to the share price quoted on the Xetra trading system. Financial statements The Group’s bank borrowings mature as follows: 31 December 31 December 2009 2008 – within 1 year 12,491,434 9,093,277 – between 1 and 2 years 16,148,572 12,149,084 – between 2 and 5 years 10,407,752 22,269,595 Total bank borrowings 39,047,758 43,511,956
At 31 December 2009 the Group had a number of undrawn loan facilities.
In September 2008 the Group signed a loan agreement for up to US$ 50 million. The credit line had not been utilised. The expiry date for the loan was 4 March 2010.
Collaterals and pledges continued In March 2009 the Group signed a loan agreement for up to RR 2.9bn. The credit line had not been utilised. The expiry date for the facility was 12 March 2010.
In September 2009 the Group signed a loan agreement for up to Euro 130 million. The credit line has been utilised to the extent of Euro 85 million. The expiry date for the facility is 24 March 2011.
68 EUROCHEM Annual Report and Accounts 2009 19 Bonds issued On 21 March 2007 the Group placed through an offering to the public under an open subscription US$ denominated 7.875% notes with a face value of US$ 300 million to be redeemed on 21 March 2012. These notes have been admitted to the official list and are trading on the regulated market of the Irish Stock Exchange. On 11 December 2008 the Group bought back and cancelled bonds to the value of US$ 10 million.
The outstanding balance of the notes was RR 8,724,895 thousand and RR 8,453,611 thousand at 31 December 2009 and 31 December 2008, respectively, applying the exchange rate at those dates net of syndication fees.
The fair value of the outstanding notes balance at 31 December 2009 and 31 December 2008 was RR 8,836,599 thousand and RR 4,303,400 thousand with reference to Irish Stock Exchange quotations as of those dates. 20 Trade payables, other accounts payable and accrued expenses 2009 2008 Trade payables Trade payables denominated in RR 1,007,316 1,015,564 Trade payables denominated in US$ 141,685 304,100 Trade payables denominated in Euros 39,164 145,095 Trade payables denominated in other currencies 185,323 328,876 Total trade payables – financial liabilities 1,373,488 1,793,635
Other accounts payable and accrued expenses Advances received 1,441,095 705,796 Payroll and social tax 262,643 261,153 Accrued liabilities and other creditors 1,648,544 2,754,494 Subtotal non-financial liabilities 3,352,282 3,721,443 Interest payable 222,240 239,304 Subtotal financial liabilities 222,240 239,304 Total other payables 3,574,522 3,960,747
Total trade payables, other accounts payable and accrued expenses 4,948,010 5,754,382 Including Financial liabilities 1,595,728 2,032,939 Non-financial liabilities 3,721,443
3,352,282 Financial statements
Trade payables include payables to suppliers of property, plant and equipment which amount to RR 324,073 thousand (2008: RR 410,010 thousand).
Annual Report and Accounts 2009 EUROCHEM 69 Notes to the consolidated financial statements continued for the year ended 31 December 2009 (all amounts are presented in thousands of Russian Roubles, unless otherwise stated)
21 Sales The components of sales were as follows: 2009 2008 Nitrogen Nitrogen fertilizers 26,274,056 39,225,066 Organic synthesis products 5,041,872 7,204,293 Complex fertilizers group 3,259,941 3,715,240 Other goods 538,815 1,346,218 Other services 326,568 295,199 35,441,252 51,786,016 Phosphates Phosphates 17,153,958 30,726,501 Iron ore concentrate 7,956,948 11,008,535 Feed phosphates group 2,288,958 4,152,095 Apatite concentrate 948,465 2,023,247 Baddeleyite concentrate 439,118 426,233 Complex fertilizers group 50,963 255,470 Other goods 238,771 367,796 Other services 524,506 416,344 29,601,687 49,376,221 Distribution Nitrogen fertilizers 1,984,185 891,556 Phosphates 1,199,879 1,453,578 Complex fertilizers group 1,398,459 2,456,713 Other goods 796,934 446,223 Other services 10,352 28,394 5,389,809 5,276,464 Others Nitrogen fertilizers 1,562,992 3,938,070 Organic synthesis products 120,436 108,091 Logistic services 394,805 951,460 Other goods 462,283 336,385 Other services 603,985 400,866 3,144,501 5,734,872 Total sales 73,577,249 112,173,573
Financial statements 22 Cost of sales The components of cost of sales were as follows: Note 2009 2008 Materials and components used or resold 20,444,650 27,077,695 Energy 4,619,546 4,077,890 Utilities and fuel 2,062,700 2,559,172 Labour, including contributions to social funds 6,362,041 6,445,568 Depreciation 2,363,127 2,381,348 Repairs and maintenance 531,614 1,386,177 Production overheads 1,237,323 1,023,635 Property tax, rent payments for land and related taxes 750,048 939,101 Transportation expenses for logistics services 716,116 1,143,211 Idle property, plant and equipment written-off 7 83,872 313,131 Reversal of provision for obsolete and damaged inventory and finished goods (6,293) (22,381) Changes in work in progress and finished goods 2,064,961 (3,089,813) Other costs 210,094 231,733 Total cost of sales 41,439,799 44,466,467
In 2009 the Group introduced a new line “Changes in work in progress and finished goods”. All components of cost of sales in the comparative period are shown in compliance with this style of presentation.
70 EUROCHEM Annual Report and Accounts 2009 23 Distribution costs Distribution costs comprised: Note 2009 2008 Transportation 15,662,588 17,838,778 Export duties,other fees and commissions 336,900 3,027,912 Labour, including contributions to social funds 710,094 888,143 Depreciation 339,519 367,955 Repairs and maintenance 726,506 652,556 Provision for impairment of receivables 14 111,549 4,133 Other 501,536 503,014 Total distribution costs 18,388,692 23,282,491 24 General and administrative expenses General and administrative expenses comprised: Note 2009 2008 Labour, including contributions to social funds 1,594,409 1,713,592 Depreciation and amortisation 273,707 193,352 Audit, consulting and legal services 205,611 275,753 Rent 131,156 138,930 Bank charges 110,141 131,056 Social expenditure 79,011 90,760 Repairs and maintenance 40,276 94,810 Provision/(reversal of provision) for impairment of receivables 14 87,009 (130,026) Other expenses 740,078 700,491 Total general and administrative expenses 3,261,398 3,208,718
The total depreciation and amortisation expenses included in all captions of the statement of comprehensive income amounted to RR 2,976,353 thousand (2008: RR 2,942,655 thousand). The total staff costs (including social expenses) included in all captions of the statement of comprehensive income amounted to RR 8,666,544 thousand (2008: RR 9,047,303 thousand).
The fees for the audit of the consolidated and statutory financial statements for the year ended 31 December 2009 amounted to RR 60,973 thousand (2008: RR 48,027 thousand). The auditors also provided the Group with consulting services amounting to RR 3,520 thousand (2008: RR 2,245 thousand).
25 Other operating income and expenses Financial statements The components of other operating (income) and expenses were as follows: Note 2009 2008 Reversal of provision for taxes – (418,689) Loss on disposal of property, plant and equipment 181,076 94,006 Sponsorship 202,847 444,201 Foreign exchange gain (679,113) (26,531) Other operating expenses 70,161 232,423 Total other operating (income)/expenses (225,029) 325,410
Annual Report and Accounts 2009 EUROCHEM 71 Notes to the consolidated financial statements continued for the year ended 31 December 2009 (all amounts are presented in thousands of Russian Roubles, unless otherwise stated)
26 Income tax 2009 2008 Income tax expense – current 2,437,953 9,295,501 Deferred income tax – reversal of temporary differences 40,195 37,840 Effect of the change in the tax rate 151,108 (441,953) Income tax expense 2,629,256 8,891,388
The profit before taxation for financial reporting purposes is reconciled to the tax expense as follows: 2009 2008 Profit before taxation 13,704,704 36,780,111 Theoretical tax charge at statutory rate of 20% (2008 – 24%) (2,740,941) (8,827,226)
Tax effect of items which are not deductible or assessable for taxation purposes: – Non-deductible expenses (447,168) (387,889) – Effects of different tax rates in other countries 768,974 (143,086) – Recognised tax loss carry forward for the year – 24,860 – Unrecognised tax loss carry forward for the year (59,013) – – Effect of the change in the tax rate (151,108) 441,953 Consolidated tax charge (2,629,256) (8,891,388)
Most companies of the Group were subject to a tax rate of 20% on taxable profits in the Russian Federation for 2009 (2008: 24%). Their deferred tax assets/liabilities are measured at the rate of 20% as at 31 December 2009 and 31 December 2008.
Effective from 1 January 2010, the rate of profit tax payable by the company in Lithuania is 15% (2009: 20%). The respective deferred tax assets/liabilities are measured at the rate of 15% and 20% as at 31 December 2009 and 31 December 2008, respectively.
In the context of the Group’s current structure, tax losses and current tax assets of the different companies may not be offset against current tax liabilities and taxable profits of other companies and, accordingly, taxes may accrue even where there is a net consolidated tax loss. Therefore, deferred tax assets of one company of the Group are not offset against any deferred tax liabilities of another company.
At 31 December 2009 the Group had RR 1,164,929 thousand of accumulated tax losses carried forward and recognised as a deferred tax asset (2008: RR 415,085 thousand).
The Group has not recognised a deferred tax liability in respect of temporary differences associated with investments in subsidiaries of RR 667,166 thousand Financial statements (2008: RR 113,164 thousand). The Group controls the timing of the reversal of these temporary differences and does not expect to reverse them in the foreseeable future.
The movement in deferred tax assets and liabilities during 2009 and 2008 was as follows: Currency Effect Differences translation of change 31 December (recognition Business difference in income 31 December 2008 and reversals) combinations (Note 2) tax rate 2009 Tax effects of (deductible)/taxable temporary differences: Property, plant and equipment and intangible assets 2,248,558 (64,412) 26,124 (9,365) 340 2,201,245 Accounts receivable (43,684) 4,778 – 1,642 10,205 (27,059) Accounts payable (516,403) 337,807 – 1,417 5,579 (171,600) Inventories (776,872) 801,842 – (26,532) 319 (1,243) Other (34,505) (97,791) – (1,552) 381 (133,467) Tax losses carried-forward (415,085) (883,016) – (1,112) 134,284 (1,164,929) Non-recognised deferred tax assets – (59,013) – – – (59,013) Net deferred tax liability 462,009 40,195 26,124 (35,502) 151,108 643,934 Recognised deferred tax assets (1,380,972) (77,536) – (21,448) 151,108 (1,328,848) Recognised deferred tax liabilities 1,842,981 117,731 26,124 (14,054) – 1,972,782 Net deferred tax liability 462,009 40,195 26,124 (35,502) 151,108 643,934
72 EUROCHEM Annual Report and Accounts 2009 26 Income tax continued The total amount of deferred tax charge is recognised in profit and loss. Currency Effect Differences translation of change 31 December (recognition Business difference in income 31 December 2007 and reversals) combinations (Note 2) tax rate 2008 Tax effects of (deductible)/taxable temporary differences: Property, plant and equipment and Intangible assets 1,485,355 1,128,220 72,862 2,269 (440,148) 2,248,558 Accounts receivable (29,104) (31,611) – 3,150 13,881 (43,684) Accounts payable (440,542) (153,477) – 5,294 72,322 (516,403) Inventories (127,659) (444,406) – (78,527) (126,280) (776,872) Other 77,043 (115,233) – 690 2,995 (34,505) Tax losses carried-forward (129,569) (320,793) – – 35,277 (415,085) Non-recognised deferred tax assets 24,860 (24,860) – – – – Net deferred tax liability 860,384 37,840 72,862 (67,124) (441,953) 462,009 Recognised deferred tax assets (481,733) (780,474) – (54,211) (64,554) (1,380,972) Recognised deferred tax liabilities 1,342,117 818,314 72,862 (12,913) (377,399) 1,842,981 Net deferred tax liability 860,384 37,840 72,862 (67,124) (441,953) 462,009
The amounts shown in the statement of financial position include the following: 2009 2008 Deferred tax assets expected to be recovered after more than 12 months (657,265) (349,296) Deferred tax liabilities expected to be settled after more than 12 months 1,880,528 2,155,634 27 Earnings per share Basic earnings per share are calculated by dividing the net profit attributable to equity holders of the company by the weighted average number of ordinary shares in issue during the year, excluding treasury shares (Note 17). The company has no dilutive potential ordinary shares, therefore, the diluted earnings per share equals the basic earnings per share. 2009 2008 Net profit 11,111,048 27,385,406 Weighted average number of ordinary shares in issue (expressed in thousands) 67,932 67,932 Basic and diluted earnings per share (expressed in RR per share) 163.56 403.13
28 Balances and transactions with related parties Financial statements Parties are considered to be related if one party has the ability to control the other party or exercise significant influence over the other party in making financial or operational decisions as defined by IAS 24 “Related Party Disclosures”. In considering each possible related party relationship, attention is directed to the substance of the relationship, not merely the legal form. Related parties are represented by entities controlled by the common ultimate shareholders with the Group. The relationships with those related parties with whom the Group entered into significant transactions or had significant balances outstanding are detailed below: 31 December 31 December Financial statements caption Nature of relationship Note 2009 2008 Statement of financial position caption Originated loans Parent company 12 – 5,729,178 Trade receivables Other related parties 16,104 56,849 Less: impairment provision Other related parties (16,104) – Prepayments, other receivables and other current assets Other related parties 50,241 25,282 Less: impairment provision Other related parties (50,241) – Interest receivable Parent company – 53,158 Trade payables Other related parties 13,517 –
Annual Report and Accounts 2009 EUROCHEM 73 Notes to the consolidated financial statements continued for the year ended 31 December 2009 (all amounts are presented in thousands of Russian Roubles, unless otherwise stated)
28 Balances and transactions with related parties continued
Financial statements caption Nature of relationship 2009 2008 Statement of comprehensive income caption Sales Other related parties 145,830 454,354 Purchases of materials and components Other related parties (60,008) (144,858) General and administrative expenses Other related parties (117,190) – Distribution costs Other related parties (16,104) ( 67,057 ) Other operating income/(expenses) Other related parties – (137,707 ) Interest income Parent company 59,376 53,158
Financial statements caption Nature of relationship Note 2009 2008 Statement of cash flows caption Decrease in trade receivables Other related parties 40,745 – Increase in other receivables Other related parties (24,959) – Acquisition of available-for-sale investments Parent company 10 (19,605,626) (5,449,233) Proceeds from sale of available-for-sale investments Parent company 10 4,529,819 – Originated loans Parent company – (5,118,848) Repayment of originated loan Parent company 12 6,568,110 – Interest received Parent company 121,199 – Dividends paid Parent company – (14,124,421)
The total key management personnel compensation included in the profit and loss was RR 177,338 thousand and RR 346,027 thousand for the years ended 31 December 2009 and 2008, respectively. This compensation is paid to six individuals who are members of the Management Board, for their services in full time positions. Compensation is made up of an annual fixed remuneration plus a performance bonus accrual. 29 Non-current assets held for sale Disposal of LLC Novomoskovsky Chlor. In December 2008 the Group signed a preliminary agreement with a third party for the disposal of LLC Novomoskovsky Chlor. At 31 December 2008 assets and liabilities of this subsidiary were presented as a disposal group held for sale. In June 2009 the Group sold its 100% stake in LLC Novomoskovsky Chlor to a third party for RR 508,396 thousand, which will be paid on a quarterly basis until 31 December 2012, bearing an interest rate of CBR rate +2.5%. At 31 December 2009 the outstanding amount was RR 402,827 thousand, which is included in other non-current assets (RR 247,893 thousand) and in other receivables (RR 154,934 thousand).
Financial statements At the date of disposal the net assets of LLC Novomoskovsky Chlor were RR 149,518 thousand. The Group recognized a gain of RR 358,878 thousand on the disposal.
The major classes of assets of LLC Novomoskovsky Chlor at the date of disposal included:
Property, plant and equipment 183,105 Inventories 111,064 Trade and other receivables 55,231 Cash and cash equivalents 693 Total assets 350,093
Major classes of liabilities directly associated with LLC Novomoskovsky Chlor at the date of disposal included:
Trade and other payables 200,575 Total liabilities 200,575 Net assets 149,518
74 EUROCHEM Annual Report and Accounts 2009 30 Contingencies, commitments and operating risks i Capital expenditure commitments As at 31 December 2009 the Group had contractual commitments for capital expenditures of RR 9,388,416 thousand (2008: RR 22,494,066 thousand), mostly denominated in Euros and US$ (RR 1,652,759 thousand and RR 5,217,095 thousand, respectively). The management estimates that, out of these, approximately RR 8,762,405 thousand will represent cash outflows in 2010.
RR 5,700,730 thousand out of the total amount relates to the development of the Gremyachinskoe deposit and the construction of a potassium salt mining facility (2008: RR 15,207,869 thousand). ii Tax legislation Russian tax, currency and customs legislation is subject to varying interpretations and changes, which can occur frequently. Management’s interpretation of such legislation as applied to the transactions and activity of the Group may be challenged in the future by the relevant regional and federal authorities.
The Russian tax authorities may be taking a more assertive position in their interpretation of the legislation and assessments, and it is possible that transactions and activities that have not been challenged in the past may be challenged.
As a result, significant additional taxes, penalties and interest may be assessed. Fiscal periods remain open to review by the authorities in respect of taxes for three calendar years preceding the year of review. Under certain circumstances reviews may cover longer periods.
Russian transfer pricing legislation provides the possibility for the tax authorities to make transfer pricing adjustments and impose additional tax liabilities in respect of all controllable transactions if the transaction price differs from the market price by more than 20%. Controllable transactions include transactions with interdependent parties, as determined under the Russian Tax Code, all cross-border transactions (irrespective of whether performed between related or unrelated parties), transactions where the price applied by a taxpayer differs by more than 20% from the price applied in similar transactions by the same taxpayer within a short period of time, and barter transactions. There is no formal guidance as to how these rules should be applied in practice. The arbitration court practice in this respect is contradictory.
Tax liabilities arising from intercompany transactions are determined using actual transaction prices. It is possible, with the evolution of the interpretation of the transfer pricing rules in the Russian Federation and the changes in the approach of the Russian tax authorities, that such transfer prices could potentially be challenged in the future. Given the nature of the current Russian transfer pricing rules, the impact of any such challenge cannot be reliably estimated; however, it may be significant.
Russian tax legislation does not provide definitive guidance in certain areas, specifically in extraction tax. From time to time, the Group adopts interpretations of such uncertain areas that may be challenged by the tax authorities, the impact of which cannot be reliably estimated; however, it may be significant to the financial condition or the overall operations of the Group.
As at 31 December 2009 management believes that its interpretation of the relevant legislation is generally appropriate and the Group’s tax, currency and Financial statements customs positions will be sustained. Where management believes that it is probable that certain tax positions taken by the Group may not be sustained if challenged by the tax authorities, the Group has recorded provisions for related taxes, interest and penalties. There were no such provisions recorded by the Group at 31 December 2009 and 31 December 2008.
In addition to the above matters, management estimates that the Group has other possible obligations from exposure to other than remote tax risks of RR 1,433,262 thousand (2008: RR 2,682,920 thousand). These exposures primarily relate to management services and other fees charged by the holding company to the Group subsidiaries. iii Insurance policies The Group generally carries insurance as mandated by statutory requirements. The Group holds insurance policies covering directors’ and officers’ liabilities and trade operations, including export shipments. Insurance strategies covering the Group’s assets are under review. iv Environmental matters The environmental regulation in the Russian Federation is evolving and the enforcement posture of government authorities is continually being reconsidered. The Group periodically evaluates its obligations under environmental regulations and an immediate response is formulated as required. Potential liabilities, which might arise as a result of changes in existing regulations, civil litigation or legislation, cannot be estimated but could be material. In the current enforcement climate under existing legislation, management believes that there are no significant liabilities for environmental damage.
Annual Report and Accounts 2009 EUROCHEM 75 Notes to the consolidated financial statements continued for the year ended 31 December 2009 (all amounts are presented in thousands of Russian Roubles, unless otherwise stated)
30 Contingencies, commitments and operating risks continued v Legal proceedings During the reporting period, the Group was involved in a number of court proceedings (both as a plaintiff and a defendant) arising in the ordinary course of business. In the opinion of management, there are no current legal proceedings or other claims outstanding which could have a material effect on the result of operations or the financial position of the Group.
vi Operating environment of the Group Following a sharp deterioration in the global economic environment in the fourth quarter of 2008, prices for nitrogen and phosphate fertilizers, as predominantly manufactured and sold by the Group, have declined significantly from the peak levels of 2008 and average levels for 2008, while remaining broadly in line with 2007 average prices, and mostly above 2006 average prices. For nitrogen fertilizers, average prices during 2009 ranged from 26% to 33% of the maximum 2008 price, 44% to 52% of the 2008 average price, 68% to 86% of the 2007 average price, and 95% to 116% of the 2006 average price. For phosphate and complex fertilizers, prices ranged from 27% to 41% of the maximum 2008 price, 35% to 51% of the 2008 average price, 80% to 114% of the 2007 average price, and 133% to 155% of the 2006 average price.
The debtors of the Group may also be affected by the tighter liquidity situation which could in turn impact their ability to repay the amounts owed. Deteriorating operating conditions for customers may also have an impact on the ability of management to forecast cash flows and assess any impairment of financial and non-financial assets. To the extent that information is available, management has reflected revised estimates of expected future cash flows in its impairment assessments.
The effects of the global financial crisis continued to have a severe effect on the Russian economy in 2009:
• the rise in Russian and emerging market risk premiums resulted in a steep increase in financing costs; and
• the official US$ exchange rate of the Central Bank of the Russian Federation increased from RR 25.37 at 1 October 2008 to RR 29.38 at 31 December 2008 and RR 30.24 at 31 December 2009. At the date of issuance of these financial statements the US$ exchange rate was RR 29.22.
Management is unable to determine reliably the effects on the Group’s future financial position of any further deterioration in the Group’s operating environment as a result of the ongoing crisis. It believes it is taking all the necessary measures to support the sustainability and growth of the Group’s business in the current circumstances. 31 Financial and capital risk management 31.1 Financial risk management The Group’s activities expose it to a variety of financial risks: market risk (including foreign currency exchange risk, interest rate risk and price risk), credit risk and liquidity risk. The overall risk management programme seeks to minimize potential adverse effects on the financial performance of the Group.
(a) Market risk Financial statements (i) Foreign currency risk The Group’s revenues, expenses, capital expenditure, investments and borrowings are denominated in foreign currencies as well as Russian Roubles. The Group is exposed to foreign exchange risk to the extent that its future cash inflows and outflows over a certain period of time are denominated in different currencies.
The objective of the Group’s foreign exchange risk management is to minimize the volatility of the Group’s cash flows arising from fluctuations in foreign exchange rates. Management focuses on assessing the Group’s future cash flows in foreign currencies and managing the gaps arising between inflows and outflows. Translation gains and losses arising from the revaluation of its monetary assets and liabilities are therefore not viewed as an indicator of the total impact of foreign exchange fluctuations on its future cash flows since such gains or losses do not capture the impact on cash flows of foreign exchange- denominated revenues, costs, future capital expenditure, investment and financing activities.
The table below summarises the Group’s financial assets and liabilities which are subject to foreign currency risk at the balance sheet date: Other foreign 31 December 2009 US$ Euro currency ASSETS Non-current financial assets Restricted cash 2,651 145,425 – Total non-current financial assets 2,651 145,425 – Current financial assets Trade receivables 911,441 169,124 3,206 Restricted cash 548,357 – 2,729 Cash and cash equivalents 4,588,444 2,867,709 7,325 Total current financial assets 6,048,242 3,036,833 13,260 Total financial assets 6,050,893 3,182,258 13,260
76 EUROCHEM Annual Report and Accounts 2009 31 Financial and capital risk management continued 31.1 Financial risk management continued (a) Market risk continued (i) Foreign currency risk continued Other foreign 31 December 2009 US$ Euro currency LIABILITIES Non-current liabilities Bank borrowings 22,899,186 3,657,138 – Bonds issued 8,724,895 – – Total non-current financial liabilities 31,624,081 3,657,138 – Current liabilities Bank borrowings 12,491,434 – – Trade payables 141,685 34,783 – Total current financial liabilities 12,633,119 34,783 – Total financial liabilities 44,257,200 3,691,921 –
Other foreign 31 December 2008 US$ Euro currency ASSETS Current assets Trade receivables 1,955,166 101,379 – Originated loans 5,729,178 – – Restricted cash 341,986 139,926 – Cash and cash equivalents 21,907,758 2,070,821 19,353 Total financial assets 29,934,088 2,312,126 19,353 LIABILITIES Non-current liabilities Bank borrowings 34,418,679 – – Bonds issued 8,453,611 – – Total non-current financial liabilities 42,872,290 – – Current liabilities
Bank borrowings 9,074,390 – – Financial statements Trade payables 304,100 145,095 – Total current financial liabilities 9,378,490 145,095 – Total financial liabilities 52,250,780 145,095 –
The Group believes that it has significant positive foreign exchange exposure towards the US$/RR exchange rate given that its expected US$ denominated revenues significantly exceed its planned outflows in US$, mostly related to servicing of debt and capital expenditure. Hence any depreciation of the RR against the US$ has a positive effect on the Group’s future cash flows.
Annual Report and Accounts 2009 EUROCHEM 77 Notes to the consolidated financial statements continued for the year ended 31 December 2009 (all amounts are presented in thousands of Russian Roubles, unless otherwise stated)
31 Financial and capital risk management continued 31.1 Financial risk management continued (a) Market risk continued (i) Foreign currency risk continued The Group’s sales for the years ended 31 December 2009 and 31 December 2008 are presented in the table below: Other foreign US$ Euro RR currency Total 2009 50,977,211 3,642,965 15,892,608 3,064,465 73,577,249 69% 5% 22% 4% 100% 2008 83,574,310 4,937,069 19,090,876 4,571,318 112,173,573 75% 4% 17% 4% 100%
At 31 December 2009, if the RR exchange rate against the US$ had been higher/lower by 10%, all other things being equal, after tax profit for the year would have been RR 3,056,505 thousand (2008: RR 1,696,069 thousand) higher/lower, purely as a result of foreign exchange gains/losses on translation of US$-denominated assets and liabilities and with no regard to the impact of this appreciation/depreciation on sales. Profit is more sensitive to movements in RR/US$ exchange rates in 2009 than it was in 2008 because of the increased amount of US$-denominated net debt.
The Group is disclosing the impact of such a 10% shift in the manner set out above to ease the calculation for the users of these consolidated financial statements of the impact on the after tax profit resulting from subsequent future exchange rate changes.
During 2008 and 2009 the Group did not hedge this exposure using financial instruments.
(ii) Interest rate risk The Group’s income and operating cash flows are substantially independent of changes in market interest rates. The Group’s principal interest rate risk arises from long-term and short-term borrowings.
The Group is exposed to risk from floating interest rates due to the fact that it has RR 35,871,028 thousand of US$ denominated loans outstanding at 31 December 2009 bearing a floating interest rate of 1 month Libor +1.8% (2008: 1 month Libor +1.8%) and RR 3,688,006 thousand of Euro denominated loans outstanding at 31 December 2009 bearing a floating interest rate of 3 months Libor +2% (2008: nil). The Group’s profit after tax for the year ended 31 December 2009 would have been RR 210,757 thousand, or 1.90% lower/higher (2008: 89,534 thousand, or 0.32% lower/higher) if the US$ 1 month Libor interest rate was 0.61 percentage point higher/lower than its actual level during the year. The Group’s profit after tax for the year ended 31 December 2009 would have been RR 7,018 thousand, or 0.06% lower/higher (2008: nil) if the Euribor interest rate was 0.63 percentage point higher/lower than its actual level during the year. During 2008 and 2009 the Group did not hedge this exposure using financial instruments.
The Group does not have a formal policy of determining how much exposure the Group should have to fixed or variable rates. However, the Group performs
Financial statements a periodic analysis of the current interest rate environment and depending on this analysis at the time of raising new debt management makes decisions on whether obtaining finance on a fixed-rate or a variable-rate basis would be more beneficial to the Group over the expected period until maturity.
(iii) Financial investments risk The Group is exposed to equity securities price risk because of investments held by the Group and classified on the consolidated statement of financial position as available-for-sale. At 31 December 2009 the Group owned 19,366,595 shares of K+S Group (10.12% of its share capital) with a fair value of RR 33,602,943 thousand (Note 10). The fair value of the shares is determined based on the closing price of Euro 39.99 as of the reporting date in the Xetra trading system. The Group’s other comprehensive income/loss for 2009 would have been RR 840,284 thousand if the share price were 1 Euro higher/lower than its actual level as at 31 December 2009. At 18 March 2010 the share price was Euro 45.55. During 2009 the Group did not hedge this exposure using financial instruments.
The Group is principally exposed to market price risks in relation to the investment in shares of K+S. Management reviews reports on the performance of K+S on a quarterly basis and provides recommendations to the Board of Directors on the advisability of further investments. The subscribed investment commitments in this respect are approved by the Board of Directors.
The Group does not enter into any transactions in financial instruments whose value is exposed to the value of any commodities traded on a public market.
78 EUROCHEM Annual Report and Accounts 2009 31 Financial and capital risk management continued 31.1 Financial risk management continued (b) Credit risk Credit risk arises from the possibility that counterparties to transactions may default on their obligations, causing financial losses for the Group. Financial assets, which potentially subject Group entities to credit risk, consist principally of trade receivables, cash and bank deposits. The objective of managing credit risk is to prevent losses of liquid funds deposited with or invested in financial institutions or the loss in value of receivables. Management believes that no credit risk arises from loans to the parent company (Note 12).
The maximum exposure to credit risk resulting from financial assets is equal to the carrying amount of the Group’s financial assets RR 13,971,571 thousand (2008: RR 35,816,756 thousand). The Group has no other significant concentrations of credit risk.
Cash and cash equivalents. Cash and short-term deposits are mainly placed in major multinational and Russian banks with independent credit ratings. No bank balances and term deposits are past due or impaired. See the analysis by credit quality of bank balances and term deposits in Note 15.
Trade receivables. Trade receivables are subject to a policy of active credit risk management which focuses on an assessment of ongoing credit evaluation and account monitoring procedures. The objective of the management of trade receivables is to sustain the growth and profitability of the Group by optimising asset utilisation whilst maintaining risk at an acceptable level.
The monitoring and controlling of credit risk is performed by the corporate treasury function of the Group. The credit policy requires the performance of credit evaluations and ratings of customers. The credit quality of each new customer is analysed before the Group provides it with the standard terms of delivery and payment. The Group gives preference to customers with an independent credit rating. New customers without an independent credit rating are evaluated on a sample basis by an appointed rating agency. The credit quality of other customers is assessed taking into account their financial position, past experience and other factors. Customers that do not meet the credit quality requirements are supplied on a prepayment basis only.
Although the collection of receivables could be influenced by economic factors, management believes that there is no significant risk of loss to the Group beyond the provision already recorded (Note 14).
The major part of trade receivables that are neither due nor impaired relates to wholesale distributors and steel producers for which the credit exposures and related ratings are presented below:
Wholesale customers Credit agency Credit rating/Other 2009 2008 Wholesale customers Credit Reform* Good 533,776 457,629 Wholesale customers and steel producers – Letter of credit 296,317 1,365,378 Wholesale customers and steel producers Moody’s Investor’s Service Aa2 to Ba2 331,434 – Total 1,161,527 1,823,007 Financial statements * Independent credit agency used by the Group for evaluation of customers’ credit quality.
The rest of trade receivables is analysed by management who believes that the balance of the receivables is of good quality due to strong business relationships with these customers. The credit risk of every single customer is monitored.
(c) Liquidity risk Liquidity risk results from the Group’s potential inability to meet its financial liabilities, such as settlements of financial debt and payments to suppliers. The Group’s approach to liquidity risk management is to maintain sufficient readily available reserves in order to meet its liquidity requirements at any point in time.
In order to take advantage of financing opportunities in the international capital markets the Group has obtained credit ratings from Fitch and Standard & Poor’s. As of 31 December 2009 these institutions have rated the Group as BB with stable and negative outlooks, respectively (2008: BB with stable outlook by both agencies).
Cash flow forecasting is performed throughout the Group. Group finance monitors rolling forecasts of the Group’s liquidity requirements to ensure it has sufficient cash to meet operational needs while maintaining sufficient headroom on its undrawn committed borrowing facilities (note 18) at all times so that the Group does not breach borrowing limits or covenants on any of its borrowing facilities. Such forecasting takes into consideration the Group’s debt financing plans, covenant compliance and compliance with internal balance sheet ratio targets.
Annual Report and Accounts 2009 EUROCHEM 79 Notes to the consolidated financial statements continued for the year ended 31 December 2009 (all amounts are presented in thousands of Russian Roubles, unless otherwise stated)
31 Financial and capital risk management continued 31.1 Financial risk management continued (c) Liquidity risk continued The table below analyses the Group’s financial liabilities into the relevant maturity groupings based on the time remaining from the balance sheet date to the contractual maturity date. Less than Between Between 1 year 1 and 2 years 2 and 5 years Total As of 31 December 2008 Trade payables 1,793,635 – – 1,793,635 Bank borrowings* 10,635,088 13,642,436 24,081,939 48,359,463 Bonds issued* 670,975 670,975 9,359,035 10,700,985
As of 31 December 2009 Trade payables 1,373,488 – – 1,373,488 Bank borrowings* 13,604,955 17,295,880 10,863,770 41,764,605 Bonds issued* 690,702 690,702 8,926,226 10,307,630
* The table above shows undiscounted cash outflows for financial liabilities (including interest together with the borrowings) based on conditions existing as of 31 December 2009 and 31 December 2008, respectively.
The Group controls the minimum required level of cash balances available for short-term payments in accordance with the financial policy of the Group adopted in alignment with economic realities on 29 April 2009 by the Board of Directors. Such cash balances are represented by current cash balances on bank accounts, bank deposits, short-term investments, cash and other financial instruments, which may be classified as cash equivalents in accordance with IFRS.
The Group assesses liquidity on a weekly basis using a twelve-month cash flow rolling forecast.
31.2 Capital risk management The Group’s objectives when managing capital are to safeguard its ability to continue as a going concern, to provide returns for shareholders and benefits for other stakeholders, to have available the necessary financial resources for investing activities and to maintain an optimal capital structure in order to reduce the cost of capital. The Group considers total capital under management to be equity as shown in the IFRS consolidated statement of financial position. This is considered more appropriate than alternatives, such as the value of equity shown in the company’s statutory financial (accounting) reports.
The Group monitors capital on the basis of the gearing ratio and the net debt to EBITDA ratio.
Financial statements Gearing ratio The gearing ratio is determined as net debt to net debt plus shareholders’ equity.
The gearing ratio as of 31 December 2009 and 31 December 2008 is shown in the table below: 2009 2008 Total debt 47,772,653 51,965,567 Less: cash and cash equivalents 11,227,858 26,707,262 Net debt 36,544,795 25,258,305
Equity attributable to the holders of the Company 72,436,377 60,226,778
Net debt and shareholders’ equity 108,981,172 85,485,083 Gearing ratio, % 34% 30%
80 EUROCHEM Annual Report and Accounts 2009 31 Financial and capital risk management continued 31.2 Capital risk management continued Net debt/EBITDA The Group has established a policy that the ratio of the Group’s net debt to its 12 months’ rolling EBITDA should not exceed two and a half times. For this purpose net debt is determined as the sum of short-term borrowings, long-term borrowings and bonds balance outstanding, less cash and cash equivalents.
The ratio of net debt to EBITDA as of 31 December 2009 and 31 December 2008 is shown in the table below:
Note 2009 2008 EBITDA 6 16,516,237 44,296,923 Net debt 36,544,795 25,258,305 Net debt/EBITDA 2.21 0.57
Since EBITDA is not a standard IFRS measure, EuroChem Group’s definition of EBITDA may differ from that of other companies. 32 Fair value of financial instruments Fair value is the amount at which a financial instrument could be exchanged in a current transaction between willing parties, other than in a forced sale or liquidation, and is best evidenced by an active quoted market price.
The estimated fair values of financial instruments have been determined by the Group using available market information, where it exists, and appropriate valuation methodologies. However, judgement is necessarily required to interpret market data to determine the estimated fair value. Management has used all available market information in estimating the fair value of financial instruments.
Financial instruments carried at fair value. Trading and available-for-sale investments are carried on the consolidated statement of financial position at their fair value.
Effective from 1 January 2009, the Group adopted the amendment to IFRS 7 for financial instruments that are measured in the consolidated statement of financial position at fair value. This requires disclosure of fair value measurements by three levels, depending on fair value measurements. Fair values of trading and available-for-sale investments were determined based on quoted market prices and were included in level 1.
Cash and cash equivalents are carried at amortised cost which approximates current fair value.
Financial assets carried at amortised cost. The fair value of floating rate instruments is normally their carrying amount. The estimated fair value of fixed interest rate instruments is based on estimated future cash flows expected to be received discounted at current interest rates for new instruments with similar credit risk and remaining maturity. The discount rates used depend on the credit risk of the counterparty. The carrying amounts of trade receivables approximate their fair values. Financial statements
Liabilities carried at amortised cost. The fair value is based on quoted market prices, if available. The estimated fair values of fixed interest rate instruments with a stated maturity, for which quoted market prices were not available, were estimated based on expected cash flows discounted at current interest rates for new instruments with similar credit risks and remaining maturities. The fair value of liabilities repayable on demand or after a notice period (“demandable liabilities”) is estimated as the amount payable on demand, discounted from the first date that the amount could be required to be paid. At 31 December 2009 and 2008 the fair value of the current and non-current borrowings is not materially different from their carrying amounts. The fair value of the issued bonds is disclosed in Note 19. 33 Subsequent events In February 2010, the Group acquired a 1.08% additional stake in Lifosa AB, a production subsidiary located in Lithuania, for a total consideration of RR 18,021 thousand paid in cash.
Annual Report and Accounts 2009 EUROCHEM 81 Main production subsidiaries
Shareholder/ Stake in Name Address participant (over 2%) authorized capital, % Kovdorsky Mining-and-Processing 184140 Murmansk Region, EuroChem MCC, OJSC 100% of common stock, Integrated Works, OJSC city of Kovdor, Sukhachyova Str., bld. 5 100% of preferred stock (Kovdorsky GOK, OJSC) Nevinnomyssky Azot, OJSC 357107 Stavropolsky Krai, EuroChem MCC, OJSC 100% city of Nevinnomyssk-7, Nizyaeva Str., bld. 1 Novomoskovsky Azot, OJSC 301660 Tula Region, Novomoskovsk, EuroChem MCC, OJSC 100% Svyazi Str., bld. 10 EuroChem – Belorechenskie 352636 Krasnodar Krai, EuroChem MCC, OJSC 100% Minudobrenia, LLC city of Bleorechensk (EuroChem-BMU, LLC) Phosphorit Industrial Group, LLC 188452 Leningrad Region, EuroChem MCC, OJSC 100% Kingisepp District, Phosphorit Industrial Zone Lifosa AB Lithuania, Kadainiai, LT-5030, EuroChem MCC, OJSC 92.229% Yuodkishke Str., bld. 50 EuroChem A.M. Limited 3.65% EuroChem-Volgakali, LLC 404350 Volgograd Region, EuroChem MCC, OJSC 100% city of Kotelnikovo, Lenina Str., bld. 7
A full list of subsidiaries is available in Attachment 1 to this report.
82 EUROCHEM Annual Report and Accounts 2009 Contact information
EuroChem Mineral and Chemical Company, OJSC Address: 53 ulitsa Dubininskaya, bldg. 6, Moscow 115054 Tel: +7(495) 795 2527 Fax: +7(495) 795 2532
Investor Relations E-mail: [email protected]
PR and Communications Department E-mail: [email protected]
Shareholder Registrar National Registrar Company, CJSC Place of business: 6 ulitsa Veresayeva, Moscow Mailing address: 6 ulitsa Veresayeva, Moscow 121357 Tel: +7(495) 440 6345, 440 7918/20/29, 440 7930/37 Fax: +7(495) 440 6355 Website: www.nrcreg.ru
License information: Date of issue: 6 September 2002 Number: 10-000-1-00252 Form: Series 03-000397 Valid until: no expiration date Issued by: the Russian Federal Securities Commission Signed by: Mr. I.V. Kostikov, Chairman of the Russian Federal Securities Commission
EuroChem’s RAS auditor Full name: Financial and Accounting Consultants Short name: FBK (LLC) Place of business: 44 Myasnitskaya Str.bld.1 101990, Moscow Tel:+7(495) 737 5353 Website: www.fbk.ru
Audit License Information License number: 000001 Date of issue: 10.04.2002 Valid through: 10.04 2012 Issuing body: Russian Ministry of Finance
EuroChem’s IFRS auditor Full name: PricewaterhouseCoopers Audit, CJSC Short name: PwC Audit Place of business: 10, Butyrsky Val, Moscow,125047 Tel: +7(495) 967 6000 Fax: +7(495) 967 6001 Website: www.pwcglobal.com
Annual Report and Accounts 2009 EUROCHEM 83 Forward-looking statements This annual report has been prepared by OJSC MHK EuroChem (“EuroChem” or the “Company”) for informational purposes, and may include forward-looking statements or projections. These forward-looking statements or projections include matters that are not historical facts or statements and reflect the Company’s intentions, beliefs or current expectations concerning, among other things, the Company’s results of operations, financial condition, liquidity, performance, prospects, growth, strategies, and the industry in which the Company operates. By their nature, forwarding-looking statements and projections involve risks and uncertainties because they relate to events and depend on circumstances that may or may not occur in the future. The Company cautions you that forward-looking statements and projections are not guarantees of future performance and that the actual results of operations, financial condition and liquidity of the Company and the development of the industry in which the Company operates may differ materially from those made in or suggested by the forward-looking statements or projections contained in this presentation. Factors that could cause the actual results to differ materially from those contained in forward-looking statements or projections in this presentation may include, among other things, general economic conditions in the markets in which the Company operates, the competitive environment in, and risks associated with operating in, such markets, market change in the fertilizer and related industries, as well as many other risks affecting the Company and its operations. In addition, even if the Company’s results of operations, financial condition and liquidity and the development of the industry in which the Company operates are consistent with the forward-looking statements or projections contained in this presentation, those results or developments may not be indicative of results or developments in future periods. The Company does not undertake any obligation to review or confirm expectations or estimates or to update any forward-looking statements or projections to reflect events that occur or circumstances that arise after the date of this presentation.
Statements regarding competitive position Statements referring to EuroChem’s competitive position are based on the company’s belief and, in some cases, rely on a range of sources, including investment analysts’ reports, independent market studies and EuroChem’s internal assessments of market share based on publicly available information about the financial results and performance of market participants.
84 EUROCHEM Annual Report and Accounts 2009 Contents EuroChem – Our world Overview of our business our of Overview 01 2009 highlights 02 Our market drivers 04 Our operations 06 Our strategy 07 Strategic objectives 08 EuroChem at a glance 10 The global industry – peer comparison 12 EuroChem history 14 EuroChem timeline 2009-2010 15 Chairman’s statement 16 Q&A with our CEO Performance Business segment performance 18 Nitrogen 20 Phosphates 21 Potash 22 Distribution 24 Management discussion and analysis 30 Key financial and non-financial data 32 Risk management Corporate governance 34 Our governance 40 Our responsibilities Financial statements 43 IFRS Consolidated financial statements and Independent auditor’s report
82 Main production subsidiaries 83 Contact information 84 Forward-looking statements This Report has been printed to environmental management system ISO 14001 standards by a printer which is Forest Stewardship Council (FSC) chain of custody-certified. All inks used are vegetable-based. This paper is environmentally friendly ECF (elemental chlorine-free) and wood-free with a high content of selected pre-consumer recycled material. The mill is fully FSC-certified. The paper is also completely bio-degradable and recyclable.
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Registered office EuroChem Mineral and Chemical Company, OJSC Address: 53 ulitsa Dubininskaya, bld. 6, Moscow 115054 Tel: +7(495) 795 2527 Fax: +7(495) 795 2532 E-mail: [email protected] Annual Report and Accounts 2009