Evraz Group S.A. annual report and accounts 2007 making the world stronger Evraz Group S.A. annual report and accounts 2007 making the world 7stronger US$12,808 54mln US$8,292 mln 2007 2006 Revenues Growth,% MAKING THE WORLD STRONGER 5 At a Glance 6 Our Results 8 Interview with the Chairman and CEO 12 Our Presence in the World 14 Highlights 2007 17 Our Business 17 Corporate Structure 18 Strategy 19 Economic and Industry Overview 22 Business Overview 35 Outlook 2008 37 Corporate Governance 38 Board of Directors 43 Committees 44 Senior Management 46 Board and Management Remuneration 48 Remuneration Committee Report 50 Risk Management 51 Internal Control 52 Audit Committee Report 55 Share Capital 57 Sustainable Development 57 Overview 58 Our People 61 Social Responsibility 64 Environmental Protection 4 66 Information for Shareholders 67 Financial Calendar 70 Selected Consolidated Financial Information 77 Management’s Discussion and Analysis of Financial Condition and Results of Operations 115 Consolidated Financial Statements Year Ended December 31, 2007 222 Abbreviations 223 Glossary 224 Reference Information Annual Report 2007 Evraz Group S. A. US$4,254 61mln US$2,642 mln 2007 2006 EBITDA Growth,% 5 MAKING THE WORLD STRONGER At a Glance OUR VALUES Evraz Group always endeavours to demonstrate ethical be- haviour. All directors, officers and other employees of Evraz Group adhere to fundamental values worldwide: ❘❚ We respect internationally proclaimed occupational human rights ❘❚ We recognise our environmental responsibility ❘❚ We are committed to our communities ❘❚ ❘❚ We strive to comply with all applicable laws and regula- Welcome to 2007 Annual Report of Evraz tions Group S.A. It has been another excellent year ❘❚ We consider all forms of fraud and corruption totally un- at Evraz Group, and we are proud to present acceptable and intolerable our achievements in this Report. ❘❚ We promote open and honest public communications ❘❚ We strive to provide equal-opportunity employment ❘❚ We act with integrity ❘❚ We encourage our employees to raise concerns OUR BUSINESS Evraz Group includes steel works, iron ore, coal and vana- dium facilities. Our assets in Russia, Europe, North America, Asia and South Africa give us a global presence. All this allows us to deliver exceptional returns to our share- holders. OUR OBJECTIVE Our objective is to maintain Evraz’s position as one of the most cost-efficient integrated steel producing and mining groups in the world, expanding its global presence through strategic acquisitions. Annual Report 2007 Evraz Group S. A. 6 7 AT A GLANCE MAKING THE WORLD STRONGER Our Results Revenues EBITDA Net Profit* Steel Sales Volumes (US$ million) (US$ million) (US$ million) (million tonnes) 4,500 2,500 4,254 18.0 14,000 4,000 2,144 16.4 12,808 16.0 15.9 12,000 3,500 2,000 14.0 3,000 13.1 12.9 10,000 12.0 2,642 8,292 2,500 1,500 1,377 8,000 1,180 10.0 6,508 2,000 2,017 1,859 8.0 6,000 5,933 918 1,500 1,000 6.0 4,000 1,000 4.0 2,000 500 500 2.0 2004 2005 2006 2007 2004 2005 2006 2007 2004 2005 2006 2007 2004 2005 2006 2007 *Net profit attributable to equity holders of Evraz Group S.A. Operating Cash Flow Total Debt/Net Debt Legend: ■ Total Debt ■ Net Debt Revenues by Region 2007 Earnings per GDR Net Debt / EBITDA (US$ million) (US$ million) 2.8% 0.1% (US$, 1 share = 3GDRs) 1.5 4.5% 7,000 6,632 3,500 7.00 6,000 6,280 Legend: 46.5% Russia 3,000 2,957 14.8% 6.00 6.05 5,000 14.7% Asia 46.5% 16.7% Americas 2,500 4,000 0.9 0.7 5.00 14.8% Europe 2,000 2,084 3,000 4.5% CIS (excl. Russia) 4.00 3.92 0.5 2,596 2.8% Africa 3.67 2,350 0.1% RoW 16.7% 1,500 1,496 2,000 1,730 3.00 1,693 2.71 1,318 1,000 1,000 2.00 946 1,025 500 500 14.7% 1.00 2004 2005 2006 2007 2004 2005 2006 2007 2004 2005 2006 2007 Annual Report 2007 Evraz Group S. A. Annual Report 2007 Evraz Group S. A. 8 AT A GLANCE Interview with Alexander Frolov, Chairman and CEO ❘❚ We are proud to report another strong financial year for Evraz Group. Together with the successful integration of our new assets and the organic growth of our existing plants we have achieved record results in our How would you describe 2007 from the business. At the same time Evraz continued financial and operational points of view? to build its global business model. Evraz managed to achieve significant growth in key financial indicators in 2007 in comparison with We expanded our geographic reach through 2006: the growing world steel markets, and in particular the booming Russian market, supported by several milestone acquisitions in line with our strong product pricing, and our improved our strategy of a continued growth through product mix contributed to an increase in revenue to US$12,808 million, US$4,516 million or 54.5 % the acquisition and the development more than in 2006. Net profit was US$2,144 million, compared with US$1,377 million in 2006. of high-value downstream facilities. EBITDA equalled US$4,254 million in 2007, which was 61 % higher than in 2006. Annual Report 2007 Evraz Group S. A. 9 MAKING THE WORLD STRONGER Alexander Frolov, Chairman of the Board and CEO > Operational results were in line with the impressive Yet another step in the realisation of our strategy is the production pace achieved in 2006: 16.4 million purchase of majority shareholdings in selected tonnes of crude steel and 12.6 million tonnes of pig production assets in Ukraine in December, including iron were produced in 2007. This, together with the the Sukha Balka iron ore mining and processing successful integration of our new assets and the complex, the Dnepropetrovsk Iron and Steel Works organic growth of our existing plants, allowed us to and three coking plants. These acquisitions will allow record another successful financial year. us to increase our iron ore self-sufficiency and ensure further upstream integration. It will also create captive Which of the 2007 acquisitions do you intra-group demand for coking coal for the surplus consider the most important? production of Evraz Group’s coal mines in Siberia. Our business continued to grow, and we made With this transaction Evraz Group also aims to enter several significant acquisitions. The acquisition of one of the lowest cost steel producing regions, and Claymont Steel at the end of the year represents yet thus to further diversify Evraz Group’s asset another substantial step in the implementation of our geography. global strategy. It will expand our presence in North America, one of the most important steel markets globally. We laid the foundation of our American plate business by acquiring Oregon Steel Mills at the beginning of last year, and we intend to continue to strengthen it now with Claymont Steel’s steel plate production. I would also point to the acquisition of Highveld Steel and Vanadium Corporation. Through Highveld, Evraz is gaining valuable access to the expanding South African steel and construction sectors, which are driven by strong demand growth and supported by new mining, infrastructure and industrial projects. In addition, Evraz Group also becomes an important player in the worldwide vanadium market. Our current goal is to fully integrate vanadium assets into the Group. Annual Report 2007 Evraz Group S. A. 10 AT A GLANCE We also increased our ownership of Yuzhkuzbassugol, A second major project is the reconstruction of the a Russian coking and steam coal producer, to 100%, converter shop at NTMK. The first converter has established a full operative control over it, stabilised already been replaced. Two converters will be its operations which were affected by serious replaced in 2008, and one more in 2009. accidents at its two mines earlier in the year and restored rigid standards of work safety at all the mines We completed an important project that entailed of the Group. This transaction goes in line with our shutting down an inefficient and highly air polluting strategy to build a vertically integrated steel business open hearth production at NKMK. We realised self-sufficient in key raw materials – coal and iron ore. a number of restructuring and cost saving initiatives at our business units including the outsourcing of Which projects and areas of production non-core services and operations, including the development are of note within the investment continuing programme for the optimisation of the programme? Group’s headcount and de-bottlenecking In 2007 we addressed a few operational issues and operational processes in order to maximise existing matters related to safety performance and plants’ productivity, resulting in increased iron ore environmental compliance at our Russian facilities. production at our Russian iron ore mines of an We completed a scheduled major reline of blast additional 3% and increased vanadium slag furnace No.1 at Zapsib and brought it back to the production at NTMK of 7%. level of production at the end of last year. This was a very successful project, with the reconstruction lasting for less than four months, which is even faster than we had planned under the original tight schedule. Annual Report 2007 Evraz Group S. A. 11 MAKING THE WORLD STRONGER Evraz Group has completed the buyout of all outstanding minority common stock of its major Russian production companies.