Metinvest B.V.
Unaudited Interim Condensed Consolidated Financial Information
30 June 2020
Contents
UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL INFORMATION
Review report
Unaudited Interim Condensed Consolidated Balance Sheet ...... 1 Unaudited Interim Condensed Consolidated Income Statement ...... 2 Unaudited Interim Condensed Consolidated Statement of Comprehensive Income ...... 2 Unaudited Interim Condensed Consolidated Statement of Cash Flows ...... 3 Unaudited Interim Condensed Consolidated Statement of Changes in Equity ...... 4
Notes to the Unaudited Interim Condensed Consolidated Financial Information ...... 5–19
1 Metinvest B.V. and its operations ...... 5 2 Operating environment of the Group ...... 5 3 Basis of preparation and significant accounting policies ...... 6 4 Adoption of new and revised standards and interpretation ...... 7 5 Segment information ...... 8 6 Property, plant and equipment ...... 11 7 Investments in associates and joint ventures ...... 13 8 Trade and other receivables and other non-current assets ...... 14 9 Loans and borrowings ...... 15 10 Trade and other payables ...... 16 11 Net operating costs (excluding items shown separately) ...... 16 12 Finance costs ...... 16 13 Balances and transactions with related parties ...... 17 14 Events after the balance sheet date ...... 19
Review report
To: the general meeting and supervisory board of Metinvest B.V.
Introduction We have reviewed the accompanying unaudited interim condensed consolidated financial information for the six-month period ended 30 June 2020 of Metinvest B.V., the Hague, which comprises the unaudited interim condensed consolidated balance sheet as at 30 June 2020, the unaudited interim condensed consolidated income statement, the unaudited interim condensed consolidated statement of comprehensive income, the unaudited interim condensed consolidated statement of changes in equity, the unaudited interim condensed consolidated statement of cash flows for the period then ended and the notes to the unaudited interim condensed consolidated financial information. The directors are responsible for the preparation and presentation of this unaudited interim condensed consolidated financial information in accordance with IAS 34, ‘Interim Financial Reporting’ as adopted by the European Union. Our responsibility is to express a conclusion on this unaudited interim condensed consolidated financial information based on our review.
Scope We conducted our review in accordance with Dutch law including standard 2410, Review of Interim Financial Information Performed by the Independent Auditor of the entity. A review of interim financial information consists of making inquiries, primarily of persons responsible for financial and accounting matters, and applying analytical and other review procedures. A review is substantially less in scope than an audit conducted in accordance with auditing standards and consequently does not enable us to obtain assurance that we would become aware of all significant matters that might be identified in an audit. Accordingly, we do not express an audit opinion.
Conclusion Based on our review, nothing has come to our attention that causes us to believe that the accompanying unaudited interim condensed consolidated financial information for the six-month period ended 30 June 2020 is not prepared, in all material respects, in accordance with IAS 34, ‘Interim Financial Reporting’ as adopted by the European Union.
Rotterdam, 2 September 2020 PricewaterhouseCoopers Accountants N.V.
Original has been signed by A.F. Westerman RA
FTF4VSSUFADU-1158685585-29
PricewaterhouseCoopers Accountants N.V., Fascinatio Boulevard 350, 3065 WB Rotterdam, P.O. Box 8800, 3009 AV Rotterdam, the Netherlands T: +31 (0) 88 792 00 10, F: +31 (0) 88 792 95 33, www.pwc.nl
‘PwC’ is the brand under which PricewaterhouseCoopers Accountants N.V. (Chamber of Commerce 34180285), PricewaterhouseCoopers Belastingadviseurs N.V. (Chamber of Commerce 34180284), PricewaterhouseCoopers Advisory N.V. (Chamber of Commerce 34180287), PricewaterhouseCoopers Compliance Services B.V. (Chamber of Commerce 51414406), PricewaterhouseCoopers Pensions, Actuarial & Insurance Services B.V. (Chamber of Commerce 54226368), PricewaterhouseCoopers B.V. (Chamber of Commerce 34180289) and other companies operate and provide services. These services are governed by General Terms and Conditions (‘algemene voorwaarden’), which include provisions regarding our liability. Purchases by these companies are governed by General Terms and Conditions of Purchase (‘algemene inkoopvoorwaarden’). At www.pwc.nl more detailed information on these companies is available, including these General Terms and Conditions and the General Terms and Conditions of Purchase, which have also been filed at the Amsterdam Chamber of Commerce.
Metinvest B.V. Unaudited Interim Condensed Consolidated Balance Sheet All amounts in millions of US Dollars
Note 30 June 2020 31 December 2019
ASSETS
Non-current assets Goodwill 585 601 Other intangible assets 132 140 Property, plant and equipment 6 5,631 6,354 Investments in associates and joint ventures 7 1,096 1,301 Deferred tax asset 99 85 Trade and other receivables 8 708 842 Total non-current assets 8,251 9,323
Current assets Inventories 987 1,185 Income tax prepaid 10 27 Trade and other receivables 8 3,235 3,028 Cash and cash equivalents 465 274 Total current assets 4,697 4,514
TOTAL ASSETS 12,948 13,837
EQUITY
Share capital 0 0 Share premium 6,225 6,225 Other reserves (8,601) (7,804) Retained earnings 8,340 8,411 Equity attributable to the owners of the Company 5,964 6,832 Non-controlling interest 91 98 TOTAL EQUITY 6,055 6,930
LIABILITIES
Non-current liabilities Loans and borrowings 9 2,359 2,442 Retirement benefit obligations 563 597 Deferred tax liability 181 273 Other non-current liabilities 224 195 Total non-current liabilities 3,327 3,507
Current liabilities Loans and borrowings 9 651 590 Income tax payable 72 31 Trade and other payables 10 2,843 2,779 Total current liabilities 3,566 3,400 TOTAL LIABILITIES 6,893 6,907
TOTAL LIABILITIES AND EQUITY 12,948 13,837
Signed and authorized for release on behalf of Metinvest B.V. on 2 September 2020:
Originally signed by Director A, Yuriy Ryzhenkov
Originally signed by Director B, ITPS (Netherlands) B.V.
The accompanying notes form an integral part of this unaudited interim condensed consolidated financial information 1
Metinvest B.V. Unaudited Interim Condensed Consolidated Income Statement
All amounts in millions of US Dollars
Note Six months ended 30 June 2020 2019
Revenue 5 4,968 5,818 Net operating costs (excluding items shown separately) 11 (4,767) (5,325) Impairment of financial assets (115) (62) Operating profit 86 431
Finance income 28 100 Finance costs 12 (293) (124) Share of result of associates and joint ventures 7 (67) 90 (Loss) / Profit before income tax (246) 497 Income tax benefit / (expense) 6 (89) (Loss) / Profit for the period (240) 408
(Loss) / Profit attributable to: Owners of the Company (241) 398 Non-controlling interests 1 10
(Loss) / Profit for the period (240) 408
Unaudited Interim Condensed Consolidated Statement of Comprehensive Income All amounts in millions of US Dollars
Six months ended 30 June 2020 2019
(Loss) / Profit for the period (240) 408 Other comprehensive (loss) / income: Items that may be reclassified subsequently to profit or loss: Currency translation differences (670) 293 Items that will not be reclassified to profit or loss: Revaluation decreases that offset previous increases in the carrying amount of property, plant and equipment (2) (18) Share in other comprehensive income / (loss) of joint ventures and associates 35 3 Income tax related to components of other comprehensive income - 3 Total other comprehensive (loss) / income (637) 281
Total comprehensive (loss) / income for the period (877) 689
Total comprehensive (loss) / income attributable to: Owners of the Company (868) 675 Non-controlling interest (9) 14
Total comprehensive (loss) / income for the period (877) 689
The accompanying notes form an integral part of this unaudited interim condensed consolidated financial information 2
Metinvest B.V. Unaudited Interim Condensed Consolidated Statement of Cash Flows All amounts in millions of US Dollars
Six months ended 30 June Note 2020 2019
Cash flows from operating activities (Loss) / Profit before income tax (246) 497
Adjustments for: Depreciation of property, plant and equipment and amortisation of intangible assets 11 418 316 Impairment of property, plant and equipment and intangible assets 11 2 22 Gain on disposal of property, plant and equipment and intangible assets (2) (5) Finance income (28) (100) Finance costs 12 293 124 Foreign exchange losses less gains / (gains less losses), net 11 123 6 Net change in retirement benefit obligations, except for interest costs, remeasurements and currency translation (7) (9) Share of result of associates and joint ventures 7 67 (90) Write-down / (reversal of write-down) of inventories, net (15) (2) Impairment of financial assets 115 62 Write-offs of accounts payable (6) (10) Other non-cash operating income, net (37) (19) Operating cash flows before working capital changes 677 792
Decrease / (increase) in inventories 134 120 Increase in trade and other accounts receivable (237) (393) Increase in trade and other accounts payable 241 271 Cash generated from operations 815 790
Income taxes paid (21) (116) Interest paid (109) (104) Net cash from operating activities 685 570 Cash flows from investing activities Purchase of property, plant and equipment and intangible assets (372) (439) Proceeds from sale of property, plant and equipment 1 3 Interest received 2 8 Loans issued (13) (82) Proceeds from loan repayment 10 - Other payments (63) (19) Net cash used in investing activities (435) (529)
Cash flows from financing activities Repayment of deferred consideration and seller's notes - (30) Payments for loans commission (5) - Repayment of loans and borrowings (67) (9) Proceeds from loans and borrowings 41 18 Net trade financing receipts / (repayments) (21) 18 Dividends paid - (31) Acquisition of non-controlling interest of subsidiaries - (6) Net cash used in financing activities (52) (40) Effect of exchange rate changes on cash and cash
equivalents (7) (2) Net increase in cash and cash equivalents 191 (1) Cash and cash equivalents at the beginning of the year 274 280
Cash and cash equivalents at the end of the period 465 279
The accompanying notes form an integral part of this unaudited interim condensed consolidated financial information 3
Metinvest B.V. Unaudited Interim Condensed Consolidated Statement of Changes in Equity All amounts in millions of US Dollars
Non- Total Attributable to owners of the Company controlling equity Share Share Other Retained Total interest capital premium reserves earnings (NCI) Balance at 31 December 2019 0 6,225 (7,804) 8,411 6,832 98 6,930
Revaluation decreases that offset previous increases in the carrying amount of property, plant and equipment - - (2) - (2) - (2) Share in other comprehensive income of joint ventures and associates - - 35 - 35 - 35 Income tax relating to components of other comprehensive income ------Currency translation differences - - (660) - (660) (10) (670) Other comprehensive income for the period - - (627) - (627) (10) (637)
(Loss) / Profit for the period - - - (241) (241) 1 (240) Total comprehensive income for the period - - (627) (241) (868) (9) (877) Acquisition of interest in subsidiary - - - - - 13 13 Realised revaluation reserve - - (174) 174 - - - Disposal of an investment in associate - - 4 (4) - - - Dividends declared - - - - - (11) (11)
Balance at 30 June 2020 0 6,225 (8,601) 8,340 5,964 91 6,055
Balance at 31 December 2018 0 6,225 (9,144) 8,264 5,345 58 5,403
Revaluation decreases that offset previous increases in the carrying amount of property, plant and equipment - - (18) - (18) - (18) Share in other comprehensive income of joint ventures and associates - - 3 - 3 - 3 Income tax relating to components of other comprehensive income - - 3 - 3 - 3 Currency translation differences - - 289 - 289 4 293 Other comprehensive income for the period - - 277 - 277 4 281
Profit for the period - - - 398 398 10 408 Total comprehensive income for the period - - 277 398 675 14 689 Realised revaluation reserve - - (96) 96 - - - Dividends declared - - - (60) (60) - (60)
Balance at 30 June 2019 0 6,225 (8,963) 8,698 5,960 72 6,032
The accompanying notes form an integral part of this unaudited interim condensed consolidated financial information 4
Metinvest B.V. Notes to the Unaudited Interim Condensed Consolidated Financial Information – 30 June 2020 All tabular amounts in millions of US Dollars
1 Metinvest B.V. and its operations
Metinvest B.V. (the “Company” or “Metinvest”), is a private limited liability company registered in the Netherlands. The Company is beneficially owned by Mr. Rinat Akhmetov, through various entities commonly referred to as System Capital Management (“SCM”), and Mr. Vadym Novynskyi, through various entities commonly referred to as “SMART” or “Smart Group”. The Company and its subsidiaries (together referred to as the “Group” or “Metinvest Group”) are an integrated steel producer, owning assets in each link of the production chain – from iron ore mining, coking coal mining and coke production, through to semi-finished and finished steel production. The steel products, iron ore and coke and coal are sold on both the Ukrainian and export markets. The principal subsidiaries of Metinvest B.V. are presented below: Effective % interest Segment Country of as at incorporation 31 December Name 30 June 2020 2019
Metinvest Holding LLC 100.0% 100.0% Corporate Ukraine Metinvest Management B.V. 100.0% 100.0% Corporate Netherlands PrJSC Azovstal Iron and Steel Works 100.0% 100.0% Metallurgical Ukraine PrJSC Yenakiieve Iron and Steel Works 92.2% 92.2% Metallurgical Ukraine JV Metalen LLC 100.0% 100.0% Metallurgical Ukraine PrJSC Khartsyzsk Pipe Plant 98.5% 98.5% Metallurgical Ukraine Ferriera Valsider S.p.A. 100.0% 100.0% Metallurgical Italy Metinvest Trametal S.p.A. 100.0% 100.0% Metallurgical Italy Spartan UK Limited 100.0% 100.0% Metallurgical UK Metinvest International SA 100.0% 100.0% Metallurgical Switzerland Metinvest Eurasia LLC 100.0% 100.0% Metallurgical Russia Metinvest Service Metal Centres LLC 100.0% 100.0% Metallurgical Ukraine JSC Promet Steel 100.0% 100.0% Metallurgical Bulgaria PrJSC Makiivka Iron and Steel Works 90.2% 90.2% Metallurgical Ukraine PrJSC Ilyich Iron and Steel Works 100.0% 100.0% Metallurgical Ukraine PrJSC Avdiivka Coke Plant 100.0% 100.0% Metallurgical Ukraine PrJSC Zaporozhcoke 56.9% 56.9% Metallurgical Ukraine PrJSC Donetskcoke 93.8% 93.8% Metallurgical Ukraine PrJSC Dniprovskiy Coke Plant (Note 7) 73.0% 49.4% Metallurgical Ukraine PrJSC Northern Iron Ore Enrichment Works 96.8% 96.8% Mining Ukraine PrJSC Central Iron Ore Enrichment Works 100.0% 100.0% Mining Ukraine PrJSC Ingulets Iron Ore Enrichment Works 100.0% 100.0% Mining Ukraine PrJSC Komsomolske Flux Plant 99.7% 99.7% Mining Ukraine United Coal Company LLC (“UCC”) 100.0% 100.0% Mining USA PrJSC Krasnodon Coal Company 99.9% 99.9% Mining Ukraine As at 30 June 2020, the Group employed approximately 67 thousand people (31 December 2019: 66 thousand). The Company’s registered address is Nassaulaan 2A, 2514 JS, The Hague. The company is registered with the commercial trade register under the number 24321697. The principal places of production facilities of the Group are in Ukraine, Italy, the UK and the USA.
2 Operating environment of the Group
In 2016 – 2019, the Ukrainian economy demonstrated growth amid overall macroeconomics stabilisation supported by structural reforms, a rise in domestic investment, revival in household consumption, increase in industrial production, construction activity and improved environment on external markets. Starting from the first quarter of 2020, the Ukrainian economy has been contracting amid decrease in industrial output and the COVID-19 outbreak, which started in March 2020. The National Bank of Ukraine (“NBU”) follows an interest rate policy consistent with inflation targets and keeps the hryvnia floating. The annualised inflation rate in Ukraine slowed to 2.0% in the first half of 2020 (as compared to 3.6% in the first half of 2019 and 4.1% in 2019), which allowed the NBU to continue key policy rate cuts after a lengthy period of rate increases – from 18.0% effective 7 September 2018 to 6.0% effective 12 June 2020, which is the lowest rate in the history of Ukraine. At the same time NBU makes appropriate market interventions in order to contain abnormal fluctuations of the exchange rate. As at the date of this report the official NBU exchange rate of hryvnia against US dollar was UAH 27.60 per USD 1, compared to UAH 26.69 per USD 1 as at 30 June 2020 and UAH 23.69 per USD 1 as at 31 December 2019.
5 Metinvest B.V. Notes to the Unaudited Interim Condensed Consolidated Financial Information – 30 June 2020 All tabular amounts in millions of US Dollars
2 Operating environment of the Group (continued)
In 2019, the NBU has cancelled some of the currency control restrictions such as the required share of foreign currency proceeds subject to mandatory sale and the amount of the dividend payments allowed to non-residents, which were implemented in 2014 – 2015. Starting from 16 May 2019, the settlement period for export-import transactions in foreign currency was steadily increased from 180 to 365 days. In order to manage external debt repayments and secure access to external financing, Ukraine continues cooperation with international financial institutions, which are major creditors of its economy. In June 2020, the Executive Board of the International Monetary Fund approved a new 18-month Stand-by Arrangement (SBA) for Ukraine with the total limit of about USD 5 billion. The approval of the SBA enabled the immediate disbursement of about USD 2.1 billion with the remainder being phased over four reviews. In July 2020, Ukraine and the EU signed an agreement granting Ukraine EUR 1.2 billion in macro-financial assistance funds. Ukraine has remained active on international debt capital markets to manage external debt maturity profile. In 2018- 2020, Ukraine not only issued several USD-denominated Eurobond tranches, but also issued several EUR- denominated Eurobond tranches with 2019 issue being its first in the last 15 years. The Group’s financial performance is largely dependent on the global prices of and demand for steel and steel products, iron ore and coal. The prices of steel products are influenced by many factors, including global economic conditions, demand, worldwide production capacity, capacity utilisation rates, raw material costs, foreign exchange rates and improvements in steel making processes. In 2019, steel and iron ore prices have experienced significant fluctuations that continued in 2020. Compared with the average for the first half of 2019, in the first half of 2020 the benchmark hot-rolled coil price (Metal Expert HRC CIS export FOB Black Sea) decreased by 14% to an average of USD 426 per tonne, the benchmark coking coal price (HCC LV, FOB Australia) decreased by 33% to an average of USD 138 per tonne, while the benchmark iron ore price (Platts 62% Fe CFR China) decreased by 1% to an average of USD 91 per dry tonne. In March 2020, the outbreak of COVID-19 has led to quarantine and various types of movement restrictions imposed in many countries. This in turn has led to reduced activity in certain sectors of the economy, reduced demand for certain goods and services and increased risks of slowing economic growth and recession in key economies around the world. On 25 March, 2020, following the Italian government’s decree restricting production operations as a result of the COVID-19 outbreak, the Group suspended operations at its two rolling facilities in Italy, Metinvest Trametal S.p.A. and Ferriera Valsider S.p.A. In April 2020, the Italian government eased the restrictions and, as a result, the abovementioned facilities have resumed normal operations from 12 April 2020 and 30 April 2020, respectively. Other entities of the Group, including the Group’s facilities in Ukraine, have been operating without any disruptions caused by the COVID-19 outbreak. The effects of the COVID-19 outbreak have resulted in a deterioration in metallurgical segment’s revenue in April 2020 mainly caused by the decrease in global steel prices; however, in May 2020, the situation started to improve following the recovery of construction sector in China and expectations of increased demand in other sectors amid quarantine measures easing. At the same time, the mining segment’s performance was less affected as a result of positive dynamics in global iron ore prices. At the date of issuing this unaudited interim condensed consolidated financial information the situation with the COVID- 19 is still evolving and its consequences are currently uncertain. Management of the Group does not expect any direct material adverse effect on the Group’s financial performance as a result of the COVID-19 outbreak. At the same time, the potential restrictive measures applied by the governments in the future may affect the overall economy and therefore may have an indirect effect on the Group through changes in demand and supply for main Group's products, fluctuations in market prices and delays in settlement of debts due from the counterparties; however, the impact of this is considered to be limited. Management believes that it is taking appropriate measures to support the stable operation of the Group, necessary in the current circumstances. Management concludes that there is no material uncertainty due to the COVID-19 outbreak in relation to the going concern assumption used for preparation of this interim condensed consolidated financial information.
3 Basis of preparation and significant accounting policies
This interim condensed consolidated financial information for the six months ended 30 June 2020 has been prepared in accordance with IAS 34, “Interim Financial Reporting” as adopted by the European Union (“EU”). The interim condensed consolidated financial information should be read in conjunction with the annual financial statements for the year ended 31 December 2019, which have been prepared in accordance with IFRS as adopted by EU. The basis of preparation, accounting policies and critical accounting estimates and judgments applied are consistent with those followed in the preparation of the Group’s annual consolidated financial statements for the year ended 31 December 2019.
6 Metinvest B.V. Notes to the Unaudited Interim Condensed Consolidated Financial Information – 30 June 2020 All tabular amounts in millions of US Dollars
3 Basis of preparation and significant accounting policies (continued)
Current and deferred taxes. Income tax expense in the interim period is recognised based on management’s best estimate of the weighted average effective annual income tax rate expected for the full financial year. Exchange rate fluctuations. The following table summarises exchange rates of UAH against USD and Euro (“EUR”) as at the dates used for translating foreign currency balances: 30 June 2020 31 December 2019 USD / UAH 26.69 23.69 EUR / UAH 29.95 26.42
The following table summarises average exchange rates of UAH against USD and EUR:
Six months ended 30 June 2020 2019 USD / UAH 25.98 26.93 EUR / UAH 28.60 30.43 Valuation techniques and inputs used to determine fair values of financial assets and liabilities in this interim condensed consolidated financial information for the six months ended 30 June 2020 are consistent with those used for the preparation of the annual financial statements for the year ended 31 December 2019. Unless otherwise stated, fair values of financial instruments approximate their carrying values as at 30 June 2020 and 31 December 2019.
4 Adoption of new and revised standards and interpretation
The following new standards, amendments to standards and interpretations became effective for the Group on 1 January 2020: Interest Rate Benchmark Reform (amendments to IFRS 9, IAS 39 and IFRS 7) (issued on 26 September 2019 and effective for annual periods beginning on or after January 1, 2020 and must be applied retrospectively. Early application is permitted.); Definition of a business – Amendments to IFRS 3 (issued on 22 October 2018 and effective for acquisitions from the beginning of annual reporting period that starts on or after 1 January 2020); Definition of materiality – Amendments to IAS 1 and IAS 8 (issued on 31 October 2018 and effective for annual periods beginning on or after 1 January 2020); Amendments to the Conceptual Framework for Financial Reporting (issued on 29 March 2018 and effective for annual periods beginning on or after 1 January 2020). These standards, amendments to standards and interpretations did not have a material impact on this unaudited interim condensed consolidated financial information. The following amendments to standards, which are relevant to the Group's financial statements, have been issued, but have not yet been endorsed by the European Union: Sale or Contribution of Assets between an Investor and its Associate or Joint Venture - Amendments to IFRS 10 and IAS 28 (issued on 11 September 2014 and effective for annual periods beginning on or after the date to be determined by the IASB); Classification of liabilities as current or non-current – Amendments to IAS 1 (issued on 23 January 2020 and effective for annual periods beginning on or after 1 January 2023); Proceeds before intended use, Onerous contracts – cost of fulfilling a contract, Reference to the Conceptual Framework – narrow scope amendments to IAS 16, IAS 37 and IFRS 3, and Annual Improvements to IFRSs 2018-2020 – amendments to IFRS 1, IFRS 9, IFRS 16 and IAS 41 (issued on 14 May 2020 and effective for annual periods beginning on or after 1 January 2022); Covid-19-Related Rent Concessions - Amendment to IFRS 16 (issued on 28 May 2020 and effective for annual reporting periods beginning on or after 1 June 2020). These amendments to standards will likely have no material impact on the Group.
7 Metinvest B.V. Notes to the Unaudited Interim Condensed Consolidated Financial Information – 30 June 2020 All tabular amounts in millions of US Dollars
5 Segment information
The Group is a vertically integrated steel and mining business. A significant portion of the Group’s iron ore and coke and coal production is used in its steel production operations. Segment information for the period ended 30 June 2020 was as follows: Metallurgical Mining Corporate Eliminations Total overheads
Six months ended 30 June 2020
Sales – external 3,899 1,069 - - 4,968 Sales to other segments 37 465 - (502) - Total of the reportable segments’ revenue 3,936 1,534 - (502) 4,968
Timing of revenue recognition At a point in time 3,588 894 - - 4,482 Over time 311 175 - - 486 Total of the reportable segments’ revenue 3,899 1,069 - - 4,968
Adjusted EBITDA 273 411 (54) (15) 615 Share in EBITDA of joint ventures (35) 135 - - 100 Adjusted EBITDA including share in EBITDA of joint ventures 238 546 (54) (15) 715
Reconciling items: Depreciation and amortisation (227) (182) (9) - (418) Impairment of PPE and other intangible assets (1) (1) - - (2) Finance income 29 Finance costs (293) Share of result of associates and share of depreciation, amortisation, tax and finance income and costs of joint ventures (167) Foreign exchange losses less gains, net (123) Other 13 Loss before income tax (246)
Metallurgical Mining Corporate Eliminations Total overheads
Capital expenditure 147 155 11 - 313
Significant non-cash items included into adjusted EBITDA - Impairment of financial assets 54 48 13 - 115
8 Metinvest B.V. Notes to the Unaudited Interim Condensed Consolidated Financial Information – 30 June 2020 All tabular amounts in millions of US Dollars
5 Segment information (continued)
Segment information for the period ended 30 June 2019 was as follows: Metallurgical Mining Corporate Eliminations Total overheads
Six months ended 30 June 2019
Sales – external 4,746 1,072 - - 5,818 Sales to other segments 40 680 - (720) - Total of the reportable segments’ revenue 4,786 1,752 - (720) 5,818
Timing of revenue recognition At a point in time 4,399 788 - - 5,187 Over time 347 284 - - 631 Total of the reportable segments’ revenue 4,746 1,072 - - 5,818
Adjusted EBITDA 141 648 (37) 4 756 Share in EBITDA of joint ventures (9) 143 - - 134 Adjusted EBITDA including share in EBITDA of joint ventures 132 791 (37) 4 890
Reconciling items: Depreciation and amortisation (316) Impairment of PPE and other intangible assets (22) Finance income 100 Finance costs (124) Share of result of associates and share of depreciation, amortisation, tax and finance income and costs of joint ventures (44) Foreign exchange losses less gains, net (6) Income from change in fair value of financial instrument 19 Profit before income tax 497
Metallurgical Mining Corporate Eliminations Total overheads
Capital expenditure 240 222 20 - 482
Significant non-cash items included into adjusted EBITDA - Impairment of financial assets 39 21 2 - 62
9 Metinvest B.V. Notes to the Unaudited Interim Condensed Consolidated Financial Information – 30 June 2020 All tabular amounts in millions of US Dollars
5 Segment information (continued)
Analysis of revenue by category: Metallurgical Mining Total
Six months ended 30 June 2020
Sales of own products 2,430 1,023 3,453 - Steel products 2,088 - 2,088 - Iron ore products - 957 957 - Coal and coke 256 60 316 - Other 86 6 92 Resale of purchased goods 1,469 46 1,515 - Steel products 1,362 - 1,362 - Coal and coke 49 20 69 - Other 58 26 84 Total 3,899 1,069 4,968
Metallurgical Mining Total
Six months ended 30 June 2019
Sales of own products 2,963 1,000 3,963 - Steel products 2,574 - 2,574 - Iron ore products - 941 941 - Coal and coke 272 55 327 - Other 117 4 121 Resale of purchased goods 1,783 72 1,855 - Steel products 1,551 - 1,551 - Coal and coke 135 68 203 - Other 97 4 101 Total 4,746 1,072 5,818
The Group’s two business segments operate in six main geographical areas. Revenue by location of customers is presented below:
Six months ended 30 June 2020 Metallurgical Mining Total
Ukraine 994 366 1,360 Rest of Europe 1,243 196 1,439 Middle East and Northern Africa 832 11 843 South Eastern Asia 221 490 711 Commonwealth of Independent States (“CIS”) 296 - 296 North America 223 6 229 Other countries 90 - 90
Total 3,899 1,069 4,968
Six months ended 30 June 2019 Metallurgical Mining Total
Ukraine 1,209 419 1,628 Rest of Europe 1,572 487 2,059 Middle East and Northern Africa 980 3 983 South Eastern Asia 285 146 431 Commonwealth of Independent States (“CIS”) 387 - 387 North America 235 5 240 Other countries 78 12 90
Total 4,746 1,072 5,818
10 Metinvest B.V. Notes to the Unaudited Interim Condensed Consolidated Financial Information – 30 June 2020 All tabular amounts in millions of US Dollars
6 Property, plant and equipment
The movements of property, plant and equipment during six-month period ended 30 June 2019 and 30 June 2020 were as follows: Land Buildings Plant and Furniture, Construction Total and machinery fittings and in progress structures equipment
As at 1 January 2019 56 1,218 2,316 34 870 4,494
Additions - - - - 472 472 Transfers - 125 313 9 (447) - Reclassification to inventory - - - - (13) (13) Depreciation charge - (74) (229) (5) - (308) Currency translation differences (1) 63 130 1 46 239 Impairment/ revaluation decreases that offset previous increases - (2) (29) - (9) (40)
As at 30 June 2019 55 1,330 2,501 39 919 4,844
Land Buildings Plant and Furniture, Construction Total and machinery fittings and in progress structures equipment
As at 1 January 2020 62 1,659 3,600 52 981 6,354
Acquisition of subsidiary - 15 56 1 5 77 Additions - - - - 297 297 Transfers - 116 298 8 (422) - Reclassification to inventory - - - - (9) (9) Depreciation charge - (95) (316) (6) - (417) Currency translation differences - (173) (386) (5) (103) (667) Impairment/ revaluation decreases that offset previous increases - (1) (2) - (1) (4)
As at 30 June 2020 62 1,521 3,250 50 748 5,631
As at 30 June 2020, the Group has recognised rights-of-use asset in amount USD 47 million within Property, plant and equipment, mainly attributable to plant and machinery (31 December 2019: USD 57 million). Included into impairment / revaluation decreases that offset previous increases for the six months ended 30 June 2019 is USD 40 million resulted from equipment which was out of use as at reporting date. As at 30 June 2020, the Group considered that the fair value of property, plant and equipment is not substantially different from its carrying value and no revaluation or impairment is required for this interim condensed consolidated financial information. In this consideration, management analysed the developments in the operating environment of the Group (Note 2) since the last revaluation of property, plant and equipment performed as at 31 August 2019. In addition, management has analysed the performance of key cash generating units in the six months ended 30 June 2020 and concluded that recoverable amount of Metallurgical segment is sufficient to cover the volatility of steel, iron ore and coal prices although the excess of recoverable amount over the carrying value decreased to USD 514 million (31 December 2019: USD 1,059 million). The decrease in recoverable amount is mainly attributable to the decrease in average prices for hot‑rolled coils during the forecasted period by 7%. At the same time, the decrease was partially compensated by the effects of changes in the prices of raw materials (average prices for low volatile hard coking coal (FOB Queensland) during the forecasted period decreased by 3%, while average prices for iron ore Fe 62% fines (CFR North China) during the forecasted period increased by 2%). Metallurgical segment. The table below summarises the impact of changes in main assumptions with all other variables held constant to the impairment of goodwill (and subsequently to property, plant and equipment and intangible assets) related to the Metallurgical segment:
11 Metinvest B.V. Notes to the Unaudited Interim Condensed Consolidated Financial Information – 30 June 2020 All tabular amounts in millions of US Dollars
6 Property, plant and equipment (continued)
30 June 2020 31 December 2019 Volumes of production/sales Decrease in all the periods by 3.7% Recoverable amount equals - carrying amount Decrease in all the periods by 6.9% Impairment of USD 444 million Recoverable amount equals required carrying amount Decrease in all the periods by 7.4% Impairment of USD 523 million Impairment of USD 87 million required required
Steel prices Decrease in all the periods by 0.8% Recoverable amount equals - carrying amount Decrease in all the periods by 1.6% Impairment of USD 490 million Recoverable amount equals required carrying amount Decrease in all the periods by 1.8% Impairment of USD 630 million Impairment of USD 148 million required required
Iron ore prices Increase in all the periods by 6.4% Recoverable amount equals - carrying amount Increase in all the periods by 12.8% Impairment of USD 511 million Recoverable amount equals required carrying amount Increase in all the periods by 14.6% Impairment of USD 649 million Impairment of USD 142 million required required
Coal prices Increase in all the periods by 5.4% Recoverable amount equals - carrying amount Increase in all the periods by 10.9% Impairment of USD 534 million Recoverable amount equals required carrying amount Increase in all the periods by 11.1% Impairment of USD 553 million Impairment of USD 19 million required required
UAH/USD exchange rates Increase in all the periods by UAH 1 Recoverable amount increases by Recoverable amount increases USD 447 million by USD 471 million
Discount rates Increase in all the periods by 3.1 pp Recoverable amount equals - carrying amount Increase in all the periods by 4.4 pp Impairment of USD 357 million Recoverable amount equals required carrying amount Increase in all the periods by 5.3 pp Impairment of USD 575 million Impairment of USD 247 million required required
Growth rate in perpetual period No reasonable changes would lead No reasonable changes would to impairment lead to impairment
12 Metinvest B.V. Notes to the Unaudited Interim Condensed Consolidated Financial Information – 30 June 2020 All tabular amounts in millions of US Dollars
7 Investments in associates and joint ventures
The principal associates and joint ventures of the Group are as follows: 30 June 2020 31 December 2019 Name Type of Segment % of Carrying % of Carrying relationship ownership value ownership value
Zaporizhstal Group Joint venture Metallurgical 49.99% 659 49.99% 823 Southern Iron Ore Enrichment Works Group Joint venture Mining 45.87% 376 45.87% 260 Pokrovske coal business Associate Mining 24.77% 48 24.77% 189 IMU Associate Metallurgical 49.91% - 49.91% 5 PrJSC Yuzkoks Associate Metallurgical 23.71% 10 23.71% 14 PrJSC Zaporizhvohnetryv Associate Metallurgical 45.39% 3 45.39% 5 PrJSC Dniprovskiy Coke Plant Associate Metallurgical 73.01% - 49.37% 5 Total 1,096 1,301 As of 31 May 2020, PJSC Southern Iron Ore Enrichment Works engaged independent appraiser to perform a revaluation of its property, plant and equipment as the assets’ fair value was expected to be higher than their carrying amounts. The revaluation result of property, plant and equipment of USD 35 million was included within the Share in other comprehensive income / (loss) of joint ventures and associates. Other key changes in the carrying amount of the Group’s investments in associates and joint ventures during the six months ended 30 June 2020 were due to the Group’s share in their after tax loss of USD 67 million and negative currency translation differences of USD 139 million due to depreciation of UAH against USD. PrJSC Dniprovskiy Coke Plant In March 2020, the Group has acquired additional 23.64% stake in the PrJSC Dniprovskiy Coke Plant from third parties for the total consideration of USD 5 million. As a result, PrJSC Dniprovskiy Coke Plant (which was previously reported as the Group’s associate as at 31 December 2019) became subsidiary of the Group. The fair value of PrJSC Dniprovskiy Coke Plant net assets at the acquisition amounted to USD 47 million. Main assets and liabilities acquired consisted of trade and other accounts receivable in the amount of USD 268 million, property, plant and equipment in the amount of USD 77 million, trade and other accounts payable in the amount of USD 251 million and bank borrowings in the amount of USD 28 million. No goodwill or gain from a bargain purchase was recognised as a result of the acquisition. Option for the acquisition of interest in Pokrovske coal business The fair value of an option to purchase the remaining 75.01% (revised in July 2019 to 75.22%) from the other co- investors is assessed through Black-Scholes Merton option pricing model (Level 3). When performing valuation using this method, the key estimates and judgments applied by the management, were as follows: 30 June 2020 31 December 2019 Volatility of share prices 39% 33% Time for execution of the option 1.1 years 1.6 years Risk free rate 0.16% 1.59% Fair value of the stake 754 713
The following table summarises key assumptions on which management has based its cash flow projections to undertake the valuation of fair value of the stake. 30 June 2020 31 December 2019
Post-tax discount rate (USD) 12.58% 12.41% EBITDA margins approximately 60% approximately 50% Growth rate in perpetual period 3.00% 3.00% Coal prices forecast for 2019-2025 USD 130 per tonne in 2020, USD 160 per tonne in 2020, USD 150 -170 in 2021-2025, USD 157-171 in 2021-2025, starting from 2026 prices are starting from 2026 prices are adjusted for the level of adjusted for the level of inflation in the USA inflation in the USA
13 Metinvest B.V. Notes to the Unaudited Interim Condensed Consolidated Financial Information – 30 June 2020 All tabular amounts in millions of US Dollars
7 Investments in associates and joint ventures (continued)
The sensitivity of the option fair value to changes in the principal assumptions is presented below:
30 June 2020 31 December 2019 Volatility increase / decrease by 1 pp 3 / (3) 4 / (4) Fair value of the stake increase/decrease by USD 6 / (5) 6 / (6) 10 million Time to expiration increase / decrease by 1 month 4 / (5) 3 / (3) Risk free rate increase / decrease by 1 pp 4 / (4) 6 / (5)
The above sensitivity analysis is based on a change in one assumption while holding all other assumptions constant. In practice, this is unlikely to occur, and changes in some of the assumptions may be correlated.
A reconciliation of movements in Level 3 of the fair value hierarchy by class of instruments as of 30 June 2020 is as follows:
2020 2019
Fair value at 1 January 122 130
Gains or losses recognised in profit or loss for the year 16 6
Fair value at 30 June 138 136
8 Trade and other receivables and other non-current assets 30 June 31 December 2020 2019 Non-current assets Trade receivables 179 367 Loans issued to SCM (USD denominated, 9% effective interest rate) 170 171 Loans issued to SMART (USD denominated, 9% effective interest rate) 95 96 Option for acquisition of interest in Pokrovske coal business 138 122 Other non-current financial assets 112 72 Other non-current non-financial assets 14 14
Total non-current assets 708 842
Current financial assets Trade receivables and receivables on commission sales 2,566 2,197 Loans issued to SCM and SMART (UAH denominated) 46 52 Loans issued to joint venture (USD denominated, 11% effective interest rate, mature in 2020, renegotiated in 2019) 101 97 Other receivables 126 121
Total current financial assets 2,839 2,467
Current non-financial assets Recoverable value added tax 158 307 Prepayments made 94 99 Prepaid expenses and other non-financial receivables 144 155
Total current non-financial assets 396 561
Total current assets 3,235 3,028
Total trade and other receivables 3,943 3,870
Impairment of financial assets for the six months ended 30 June 2020 amounted to USD 115 million. Change in estimates and assumption related to recovery period resulted in recognition of expected credit losses in the amount of USD 91 million, while increase in the outstanding receivables balance led to additional charge of USD 24 million.
14 Metinvest B.V. Notes to the Unaudited Interim Condensed Consolidated Financial Information – 30 June 2020 All tabular amounts in millions of US Dollars
9 Loans and borrowings
30 June 31 December 2020 2019 Non-current Bonds issued 2,080 2,074 Bank borrowings 255 338 Lease liability 24 30
Total non-current loans and borrowings 2,359 2,442 Current Bonds issued 21 25 Bank borrowings 243 153 Trade finance 374 399 Lease liability 13 13
Total current loans and borrowings 651 590
Total loans and borrowings 3,010 3,032
As at 30 June 2020, the bank borrowings include pre-export finance (PXF) facility in the amount of USD 365 million (31 December 2019: USD 411 million). As of 30 June 2020, the Group’s bonds were traded on open markets. Fair value of bonds and discount / premium are as follows: 30 June 2020 31 December 2019 Premium / Premium / Fair value Fair value (Discount) (Discount) 2021 115 (0.3%) 116 0.5% 2023 516 (0.5%) 547 5.6% 2025 307 (9.0%) 342 1.9% 2026 649 (1.4%) 709 7.7% 2029 474 (6.1%) 520 2.5% Total 2,061 2,234 Have these market quotations been used to determine the fair values of the PXF as at 30 June 2020, those would be USD 361 million (31 December 2019: USD 419 million). For all other bank borrowings, their fair value approximates to its carrying amount as at 30 June 2020 and 31 December 2019. The Group is subject to certain covenants related primarily to its borrowings. Non-compliance with such covenants may result in negative consequences for the Group including increase in the cost of borrowings and declaration of default. As at 31 December 2019 and as at 30 June 2020, the Group was in compliance with the covenants.
15 Metinvest B.V. Notes to the Unaudited Interim Condensed Consolidated Financial Information – 30 June 2020 All tabular amounts in millions of US Dollars
10 Trade and other payables
30 June 31 December 2020 2019
Trade payables and payables on sales made on commission 1,942 1,760 Dividends payable to shareholders of Metinvest B.V. 304 304 Dividends payable to non-controlling shareholders of Company’s subsidiaries 16 6 Payable for acquired property, plant and equipment and other intangible assets 108 227 Other financial liabilities 83 47
Total financial liabilities 2,453 2,344
Prepayments received 124 142 Accruals for employees’ unused vacations and other payments to employees 88 98 Other taxes payable, including VAT 109 124 Wages and salaries payable 32 33 Guarantee issued 6 6 Other allowances and provisions 31 32
Total trade and other payables 2,843 2,779
As at 30 June 2020, the Group had contractual capital expenditure commitments in respect of property, plant and equipment totalling USD 332 million (31 December 2019: USD 347 million).
11 Net operating costs (excluding items shown separately)
Six months ended 30 June 2020 2019
Raw materials including change in finished goods and work in progress 1,204 1,547 Goods and services for resale, excluding related transportation 1,376 1,700 Energy materials including gas, electricity and fuel 444 560 Wages and salaries 380 372 Transportation services 435 398 Repairs and maintenance expenses 99 129 Pension and social security costs 73 65 Pension costs – defined benefit obligations 8 7 Depreciation and amortisation 418 316 Impairment of property, plant and equipment and other intangible assets 2 22 Taxes and duties 55 60 Services and other costs 150 143 Operating foreign exchange losses 123 6
Total net operating costs (excluding items shown separately) 4,767 5,325
12 Finance costs
Finance costs for the six months ended 30 June were as follows:
Six months ended 30 June 2020 2019
Net foreign exchange loss 164 - Interest expense - borrowings 12 14 - bonds 78 72 - seller’s notes - 2 Interest cost on retirement benefit obligations 31 28 Other finance costs 8 8
Total finance costs 293 124
16 Metinvest B.V. Notes to the Unaudited Interim Condensed Consolidated Financial Information – 30 June 2020 All tabular amounts in millions of US Dollars
13 Balances and transactions with related parties
Unless stated otherwise, other related parties are related through common control under SCM. As at 30 June 2020 and 31 December 2019, significant balances outstanding with related parties are detailed below: 30 June 2020 31 December 2019 SCM Asso- Joint SCM Smart SCM Asso- Joint SCM Smart Limited ciates ventures and Group Limited ciates ventures and Group (Cyprus) related (Cyprus) related entities entities ASSETS
Non-current trade and other receivables, including: - 179 - 170 95 - 367 - 171 96 Long-term loans issued - - - 170 95 - - - 171 96 Trade receivables and receivables on commission sales - 179 - - - - 367 - - - Current trade and other receivables, including: 4 208 1,085 179 21 - 77 1,032 194 24 Trade receivables and receivables on commission sales - 188 959 91 2 - 75 903 82 2 Prepayments made - - - 42 - - - - 70 - Loans issued - 19 101 27 19 - - 97 30 22 Other financial receivables (short- term, non-interest bearing) 4 1 25 19 - - 2 32 12 - Cash and cash equivalents - - - 61 - - - - 78 -
30 June 2020 31 December 2019 SCM Asso- Joint SCM Smart SCM Asso- Joint SCM Smart Limited ciates ventures and Group Limited ciates ventures and Group (Cyprus) related (Cyprus) related entities entities LIABILITIES
Trade and other payables, including: 270 84 724 129 35 270 121 515 146 35 Dividends payable to shareholders of Metinvest B.V. 269 - - - 35 269 - - - 35 Dividends payable to non-controlling shareholders of Company’s subsidiaries - - 2 13 - - - - 3 - Trade payables and payables on sales made on commission - 63 705 112 - - 99 503 137 - Prepayments received - 19 1 1 - - 22 - 1 - Other financial liabilities 1 2 16 3 - 1 - 12 5 -
17 Metinvest B.V. Notes to the Unaudited Interim Condensed Consolidated Financial Information – 30 June 2020 All tabular amounts in millions of US Dollars
13 Balances and transactions with related parties (continued)
Significant transactions with related parties during the six months ended 30 June 2020 are detailed below: Associates Joint SCM Smart Total ventures and related Group entities Sales, including: 75 497 35 1 608 Steel 19 18 28 1 66 Scrap metal - 12 - - 12 Coke and coking coal 53 254 - - 307 Iron ore - 176 - - 176 Other 3 37 7 - 47
(Impairment)/ reversal of impairment of financial assets (71) (18) (8) (5) (102)
Finance income - 5 8 3 16
Significant transactions with related parties during the six months ended 30 June 2019 are detailed below: Associates Joint SCM Smart Total ventures and related Group entities Sales, including: 67 590 34 2 693 Steel 9 17 31 2 59 Scrap metal - 9 - - 9 Coke and coking coal 56 341 - - 397 Iron ore - 199 - - 199 Other 2 24 3 - 29
(Impairment)/ reversal of impairment of financial assets (38) 7 (3) 1 (33)
Finance income - 5 5 3 13
The following is a summary of purchases from related parties during the six months ended 30 June 2020: Associates Joint ventures SCM Total and related entities Purchases, including: 210 816 655 1,681 Steel products 9 785 7 801 Coke and coking coal 182 - 17 199 Raw materials and spare parts 13 18 62 93 Electricity - - 242 242 Gas - - 75 75 Fuel - - 17 17 Services, including transportation 1 4 221 226 Other 5 9 14 28
18 Metinvest B.V. Notes to the Unaudited Interim Condensed Consolidated Financial Information – 30 June 2020 All tabular amounts in millions of US Dollars
13 Balances and transactions with related parties (continued)
The following is a summary of purchases from related parties during the six months ended 30 June 2019: Associates Joint ventures SCM Total and related entities Purchases, including: 238 925 680 1,843 Steel products - 876 7 883 Coke and coking coal 217 4 19 240 Raw materials and spare parts 17 32 58 107 Electricity - - 241 241 Gas - - 128 128 Fuel - - 42 42 Services, including transportation - 3 169 172 Other 4 10 16 30
Not included in the tables above are Group’s transactions on purchase and further re-sale of iron ore, coal and steel products from or to joint ventures where the Group is acting as an agent and not as principal. Group’s net revenue on such transactions was USD 9 million during the six months ended 30 June 2020 (six months ended 30 June 2019: USD 4 million). During the six months ended 30 June 2020, the remuneration of key management personnel of the Group comprised current salaries and related bonuses totalling USD 7 million (six months ended 30 June 2019: USD 7 million). As at 30 June 2020, key management held the Group’s bonds in the total amount of less than USD 1 million. Rights of these bondholders are not different from the rights of other bondholders.
14 Events after the balance sheet date
During July – September 2020, the Group increased ownership in PrJSC Zaporizhvohnetryv from 45.39% to 50.79% by acquiring interest held by the minority shareholders. Management is currently assessing the financial impact of the transaction.
19