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Rising to the Challenge

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Rising to the Challenge RISING TO THE CHALLENGE ANNUAL REPORT AND FINANCIAL STATEMENTS 2012 METINVEST ANNU METINVEST A L REPO L R T T A ND F ND IN A NCI A L ST A TE M ENTS 2012 WHILE 2012 WAS A CHALLENGING YEAR FOR METINVEST, OUR MARKETS AND THE GLOBAL ECONOMY, WE WERE PROACTIVE. IN RESPONSE TO THE CHALLENGES, WE HAVE TAKEN A SERIES OF DECISIVE ACTIONS IN LINE WITH OUR LONG-TERM STRATEGY TO PROTECT OUR STABLE FINANCIAL POSITION AND MARKET LEADERSHIP. Key Strategic Actions: #1: We have adapted our capital expenditure plans to focus on the most efficient investments in line with our Technological Strategy READ MORE ON PAGES 12-13 #2: We have pursued greater efficiency, quality and customer satisfaction through continuous improvement and lean production implementation READ MORE ON PAGES 14-15 #3: We have launched a major initiative to optimise working capital and enhance liquidity across the Group READ MORE ON PAGES 16-17 #4: We have adjusted and strengthened sales by expanding our network, focusing on strategic markets and balancing our product range READ MORE ON PAGES 18-19 STRONG MODEL IN STRATEGIC REVIEW OF OUR FINANCIAL ADDITIONAL INTRODUCTION CHALLENGING TIMES OVERVIEW THE YEAR GOVERNANCE SUSTAINABILITY STATEMENTS INFORMATION INTRODUCTION Metinvest is a leading steel producer in WE ARE METINVEST: the CIS and one of the top 30 steelmakers and top 10 iron ore producers in the world. A VERTICALLY INTEGRATED We are resourceful, managing every part of the value chain, from mining and processing STEEL AND MINING GROUP iron ore and coal to making and selling steel products. We employ more than THAT HAS ASSETS IN UKRAINE, 100,000 people. EUROPE AND THE US AND The Group maintains a conservative financial position and has an established SELLS ITS PRODUCTS THROUGH track record of ensuring operational excellence and delivering on its strategy. A GLOBAL NETWORK We have a global sales presence and benefit from our unique geographic position in both Europe and the CIS. Our diversified product mix, superior global distribution network and downstream service centres are key competitive advantages. Our vertically integrated business model has been designed to manage a vast and expandable resource base. We have 7,433 million tonnes of long-life iron ore resources, including 1,867 million tonnes of proven and probable iron ore reserves ,1 and are fully self-sufficient in iron ore concentrate and pellets. We also have some 627 million tonnes of long-life coal reserves, 2 and the production capacity to cover 65% of our internal needs for coking coal. INTRODUCTION SECTION III: SECTION VI: Introduction .........................................................01 REVIEW OF THE YEAR ABBREVIATED IFRS CONSOLIDATED Highlights of 2012 ...............................................02 Industry and Market Overview ...............................34 FINANCIAL STATEMENTS 2012 Achievements of 2012 .........................................03 Chief Financial Officer’s Review ............................36 Contents ..............................................................66 Chairman’s Statement..........................................04 Divisional Review Independent Auditor’s Report ...............................67 – Mining ...............................................................40 Abbreviated Consolidated Balance Sheet..............68 SECTION I: – Metallurgical .....................................................42 Abbreviated Consolidated Income Statement ........69 STRONG MODEL IN Abbreviated Consolidated Statement CHALLENGING TIMES SECTION IV: of Comprehensive Income ....................................70 OUR GOVERNANCE Abbreviated Consolidated Statement General Director’s Review.....................................08 of Cash Flows ......................................................71 Corporate Governance..........................................46 Key Performance Indicators ..................................11 Abbreviated Consolidated Statement Management Team ...............................................48 Strategic Actions of Changes in Equity .............................................72 Risk Management ................................................52 – Adapt Capital Expenditure .................................12 Notes to the Abbreviated – Pursue Greater Efficiency and Consolidated Financial Statements ......................73 Customer Satisfaction .......................................14 SECTION V: – Optimise Working Capital and Enhance Liquidity ..............................................16 SUSTAINABILITY SECTION VII: – Adjust and Strengthen Sales .............................18 Health and Safety ................................................58 ADDITIONAL INFORMATION Our People ...........................................................60 Parent Company and Principal Subsidiaries ........110 Environment and Communities .............................62 SECTION II: Sales Offices .....................................................111 STRATEGIC OVERVIEW Glossary and Abbreviations ................................112 Corporate Strategy ...............................................22 Strategic Objectives .............................................24 Business Model ...................................................26 Vertical Integration and Operating Model ..............28 Global Presence ...................................................30 1 As of 31 December 2009, according to JORC standards. 2 As of 31 December 2012 (unaudited). WWW.METINVESTHOLDING.COM 01 HIGHLIGHTS OF 2012 RESILIENT IN CHALLENGING TIMES Revenues Adjusted EBITDA 3 US$12,565M US$1,985M -11% year-on-year -46% year-on-year Revenues totalled US$12,565 million, down 11% from the US$14,189 million in 2011, Adjusted EBITDA amounted to US$1,985 million, down from the US$3,655 million in 2011. due to weakness in the global steel market. We managed to maintain a relatively high margin of 16% thanks to robust cost controls. Net Profit Capital Expenditure US$435M US$765M -77% year-on-year -34% year-on-year Net profit came to US$435 million, down 77% from the US$1,854 million in 2011, Capital expenditure stood at US$765 million, down 34% from the US$1,165 million in 2011, the main reason being falling global steel and iron ore prices. as we adjusted our investment plans in light of the difficult macroeconomic environment and to maintain our conservative debt position. Crude Steel Production Iron Ore Concentrate Production 12,459KT 36,224KT -13% year-on-year +1% year-on-year Crude steel production totalled 12,459 thousand tonnes, down 13% from the Iron ore concentrate production reached a record 36,224 thousand tonnes, up 1% from 14,375 thousand tonnes in 2011, due to weaker global demand for steel products. the 35,741 thousand tonnes in 2011. 3 Adjusted EBITDA is calculated as profits before income tax, financial income and costs, depreciation and amortisation, impairment and devaluation of property, plant and equipment, sponsorship and other charity payments, the share of results of associates and other non-core expenses. We will refer to adjusted EBITDA as EBITDA throughout this report. 02 METINVEST ANNUAL REPORT 2012 STRONG MODEL IN STRATEGIC REVIEW OF OUR FINANCIAL ADDITIONAL INTRODUCTION CHALLENGING TIMES OVERVIEW THE YEAR GOVERNANCE SUSTAINABILITY STATEMENTS INFORMATION ACHIEVEMENTS OF 2012 ONGOING INVESTMENT IN THE FUTURE Investment in Growth Sustainable Financing Social and Environmental Investments WE APPROVED OUR TECHNOLOGICAL WE SECURED A US$300 MILLION WE CLOSED THREE OBSOLETE AND FINANCING STRATEGIES, giving three-year pre-export finance facility COKE BATTERIES AND MOTHBALLED us a long-term roadmap for investments to support the implementation of our THE SINTER PLANT at Azovstal ahead of in technology, one that factors in a volatile Technological Strategy. The amount schedule to dramatically reduce emissions macroeconomic environment and prioritises was more than initially envisaged in the surrounding communities. a conservative financial position. due to strong interest from banks. WE MAINTAINED OUR SPENDING WE ACQUIRED 49.9% OF WE SECURED A US$325 MILLION ON THE ENVIRONMENT AT three-year pre-export finance facility, ZAPORIZHSTAL, which is in line with our US$455 MILLION4 despite challenging strategic goal of expanding steel production which was higher than the original market conditions, underlining our long- capacity and strengthens our product amount sought and oversubscribed. term commitment to achieving European portfolio in Ukraine and Western Russia standards for air quality through sustained with rolled products. WE REPAID A RECORD US$1.5 technological investments. BILLION five-year pre-export finance WE IMPLEMENTED A PCI facility, the largest in our history, on time WE INVESTED IN CUTTING-EDGE TECHNOLOGY PROJECT at Ilyich Steel, and in full, underlining our reputation as SAFETY TECHNOLOGY AT a reliable borrower. which allows us to lower production costs KRASNODON COAL, including new by fully eliminating the use of natural gas monitoring and employee positioning gas in our blast furnaces and reducing WE REPAID AHEAD OF SCHEDULE systems, as we continue to work towards coke consumption. A €410 MILLION seven-year senior the highest possible safety standards. facility agreement used to buy Trametal WE EXPANDED OUR SALES (Italy) and Spartan UK (UK), as part of our WE IMPLEMENTED OUR SOCIAL drive to optimise Metinvest’s corporate NETWORK by acquiring a large warehouse INVESTMENT POLICY, designed to debt structure. complex in Belgorod (Russia) and four promote long-term
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