2019 ANNUAL AND SUSTAINABILITY REPORT LKAB aims to create prosperity by being one of the most innovative, resource-efficient and responsible mining and minerals companies in the world. 02 LKAB ANNUAL AND SUSTAINABILITY REPORT 2019 CONTENTS INTRODUCTION RESPONSIBILITY AND GOVERNANCE The year in brief 2 Sustainable enterprise 50 Comments by the President and CEO 4 Risks and risk management 51 How we create value 8 Comments by the Chairman of the Board 58 Objectives for sustainable development 10 Corporate governance report 59 Board of Directors 66 BUSINESS CONTEXT AND STRATEGY Executive management team 68 Global context 13 Strategic priorities 16 FINANCIAL RESULTS Group overview 70 PRODUCTS AND MARKETS Financial statements 73 Customer offering 21 Notes 83 Drivers and trends 22 The Board’s attestation 121 Market development 24 Auditor’s report 122 OPERATIONS SUSTAINABILITY NOTES Exploration 27 Notes to the sustainability report 126 Mining 31 Auditor’s Limited Assurance Report Processing 33 on the Sustainability Report 144 Transport 34 OTHER INFORMATION Suppliers 35 Mineral reserves and mineral resources 146 Employees 36 Ten-year overview 150 Social responsibility 40 Terms and definitions 151 Environmental responsibility 44 Annual General Meeting and financial information 153 Impact in the value chain 48 Addresses lkab.com Administration report pages 2–3, 8–14, 35–72 and 121. Sustainability report pages 8–14, 35–41, 44–47, 50–56 and 125–143. RAIL TRANSPORT PORTS ABOUT LKAB’S ANNUAL AND SUSTAINABILITY REPORT 2019 The Board of Directors and the President hereby submit the annual and sustainability report for Luossavaara-Kiirunavaara AB (publ), corporate identity number 556001-5835, for the calendar year 2019. LKAB is a limited liability company that is wholly owned by the Swedish state. The annual report is integrated, meaning that the description of operations – including our sustainability work and corporate governance – is reported together with the administration report and financial statements that make up the statutory part of the annual report. A statutory sustainability report has been prepared as part of the administration report, in accordance with Chapter 6 of the Swedish Annual Accounts Act, and can be found on pages 8–14, 35–41, 44–47 and 50–56. A corporate governance report has been prepared as part of the administration report. LKAB reports its sustainability work in accordance with Global Reporting Initiative (GRI) Standards at the Core level and the scope of sustainability reporting is defined on pages 142–143. The English version of LKAB’s annual and sustainability report is a translation of the Swedish original version. In case of discrepancies, the Swedish version shall prevail. EUROPE’S LEADING MINING AND MINERALS GROUP LKAB is an international high-tech mining and minerals group that mines and upgrades the unique iron ore of northern Sweden for the global steel market. Sustainability is at the core of our business and our ambition is to be one of the industry’s most innovative, resource-efficient and responsible companies. The Group’s operations also include industrial minerals, drilling systems, rail haulage, rockwork services and property management. PROCESSING PLANTS OPEN-PIT MINES - KIRUNA - SVAPPAVAARA - SVAPPAVAARA - MALMBERGET RESEARCH AND DEVELOPMENT ROCKWORK UNDERGROUND MINES - KIRUNA - MALMBERGET SEK 31.3 bn SEK11. 8 bn SEK 6.1 bn 4,300 Net sales for 2019 Operating profit for 2019 The Board of Directors LKAB has about amounted to SEK 31.3 amounted to SEK 11.8 proposes an ordinary 4,300 employees. (25.9) billion. (6.9) billion. dividend of SEK 6.1 billion to the Annual General Meeting. 2nd 80% >30 1890 LKAB is the world’s second- LKAB is Europe's largest LKAB has more than 30 LKAB, established in 1890, largest producer in the iron ore producer and industrial minerals in its is one of Sweden’s oldest seaborne pellet market. mines around 80 percent product portfolio. industrial companies and of all iron ore within the EU. is wholly owned by the Swedish state. RESEARCH AND INDUSTRIAL MINERALS MINING AND CONSTRUCTION REAL ESTATE DEVELOPMENT SERVICES, ENGINEERING SERVICES PROPERTY MANAGEMENT EXPLOSIVES DRILLING SYSTEMS THE YEAR IN BRIEF THE YEAR IN BRIEF NET SALES AND OPERATING PROFIT Net sales Net sales 2019 Operating profit PRODUCED DELIVERED Iron ore products Iron ore products MSEK 35,000 30,000 27.2 Mt 24.8 Mt 25,000 2019 27.2 2019 24.8 20,000 2018 26.9 2018 26.8 15,000 2017 27.2 2017 27.6 10,000 5,000 0 CO2 EMISSIONS ENERGY INTENSITY -5,000 CO2 emissions per tonne of product Energy intensity per tonne of product -10,000 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 25.8 kg/tonne 158 kWh/tonne FINANCIAL OVERVIEW, GROUP 2019 25.8 2019 158 2019 2018 2018 25.7 2018 161 Net sales, MSEK 31,260 25,892 2017 27.4 2017 164 Operating profit, MSEK 11,788 6,869 Less: Costs for urban transformation provisions, MSEK 1,441 2,106 Underlying operating profit1, MSEK 13,229 8,975 SAFETY GENDER EQUALITY Operating margin, % 37.7 26.5 Accidents involving absence per Percentage of women in the Group Profit/loss for the year 10,173 5,274 million hours worked Operating cash flow, MSEK 6,981 3,386 Return on equity, % 24.2 14.1 6.8 accident rate 23.8% Net debt/equity ratio, % -2.5 9.2 Capital expenditure on property, plant and equipment, MSEK 2,373 2,455 2019 6.8 2019 23.8 Provisions for urban transformation at end 2018 7.7 2018 22.1 of reporting period, MSEK 16,873 17,625 2017 6.7 2017 21.1 Dividend to owner2, MSEK 6,104 3,164 1 Underlying operating profit is reported in Note 45 on page 120. 2 The dividend proposed by the Board of Directors will be put to the Annual General Meeting for approval on 23 April 2020. Q1 JAN–MAR Q2 APR–JUN Production was negatively impacted at the start of the year following Together with SSAB and Vattenfall, LKAB starts building a unique minor operational disruption at the pelletising plants in Kiruna and test facility – the first of its type in the world – as part of the by maintenance work at the pelletising plant in Svappavaara. HYBRIT initiative. HYBRIT aims to achieve fossil-free steelmaking by 2035. LKAB announces its decision to invest MSEK 45 in pilot plants in the Swedish orefields, aimed at industrialising the extraction The global spot price for iron ore reached levels of around USD of phosphorus and rare earth elements from residual products 125/tonne at the year’s peak during the summer. The price then arising from iron ore production. fell significantly following a slowdown in demand from the steel industry. Towards the end of the year prices increased again, LKAB signs agreement with PEAB to reconstruct the classic and at the end of the year the price was USD 92/tonne. Bolagshotellet in Kiruna based on drawings from 1925. The hotel was a landmark for Kiruna’s residents, and an active and very significant part of LKAB’s operations for nearly 120 years. 2 LKAB ANNUAL AND SUSTAINABILITY REPORT 2019 THE YEAR IN BRIEF Stable production and favourable market conditions enabled LKAB to achieve strong MSEK 11,78 8 MSEK 6,981 Operating profit increased by Operating cash flow was earnings in 2019, despite lower delivery volumes. 72 percent compared with 2018. boosted to MSEK 6,981 (3,386). NET SALES AND EARNINGS BY DIVISION3 NORTHERN DIVISION Comprises mines and processing plants in Kiruna. The products are transported along the Malmbanan and Ofotbanen ore railway to the port in Narvik for shipment to steelworks customers around the world. Net sales during the year amounted to MSEK 16,630 (14,416) and earnings to MSEK 8,069 (4,264). Iron ore products4 SOUTHERN DIVISION 90% Comprises mines and processing plants in Malmberget and Svappavaara. The products are transported along the Malmbanan ore railway, mainly to the port in Luleå for shipment to European steelworks customers. Net sales during the year amounted to MSEK 13,500 (10,534) and earnings to MSEK 4,459 (2,799). SPECIAL PRODUCTS DIVISION Industrial minerals Develops and supplies products and services that supplement the iron ore operations, and other4 including industrial minerals, drilling technology and full-service solutions for the mining and construction industries. Net sales during the year amounted to MSEK 4,732 (3,806) and 10 % earnings to MSEK 343 (330). 3 Effective from 1 January 2020 the three divisions – Northern, Southern and Special Products – have been reorganised into two business areas, Iron Ore and Special Products. However, the Annual and Sustainability Report for 2019 reflects the three divisions in effect during the year. 4 Percentage of the Group’s sales. Q3 JUL–SEP In September, LKAB attends the UN climate summit in New York, At the end of the year, LKAB presents the SMMART (Swedish where the HYBRIT initiative was highlighted as one of the most Magnetite Microwave Asphalt Road Technology) project, which is ambitious and most transformative initiatives to combat climate developing microwave-based technology to heat asphalt mixed change. with magnetite. This allows the asphalt to be heated using electricity rather than fossil fuels, thereby reducing emissions. Despite the start to the year, production was stable in 2019 and ended with two strong quarters. During the third quarter the Group LKAB presents a new Group structure effective from 1 January hit its previous production record of 7.3 Mt in a single quarter. 2020 as the next step in developing a decentralised organisation. Three divisions are being replaced by two business areas, partly in order to differentiate more clearly between Group functions Q4 OCT–DEC and production functions.