ANNUAL REPORT

2006

AN INTERNATIONAL HIGH-TECH MINERALS GROUP 2 PRESIDENT’S REPORT 30 HUMAN RESOURCES Comments on operations and the year-end fi nancial state- Competence development, management development, ments for 2006 by Group President and CEO Martin Ivert. absence due to illness, recruiting, diversity and equality. 4 SAFETY FIRST 33 ENVIRONMENT Safety efforts have top priority and are aimed at raising the Organization of environmental work, environmental im- level of awareness and commitment among all employ- pact, permits, trade in emissions rights, deformation and ees. alterations to the landscape, social impact and planning issues. 6 LKAB’s CLIMATE IMPACT On carbon dioxide emissions, the environmental advan- 40 ORE RESERVES AND MINERAL RESOURCES tages of LKAB’s products, and work to reduce climate Short-term and long-term objectives of prospecting work, impact. and access to iron ore for future exploitation. 8 ENERGY - A DECISIVE ISSUE FOR THE FUTURE 42 GROUP OVERVIEW With regard to costs, process technology and climate im- Summary and fi nancial highlights 1997-2006 pact, the energy issue is strategically important for LKAB. 9 MARKETS AND COMPETITION 43 CONTENTS FOR FINANCIAL REPORTING On global trade in iron ore, the market for industrial miner- als, and other Group operations. 44 REPORT OF THE DIRECTORS 12 VISION AND STRATEGIES 52 FINANCIAL REPORTS AND NOTES Overall Group strategies and strategic activities in the op- 100 PROPOSED DISPOSITION OF UNAPPROPRIATED erative divisions. EARNINGS 15 DIVISIONAL OPERATIONS 2006 101 AUDIT REPORT Market trends, production and results, and operating tar- gets and outlook for the respective divisions. 24 INVESTMENTS AND CONSTRUCTION PROJECTS 102 ORGANIZATION, LEGAL STRUCTURE Ongoing programs of capital expenditure to increase pro- 103 CORPORATE GOVERNANCE duction and improve logistics in the iron ore operation.. 108 BOARD OF DIRECTORS AND AUDITORS 26 RESEARCH AND DEVELOPMENT LKAB secures its position as a world-leading pellet manu- 110 GROUP MANAGEMENT facturer through research and development. 111 ORGANIZATION, OPERATIVE 28 POLICIES AND GUIDELINES 112 ADDRESSES The fundamental control documents for LKAB’s person- nel: Ethics Policy, Environmental and Energy Policy, Quality 113 FINANCIAL REPORTING 2007 Policy and Information Policy.

Cover: A new pelletizing plant, MK3, in Malmberget, was operational in December 2006. LKAB in brief

• Mission: LKAB’s mission is, based on the Swedish Orefi elds, to manufacture and deliver to the world market upgraded iron ore products and services that create added value for its customers. Other closely related products and services that are based on LKAB’s know-how and support the main business can also be included in the company’s operations.

• Vision: LKAB will be perceived by the customers as the supplier that provides the most added value and is thereby the leader in its chosen market segments.

• The main product is iron ore pellets for production of hot metal in blast furnaces and direct reduction processes. The product portfolio consists of about 30 industrial mineral products; mainly magnetite, olivine, mica and minerals with fl ame-retardant properties.

• Today, the LKAB Group consists of about 30 companies in 15 countries. Operations are organized in divisions: – The Market Division sells iron ore products to the steel industry. – The Mining Division mines, upgrades and delivers iron ore products. – The Minerals Division develops, produces and markets industrial minerals. – The Special Businesses Division supports Group companies with services and technical development.

• The Group has about 3,700 employees, of which more than 600 outside Sweden.

• LKAB is wholly owned by the Swedish state, represented by the Ministry of Industry, Employment and Communications. Chairman of the Board: Björn Sprängare. President and Group CEO: Martin Ivert. 2006 in summary

• Global production of crude steel and demand for iron • Operating income increased by 2%, amounting to ore continued to grow. LKAB’s total deliveries of iron ore MSEK 6 256 (6 109). Income has been affected positively products amounted to 23.3 (23.2) Mt. The share of pellets by increased prices and increased volume of pellets, but increased to 15.9 to 15.3 (15.3) Mt. negatively by higher production costs including costs for energy, material and services. • The market for industrial minerals was also characterized by strong growth. Restricted supply of magnetite products • Of investments in fi xed assets totaling nearly 5 billion meant that the Mineral’s Division’s deliveries were lower kronor, the new pelletizing plants in Malmberget and Ki- than the previous year and amounted to 0.7 (1.0) Mt. runa accounted for a greater share of disbursements.

• The Group’s revenue increased by 2% to MSEK 14 615 • During the year, the olivine mine in Greenland came into (14 337), which is mainly attributable to a net increase in production, which means that LKAB is now self-suffi cient the price of iron ore and a greater share of pellet products. for the supply of olivine to its pelletizing operation. Deli- very of olivine to the steel industry has also commenced.

LKAB worldwide

Head offi ce

Market Division

Mining Division

Minerals Division

Special Businesses Division

THE GROUP’S SALES OF INDUSTRIAL MINERALS LKAB’S EXPORTS OF IRON ORE PRODUCTS are mainly to customers in Europe, but Asia and the USA are mainly to northern Europe, North Africa and are growing markets. There are subsidiaries with processing the Middle East. There are iron ore mines, processing plants in Sweden, Finland, Greenland, the UK, the Nether- plants and ore harbors in northern Sweden lands, Greece, Turkey and China. The company has additional and northern Norway, and sales offi ces in Sweden, subsidiaries in Germany, the USA and Hong Kong, as well as Belgium, Germany and Singapore. representative offi ces in Slovakia and Thailand. • Production of fl ame retardant minerals in Turkey and mica • The average number of employees increased to 3 737 products in Finland has been expanded with new production (3 563). The number of recruitments was the highest in 30 lines. years, and the proportion of women employed in the Group continued to increase. However, attracting more women • In October, a new pelletizing plant in Malmberget was co-workers is still a big challenge. inaugurated. The came online in December and will produce 2,5 million tonnes of pellets in 2007. • Absence due to illness, both short-term and long-term, con- tinues to decline. However, the number of industrial accidents • Construction of concentrating and pelletizing plants in increased following the downward trend of recent years. Kiruna and of a new ore harbor in Narvik is under way. These Safety efforts have therefore been intensifi ed as part of a are expected to be operational in the second quarter of 2008 campaign to improve safety in the workplace and to raise the and the fi rst quarter of 2009, respectively. level of awareness and commitment among employees.

• During the year, LKAB assumed full ownership of the • LKAB’s expansion of mining operations in the Orefi elds subsidiary Wassara, which develops and sells water-powered entails a successive expansion of deformation zones that will drilling systems. Wassara will now increase its marketing eventually have an impact on local planning. Together with efforts directed towards other mining companies and the concerned parties, LKAB is seeking to fi nd practical and eco- construction sector. nomically feasible local planning alternatives.

NET SALES AND EARNINGS RETURN ON SHAREHOLDERS’ EQUITY

% 15 000 Mkr 50

40 12 000 30 9 000 20 6 000 8,5% 10

3 000 0

0 -10 01 02 03 04 05 06 01 02 03 04 05 06 Net sales Operating income Return of equity (after tax) Targeted return on equity (after tax) Net sales and operating income improved by 2%, main- ly due to price increases and a greater share of pellet prod- The target for return on shareholders’ equity ucts. is 8,5% over a business cycle.

SALES PER MARKET REGION GROUP SUMMARY Other 8% MSEK 2006 2005 2004

Net sales 14 615 14 337 8 988 Asia 18% Operating income 6 256 6 109 1 941 - operating margin, % 42,8 42,6 21,6 Income after fi nancial items 6 382 6 451 2 023 - profi t margin, % 43,7 45,0 22,5 Tax -1 785 -1 904 -456 Net income for the year 4 597 4 547 1 567

Fixed assets 14 341 9 798 6 746 Europe 74% Current assets 11 524 10 776 6 911 Shareholders’ equity 19 076 14 802 10 044 Both iron ore products and industrial minerals are sold mainly in Europe. Cash fl ow for the year 70 554 -176 Return on equity, % * 27,1 36,6 16,5 Equity/assets ratio, % 73,8 72,0 73,6 Capital expenditures 2 525 2 648 973 Avarage number of employees 3 737 3 563 3 482

* After tax President’s report

2006 was another very good year for the LKAB Group. The market for iron ore con- tinued to grow and the trend for other minerals was also positive. In combination with good production outcomes, this resulted in a greater operating income than the previous year, and return on shareholders’ equity was 27.1%. However, in one area we have not succeeded; reducing the number of accidents.

Production and deliveries from the Mining Division reached program, initiated in the autumn, will continue during the 23.3 Mt, the same level as in 2005, but with a greater share spring of 2007. of pellets. Following the dramatic price increases over re- The driving force is, of course, also consideration for the cent years, 2006 saw a minor reduction in the price of pel- wellbeing of our employees; but we want to be able to at- lets, although an overall increase in net price, thanks to high- tract future employees. er fi nes prices. It is particularly pleasing to report that absence due to The Minerals Division has continued its concentration illness is at a low level and long-term sick leave is showing on selected minerals with good growth potential. This has a positive trend. meant that production has been concentrated in fewer units. The division now supplies LKAB’s iron ore production with IMPACT ON THE COMMUNITY olivine from the deposit in Greenland, and the fi rst external Mining operations have an impact on the surroundings and delivery contracts have been signed. affect many stakeholders, both the community at large and individuals. In this regard, the media have shown a great HIGHER PRODUCTION WITH GREATER STABILITY interest. The organization must be able to respond to ques- Aided by among other measures, better maintenance effi - tions of a technical and economic nature as well as manag- ciency, efforts to achieve greater stability at a higher level ing communications with all types of stakeholders. of production have continued. Within the industry, the po- All of this requires enormous energy, which is why the tential gains that can be made in the area of maintenance organization has been strengthened to be able to deal with are underestimated. Here, LKAB has taken advantage of the questions in a credible manner and to be able to carry on the possibilities as a basis for resource-effi cient growth. dialogue with municipalities, public administrations, proper- A new pelletizing plant in Malmberget came on line ty owners and other stakeholders. ahead of schedule and started producing in December. The In Malmberget, the purchase of private homes is under larger pelletizing plant, under construction in Kiruna and is way. Once this is complete, planning for increased production expected to be operational in the second quarter of 2008, can begin. In Kiruna, primarily the infrastructure, including the just as several customers are expected to have completed railway, will be affected during the coming years. Planning of their capacity expansion. This means that LKAB’s increased a new railway branch line, which must be in place in about pellet capacity will be well timed. fi ve years, continues. LKAB is engaged in active dialogue with One of our strategies is to develop our logistics; not least Banverket and the Municipality. with respect to transports on the Ore Railway, through the use of new, larger ore cars. The cars are being delivered by ENVIRONMENT AND ENERGY a Swedish consortium of which LKAB is a partner. Introduction of environmental and energy management sys- tems continues. By the turn of the year, all of the processing ACCIDENTS MUST BE PREVENTED plants, harbors and railways in the Mining Division had been During 2006, 86 industrial accidents resulting in absence oc- certifi ed, ensuring the basis for our ongoing, systematic en- curred. A positive trend of several years was thereby bro- ergy conservation and environmental safety efforts. ken. Unfortunately, a tragic fatal accident, resulting from fall- LKAB’s pellet production is very environmentally ef- ing rock, occurred in the underground operation. fi cient in comparison with that of other producers. This is Great care has been taken in investigating the circum- due to our special iron ore - magnetite - and a half century stances surrounding the accident, and we must continue to of experience of pellet manufacture. Use of LKAB pellets develop mining methods and rock reinforcement methods in hot metal production contributes to lower emissions of as well as implementing training initiatives in order to pre- the greenhouse gas carbon dioxide than does the use of vent similar accidents or incidents from happening. other iron ore raw materials. It is therefore imperative that The ambition and the vision is to achieve a zero-acci- trade in emissions rights becomes global, and that alloca- dents working environment. Therefore, we have launched tions of rights is realized in an environmentally just and ef- a program known as “Safety First”. An intensive training fective way.

PRESIDENT´S REPORT 2 LKAB ANNUAL REPORT 2006 Energy is also a vital issue for the future. Like many other At the same time, LKAB’s operations are very important companies in Swedish primary industries, we at LKAB are for the local economy and social development in the mining very concerned about developments on the electricity mar- communities. The ongoing program of investment repre- ket and how we can secure a stable power supply that will sents a major capital injection for all of northern Sweden. allow us to maintain our competitive advantage. As mentioned, safety is a priority area, and we must There are two aspects to this issue. These are price and reduce the number of work-related accidents and sick ab- supply. In our assessment, electricity prices will not fall, sence. With better equality of opportunity, the number of since marginal pricing means that coal-based power gen- women employed in the company will increase. Recruiting eration results in higher emissions-rights costs and thereby and human resources development are key focus areas for higher prices. the future. The company therefore cooperates closely with One way of avoiding this dilemma is to own power the university and schools in the region. plants. We are therefore investigating several alternatives within the framework of the process industry’s joint com- THE OUTLOOK FOR 2007 pany BasEl. Demand for iron ore and other minerals is expected to re- main high, prices in UD dollars have increased somewhat SUSTAINABLE DEVELOPMENT and the US dollar has been hedged at a satisfactory level. LKAB awaits new guidelines for sustainability reporting. We The new pelletizing plant in Malmberget is quickly ap- have therefore elected not to report according to the Global proaching full capacity. The ambition is to increase produc- Reporting Initiative. The information given in this annual re- tion by about 2 Mt during 2007. The fi nancial outcome will, port should, however, provide a representative view of how however, be affected negatively by certain one-off expendi- LKAB addresses these issues. tures for infrastructure, which include relocation of the rail- The fundamental control documents for the company’s way in Kiruna. work with respect to sustainability are the policies that have China has for many years driven market demand. Now been adopted by the Board. The ethics policy complies with we have seen indications that India will be the next big the United Nations Universal Declaration of Human Rights driver of the minerals and metals-based global economy. and specifi es clear guidelines for business ethics, environ- As the populous nations of Asia achieve a certain per-capita mental consideration and relations with employees and soci- income, the demand for steel, among other commodities, ety. This has been clarifi ed in, among other documents, the increases dramatically. This boost in world steel production policies for information, quality, environment and energy. must be based on iron ore, which is why we are confi dent LKAB’s operations are in many ways a refl ection of the that the current positive trend will persist during the years three dimensions of sustainability: the environmental, social to come. and economic dimensions. Mining and processing of miner- als affects the environment; principally by causing changes in the landscape. Settlements must be relocated and new Martin Ivert infrastructure built. President and CEO

PRESIDENT´S REPORT LKAB ANNUAL REPORT 2006 3 Safety First

A safe working environment in which all employees are attentive to their own safety and the safety of others is both a right and a responsibility of all who work within LKAB. “Safety First” a long-term campaign that began in 2005. The intention is to eliminate accidents. The vision is zero accidents.

This work has the highest priority, covers the entire work- LKAB is making a determined effort to raise the level of environment area and aims to raise the level of knowledge commitment to greater safety, one result of which has been and commitment among all employees. The objective is to a dramatic increase in the reporting of incidents and acci- place “Safety First” at the center of day-to-day operations dents. In 2006, 7 483 incidents were reported, as opposed by motivating each person to change their incorrect behav- to 5 122 in 2005. ior and that of. In this way, a culture of safety will grow with- Risk and incident reporting is the basis of a long-term, in the company. systematic improvement effort. All reported risks, incidents Within the Group’s national and international operations, and accidents are investigated in the workplace in order to the laws and regulations that apply in the countries in which gain an understanding of the risk factors and take measures operations are conduct are followed. The Group’s environ- to eliminate them. mental policy is often more far-reaching than local legisla- tion, and the policy is a directive for all LKAB facilities world- ANALYSIS OF ACCIDENTS wide. In the iron ore operation, a working committee has analyzed From a safety point of view, 2006 was a bleak year. With- the frequency of different types of accidents in 2006 and in the Group, 86 (64) accidents resulted in absence and a to- identifi ed ten accident categories. Three categories togeth- tal of 431 accidents with or without absence occurred. The er accounted for about 40% of all accidents leading to ab- short-term negative trend is unacceptable, but it must not sence: namely; falls, impacts and self-infl icted injuries. allow our safety work or the conviction that the vision of The latter is clearly the most common cause of accidents, zero accidents is attainable to falter. which shows how important it is to always do a quick risk A positive trend of several years was thereby broken. assessment before starting a job. The working committees Unfortunately, a tragic fatal accident, resulting from falling analyses are now being followed up with plans of action, rock, occurred in the underground operation. A serious ac- including measures to reduce accidents due to falls. cident occurred when a young employee lost an arm. The During the spring, an audit of LKAB’s occupational safety fatality was the fi rst in more than a decade. work was done by DuPont Safety Resources. Using this as

WORK-ENVIRONMENT VALUES

”Our safety conviction” • All injuries and work-related illnesses can be prevented. OCCUPATIONAL ACCIDENTS WITH ABSENCE INCIDENT REPORTING • Working safely is a requirement of employ- ment and contract work. Total accidents Accidents per million working hours Total 100 25 10 000 • Each of us is responsible for preventing work-related injuries and illnesses. 80 20 8 000 • All are visibly and clearly committed to im- proving the working environment. 60 15 6 000 • All safety faults will be quickly remedied. • Continuous safety training for all is essen- 40 10 4 000 tial for creating a safe workplace. 20 5 2 000 • Safety is as important outside work as it is at work. 0 0 0 • Preventing work-related illnesses and inju- 01 02 03 04 05 06 04 05 06 ries is good for business. Total number of accidents with absence in the Grou Total accidents per million working hours. Total reported incidents and risks.

SAFETY FIRST 4 LKAB ANNUAL REPORT 2006 ”Safety First” is a long-term campaign aimed at reducing the number accidents and increasing all employees’ knowledge of, and commitment to, a safe working environment.

a basis, a systematic campaign with priority measures and A new activity is the safety rounds that employees carry improvements in working environment is now being imple- out as a complement to the safety inspections that are re- mented throughout the Group. quired by law. With safety rounds, it is easier to see how During the year, LKAB adopted a common set of work- employees comply with the regulations and discover defi - environment values and reviewed supervisors’ pre-requi- ciencies, and how communication and dialogue on safety sites for handling work-environment issues, in among other functions in the workplace. ways, by reducing their administrative tasks. Another example of safety-improvement is the bus The commitment and determination of mangers is a nec- transports between Kiruna, Svappavaara and Malmberget. essary condition for success. Most of LKAB’s managers, Vehicle traffi c has thereby been dramatically reduced. Buses key support resources and larger contractors have under- are equipped with studded tires, seatbelts for all passengers gone a three-day course in safety work. In 2007, training for and alcohol locks for the drivers. all personnel is planned. Above all, LKAB’s focus on working environment is on Work is in progress to further improve supervisors’ com- prevention. In the work with alcohol and drug prevention, a petence, and in 2007, among other initiatives, a work-envi- training course was given for all supervisors and safety of- ronment certifi cate will be introduced. All supervisors will fi cers in 2005. During 2006, this work continued in an effort thereby complete a compulsory safety-training program. to identify people in the risk zone. In LKAB’s workplaces, Other areas that must be reviewed include regulations, or- employees and contractors’ personnel are subject to ran- ganization and information structure. dom drug tests.

SAFETY FIRST LKAB ANNUAL REPORT 2006 5 LKAB’s climate impact

LKAB’s use of fossil fuels and carbon-based additives results in emissions of the greenhouse gas carbon dioxide. At the same time, it is important to emphasize the great environmental advantages implicit in LKAB’s production processes and products, both with respect to energy consumption and emissions, in both a global and a regional perspective.

As pellet production increases, so will emissions. At the changes in processes enabled LKAB to halve the supply of same time, use of fossil fuels is declining in the heat sector, external energy. In recent years, the possibility of utilizing where more and more residual heat energy from processes residual heat from process gases for heating has meant is being used. considerable reductions in carbon dioxide emissions from LKAB’s participation in the EU’s system of trade in car- oil-fi red central boilers. bon-dioxide emissions rights means that the increased car- Some of the most important energy effi ciency improve- bon dioxide emissions are compensated by the purchase of ments have been the installation of waste gas boilers in the surplus emissions rights from other operations. pellet plants, which has reduced energy consumption. LKAB recovers excess heat from the pelletizing process for space ENERGY-EFFICIENT IRON ORE PRODUCTION heating in its own plants. In Kiruna, some of this surplus Energy consumption per tonne of iron ore produced and heat also goes to the municipal district heating system. processed has declined steadily over the years. At the same This work, in combination with the raw material magne- time, there has been a changeover in the energy sources tite, makes LKAB’s pelletizing plants the world’s most en- used. ergy-effi cient. This means that where energy supply and The predominant iron mineral in LKAB’s mines is magne- carbon dioxide emissions are concerned, LKAB has a big tite, which has the advantage that energy is liberated during head start compared to competitors that produce hematite- the upgrading process. In comparison with hematite ore, ap- based pellets. proximately 60% of the thermal energy needed during pel- In the new pelletizing plants, improved possibilities for let manufacture comes from oxidation, which reduces the process control will mean more even and energy-effi cient need for external fuel. production. Most other pellet producers in the world use hematite However, LKAB’s dependency on fossil fuels and the de- ore, which requires a greater input of energy in the upgrad- mand for coal and oil increase as pellet production increas- ing process, approximately 15 liters of oil per tonne of fi n- es. Energy effi ciency is one of LKAB’s main focus areas, but ished product. By comparison, LKAB’s pellet plant in Malm- the potential is not as great at it was in the past, considering berget uses only 5 liters of oil per tonne of pellets. the vast improvements in effi ciency that have already been The major energy effi ciency gains for coal and oil in made. iron ore operations were made in the ‘70s and ‘80s, when

C02 EMISSIONS FROM MINE TO SINTERING AND PELLETS

Kg CO /tonne crude steel 300 2

250

200 THE ENVIRONMENTAL ADVANTAGES OF LKAB’S PRODUCTS 150 LKAB’s iron ore consists mainly of magnetite, which implies major environmental advantages: 100 • During sintering in the pelletizing process, energy is liberated when oxidation takes place. • 60% of the thermal energy needed for production comes from oxidation. 50 • Less addition of coal and oil is necessary, which implies lower emissions. 0 • Production of LKAB pellets generates one-seventh the quantity of emissions compared with Sinter 70fines Hematite-80 LKAB-pellets90 sintering at steelmills. pellets

The Minerals Division supplies products made from naturally occurring minerals: Total carbon dioxide emissions from production of crude steel, about 2 000 kg C0 /tonne, are reduced when LKAB • Minerals with fl ame-retardant properties replace synthetic products. 2 pellets are used as the iron raw material. Production of • Magnetite is used for water treatment and desulphurization of coal. LKAB pellets generates one-seventh the quantity of car- • Olivine improves the working environment in foundries and reduces carbon dioxide bon dioxide emissions compared with sintering at steel- emissions in steelmaking. mills, and three times less than when manufacturing he- matite-based pellets.

LKAB’s CLIMATE IMPACT 6 LKAB ANNUAL REPORT 2006 The use of other fuels that result in lower carbon dioxide emissions may be possible within a fi ve-year period, though only when the right process technologies and commercial prerequisites exist. The use of bio-based fuels will not be possible for many years to come, largely because the neces- sary process technology is lacking.

RESEARCH COLLABORATION LKAB is working in several areas to alleviate impact on the climate, in among other ways through participation in inter- national research programs. The ULCOS project is an ini- tiative of the International Iron & Steel Institute (IISI) to in- vestigate the possibilities for cutting steel-industry carbon dioxide emissions by 50%. LKAB has contributed the use of the experimental blast furnace in Luleå for studies of how

CO2 emissions from blast furnaces can be reduced. Another project concerns the development of a method for sequestration of carbon dioxide in mine waste rock. Car- bon dioxide is allowed to react with water and mine tailings so that the mineral is dissolved and subsequently precipi- tates as carbonates, which bind the carbon dioxide over the long term. A third project has to do with reducing atmospheric car- bon dioxide via increased forest production. With others, LKAB is conducting trials of which the aim is to double for- est production on limited areas of land. In the long term, much of LKAB’s emissions can probably be sequestered in increased forest production.

In one of LKAB’s development projects, a method for sequestering carbon dioxide in waste rock will be found.

FUEL CONSUMPTION ENERGY CONSUMPTION IN LKAB’S PELLETIZING PLANTS ENERGY CONSUMPTION PER TONNE PELLETS

MJ/tonne pellets GWh Mt MWh/tonne pellets 1 000 3 500 21 0,25

3 000 18 800 0,20 2 500 15

600 2 000 12 0,15 9 400 1 500 0,10 1 000 6 200 0,05 500 3 0 0 0 0,00 70 80 90 00 06 01 02 03 04 05 06 01 02 03 04 05 06 Pellet production Oil Coa Electricity

Thanks to systematic efforts, fuel economy in the For several years, energy consumption has been directly Thanks to improved effi ciency, energy con- pelletizing plants has successively improved. proportional to pellet production. Effi ciency improvements sumption has not increased at the same rate will contribute to a reduction in energy consumption in rela- as pellet production. tion to the number of tonnes of pellets produced.

LKAB’s CLIMATE IMPACT LKAB ANNUAL REPORT 2006 7 Energy – a decisive issue

With regard to costs, process technology and climate impact, the energy issue is strategically important for LKAB. There is a risk that energy costs within the Group will soon become as great as or greater than personnel costs. There is increasing concern over the future availability of competitively priced energy.

LKAB is one of Sweden’s largest electricity consumers and companies have a combined power consumption corre- accounts for more than 1% of the country’s total electricity sponding to about half of Sweden’s total industrial electric- consumption. When the planned investments in increased ity consumption. production have been realized, by about 2009, LKAB’s elec- One of the projects has resulted in the establishment of tricity consumption will have risen to nearly 1.5% of total the power company VindIn AB, which will build and operate national consumption. At the same time, electricity prices wind-power plants for the purpose of delivering electricity can only be expected to rise over the long term. to the owner companies. The ambition within a fi ve-year pe- In the iron ore operation, vast amounts of electricity are riod is to produce one terawatt hour (TWh) of wind power used, mainly in mine operation and mineral processing. In per year. the next year, annual consumption of electricity will have increased from about 1.7 to more than 2 terawatt hours IMPROVEMENTS IN ENERGY EFFICIENCY (TWh). At the same time, market prices on the Nordic power Improving energy effi ciency is one of LKAB’s priority areas. exchange have risen dramatically since deregulation. The Energy Management System (EMS) provides a platform LKAB has a long-term contract that ensures delivery for for this effort. LKAB is committed to improving its power ef- many years to come, but the higher prices on the exchange fi ciency through participation in the Swedish Energy Agen- are already having a noticeable impact. If the current situa- cy’s Program for Energy Effi ciency (PFE) and is thereby eli- tion persists, the long-term implication will be signifi cantly gible for a tax reduction of 0.05 kronor/KWh. higher production costs. For LKAB, a price increase of 0.01 LKAB is participating with fi ve operational areas: Svap- kronor per kilowatt hour translates to 20 million kronor. pavaara ore processing, Kiruna ore processing and mining, To meet the power demand, LKAB and about 20 oth- and Malmberget ore processing and mining. Through par- er companies in the energy-intensive primary industries ticipation in PFE, LKAB will introduce an energy manage- have formed BasEl, a company that will generate power- ment system according to Swedish Standard (SS 627750) producing projects that may signifi cantly boost the supply and conduct a special energy analysis, which will involve de- of competitively-priced electricity. BasEl was formed with scription of energy use and defi nition of measures to save companies mainly in the forestry, steel, chemical and min- electricity. ing industries with operations in Sweden and abroad. These Special procedures for planning and purchasing will be introduced, which means that the most energy effi cient solutions will be chosen whenever technically feasible. Measures and results will be submitted for approval by the Swedish Energy Agency, which will also approve continued participation in the program. In June 2006, LKAB’s environmental and energy man- agement system for ore processing in Kiruna and Malm- berget was certifi ed, at which time it was decided that the PFE requirements would also be included. Certifi cation of the Svappavaara processing facilities had previously been completed. Introduction of the management system in the mines began during 2006, and it is expected that the sys- tem will be successively implemented throughout the entire group.

ENERGY TRAINING To raise awareness and commitment with respect to energy issues, co-workers in the Orefi elds have participated in an energy training program that has been developed in collabo- ration with Jernkontoret, Sandvik, SSAB and the Swedish LKAB and other companies in the primary industries have formed the wind Energy Agency. power company VindIn AB, which will deliver electricity to the owner companies.

ENERGY – A DECISIVE ISSUE 8 LKAB ANNUAL REPORT 2006 Markets and competition

LKAB’s main product is iron ore pellets for production of hot metal in blast furnaces and direct reduction processes. The Group also produces iron ore products for other purposes, and industrial minerals for many different industries worldwide.

IRON ORE PRODUCTS Direct reduction processes account for only 7% of ore- Three major players dominate global trade in iron ore: the based iron production, but are on the increase in countries multinational mineral groups Rio Tinto and BHP Billiton with where natural gas is in good supply. The volume of DR pel- iron ore mines in Australia and CVRD in Brazil. These three lets is expected to follow this trend. command more than 70% of the world market. In global LKAB also delivers fi nes, which unlike pellets, must be terms, LKAB, with only 3%, is considered a small player but sintered to form larger pieces before being used in the blast has a strong position in Northern Europe and is a world lead- furnace process. The volume of fi nes is expected to succes- er in the pelletization of iron ore. sively diminish and in future, the trend points to 100% blast LKAB is a niche supplier of upgraded iron ore products, furnace and direct reduction pellets for the steel industry. mainly pellets, which are centimeter-sized spheres of ore LKAB’s great competitive advantages are the high- with specifi c characteristics. Value is created by LKAB’s pel- quality magnetite ore, which is very energy-effi cient in the let products, in that they are adapted to customers’ process- pelletization process, and the fact that the ore reserves es and increase productivity in hot metal production. have increased. Pellet expertise and the position as a world- LKAB produces two types of pellets: blast furnace pel- leading pellet producer are other strengths. lets are delivered to steelmills in Northern Europe, and di- LKAB’s mines are the world’s most modern underground rect reduction pellets (DR) are sold to North Africa and the mines; but underground mining is a disadvantage, since Middle East. competitors are able to mine ore in open pits at a much In terms of volume, blast furnace pellets are the biggest lower cost. Other weaknesses include our US-dollar depen- product. There are indications that that hot metal from the dency, energy dependency, logistics from mine to harbor, blast furnace is, and will in the foreseeable future contin- and the position of orebodies under the communities of the ue to be, the dominating raw material for steel production. Orefi elds region. Blast furnace productivity is also increasing with fewer and The opportunities lie in the strong development of the larger production units. steel and iron ore market, which will enable growth through

Global seaborne trade in iron ore is dominated by mining groups in Brazil and Australia, which ship most of their products to the major import regions China, Japan and the EU. LKAB exports mainly to Northern Europe, North Africa and the Middle East.

GLOBAL TRADE IN IRON ORE

The largest exporting countries Australia Brazil India South Africa Canada Sweden

The largest importing countries China The EU Japan South Korea Taiwan

MARKETS AND COMPETITIONS LKAB ANNUAL REPORT 2006 9 Magnetite and dolomite for the European industrial minerals market are discharged and processed at the Minerals Division’s facility in Moerdjik, the Netherlands.

effi ciency improvement and increased production. The mated at over 20 billion kronor. Products are supplied to cus- greatest potential threat is in a possible stagnation in China’s tomers in the rubber and plastics industries, the chemical in- economic growth. Other threats are a falling dollar rate and dustry, foundries and manufacturers of refractory materials, lower pellet prices, and higher energy prices and new envi- civil engineering, the oil and gas industry and others. ronmental legislation that can distort competition. Magnetite is LKAB’s raw material for iron ore products, Emissions of greenhouse gases present a major chal- but it also has other uses. There is a strong demand for mag- lenge for the future. LKAB is working in several areas to netite products in the oil and gas industry for underwater reduce emissions, both in its own production and in custom- gas pipelines. Minelco is the market leader for magnetite ers’ iron and steelmaking processes. in Europe. The European system of trade in emissions rights im- The olivine market comprises three major application ar- plies that LKAB can purchase emissions rights from other eas: the steel, refractory and foundry industries. LKAB is a companies participating in the trade system. Production in- large consumer of olivine, which is a key ingredient in pellet creases in LKAB’s existing facilities can thereby be realized manufacture. without increasing emissions in Sweden or the EU. How- Mica is used principally as a functional fi ller in the paint ever, the system impacts global competition, since it does and plastics industries, for example, to make plastics more not include all players on the world market. bendable and give paint a smoother fi nish. Minelco has long been an important supplier on the market for mica products INDUSTRIAL MINERALS and is a market leader in Europe. Via a business agreement, Under the name Minelco, the Minerals Division has broad the company has exclusive right to mica that is a by-product and extensive operations on an international market. The di- of the apatite mine in Siilinjärvi, Finland. vision develops, produces and markets mineral products for The potential for UltraCarb products is very good. Above different industries. all, continued global market growth is expected for environ- For strategically important minerals, Minelco has full con- mentally friendly fl ame retardants in the cable industry and trol from mine to end user. other polymer industries. The Turkish deposit, which is the The selected minerals are currently magnetite, olivine, world’s largest, is economically competitive thanks to cost- mica, huntite and hydromagnesite. The latter two are miner- effi cient production. als with fl ame-retardant properties and are market under the In China, the Minerals Division has two production fa- product name UltraCarb. cilities in Tianjin. These factories produce ceramic and re- In many application areas, the Minerals Division has fractory products, mainly for the Chinese steel and foundry achieved a leading position. This position is based on a high industries. Business is conducted in partnership with two degree of expertise in mineral technology, production, producers in the respective areas. applications and markets, as well as the ability to devel- The division’s most important strengths are its broad op materials and processes in close collaboration with product portfolio and widespread geographic distribution, customers. as well as the considerable intra-group knowledge of miner- The market potential for the division’s products is esti- als and processes. Opportunities are in, among other areas,

MARKET AND COMPETITION 10 LKAB ANNUAL REPORT 2006 KGS Mekaniska is part of the Swedish consortium that is building the new ore cars for LKAB.

olivine production, increased demand for magnetite, posi- water-drive, other systems are either driven with oil or use tive environmental trends in water treatment products and oil as an additive in the fl ushing agent, which directly con- fl ame retardants, and growth in Asia and the USA. The most taminates the environment or increases the presence of oil apparent potential threats are a major economic downturn, products in the mine. higher freight rates and poorer exchange rates. AB KGS is planning for an increase in tunnel construc- tion in the Mining Division, and thereby increased concrete OTHER OPERATIONS production. Shotcreting will be marketed to other mines and The Special Businesses Division supports the Group by civil engineering and tunnel driving enterprises. KGS Me- providing drilling systems and explosives, mining engineer- kaniska has in collaboration with K-Industrier/Kiruna Wagon ing and concrete work, and properties. Outside the LKAB been contracted to manufacture LKAB’s new ore cars. Group, the division also has business with other mining Kimit’s main business is to supply LKAB with effective companies and construction and civil engineering fi rms. and effi cient explosives and related services. Kimit also Wassara markets its patented drilling system to the min- sells its products to other companies on the Nordic mar- ing industries in Sweden, South Africa and South America, ket, and signed an agreement in 2006 with the Finnish com- as well as to companies in tunnel construction and oil and pany Lapua to sell products to the Finland mining industry gas exploration. During 2006, Wassara became a wholly- construction and civil engineering. owned LKAB subsidiary and the company will intensify its Fastighets AB Malmfälten manages residential proper- marketing efforts. ties and has a strong position on the local housing market in Wassara’s main strength lies in the environmental advan- the municipalities of Kiruna and Malmberget. tages of it drilling system. While the Wassara Hammer is

MINERAL PRODUCTS SPECIAL BUSINESSES DIVISION

Products Markets Company Operations

Magnetite Oil and gas industries, rubber and plastic industries, KGS Rock cocrete civil engineering and construction, desulfurization of coal, water treatment Kimit Explosives Olivine Iron, steel, foundry, refractory industries KGS Mekaniska Mech. engineering Glimmer Plastics, paint, surface coating, building materials FAB Residential properties UltraCarb Plastics, cable industry Wassara Drilling systems Zirkon Ceramics, glass, chemicals, refractory industry Bentonite Foundry, paper, paint, chemicals and food industries

MARKET AND MARKETITION LKAB ANNUAL REPORT 2006 11 Vision and strategy

The strategic plan is based on an annual business-intelligence analysis of markets, product and process development and technical development.

Mission LKAB’s mission is, based on the Swedish Orefi elds, to man- ufacture and deliver to the world market upgraded iron ore products and services that create added value for its cus- tomers. Other closely related products and services that are based on LKAB’s know-how and support the main business can also be included in the company’s operations.

Vision LKAB will be perceived by the customers as the supplier that provides the most added value and is thereby the lead- er in its selected market segments.

Strategies The Group’s overall strategies can be summarized in the following points:

• Maintain a niche strategy based on pellets as the product, with added value for the customer. • Full capacity utilization as a basic strategy. • Volumetric growth via better utilization of plant and human resources. • Selective and ongoing ‘lean’ expansion of pellet capacity. • Organizational development for greater productivity and better work environment. • Development of industrial minerals.

The general assessment is that demand for iron ore prod- Another important factor is that LKAB can take advan- ucts, particularly pellet products, will remain high in the tage of the strong fi nancial platform which it has created. coming years. This will enable LKAB to grow through in- LKAB’s fi nancial strategy is to maintain a high equity-assets vestment in new processing plants and new main levels in ratio that will enable self-fi nancing of capital expenditures the iron ore mines. while retaining a buffer to alleviate the effects of a possible Demand for the Group’s other mineral products, princi- cyclical downturn. pally olivine, mica and UltraCarb (minerals with fl ame retar- A range of strategic activities are under way in the areas dant properties) is also expected to remain high. of environment, human resources, growth and effi ciency. Access to mineable ores a fundamental prerequisite for The new pelletizing plant in Malmberget, which came on growth. LKAB has suffi cient iron ore reserves to ensure line during the year, represents one of the strategic activities mining far into the foreseeable future. As for industrial min- towards the fulfi llment of our mission and the realization of erals, the LKAB Group has secured access to reserves of our vision. olivine, mica, huntite and hydromagnesite.

VISION AND STRATEGY 12 LKAB ANNUAL REPORT 2006 At Narvik, a ship discharges its cargo of olivine from Greenland.

The Mining Division produces iron ore products for production of hot metal in the steel industry. The division’s main competitive advantages are the magnetite ore of the Orefi elds of northern Sweden, and the knowledge and expertise in pellet production that has been amassed over the years.

• Continued niche strategy based on pellet products and a • Long-term increase in the speed at which production facili- target of 100% pellets. ties are operated, without jeopardizing quality. • Full capacity utilization in production for the highest pos- • Organizational development to increase productivity by sible cost effectiveness. delegating responsibility and authority. • Resource-effi cient volumetric growth via better utilization • Improved working environment, greater safety and more of plant and human resources. attractive workplaces to attract future employees and in- • Increased delivery capacity with better logistics, including crease the number of women employed in the company. larger ore cars, renovation of loading terminals and the ore • Ongoing efforts to increase energy effi ciency for reasons harbor in Narvik. of cost and environment. • Continued focus on maintenance in order to stabilize pro- • Research and development to assure the company’s lead- duction volume and assure product quality. ing position as a pellet producer.

VISION AND STRATEGY LKAB ANNUAL REPORT 2006 13 The Minerals Division develops, produces and markets selected minerals, customized for different industries. Operations should support the iron ore business; the division should seek other application areas for iron ore and derive benefi t from its mineral expertise in other industries.

• Selected minerals are magnetite, olivine, mica and miner- • In Turkey, Minerals has signifi cant deposits of huntite and als with fl ame retardant properties (UltraCarb). hydromagnesite for manufacturing UltraCarb products (minerals with fl ame retardant properties). • The strategy is to exercise control over the selected min- erals from raw-material source to end user. • In Finland, the division has a facility for production of mica and has increased the production capacity in order to • Product development in collaboration with customers. grow on markets for products used in plastics, paint, sur- • The main market is Europe, while the future growth is ex- face coating, construction and sound dampening. pected to take place mainly in Asia and North America. • In Asia, the division has mainly worked with sales of ex- • Growth areas for magnetite are, above all, applications for ternal suppliers’ mineral products. The strategy is to suc- heavy concrete, water treatment and desulphurization of cessively expand the product portfolio with the compa- coal. ny’s own products. • External olivine customers are mainly within the Euro- pean steel industry. Other major application areas are in the foundry and refractory industries.

The Special Businesses Division supports the Group by providing services and technical development of drilling systems, mining engineering and concrete work, engineering ser- vices, explosives and property management. Operations are organized in the subsidiaries AB KGS Wassara AB and Fastighets AB Malmfälten (FAB).

• KGS upgrades some of LKAB’s waste rock to road and • Wassara develops and sells drilling systems on the mar- concrete ballast, blasts, crushes and hauls mineral prod- kets Mining and Construction and Civil Engineering. ucts, processes concrete and works with rock reinforce- Wassara’s organization will become successively more ment in the mining and construction industry. market oriented. • KGS Mekaniska fabricates technically advanced steel • FAB provides residential and offi ce premises in the lo- structures and mechanical components for the engineer- cations in which LKAB operates. Business is conducted ing, mining and construction industries. with normal requirements for fi nancial returns. FAB is LKAB’s resource for the transition that is taking place in • Kimit supports LKAB’s iron ore operation by developing, the communities of Kiruna and Malmberget. manufacturing, purchasing, stocking and delivering explo- sives.

VISION AND STRATEGY 14 LKAB ANNUAL REPORT 2006 Divisional Mining Division The Mining Division mines and upgrades operations 2006 iron ore for products, principally pellets, which are the division’s main product, and magnetite products for the Minerals Division. The Market Division sells iron ore products to the steel industry.

Stefan Hertil and Roland Paulsson work at the new pelletizing plant, MK3, in Malmberget.

DIVISIONAL OPERATIONS 2006 LKAB ANNUAL REPORT 2006 15 THE IRON ORE MARKET IN 2006 due in part to restricted production owing to ongoing plant World production of crude steel, which has driven demand construction. The export market for DR pellets stagnated, for iron ore, increased in 2006 to a new record high for the and LKAB’s deliveries of DR pellets were reduced in favor of eighth consecutive year. Preliminary statistics from the Inter- an increase in the export of blast furnace pellets. national Iron and Steel Institute indicate that world produc- The persistent shortage of iron ore on the world mar- tion of crude steel increased by 8.9% to more than 1.2 bil- ket in 2006 contributed to an increase of 19% in the price lion tonnes. The strongest growth was seen in China, where of fi nes and lump ore from the major producers. The fi rst crude steel production reached about 423 million tonnes benchmark price agreement was reached in May 2006 be- (Mt), an increase of 18.8%. Production also increased in the tween Brazilian CVRD and German Thyssen Krupp Stahl. other major iron ore import regions; for example, in Japan by Demand for pellets was not as strong, which meant that 3.3% and in the EU-25 by 6.0%. prices of these products fell by 3%. For LKAB, the outcome The continued rise in global crude steel production meant of price negotiations was somewhat less favorable as a re- strong demand for iron ore throughout the entire year. Global sult of lower shipping rates and LKAB was compelled to ac- trade in seaborne iron ore increased to about 740 Mt (2006), cept a lower price than more far-distant suppliers. However, or about 13.4% over the previous year. China’s imports in- on average, LKAB achieved a net price increase, thanks to creased by 18.6% to 326 Mt. higher prices on fi nes. Within the EU-15, LKAB’s principal market for blast furnace products, crude steel production rose by 4.9% to PRODUCTION 173 Mt. LKAB’s deliveries to these countries increased by The process chain stretches from the mines in Kiruna and 10.5%. Malmberget to the harbors in Narvik and Luleå; from mining In the Netherlands, where crude steel production de- or ore under ground, production of pellets in the processing clined, LKAB’s deliveries were unaffected, which is indica- plants at the surface, and rail transport to Narvik and Luleå. tive of an increase in market share. Owing to maintenance Based on the strong demand for iron ore in recent years, work and technical conditions, crude steel production in the overall goal has been to increase production capacity in Sweden fell, which meant a reduction in deliveries from all stages; mining, processing and logistics. LKAB to the domestic market. Through greater effi ciency and improved maintenance, Consolidation of the world steel industry took a further the production volume has been successively increased step in 2006, when the world’s largest steel producer, Mit- from 20 Mt/yr to 23 Mt/yr. Ongoing investment in new pro- tal Steel, acquired the world’s second largest steelmaker, cessing plants and increased transport capacity is expected Arcelor. Arcelor Mittal, the product of the merger, produc- to result in a further increase in production volume to 30 Mt. es about 120 Mt of crude steel per year. During the year, Efforts are concentrated on improving the yield from a bidding war began over the Anglo Dutch steel company mining operations, i.e., minimizing ore losses and extract- Corus. ing the maximum amount of iron in relation to the quantity Global production of sponge iron, iron produced by direct of ore mined. Measures include improvements in blasting reduction, continued to rise in 2006. The increase was seen technology and loading. In addition to lower costs, improved mainly in India and Mexico, which are largely self-suffi cient yield also implies an extension of the operating life of the in iron ore. main levels. In the Middle East and North Africa, LKAB’s main market Underground mining in Kiruna began in the mid-1950s. for direct reduction pellets, production declined, which was The present main haulage level is 1 045 meters below the

GLOBAL IRON ORE EXPORT CRUDE STEEL PRODUCTION FINANCIAL HIGHLIGHTS – MINING DIVISION AND PRODUCTION OF CRUDE STEEL IMPORTANT CUSTOMER Mt MSEK 2006 2005 1 500 Change in 2005-2006 Net sales 12 576 12 349 1 200 Operating income 6 038 5 720 1. Germany +6,1% 2. Sweden -4,5% Operating margin, % 48,0 46,3 3. Finland +6,6% 900 Assets 23 433 18 612 4. The Netherlands -7,9% Liabilities 6 663 5 459 5. Saudi Arabia -5,1% 600 Capital expenditures 4 650 2 314 6. Turkey +11,2% 7. Egypt +7,1% Depreciation 948 791 300 Average number of employees 3 170 2 797 8. Belgium +11,6% 9. Libya -8,3% of which Parent Company 2 925 2 797 0 10. Hungary +6,7% 1960 1970 1980 1990 2000 2006 Production, Mt 23,3 23,3 Global export of ore (preliminary 2006) Deliveries, Mt 23,3 23,2 The ten largest customer nations accounted for 95 (94)% of the Mining Global production of crude steel Inventories, Mt 1,8 1,9 Division’s total deliveries.

DIVISIONAL OPERATIONS 2006 16 LKAB ANNUAL REPORT 2006 Sorting/concentrating plant Skip hoisting Pelletizing plant

Drilling/ blasting

Fines

Pellets Loading Crushing

Rail transport

Blast furnace

Shipping

Train /truck haulage on the main level

The process chain stretches from mining in the underground mines in Kiruna and Malmberget to upgrading of ore in the sorting, concentrating and pelletizing plants at the surface, rail transport to the harbors in Narvik and Luleå and shipping to customers.

zero point (the number of meters below the original peak of are expected to be operational in the second quarter of 2008 Kiirunavaara). During the year, the decision was taken to pro- and the fi rst quarter of 2009, respectively. ceed with development work for a new main level at 1 365 m. The fi rst stage of a new main level in Kiruna is expected PRODUCTION AND DELIVERY VOLUMES to enable access to iron ore corresponding to about 400 Mt The volume of upgrated iron ore products amounted 23.3 of iron ore products. (23.2) Mt. Pellet production totaled 16.9 (16.5) Mt, which is In addition, the decision was taken to extend the 1 000 m a new volume record. main level in Malmberget. This presents special conditions, Deliveries amounted to, 23.3 (23.2) Mt, with a greater since sections of the community lie within the area affected share of pellets, 15.9 (15.3) Mt. by the extension. A total of 23.5 (23.4) Mt was hauled on the Ore Railway The trend towards more customer-tailored products con- to Luleå and Narvik. As of 31 December, stocks of ore prod- tinues. Efforts are therefore being directed towards produc- ucts amounted to 1.8 (1.9) Mt. ing all pellet product in all pelletizing plants, and thereby The year’s contribution from the new pelletizing plant achieving maximum fl exibility. in Malmberget corresponds to what would have been pro- A new pelletizing plant in Malmberget, including a con- duced by the closed Steel-belt plant. For 2007, production centrating plant and discharge station, came on line in De- capacity has been increased by more than 2 Mt. cember. In June, a smaller pelletizing plant, the so-called Steel-belt plant in Malmberget, was closed. SALES AND EARNINGS The other pelletizing plant in Malmberget, the Belt-kiln Revenue increased, reaching MSEK 12 576 (12 349), due plant, is undergoing an overhaul, which will improve the mainly to a net increase in the price of iron ore over the pre- working environment. Remote-controlled loaders were intro- vious year. Greater delivery volumes and a higher share of duced in the Kiruna mine several years ago. During 2006, a pellets also contributed to the increase in revenue. new automatic loading system was tested in Malmberget. Operating income increased, amounting to MSEK 6 038 In September, the fi rst shipment of olivine from Green- (5 720). In addition to the above-mentioned factors, income land was discharged at the harbor in Narvik. Olivine is an has also been affected by higher production costs including important additive in pellet production, and LKAB is now costs for energy, material and outsourced services. Finan- self-suffi cient for the supply of olivine to its pelletizing op- cial results for fi scal year 2005 were affected by provisions eration. amounting to MSEK 241 which are attributable to structural Construction of concentrating and pelletizing plants in changes in the Orefi elds. Kiruna and of a new ore harbor in Narvik is under way. These

DIVISIONAL OPERATIONS 2006 LKAB ANNUAL REPORT 2006 17 MARKET OUTLOOK agreements in China and Italy set the standard for other iron Industry analysts foresee continued stability in the steel ore prices on both the Asian and European markets. market for 2007. Global crude steel production is again ex- On 22 March 2007, LKAB reached an agreement with pected to reach new record levels and it is expected that the the Anglo-Dutch steel group Corus for a price increase of iron ore market will remain strong. 7.2% on blast furnace pellets and price increases of 11.1% China will continue to be the major driver of demand. A and 11.0%, respectively, on Kiruna B Fines (KBF) and Malm- Chinese trade organization predicts that China’s crude steel berget A Fines (MAF). production will increase by 10% to 462 Mt in 2007. At the In light of these developments, the outlook for LKAB in same time, it is expected that China’s iron ore imports will 2007 is good. Demand for LKAB’s products is strong, which rise by 9% to 355 Mt in 2007, thereby exceeding total im- bodes well for full capacity utilization. ports by Japan and Europe. LKAB’s increased pellet capacity in 2007 will be ab- The outlook is positive for LKAB’s home market, Europe, sorbed by established customers in Europe and the Middle where Germany is expected to produce just as much steel East. The new pelletizing plant in Malmberget will replace as in 2006, about 47 Mt, and where Sweden has a chance production of Kiruna pellets on the domestic market and will to recover from the decline of 2006 and realize an upswing enable increased exports of both blast furnace pellets and in 2007. DR pellets from Kiruna. In the Middle East, two new direct reduction plants will be commissioned during the fi rst half of 2007, and the mar- OBJECTIVES 2007 ket for DR pellets is expected to recover from the temporary There is a strong focus on improving maintenance, includ- downturn of 2006. ing preventive maintenance. The aim is to stabilize produc- Iron ore prices for 2007 reached a record-early bench- tion at a higher and more consistent level. This is aided by, mark. Anxious to assume a leading role in setting the price among other measures, greater use of new technology. of iron ore, the Chinese steel producers reached an agree- The work of assuring safety in the working environment ment on 21 December 2006 with CVRD for a 9.5% price and quality in the company’s processes has high priority, and hike on fi nes in 2007. here, too, the keyword is stability. Consistent quality, the This was the fi rst time China had a decisive infl uence right quality and delivery assurance are the most important over world market prices. On 28 December 2006, CVRD success factors for customer relations. Work also focuses reached an agreement with Italian Ilva for a 5.28% price in- on establishing best practice and making production more crease on blast furnace pellets and 9.5% on fi nes. The price fl exible to enable maximum capacity utilization.

PRICE TRENDS, IRON ORE PRODUCTS PRODUCTION AND PRODUCTIVITY

US Cents Mt Tonnes/employee 160 25 10 000 140 20 8 000 120 100 15 6 000 80 60 10 4 000 40 5 2 000 20

0 0 0 01 02 03 04 05 06 07 01 02 03 04 05 06

LKAB Pellets (fob Narvik) Kiruna B Fines (fob Narvik) Production, Mt Productivity, CVRD Pellets (fob Tubarao) Carajas Fines (fob Ponta tonnes/employee de Madeira) Productivity is calculated for the Parent Company and was infl uenced in 2006 by recruitments made to meet future production requirements.

DIVISIONAL OPERATIONS 2006 18 LKAB ANNUAL REPORT 2006 Minerals Division The Minerals Division, which operates under the name Minelco on the global market, develops, produces and markets industrial mineral products for many different application areas and industries.

Magnetite products are used in the manufacture of underwater pipelines for the oil and gas industry.

DIVISIONAL OPERATIONS 2006 LKAB ANNUAL REPORT 2006 19 The most important markets for the division’s products are price trends for industrial minerals were positive. Demand construction and civil engineering, the oil and gas industry, for magnetite products in the oil and gas industry has re- the rubber, plastics and paint industries, the chemical indus- mained strong. Among other market successes, the division try, the automotive industry, foundries and manufacturers of reports a major order for magnetite products for gas pipe- refractory materials. lines in the Middle East. The Minerals Division accounts for nearly 13% of the In Finland and Turkey, construction of new processing Group’s total sales. The division has about 400 employees, plants for minerals, mainly for the plastics and cable indus- most of them outside Sweden. tries, has been completed. Minelco’s competitive advantage With representation in Europe, Asia and the USA, the on these markets is thereby further strengthened. With new operation covers much of the world. There are subsidiaries production lines for upgrading mica and UltraCarb products, with processing plants in Sweden, Finland, Greenland, the the company not only increases its production capacity but UK, the Netherlands, Greece, Turkey and China. The com- also its product offerings and the possibilities for a greater pany has additional subsidiaries in Germany, the USA and degree of product customization. Hong Kong, as well as representative offi ces in Slovakia and During 2006, Minelco has invested in recycling of re- Thailand. fractory materials, a market that is growing as a result of The product portfolio includes more than 30 different in- tougher environmental requirements. New products creat- dustrial minerals. Selected minerals are at present magne- ed by processing used refractory materials have been well tite, olivine, mica and minerals with fl ame retardant proper- received by customers. ties (UltraCarb). SALES AND EARNINGS THE INDUSTRIAL MINERALS MARKET IN 2006 Revenue amounted to MSEK 2 100 (2 159). The trend in During 2006, the global demand for industrial minerals re- sales has been consistently positive. One exception, how- mained strong. However, limited supply of magnetite prod- ever, has been the delivery of zircon sand to China, where ucts from the Mining Division meant that, despite increased greater competition and consolidation in the market have demand, Minelco’s deliveries were lower than in 2005. resulted in a decline in sales of MSEK 130 or 24% following The transport sector has been overheated. With raw ma- two years of strong growth. Excluding sales of zircon sand, terial sources in Europe, Minelco is at a considerable advan- sales in 2006 rose by 4.4% compared to 2005. tage compared to competitors in e.g., China, when freight Operating income amounted to MSEK 134 (148). Operat- rates are high but rising freight rates have, however, had a ing income for the year was affected positively by the dis- negative effect of earnings. posal of the Vermiculite operation in England. Generally high The world market for industrial magnetite is estimated at sea freight rates and initial overhead costs for mining and slightly more than 2 Mt per year. With sales of more than 0.7 production of olivine in Greenland have restricted an other- (1.0) Mt, the Minerals Division is still a market leader. De- wise positive growth trend for the Minerals Division. spite strong growth in Asia, Europe remained the principal market region, accounting for 60% of sales. This market is MARKET OUTLOOK decreasing in relative importance, however, while the USA The favorable market conditions are expected to persist and Asia are becoming increasingly important markets for throughout 2007. Owing to growing demand for, above all, the Minerals Division. magnetite products, delivery volumes are expected to in- A greater demand for magnetite, in combination with lim- crease. ited supply, has resulted in price increases. On the whole, Europe is the Minerals Division’s home market and ac- counts for more than half of sales. However, most of the growth is taking place on other markets. In the future, Eu- rope’s relative signifi cance will diminish and sales will be more evenly distributed over Europe, Asia and the USA. In China, the rate of growth is expected to remain high. FINANCIAL HIGHLIGHTS – MINERALS DIVISION The Chinese government has announced that it will intro- duce export duties on industrial minerals in 2007 in order to MSEK 2006 2005 ensure domestic supply. In combination with huge domestic Net sales 2 100 2 159 consumption of industrial minerals in China, this increases Operating income 134 148 Operating margin, % 6,4 6,9 the probability of further price hikes. Tougher environmental legislation in China is expected to result in new business op- Assets 1 747 1 527 Liabilities 1 325 1 130 portunities for several of the division’s minerals. Capital expenditures 172 192 The Minerals Division is growing in the energy sector, Depreciation 30 33 where rising energy prices have driven up demand from the Average number of employees 389 372 oil and gas industry. Sales of magnetite products for man- ufacturing underwater gas pipelines have increased, and

DIVISIONAL OPERATIONS 2006 20 LKAB ANNUAL REPORT 2006 there is good potential for further sales, since several proj- OBJECTIVES 2007 ects are foreseen in the immediate geographic market re- Investments have been steered towards selected minerals, gion. fulfi lling the strategy “From mine to end user”. Investments The growing environment sector is also gaining in impor- in 2006 have provided a good basis for expansion. tance. UltraCarb products, which are based on minerals with During 2006, the fi rst commercial deliveries of olivine natural fl ame-retardant properties, have strong competitive from the Seqi mine in Greenland were made, and orders advantages over synthetic fl ame retardants. The US and Eu- have been agreed upon for delivery in 2007. This will be ropean markets for fl ame-retardant products are expected the fi rst real year of production for Seqi, when the operation to see strong growth over the coming years. reaches full capacity of more than 1 Mt. The aim is to estab- The market for water treatment chemicals, in which lish the company’s olivine products on the global market and magnetite is an important additive, is steadily growing. In to increase market shares of other selected minerals within Europe, new EU member nations must adapt to meet ap- strategic business areas. plicable EU emissions standards. The expectation for 2007 is that the Minerals Division’s The Minerals Division’s olivine products for foundries of- rate of growth, will be higher than the underlying rate of fer environmental advantages not seen in competing prod- growth for the market as whole. ucts. Olivine improves the working environment in foundries Besides the ambition to grow in strategic areas, the divi- when it is used instead of quartz sand. In the steel indus- sion also has a number of other priorities. One of these is try, olivine has advantages over dolomite, in that it results to continue to improve capital effi ciency. With less capital in lower energy consumption and reduced carbon dioxide tied up in inventories and shorter customer credit periods, emissions. greater returns and profi tability will be realized.

DIVISIONAL OPERATIONS 2006 LKAB ANNUAL REPORT 2006 21 Special Businesses Division Subsidiaries in the Special Businesses Division are mainly sub- contractors to the Mining Division and the Minerals Division, but also support the Group by providing services and technical development.

Wassara’s drilling systems are used in the mining industry and in construction and civil engineering; here, near the parliament building in Stockholm.

DIVISIONAL OPERATIONS 2006 22 LKAB ANNUAL REPORT 2006 AB KGS works with rock, concrete and engineering servic- For FAB, the high demand for dwellings has meant a es. Kimit AB, a subsidiary of KGS, manufactures explosives. boost in rentals of more than 99%. LKAB’s mining expan- Fastighets AB Malmfälten (FAB) manages properties in lo- sion will entail major changes for the company. During 2006, cations where LKAB operates. Wassara AB develops and FAB has been the Group’s resource for the purchase of ex- delivers drilling systems. ternal properties in Malmberget and has prepared for the relocation of buildings to new areas. SALES AND EARNINGS For FAB, the housing transition in the Orefi elds, and Revenue amounted to MSEK 600 (1 091). As of 2006, the above all, the major urban transformation in Kiruna, will subsidiary Malmtrafi k AB and its subsidiary Malmtrafi kk A/S, mean a greater burden of work over the coming 20 years. which are responsible for the transport of ore products to FAB is also responsible for the decommissioning and re- the harbors, are part of the Mining Division. This explains development of the old harbor area Svartön, in Luleå. Full the decline in revenue. Operating income amounted to remediation will be completed during 2007. MSEK 98 (100). Wassara has intensifi ed its marketing activities during the year, above all in the construction and civil engineering IMPORTANT EVENTS, OUTCOMES AND TARGETS sector. Both sales and revenue have improved. The positive market situation in the mining industry and the During the year, LKAB assumed full ownership of the construction sector, nationally, but above all in the Orefi elds, subsidiary Wassara, when the other owners, Sandvik and has favored the various business divisions of KGS. Tamrock, sold their shares to LKAB. Joint marketing with Within the business area concrete, the delivery volume Sandvik was thereby terminated. has increased by 110%. The company’s three concrete sta- Sandvik’s former ownership role entailed operative re- tions, one of which was re-started during the year, have pro- sponsibility for marketing to other mining companies, and duced at full capacity. LKAB’s major construction projects, Sandvik was also an important partner in the construction in both Malmberget and Kiruna, have been the most impor- and civil engineering market area. This division did not bene- tant contributors to this increase. Shotcreting contracting in- fi t Wassara’s business, since the companies’ products com- creased by 58%, thanks largely to deliveries to NCC. peted all too often with each other. In explosives manufacture, the winding up of coopera- With the change in ownership, a new strategy will be tion and joint ownership of OKE AB with Orica has meant formulated for the company. LKAB’s ambition is for sales to greater business opportunities for Kimit. Long-term con- double within three years. tracts for the delivery of explosives to customers in Finland and central Sweden have been signed. Kimit’s production volume rose by 4.5% over the previous year.

FINANCIAL HIGHLIGHTS – SPECIAL BUSINESSES DIVISION

MSEK 2006 2005 Net sales 600 1 091 Operating income 98 100 Operating margin, % 16,3 9,2 Assets 520 1 808 Liabilities 339 1056 Capital expenditures 29 205 Changes in key ratios are mainly a result of the fact that, as of 2006, the subsidiary Malmtrafi k AB and its subsidiary Depreciation 19 128 Malmtrafi kk A/S, which operate rail transports of ore to the Average number of employees 178 394 harbors, have been included in the Mining Division.

DIVISIONAL OPERATIONS 2006 LKAB ANNUAL REPORT 2006 23 Processing plants at the mine in Kiruna. In the foreground, construction of new concentrating and processing plants is in progress. The plants are expected to be operational in the second quarter of 2008.

INVESTMENTS AND CONSTRUCTION PROJECTS 24 LKAB ANNUAL REPORT 2006 Investments and construction projects

To increase both the volume of crude ore mined and the production of upgraded iron ore products, major invest- ments are now being made. Efforts are also being directed towards improved effi ciency in logistics and process fl ows.

A new pelletizing plant in Malmberget (MK3) came on line mized, with each train running two round-trips per 24 hours. in December. Construction of new concentrating and pel- In future, additives will be hauled by returning trains; for ex- letizing plants in Kiruna is under way. At most, about 1300 ample, minerals such as olivine and quartzite from Narvik people will be involved in the project on-site during 2007. and limestone and coal from Luleå. Commissioning is expected to take place in the second quarter of 2008. RAIL TERMINALS The total investment, estimated at more than six billion The terminals in Malmberget and Luleå are ready to meet kronor, includes measures to increase capacity in the mine the future production requirements. The terminals in Kiruna and transport of iron ore product from the pelletizing plant and Svappavaaramust, however, be overhauled. In Kiruna, via a belt conveyor to the rail terminal. The 1.5-kilometer this is complicated by the extent of the deformation zone. long conveyor tunnel was completed in December. During 2006, the decision was taken for a new terminal structure for Kiruna, with loading of ore trains at surface lev- NARVIK ORE HARBOR el. The rail yard will be rebuilt. Of the existing seven tracks, In January 2006, construction of a whole new storage and four will be extended to be able to accommodate marshal- discharging structure with underground silos began in Nar- ling and handling of the new, longer trains. In addition, a vik. The work will take about two years. new track for discharging trainloads of additives and a new The total investment is more than one billion Swedish receiving facility were built. A deicing plant for rail cars will kronor. About 100 people are working on the construction also be installed. project at the same time as deliveries to customers are made without interruption. NEW MAIN LEVELS IN THE MINES Commissioning of the new harbor facility is expected to Development work such as driving of access roads, venti- begin during the fi rst quarter of 2009. lation shafts, etc. for the planned new main levels in the Malmberget and Kiruna mines has commenced. RAILWAY LOGISTICS During 2006, it was decided that conventional remote During 2006, the foundations were laid for a future logis- train control for ore haulage on the new Kiruna main level. In tical structure in which increased payloads and shorter Malmberget, main-level haulage is done with mine trucks. turn-around times for trains will enable greater rail haulage The Board will probably deliberate on a go-ahead for the capacity. This will be accomplished mainly through the intro- new main levels during 2007/2008. duction of a uniform fl eet of locomotives and ore cars for a minimum 30-tonne axle load, and better effi ciency in infra- NEW PLANT FOR MINERALS structure such as sidings and terminals. Production facilities for processing mica and UltraCarb were An initial pre-series of 70 ore cars of a new type with completed in 2006. Plants for the production of mica prod- a 100-tonne payload was delivered in March 2006. These ucts in Finland and fl ame retardant minerals in Turkey have have been tested with satisfactory result and a framework been expanded with new production lines. agreement for an additional 680 cars was signed, of which During 2006, the olivine deposit Seqi in Greenland came the fi rst delivery was made in December. In all, ten full train on line and will be fully commissioned during 2007, which sets of cars will be operational by 2010, by which time the means that LKAB is now self-suffi cient for the supply of oliv- 30-tonne structure will be fully implemented. ine to its pelletizing operation. Delivery of olivine to the steel The capacity increase implies a signifi cant reduction in industry has also commenced. terminal turn-around times. Train utilization will be maxi-

INVESTMENTS AND CONSTRUCTION PROJECTS LKAB ANNUAL REPORT 2006 25 Research, product and process development

LKAB’s strategy, through determined investment in research and development, is to be world-leading in the pelletization of iron ore.

To strengthen the company’s expertise in pellet manufac- A pre-study on the EPP (Experimental Pellet Plant) has ture, LKAB plans to establish a laboratory for pellet research been conducted. The advantage of an experimental plant is (AggloLab) and an experimental pelletizing plant (EPP). To- that, unlike a production-scale facility, it is possible to make gether with the existing experimental blast furnace in Luleå, process changes and get quick answers to questions about this will provide unique conditions for developing processes factors that infl uence processes and products. Such a plant and products, as well as enabling delivery of more custom- would be the fi rst of its kind. er-specifi c products. The Hjalmar Lundbohm Research Center for Mining and Pre-project planning began during the year. For Agglo- Metallurgy (HLRC) at Luleå University of Technology (LTU) Lab, the strategy is to invest in modern instrumentation and has been established on the basis of a 100-million-kronor premises for both research and education, and to create an donation from LKAB. The principal aim is to conduct re- interdisciplinary research group. AggloLab will be used for search in mining engineering and metallurgy that supports both research and product and process development. LKAB’s strategies and helps to secure future competitive advantage on the world market. Activities are in three main areas: sustainable iron ore production, intelligent pellets and new products. Ten research projects have begun and are conducted in close collaboration between the university’s and LKAB’s own researchers. The projects are in line with LKAB’s strategies for pelletizing, modeling and control, and the establishment of a stable, science-based platform for deeper understanding of present and future product and process technologies.

JOINT PROJECTS During the year, LKAB has also participated in the planning and start of a center of excellence for steel research in col- laboration with SSAB, Ruukki, Luleå University of Technol- ogy and the metallurgical research company MEFOS. The Centre for Process Integration in Steelmaking (PRISMA) at MEFOS, in Luleå, now has fi ve defi ned research areas: fu- ture production systems; optimal raw-material design; effi - cient and sustainable energy systems; analysis of residual products and recycling systems, and methodology develop- ment in process integration. The ULCOS project is an international initiative of which the aim is to cut steel-industry carbon dioxide emissions by 50% LKAB is contributing the use of the experimental blast furnace (EBF). During 2006, in the New Blast Furnace sub-project, the

EBF was rebuilt as an oxygen blast furnace with a CO2 separating system. In another sub-project, New Natural-Gas Based Steelmaking, the direct reduction process is being investigated with a similar aim.

IRON ORE PRODUCT DEVELOPMENT Product development of iron ore pellets is mainly oriented towards product care and adaptation to customers’ specifi - cations. For example, the recipe for MPBO blast furnace pel- Emma Andersson analyzes drill cores in the laboratory in Kiruna. lets has been changed, which, together with modifi cations

RESEARCH, PRODUCT AND PROCESS DEVELOPMENT 26 LKAB ANNUAL REPORT 2006 in the pelletizing plant, has resulted in improvements in the Another area in which research efforts are being focused product’s mechanical and metallurgical strength. is the attempt to reduce the amount of nitrogen residues The product KPBO has been quality-assured with olivine left in crude ore as a result of incomplete detonation in drill from the new Seqi mine in Greenland and is being tested in holes. New blasting technologies, tested in the Kiirunavaara the experimental blast furnace. In collaboration with one of mine, have met with positive results. Two doctoral students LKAB’s customers, new mixed-burden concepts are being at Luleå University of Technology have completed a study developed. Here, the experimental blast furnace is an impor- related to blasting in compacted rock. tant instrument for research. Where DR pellets are concerned, a new product has REMOTE CONTROL AND AUTOMATION been developed and tested at Egyptian EZDK (formerly In the new-technologies area, advancements are being ANSDK) as part of a joint development venture. made in remote control and automation. In Malmberget, tri- als with remote-controlled loaders began during the year. In PRODUCT DEVELOPMENT - INDUSTRIAL MINERALS Kiruna, where remote-controlled equipment has been in use The Minerals Division’s research and product development for many years, the aim is to increase productivity. are application-oriented and are conducted in close coop- During the year, work on developing the next generation eration with customers. In addition to the LKAB Group’s re- of production drilling rigs also began. The prototype, which search organization, the resources of the Minerals Division’s will be delivered in early-2007, is remote-controlled and will UK subsidiary are available. The Minerals Division also col- be able to drill 60-meter-deep upward holes with high preci- laborates with universities and research institutes in Europe sion and capacity. and the USA. Where the mineral olivine is concerned, the LKAB Group GREATER EFFICIENCY IN ORE FLOWS has a high level of expertise. LKAB introduced olivine as an For many years, the Kiruna mine has delivered three differ- ingredient in pellets for ironmaking, is a world leader in this ent grades of crude ore to the processing plants in Kiruna area, and will continue to increase its knowledge in olivine and Svappavaara, and more recently, to Malmberget, as applications, even outside the steel industry. well. Among other things, the different ore grades have dif- fering phosphorus contents, and must be kept separate in PROCESS AND ENERGY ENGINEERING order to meet customers’ quality specifi cations for fi nes and A new department, with responsibility for process and sys- pellet products. tems engineering, energy engineering and emissions, was In future, the ambition is to transform the Kiruna facility formed in 2006. The aim has been to reduce emissions of into a 100-percent-pellets supplier. Following the comple- nitrogen oxides (NOx) from the pelletizing plants through ini- tion of studies, the decision was taken in 2006 for the intro- tiatives including a research project together with the Royal duction of a “single-product mine” in Kiruna. This means Institute of Technology (KTH), where the aim has been to that, within a few years, the mine will deliver a single grade develop a new NOx burner with low emissions. Pre-stud- of crude ore to the processing plants. ies on alternatives to oil and coal powder have begun. The The single-product mine is expected to result in consid- department will support the Minerals Division with research erable simplifi cation and improved effi ciency in the fl ow of and development. iron ore. In the process of upgrading to pellets, the ore is dephosphorized in the concentrating plant via fl otation. The ROCK MECHANICS AND MINING ENGINEERING decision also means that fl otation facilities will be installed During the year, extensive work has been carried out for ini- in Svappavaara’s concentrating plant. Work began during tial rock-mechanical dimensioning of infrastructure and plant the fi rst quarter of 2007. for the new main levels in Malmberget and Kiruna. At pres- ent, rock stress measurements are being conducted at the sites of the planned crushing and hoisting plants. In the rock engineering fi eld, work is under way to im- prove and economize on blasting technology. Among other innovations, a new control system has been introduced that enables, better, smoother contour blasting.

RESEARCH, PRODUCT AND PROCESS DEVELOPMENT LKAB ANNUAL REPORT 2006 27 Policies and guidelines

The fundamental control documents for operations and for employees in the LKAB Group are the policies that have been adopted by the Board: Ethics Policy, Environmental and Energy Policy, Quality Policy and Information Policy.

Ethics policy BUSINESS ETHICS LKAB will strive to be perceived by customers, sharehold- LKAB will not use methods such as bribery and other cor- ers, suppliers, employees and the community as a company rupt and unfair competitive practices that distort markets that conducts a sound and successful business operation and hinder economic, social and democratic development. with integrity and moral correctness

• LKAB will always comply with the laws and regulations that • LKAB will not contravene applicable laws governing competition. apply in the countries in which LKAB operates, and in so do- • Bribery is strictly prohibited in LKAB’s business relations. ing LKAB will respect the United Nations Universal Declaration of Human Rights. • LKAB will strive to uphold impeccable business ethics. ENVIRONMENT • In realizing its objective of maintaining a fi nancially sound and successful business operation, LKAB will strive to protect the LKAB’s work shall be characterized by concern for the en- environment and use energy responsibly. vironment; for which reason LKAB has adopted an Environ- • LKAB will strive to maintain strong and enduring relations with mental and Energy Policy that will guide our actions while its employees. acknowledging our objective to maintain a fi nancially sound and successful business operation.

GENERAL PRINCIPLES EMPLOYEE RELATIONS LKAB’s chief task is to develop and maintain a fi nancially It is very important for LKAB to uphold a strong and enduring sound and successful business operation. LKAB has a long- relationship with employees that is based on mutual respect term responsibility. In the countries, communities and envi- and dignity. The terms of employment offered will comply ronments in which LKAB operates, we have a long-term re- with national legislation. sponsibility towards our employees, business partners and society in general. • LKAB will provide a working environment that is safe and sound with respect to the nature of our operations, and we will strive continuously to implement improvements. *Special, written health • We will always comply with the laws and regulations that apply in and safety instructions shall be issued and will apply in all work- the countries in which we operate. places. • We will respect the United Nations Universal Declaration of Hu- • LKAB acknowledges employees’ right to organize under the appli- man Rights, and we will accept our responsibility to observe the cable labor laws and principles of the respective countries in which rights of employees and society to the extent that they are affect- we operate. ed by our operations. • LKAB strives to give all people equal opportunities, regardless of • We will strive to manage our business operation with integrity and race, color, gender, nationality, religion, ethnic origin or any oth- moral correctness. er distinguishing characteristic. LKAB does not tolerate discrimina- • We will strive to adopt an attitude of openness in dialogue with tion or harassment. LKAB does not tolerate discrimination or ha- those who are affected by our operations. rassment. • Wherever possible and wherever we exercise infl uence, we will • LKAB prohibits forced labor and other forms of involuntary labor in strive to ensure that our suppliers and subcontractors adhere to our workplaces. LKAB does not tolerate the use of methods that the principles of our ethical guidelines. restrict employees’ freedom of movement. LKAB does not toler- ate the use of methods that restrict employees’ freedom of move- ment. • LKAB does not employ persons younger than 15 years of age or the higher age that may be stipulated by local legislation.

POLICIES AND GUIDELINES 28 LKAB ANNUAL REPORT 2006 Environment and energy policy Information policy Through continuous improvement of the working environ- LKAB’s employees will always be well informed with re- ment, the natural environment and energy use, LKAB’s op- spect to the company’s operations, its business environ- erations will promote long-term sustainability and profi table ment, goals, strategies and results, and of their own work- development. place and their role in the company’s operations. LKAB’s customers, shareholders, suppliers and the community will • This policy applies to companies within the LKAB Group as well as be given, on an ongoing basis, timely and correct informa- suppliers operating on LKAB’s premises. tion that provides a representative view of the company and • Established laws, bylaws, regulations and other commitments to its operations. which LKAB is subject are minimum requirements. • LKAB shall strive to create a working environment that is stimulat- GUIDELINES ing and safe. Our employees will receive ongoing training in envi- ronmental issues. The Group’s corporate communications will contribute to greater knowledge and trust among the company’s stake- • New technologies and technical advances will be assessed with consideration to the working environment, environmental protec- holders. tion, energy consumption and the effi cient use of resources. • Suppliers working outside LKAB’s facilities and premises will be INTRA-GROUP INFORMATION encouraged to work in compliance with our policy. Each line manager is responsible for communication, the on- • In dialogue and cooperation with public administrations and soci- going dialogue, in his or her workplace. Similarly, each line ety, our attitude shall be characterized by openness and factuality. manager is responsible for ensuring that co-workers have continuous access to current and necessary information about their workplace and its role in the company’s opera- tions.

Quality policy EXTERNAL INFORMATION LKAB will exceed customers’ present and future expecta- The President has the overall responsibility for external com- tions by involving all employees in the process of continuous munications. Members of Group Management are respon- improvement. We will strive for zero defects in everything sible for external communications with respect to their in- we do, and each employee is responsible for the quality of dividual areas of responsibility. The Chairman of the Board his or her own work. issues statements pertaining to ownership issues. The mass media are an important channel of information in society - and thereby for all of the company’s stakehold- ers. LKAB will work actively and openly with the mass me- dia to present a positive image and foster confi dence in the company. There must be particular reasons for declining to comment or give information. This may be information per- taining to fi nance, safety, competition, ongoing negotiations Financial policies or other information that might be detrimental to the com- The Board has established the following fi nancial policies: Cred- pany if disclosed. Great care must be taken to safeguard it Policy, Currency Policy and Policy for Managing Financial As- personal integrity. sets and Liabilities. Full versions of these are published on LK- LKAB will strive to follow the rules of corporate informa- AB’s website under the heading Corporate governance/Control documents. In consultation with the owner, the Board has estab- tion disclosure that are recommended for companies listed lished a Dividend Policy, which is presented in the Corporate Gov- on the Stockholm Stock Exchange. No fi nancial information ernance Report. other than offi cial year-end or interim reports may be dis- closed to external parties.

POLIIES AND GUIDELINES LKAB ANNUAL REPORT 2006 29 Above: Joakim Stålnacke is a terminal worker in Kiruna. Above: Angelique Bohm works with mine planning in Kiruna. Below: Mats Karlberg, at the metallurgy lab in Malmberget. Below: Nils Nordspets is a driller at the Kiirunavaara mine.

HUMAN RESOURCES 30 LKAB ANNUAL REPORT 2006 Human Resources

Work environment and recruiting are two areas that are decisive for LKAB’s success. Safe and healthy workplaces are a pre-requisite for developing the operation and recruiting new employees.

Both short-term and long-term absence due to illness eral years within the framework of our effort to ensure an continue to decline. Short-term absence declined to 2.3 equal-opportunity workplace. (2.4)% and long-term absence to 1.4 (1.9)%. Women Of new employees during the year, about 19 (26)% were were healthier than men. women, which means that the number of women has risen The reduction in long-tern absence is remarkable. from 353 to 382. However, we still face the challenge of LKAB is thereby well on the way to realizing the goal of placing more women in male-dominated occupations, since cutting long-term sick leave by half from 2004 to 2009. a better balance between the sexes leads to greater effi - Together with solid commitment and a determined effort ciency and increased safety. The proportion of women em- with clear requirements for all parties concerned, sustain- ployed in the Group was 12 (10)%. able results can be achieved. As part of our drug prevention work, we are collabo- MODERN WORK ORGANIZATION rating more and more with other companies and organi- One of the company’s strategies for improving effi ciency zations in the Orefi elds communities. LKAB refl ects the and creating attractive workplaces is to delegate greater re- surrounding community, and by assuming a greater social sponsibility and authority among our co-workers. Employee- responsibility in this regard, we can improve the condi- ship must be characterized by the will and ability to infl uence tions for freedom from drug abuse. one’s own workplace and the contribution made to the over- all results of the companies operations. Over time, this will RECRUITING also result in fewer levels in the organization’s hierarchy. The number of employees increased by 174 to 3 737. Dur- During 2006, efforts have been directed towards ensur- ing 2006, 264 people were hired, which is the greatest ing even better conditions for increased involvement and number in 30 years. commitment on the part of all co-workers. At the new pallet- Recruitment is a decisive factor for LKAB’s future, con- izing plant in Malmberget, new working methods and a new sidering, above all, the ever-greater demands with respect organization have been introduced, whereby have assumed to qualifi cations and skills. The diminished supply of labor an even greater responsibility for the development of the in the Orefi elds means that, to compete for qualifi ed peo- operating and working environment. ple, we must be perceived as an attractive employer. Cooperation with schools is increasing; among the best examples are the LKAB high schools Kiruna and Gäl- livare. The secondary schools have succeeded in attract- ing young people to study programs with an LKAB orien- tation. In Malmberget the LKAB high school is in its second year, and has already made a positive contribution to LK- AB’s vocational areas and the gender perspective. The number of girls enrolled in the industrial program has in- ABSENCE DUE TO ILLNESS % creased in three years from 1 to 21. Of these, eight girls 10 attend the LKAB high school. 8 EQUALITY AND DIVERSITY LKAB must be an attractive employer for both present and 6 future co-workers. We now have a plan of action to en- 4 sure the suitability of LKAB’s workplaces for all employ- ees, regardless of their ethnic origin or faith. Aspects of 2 the plan include review of our recruiting process. A big challenge is to improve LKAB’s attractiveness as 0 01 02 03 04 05 06 an employer of women, an endeavor that has been con- Total sick absence in the Group, as ducted successfully and in a determined manner for sev- percentage of total working hours.

HUMAN RESOURCES LKAB ANNUAL REPORT 2006 31 COMPETENCE DEVELOPMENT GRANTS AND SPONSORING Competence development is another strategic area, both To encourage young people to enroll in study programs respect to the development of existing personnel and for within LKAB’s competence areas, several grants are award- attracting new employees. The aim is that each employee ed. These include LKAB’s future grants for post-secondary should participate in 10 days of competence development studies in engineering. per year, of which 5 should be training days. Another example of LKAB’s social commitment is the spon- The number of training days per employee in 2006 was soring of athletic and cultural organizations. An important 5.8 (4.5). The principal areas included work environment and aspect of sponsoring is to encourage the broad base of vol- safety, quality, management and personal development, and unteer youth activities in locations where LKAB operates, vehicle training. though mainly in Malmberget. An extensive training program for all truck and loader op- LKAB also assists promising young athletes at the elite. erators in Malmberget has been implemented. The week- LKAB was one of the main sponsors of the World Cup in long program, which contained both training blocks and cross-country skiing, in November 2006, in Gällivare. work-crew team development, was carried out. INTERNATIONAL GROUP MANAGEMENT DEVELOPMENT 17% of LKAB’s employees work outside Sweden. At the Good management is decisive for profi tability, effi ciency and ore harbor and transport operations in Narvik, Norway, the productivity as well as for employees’ wellbeing and per- Mining Division has 225 employees. When the ongoing formance. Managers and supervisors are recruited mostly construction is complete and effi ciency improvements have from within the company, and a management training pro- been realized, manning will be reduced to slightly more than gram for present and prospective managers and supervisors 100 people. is a central activity. The Minerals Division has about 400 employees, most During 2006, LKAB’s managers underwent an average of of them outside Sweden. There are operations in about ten 8.2 days of training. Work environment is the area of man- countries, and production companies are located Greenland, agement development with the highest priority, and during Finland, England, Turkey and China. the year, most managers completed a three-day course in An international management program began in March safety. 2007. The aim of the program is personal development and better integration of managers within the LKAB Group.

TOTAL NUMBER OF TOTAL NUMBER OF MANAGERS AS OF 31 DEC. TRAINING 2006 EMPLOYEES (AVERAGE)

total of which women Number of training days: 15 074 2001 3 172 2001 240 5,0% Number of participants: 14 997 2002 3 078 2002 230 5,2% 2003 3 433 2003 272 7,8% Training days/employee: 5,8 2004 3 482 2004 325 8,5% (women 7.8, men 5.55) 2005 3 563 2005 353 10,4% Training days, managers: 8,2 2006 3 737 2006 388 11,3%

HUMAN RESOURCES 32 LKAB ANNUAL REPORT 2006 Environment

Mining and processing of minerals impact the environment through alteration of the landscape, energy consumption, emissions to the air and discharges to the water. LKAB is working to limit this impact and to improve energy effi ciency and environ- ment through the implementation of an environmental and energy management system that will be integrated with the company’s quality management system.

The management system will also ensure that LKAB complies with current energy and environmental legislation. The system will be fully implemented and certifi ed within the Mining Division during 2007. Introduction of the environmental and energy management system is also planned for the Minerals and Special Businesses Divisions.

Operations outside of Sweden

NORWAY amounted to about 240 000 tonnes. During 2007, produc- The Mining Division has operations at the ore harbor in tion is expected to exceed 1 Mt. Narvik, which is LKAB’s largest shipping harbor. For the The Seqi mine is operated under an exploitation license operation, an emissions permit specifi es the conditions for from Greenlandic authorities. For the operation, an environ- handling of iron ore products, olivine and quartzite. The en- mental monitoring plan, in which background and follow-up vironmental impact is mainly from dusting and discharge of exploration are regulated, has been established. particulates. Emissions limits for particulate matter are set for the TURKEY discharge station, screening plant and pellet stockpiles. A In Turkey, the minerals huntite and hydromagnesite are new ore harbor is under construction. The ore silos are be- mined by Likya Minelco, with has environmental permits ing built into the bedrock, which will signifi cantly improve for extraction and production. These minerals have fl ame- the environment. retardant properties and replace synthetic products in, for For discharges to the water, conditions are specifi ed for example, the cable industry. water use in the discharge station, bulk storage facilities, The minerals are marketed under the product name and discharge of grey water, water containing oil, and dredg- UltraCarb. The production facility began operating in 2006. ing.

GREENLAND The Minerals Division mines olivine in Greenland. Produc- tion began in earnest at the Seqi mine during 2006 and

LKAB WORLDWIDE

Countries Operations Sweden Mining of iron ore and dolomite, production of iron ore pellets Rail transports, discharging, storage, loading and shipping Norway Discharging, storage, loading, shipping Finland Mica production Greenland Mining of olivine England Storage of mineral products The Netherlands Storage of mineral products Turkey Mining of huntite and hydromagnesite, production China Manufacturing of ceramic and refractory products

Mineral mining at Likya Minelco’s open pit in Izmir, Turkey.

ENVIRONMENT LKAB ANNUAL REPORT 2006 33 Operations in Sweden

FINLAND OPERATIONS SUBJECT TO REGULATION In Finland, the Minerals Division has a production plant for The Group conducts operations that are subject to regula- mica, which is a by-product from Kemira GrowHow’s apatite tions embodied in the Environmental Code. Three permits mine in Siilinjärvi. Environmental impact from the plant is refer to mining in Kiruna, Malmberget and Svappavaara (the relatively limited and is mainly the result of dust in the drying latter not currently applicable), and three permits refer to air. No chemicals are used in the process. processing of ore in Malmberget, Svappavaara and Kiruna. Kemira Growhow holds the necessary environmental One permit refers to mining of additives used in ore pro- permits and is responsible for waste management and in- cessing and two refer to the manufacture of explosives. spection. The current permit is now under review for a new Several permits refer to water management in connection period. The operation is environment-certifi ed according to with LKAB’s dam facilities, and two permits refer to the han- ISO 14001. dling of products at the harbors.

ENGLAND NEW ENVIRONMENTAL PERMITS In England, the Minerals Division has facilities for storing In 2006, another new pelletizing plant came on line in Malm- and handling industrial minerals such as dolomite, olivine, berget. The environmental permit for Malmberget entitles mica and UltraCarb products. LKAB to produce 6.7 Mt of pellets per year. During 2006, seven facilities were in operation: Derby, A new permit application for “Increased capacity in Flixborough, Foxfi eld, Lund, Shoreham, Stockton and Yate. Malmberget”, which refers to the entire operation, was In accordance with the Environmental Protection Act, each submitted to the Environmental Court in October 2006. It facility operates under permits from local environmental pro- is expected that a new permit for increased production in tection authorities. The Yate facility was closed on 31 Dec. Malmberget will be forthcoming during 2007. A permit for a 2006. temporary increase in the production of crude ore from 0.7 Mt to 14.7 Mt during 2006 was granted by the Environmen- THE NETHERLANDS tal Court in November 2006. In the Netherlands, the Minerals Division has a facility in During the summer of 2006, upon approval from the Moerdjik for stocking and processing magnetite and dolo- Environmental Court, the levels of the dam embankments mite. in the dam system at the Malmberget industrial area were raised by 3 to 6 meters. Preventive safety measures carried CHINA out earlier were also approved under the same permit. In China, the Minerals Division has plants in Tianjin that pro- In 2005, the Board voted to build additional concentrat- duce ceramic and refractory. Operations are in compliance ing and pelletizing plants in Kiruna. The Environmental Court with local environmental legislation, with permits for current had already granted LKAB a permit for Kiruna to produce product. 14.8 Mt of pellets per year. The new plants are expected to be operational in 2008. During 2006, the ruling was ap- pealed with the Environmental Court of Appeal by, among others, the Swedish Environmental Protection Agency, with respect to the time for presentation of studies of internal

Environmental organization and responisbility

• The President bears the overall responsibili- pervisory authorities, in accordance with es- of medical, technical and behavioral sci- ty for environmental issues. Operational re- tablished programs that measure both emis- ence, work organization and rehabilitation sponsibility is delegated to the heads of di- sions/discharges and environmental impact. methodology. visions and unit managers. An environmental report for each operating location is submitted annually to the author- • Environmental and energy issues are also • The specialist function External Environ- ities concerned. addressed in various trade organizations. ment is responsible for the entire Group’s LKAB is an active member of SveMin (the environmental work: provides advice, ap- • The Chemicals Committee in LKAB handles Association of Mines, Mineral and Metal plies for the necessary permits and veri- all matters pertaining to chemical products, Producers in Sweden, formerly the Swedish fi es compliance with permit conditions and for example, approval of new products for Mining Association) and the Swedish Steel laws, sampling, investigations and reporting use in LKAB. Producers’ Association. LKAB also supports to supervisory authorities. and actively participates in a number of en- • LKAB’s Occupational Health unit works vironmental research programs. The compa- • LKAB’s environmental monitoring is carried above all with preventive measures. The ny is an active member of the Torne and Ka- out by the company, in consultation with su- unit’s work is based on a broad knowledge lix Rivers’ Water Conservation Association.

ENVIRONMENT 34 LKAB ANNUAL REPORT 2006 process measures and reduction of nitrogen oxides, as well successful, and a decision has been taken to install an SCR as possibilities for the improvement of energy effi ciency. unit in the new pelletizing plant that is under construction According to the ruling by the Environmental Court of Ap- in Kiruna. peal of February 2007, LKAB must investigate the possibili- In addition to investigating possible techniques for ties for reducing emissions of nitrogen oxides and improv- treating nitrogen oxides, a project for reducing emissions ing energy effi ciency by 30 September 2009, and present a through process improvement is now under way. During remediation plan by 31 December. 2007. 2005, equipment for continuous monitoring of nitrogen ox- Continued production of dolomite is necessary to meet ide was installed in Kiruna’s KK2 pelletizing plant. This is to demand from increasing pellet production in Kiruna. In May verify previous measurements and the effects of process 2006, the Environmental Court granted LKAB a permit for improvement measures. continued operation and expansion of the dolomite quarry in Masugnsbyn, and to produce 2.9 Mt of dolomite up until TRADE IN EMISSIONS RIGHTS 2023. LKAB is involved in the EU’s system of trade in greenhouse gas (GHG) emissions rights. The period 2005-2007 is a trial ATMOSPHERIC EMISSIONS period for CO2. All countries that are parties to the Kyoto Most of LKAB’s atmospheric emissions come from pellet Protocol will be subject to a new trading period, 2008- manufacture, which gives rise to emissions of carbon diox- 2012. ide, sulfur dioxide, fl uorides, chlorides, nitrogen oxides and One emissions right entitles the holder (the owner of an particulate matter. industrial plant) to release one tonne of carbon dioxide dur- The environmental impact must be regarded in a global ing the course of a given trading period. Rights are acquired perspective. Pellet manufacture at LKAB’s mines results in through allocation by the state or via purchase. A surplus of one-seventh the quantity of emissions compared with sin- rights can be sold. For the period 2005-2007, all Swedish tering at the steelmills. This is because thermal energy is companies that applied for emissions rights have been al- utilized in the pellet process and is used in production. located rights, free of charge, by the state. This means that some of the emissions have been moved LKAB has three plants that are subject to the trading sys- from the steelmills to the mine locations. At the same time, tem: in Kiruna, Malmberget and Svappavaara. They include use of LKAB pellets in European steelmills has meant that pelletizing plants and central boiler plants. Carbon dioxide the total environmental impact has been reduced. emissions from these plants come from the combustion of

LKAB has conducted pilot-scale trials of treatment of ni- coal and oil, the release of CO2 from organic binders and trogen oxides using so-called selective catalytic reduction carbonate-based additives such as dolomite and limestone. (SCR). The object of the trials has been to determine how Combustion of oil in central boiler plants generates carbon the SCR unit reacts to LKAB’s exhaust gases and to esti- dioxide. mate the useful life of the SCR unit. The trials have been

C02 EMISSIONS FROM MINE ATMOSPHERIC EMISSIONS EMISSIONS PER TONNE PELLETS TO SINTERING AND PELLETS

Emissions, tonnes Pellets Mt g/tonne pellets Kg CO2 /tonne crude steel 5 000 20 250 300

250 4 000 16 200 200 3 000 12 150 150 2 000 8 100 100

1 000 4 50 50

0 0 0 0 80 85 90 95 00 05 06 01 02 03 04 05 06 Sinter 70fines Hematite-80 LKAB-pellets90 pellets Particulates Pellet production Nitrous oxides Carbon dioxide, kg/tonne Sulfur dioxide Particulates Hydrogen chloride The total carbon dioxide emissions from produc- Hydrogen Fluoride Sulfur dioxide Hydrogen Fluoride tion of crude steel, about 2 000 kg CO2/tonne, are reduced when LKAB pellets are used as LKAB’s capacity expansion is taking place in keep- Mean values of emissions from the pelletizing the iron raw material. A sinter-based steelmill ing with strict environmental standards. Since plants in Kiruna, Svappavaara and Malmberget. releases seven times as much carbon dioxide 1980, emissions of particulates, sulfur dioxide and The fl ue gas cleaning equipment in the pelle- and emissions from hematite-based pellets fl uorine have been more than halved at the same tizing plants has reduced emissions of, above are more than three times higher compared to time as pellet production has more than doubled.. all, sulfur and particulates. LKAB pellets.

ENVIRONMENT LKAB ANNUAL REPORT 2006 35 During 2006, LKAB was granted a renewed permit to re- water has been used in processing, it is led via an internal lease carbon dioxide. The granting authority is the County treatment system to LKAB’s dam system for separation of Administrative Board of Norrbotten. The permit regulates particulate matter. More than 75% of the process water is how LKAB, in a reliable way, controls, monitors and reports pumped back to the processing plants through recirculation emissions. There are special rules for quality assurance of systems. The rest is discharged into lakes and rivers, which emissions trading. are recipients of surplus water. The 438,780 tonnes of carbon dioxide (emissions rights) The various industrial processes change the chemistry allocated by the state to LKAB for 2006 are insuffi cient. To of the process water. Process-water chemistry is primarily be able to produce more iron ore, LKAB must successively infl uenced by the mineral content of the ore. After use in purchase more rights. During 2006, 20,000 emissions rights processing, the water has a relatively high pH level, a high have been acquired, and in April 2007, LKAB must have suf- concentration of soluble inorganic ions, and low levels of fi cient rights to cover actual CO2 emissions for 2006. heavy metals. In addition, the process water contains rela- By purchasing emissions rights, LKAB can increase pro- tively high levels of nitrogen that originate from explosives duction and carbon dioxide emissions without contributing residues and are dissolved in the process water. to any increase in total emissions in Sweden or Europe. A study is being conducted in Kiruna aimed at minimizing Overall reduction of GHG emissions is the prime concern nitrogen discharges to water by more effi cient use of explo- - not where these emissions occur. sives. The results of the investigation have been submitted to the Environmental Court. The report presents the mea- DISCHARGES TO WATER sures adopted in the project, proposals for additional mea- The water that is used as process water comes from two sures, and current discharges of nitrogen. In Malmberget, a sources: water pumped from the mines and rain. After the similar project was started in 2006.

The ore harbor in Narvik will have a whole new storage and discharging structure with underground silos.

ENVIRONMENT 36 LKAB ANNUAL REPORT 2006 Waste rock dumping can also give rise to discharges a tunnel above the storage silos. This reduces noise and to water. Weathering processes start after the waste is dust. There has been an environmentally effi cient ore harbor dumped. If the rock contains sulfi des, an acidic, metallifer- in Luleå since 1996. ous leachate is formed. Waste rock from LKAB’s mines has relatively low sulfi de content and contains a surplus of neu- DEFORMATION AND ALTERATION tralizing substances that counteract acidifi cation. OF THE LANDSCAPE The major visible effects of mining are open-pit mines, de- DAM SAFETY formation zones, waste rock heaps, and pond systems for LKAB has an extensive dam-safety program. LKAB devotes mine and process water. great efforts to dam safety. All of the company’s dams in Another visible impact of the Mining Division’s opera- Kiruna, Malmberget and Svappavaara are designed with the tions in Malmberget is Kaptensgropen, the “Captain’s Pit”, aid of independent experts in accordance with RIDAS (the a 20-hectare area in the middle of the community. In keep- Power Industry’s Guidelines for Power Dam Safety). ing with the remediation plan, the pit is now being back- The dams are inspected every year, and regular checks fi lled, which will stabilize the area. are made by LKAB personnel. At all locations, control cen- Near Kaptensgropen lies the Fabian orebody. Seismic ac- ters are manned round-the-clock, and there are automatic tivity indicates that blocking is occurring; i.e., rock masses in alarms and daily inspections. the mined area are caving in and a new pit may be forming, LKAB is now completing compilation of GRUVRIDAS which is according to plan. (the Mining Industry’s Guidelines for Mining Companies’ During 2006, LKAB submitted an application to the Dam Safety) in collaboration with other mining companies Swedish Mining Inspectorate (Bergstaten) for an extended and SveMin. This work will be completed during 2007 and mining concession for the Fabian orebody, and parallel with will apply to the sand impoundments. For settlement ponds, this, the company is working on the relocation of buildings RIDAS will continue to be applied. situated in Elevhemsområdet, since the ore extends under In the summer of 2006, after approval by the Environ- residential properties in the area. mental Court, capacity-increase and preventive safety mea- In the eastern part of Malmberget, blocking of the so- sures were implemented in Malmberget. For the sand im- called ViRi orebody has occurred, with a visible result in the poundment in Kiruna, a capacity-increase measure will be form of a new pit. It lies within the existing industrial area necessary during 2008. An application will be submitted to and constitutes no third-party risk. the Environmental Court during 2007. In Kiruna, deep drilling investigations are being conduct- ed to ascertain the extent of the orebody towards the north. NOISE, VIBRATION AND DUST An extension of the mining concession for Kiruna will also Noise and vibration are emitted from many sources in be sought during 2007. LKAB’s different activities; for example, from fans, vehicles In Kiruna, the consequences of mining for the surround- and blasting. Blasting in the mines causes vibration, which ing community, in the form of deformation, are now becom- can be considered annoying in some residential areas. ing apparent. During 2006, the road known as Gruvvägen, Large amounts of fi ne-grained material are handled in between the town and mine-industrial area, has been re- LKAB’s operations, which can give rise to dust or discharge routed. of particulate matter. Dust and particulate matter originates In cooperation with Kiruna’s municipal works department from several activities and in several areas: ore comminu- and the City of Kiruna, studies have been conducted to as- tion, loading and discharging of material in harbors, and sess alternatives and measures for minimizing and prevent- handling at outdoor stockpiles. Handling of waste rock for ing possible damage due to the growth of the deformation backfi lling of Kaptensgropen, the “Captain’s Pit”, in Malm- zone. A viaduct under the railway has been closed after de- berget, has at times also caused disturbances. Dust control liberation with Banverket. measures have included treatment of haulage roads with In cooperation with the Swedish Geotechnical Institute, dust-binding lignosulfate and watering, as well as minimiz- during the year, LKAB has conducted fi eld investigations ing of the active dumping area and lowering levels for trucks of ground movement in the area. Banverket and Vattenfall when loading. have begun planning and construction of a converter station LKAB inspects the areas daily to determine if there is a and a switchgear station south of Kiirunavaara to replace the dust risk. During 2006, a new sprinkler system was installed existing stations. in Kaptensgropen in Malmberget. The sprinkler system will During 2006, work has been done to improve the cul- be extended during 2007 and a weather station with a vis- vert that carries water from Luossajärvi Lake to Ala Lom- ibility camera will be installed in the area. bolo Lake and the lake system east of the industrial area. Renovation of the Narvik ore harbor will improve the en- This culvert cannot be used in future: Therefore, studies vironment in and around the harbor area. Storage silos will concerning the future discharge of Luossajärvi, and of its be blasted out of the bedrock and equipped with dust evac- possible downstream effects, will continue. uation systems. When discharging, the ore trains will enter

ENVIRONMENT LKAB ANNUAL REPORT 2006 37 As a consequence of the ground deformation in the Ore- with respect to increased concentrating and pelletizing ca- fi elds resulting from mining, a number of commitments pacity in Kiruna, a bank guarantee of MSEK 63 has been (both formal and informal) will arise and will entail consid- pledged to the supervisory authority (the County Administra- erable expenditures for the company. Forecasts of future tive Board of Norrbotten). economic consequences, which are made on an ongoing Some examples of initiated measures are backfi lling of basis, indicate that the construction of a new railway line open pits, planned disposition of waste rock, grass sowing in Kiruna will account for a signifi cant share of the costs. and tree planting. In 2006, LKAB completed remediation Some of these costs are attributable to LKAB’s own resi- measures at a cost of about MSEK 6.6. These measures dential properties. included backfi lling of Kaptensgropen in Malmberget and re- mediation of the old Tuollavaara industrial park in Kiruna. MONITORING OF DEFORMATION Previously identifi ed contamination areas in Luleå have Deformation and seismic events within LKAB’s area in Kiru- been further surveyed and remediation of these is planned na and Malmberget are monitored on a continuous basis for 2007. with the help of modern technology, for example, with mi- During 2004, LKAB began remediation of a former depo- cro-seismic measurements and GPS. This is done so that sition site for oil-contaminated soil. The soil is mixed with ground movements can be followed on an ongoing basis specially cultured bacteria. Decontamination has continued and boundaries around deformation zones can be extended through 2005 and 2006 with good results, and most of the when necessary. old landfi ll has been fully remediated. A small remaining area The seismic system has proven to be a very valuable will be treated in 2007. tool for forecasting the blocking events that occurred dur- Planning continued through 2006 for the start of reme- ing 2006 in the Lake Ore and the ViRi orebody in Kiruna and diation of the Vitåfors industrial area in 2007. Malmberget, respectively. The system in Malmberget has Surveying, decontamination and remediation of areas in been augmented during the year. In Kiruna, seismic survey all operating locations is done on an ongoing basis. A MIFO under the railway has begun. (Method of Surveying Contaminated Areas) survey provides When a seismic event occurs, it is recorded by a num- the basis for planning of decontamination measures and the ber of instruments placed around the mine and settlement ongoing work of environmental impact assessment and pri- areas. Geophones, highly sensitive sensors that are placed oritization of areas, as well as for communicating LKAB’s in the ground, register activity and the data is processed; coming program of decontamination. knowledge of the location and magnitude of the events is thereby gained. Geophysicists visit the site to survey both PLANNING ISSUES the mine and the ground surface to verify whether the event During 2006, LKAB has taken an active part in the revision has left any visible traces. When a seismic event occurs, of Kiruna and Gällivare’s detailed municipal key plans for a preliminary analysis is carried out by geophysicists. A re- the City of Kiruna and Gällivare/Malmberget. In this regard, port is issued when the event has activated several of the LKAB has contributed information on current and future devices that are placed around settlement areas to register mining in the respective locations. The ambition has been vibration, or when residents have noticed activity and con- to provide the clearest possible information based on the tacted LKAB. present knowledge of mineral resources, production condi- Information is sent to the responsible parties at LKAB, to tions and economy. the municipal emergency services, local offi cials and public At the request of LKAB, the process of revising the detail authorities such as the County Administrative Board. If vi- plan for Elevhemsområdet in Malmberget has been brought brations have been noticed in several locations in the com- forward by the Municipality of Gällivare, while an application munity, or if they have a magnitude of 1.5 mm/s or more, for an exploitation concession for the area has at the same information is also published on LKAB’s website. time been submitted. In connection with the above, a study of the road system in Malmberget has been carried out by SITE REMEDIATION LKAB. Site remediation is a statutory obligation where consider- In Kiruna, the process of amending the current detail plan ation must be given to safety, environmental and esthetic has begun, the aim of which is to enable the construction aspects. LKAB cooperates with the environmental authori- of a new road leading into the mine-industrial area. During ties in devising long-range remediation plans for the mining the year, work also began on assessing the conditions for a sites. An example of work begun during the year is the re- minor expansion, principally to the northeast, of the present vision of plans for waste-rock landfi lls for the operations in detail plan for Kiruna. Initial assessments indicate that land Malmberget and Svappavaara. used for dwellings, primarily residential properties owned LKAB is required to provide fi nancial guarantees to cover and managed by LKAB’s property management company, is the costs of remediation and other remedial measures. Fol- affected by such plans. lowing the most recent ruling of the Environmental Court /TABELL/ RESOURCE CONSUMPTION, PRODUCTION AND EMIS- SIONS

ENVIRONMENT 38 LKAB ANNUAL REPORT 2006 From a helicopter, Mirjana Boskovic, research engineer, and Christina Dahnér Lindkvist, general manager of rock mechanics, conducting aerial inspect of deformations.

RESOURCE CONSUMPTION, PRODUCTION AND EMISSIONS

2006 2005 2004 2003 2002 2001 2000 1999 1998 1997 Input materials: Crude ore (Mt) 40,5 37,3 35,9 34,7 31,5 33,0 33,4 30,6 33,4 32,9 Explosives (kt) 16,4 15,2 13,7 13,1 12,3 12,8 13,2 13,1 12,3 14,0 Additives1) (kt) 627 613 632 568 536 549 572 508 590 590 Energy2) (GWh) 3 182 3 069 2 930 2 914 2 741 2 676 2 854 2 669 3 053 2 659

Products and residual products, etc: Pellets (Mt) 16,9 16,5 16,0 15,3 14,1 13,8 14,9 13,0 15,1 15,4 Fines (Mt) 5,6 6,8 6,2 6,2 6,2 5,7 5,7 5,9 5,9 6,5 Residual products: Waste rock (Mt) 12,7 10,7 10,8 10,0 9,6 10,2 10,1 11,6 12,8 11,5 Tailings (Mt) 3,2 3,4 3,8 3,7 3,6 3,3 3,5 3,5 3,9 3,4 Recovered excess heat (GWh) 162 163 139 149 92 102 99 53 84 115

Atmospheric emissions: Particulates (tonnes) 2 490 2 450 1 360 1 565 1 760 1 575 2 000 1 355 1 850 1 490 Sulfur dioxide (tonnes) 1 985 1 695 1 540 1 540 1 385 1 495 1 760 1685 1 695 1 900 Hydrogen fl ourides (tonnes) 218 190 179 148 127 171 191 183 215 220 Hydrogen chlorides (tonnes) 672 385 389 347 330 307 315 330 350 385

Nitrogen oxidesx (tonnes) 3 386 2 920 3 050 2 765 2 620 2 585 2 460 2 640 3 550 3 200

Carbon dioxide2 (kilotonnes) 439 439 419 427 395 362 426 385 434 383

Discharges to water Nitrogen (tonnes) 398 468 379 237 211 283 315 273 250 200 Total phosphorus (kg) 492 644 478 366 364 641 691 398 500 300 Trace metals3) (kg) 250 378 303 171 187 265 315 177 174 205

1) Olivine, dolomite, bentonite, lime and quartzite. 2) Electricity, oil and coal. 3) Chromium, cadmium, copper, nickel, lead, zinc and arsenic.

ENVIRONMENT LKAB ANNUAL REPORT 2006 39 Prospecting, ore reserves and mineral resources

Within the Mining Division, prospecting and defi nition exploration are conducted in conjunction with ongoing mining operations in Kiruna and Malmberget. In the Minerals Division, prospecting is in progress in the Seqi olivine mine in Greenland and in mineral deposits in which the company has ownership interest in Izmir, Turkey.

In the Mining Division, the intention is to further defi ne and reached consensus in preparing alternative solutions for a verify the extent of the orebodies, mainly at depth, but also new key plan and alterations to the road and railway infra- in terms of the area of ore within the existing mining area. structure. Discussions are being held with other concerned Prospecting is also being done to determine the extent parties. at depth below the planned new main levels. During 2006, exploration began in Kirunavaara further defi ne and verify MALMBERGET the extent of the orebody towards the north and at depth During the year, exploration work has been focused on veri- below the 1 365 m level. fying the extent at depth of several orebodies. Exploration The aim is to search for and evaluate potential iron miner- work under parts of settlement areas in Malmberget is pro- alizations in the area near the Orefi elds. During 2006, explo- ceeding under existing permits. An application for a mining ration permits were granted for the area near Kiruna known concession for Fabian orebody, under the residential area as Lappmalmen. Work will begin during the fi rst quarter of Elevhemsområdet, has been approved in March 2007. 2007. Exploration work is aimed at defi ning the orebodies as a basis for a decision on new facilities that will enable mining PROSPECTING - IRON ORE outside the current haulage system, with a preliminary pro- The strategy for prospecting in the Mining Division is to de- duction start in 2009. fi ne and secure mineable quantities of ore that will provide Future mining operations will have an impact on parts of the basis for future mining beyond the current main levels, the community of Malmberget. LKAB is planning the nec- in Kiruna 1 045 m and in Malmberget 1 000 m below pre-de- essary measures in cooperation with the Municipality of fi ned leveling points at the surface. Malmberget and other public authorities. Closure of parts of The orebodies must be defi ned so that the economic LKAB’s residential areas Johannes and Hermelin has com- value of the requisite equipment for mining under current menced. levels can be assessed, decided upon, built and commis- sioned before the current levels are mined out. PROSPECTING - OTHER MINERALS During 2006, LKAB invested MSEK 32 (30) on exploration During 2006, the Minerals Division began mining olivine at work in extension to the mines in Kiruna and Malmberget. the Seqi mine in Greenland via the wholly owned subsidiary Seqi Olivine A/S. In connection with the establishment of a KIRUNA mining plan, diamond drilling totaling about 1 500 meters of During the year, in Kiruna, exploration drilling has been done drill core has been completed. via drifts adjacent to the orebody. Work has focused main- The Minerals Division has also upgraded raw materials ly on determining the extent at depth of the northern and from the Mining Division as well as purchasing raw materi- southern parts of the orebody. als from other sources. To a limited degree, LKAB upgrades Results thus far confi rm the continuity and extent of the material from deposits in Turkey in which the company has ore and will provide a basis for development work and min- an ownership interest. LKAB has therefore elected not to ing below the present main level. Continued mining below report deposits partly owned by LKAB in the formal report- 1 045 m is being assessed and decisions for the construc- ing of mineral resources and ore reserves. tion of new facilities will be taken during 2007. A new main level may be operational in 2012. ORE RESERVES AND MINERAL RESOURCES The extent of the orebody is such that future mining of LKAB reports ore reserves in compliance with recommen- the Kiruna ore will directly impact parts of the city of Kiru- dations adopted by SveMin, applicable sections of which ap- na. This mainly concerns LKAB’s residential area, as well as plied in the presentation below. road and railway infrastructure, switchgear and substations. Concerned parties, the Municipality of Kiruna, the County MINERAL RESOURCES Administrative Board, the National Road Administration, Prospecting and exploration provide a survey of mineraliza- the National Rail Administration, Vattenfall and LKAB have tions which, according to certain criteria, can be classifi ed

PROSPECTING, ORE RESERVES AND MINERAL RESOURCES 40 LKAB ANNUAL REPORT 2006 as mineral resources; i.e., an occurrence of minerals in the yses that are performed to determine the potential profi t- bedrock. ability of future mining of the deposit. Mineral resources are classifi ed as ‘inferred resources’ when quantities, grades and mineralizations can be estab- ORE RESERVES lished with a low degree of certainty. Detailed exploration The sections of the measured and indicated mineral resourc- can result in the classifi cation of mineral resources as ‘indi- es that can be mined and processed on the basis of LKAB’s cated resources’. profi tability requirements are referred to as the company’s The information that has been amassed from drilling ore reserves. Ore reserves are classifi ed as either ‘probable’ campaigns and other sampling is suffi cient to enable techni- or ‘proven’, the latter being the more precisely documented cal and fi nancial calculations. of the two. After additional drilling campaigns and sampling, the de- Ore reserves and mineral resources are quoted in quanti- posit may be classifi ed as ‘measured’, whereby mine plans ties and grades after mining; i.e., with allowance for losses and fi nancial assessments can be produced. The mine plans during extraction. and processes form the basis of technical and fi nancial anal-

ORE RESERVES MINERAL RESOURCES IN ADDITION TO ORE RESERVES per 31 December 2006 (to dressing plant) per 31 December 2006 (to dressing plant) Quantity, Mt Fe, % Kiruna Quantity, Mt Fe, % Kiruna Proven 662 48,6 Mineral resources in Kiruna down to Measured 122 47,9 Probable 77 46,8 1 500 meters (from leveling point) are Indicated 133 46,5 Malmberget reported. Below this level, there is Inferred 122 46,5 Proven 129 41,2 insuffi cient data to enable an estimate Probable 80 40,6 Svappavaara of grades and quantities. Mineral Measured 80 47,1 resources in Malmberget, within Indicated 30 47,0 existing concessions, are reported for Ore reserves include ore within the mining concessions. The Inferred – – the eastern fi eld down to 1 250 meters ore reserve in Kiruna includes ore above 1 365 meters (from Malmberget and between 600 and 800 meters for leveling point). The ore reserve in Malmberget includes ore Measured 117 41,9 the western fi eld. At deeper levels, above 1 250 meters (from leveling point) in the eastern fi eld. Indicated 18 42,7 there is insuffi cient data to enable an For the western fi eld, ore above 600 meters is included. Prices Inferred 19 41,2 estimate of grades and quantities. at the turn of the year 2004/-2005 have been applied in calcula- LKAB also has mining concessions for tions. Iron losses in the upgrading process are about 8%. Gruvberget and Mertainen.

LKAB reports ore reserves in compliance with recommendations adopted by SveMin, applicable sections of which correspond to the Ontario Securities Commission’s (OSC) National Instrument 43-101, which stipulates how ore reserves and mineral resour- ces are to be reported.

Estimates of LKAB’s mineral resources and ore reserves have been compiled under the direction of Carlos Quinteiro, Mineral Resources and Mineral Economics Specialist with the Technology and Business Development unit. Carlos Quinteiro is recogni- zed as a ‘Qualifi ed Person’ by SveMin and has more than 10 years of experience in the mining and minerals industry.

PROSPECTING, ORE RESERVES AND MINERAL RESOURCES LKAB ANNUAL REPORT 2006 41 Group overview

(MSEK) 2006 2005 2004 2003 2002 2001 2000 1999 1998 1997

CONSOLIDATED STATEMENTS OF INCOME Net sales 14 615 14 337 8 988 7 466 5 186 4 870 4 882 3 985 5 129 5 096 Cost of goods sold -7 706 -7 535 -6 180 -5 959 -4 515 -4 383 -4 150 -3 891 -4 023 -3 907 Gross income 6 909 6 802 2 808 1 507 671 487 732 94 1 106 1 189 Selling expenses -178 -174 -289 -285 -135 -86 -80 -63 -67 -68 Administrative expenses -333 -349 -353 -247 -192 -246 -218 -255 -276 -338 R&D expenses -165 -159 -235 -116 -101 -116 -93 -118 -148 -99 Other operating revenues/expenses 23 -11 10 64 50 28 132 -106 32 110 Operating income 6 256 6 109 1 941 923 293 67 473 -448 647 794 Income from fi nancial items 546 550 227 181 191 125 198 246 369 454 Financial expenses -420 -208 -145 -129 -88 -130 -80 -42 -56 -42 Profi t after fi nancial items 6 382 6 451 2 023 975 396 62 591 -244 960 1 206 Tax -1 785 -1 904 -456 -286 -96 -15 -179 11 -281 -337 Net income for the year 4 597 4 547 1 567 689 300 47 412 -233 679 869

Attributable to: Parent Company shareholders 4 597 4 546 1 568 690 305 54 421 239 686 880 Minority share 1 -1 -1 -5 -7 -9 -6 -7 -11

Includes depreciation according to plan 997 952 1 079 1 049 994 954 920 838 776 641

CONSOLIDATED BALANCE SHEETS Intangible assets 387 477 211 182 22 8 8 10 11 21 Tangible assets 11 746 7 928 6 316 6 476 6 583 7 056 6 970 6 962 6 821 6 238 Financial assets 2 208 1 393 219 245 322 261 328 198 176 195 Total fi xed assets 14 341 9 798 6 746 6 903 6 927 7 325 7 306 7 170 7 008 6 454 Inventories, etc. 1 631 1 423 1 006 976 870 870 707 675 585 475 Accounts receivable 1 697 1 846 1 194 1 198 724 711 635 504 529 588 Liquid assets and short-term investments 6 982 7 091 4 516 2 944 3 045 2 780 3 060 3 101 3 602 3 498 Other receivables 1 214 416 195 316 117 245 317 200 481 621 Total current assets 11 524 10 776 6 911 5 434 4 756 4 606 4 719 4 480 5 197 5 182 Total assets 25 865 20 574 13 657 12 337 11 683 11 931 12 025 11 650 12 205 11 636

Shareholders’ equity 19 076 14 802 10 044 9 004 8 673 8 609 8 789 8 412 8 882 8 605 Minority interest 4 3 4 3 46 41 34 154 156 Provisions* 2 209 2 154 2 160 2 096 2 278 2 210 1 917 Long-term liabilities 4 627 3 598 2 230 2 2 41 66 96 5 17 Current liabilities 2 162 2 170 1 380 1 118 851 1 075 1 033 830 954 941 Total shareholders’ equity and liabilities 25 865 20 574 13 657 12 337 11 683 11 931 12 025 11 650 12 205 11 636

CONSOLIDATED STATEMENTS OF CASH FLOW Income before tax 6 382 6 451 2 010 975 396 62 591 -244 960 1 206 Adjustment items 874 1 156 1 084 1 132 994 973 937 842 657 642 Income tax paid -1 568 -1 534 -318 -325 -34 -57 -188 -44 -205 -162 Cash fl ow before change in working capital 5 688 6 073 2 776 1 782 1 356 978 1 340 554 1 412 1 686 Change in working capital 358 -553 79 -556 -172 -19 -51 307 215 -13 Cash fl ow from operating activities 6 046 5 520 2 855 1 226 1 184 959 1 289 861 1 627 1 673 Investments in tangible assets -4 844 -2 648 -965 -670 -519 -1 065 -943 -986 -1 358 -1 212 Acquisition of operation, minority and assets -5 -75 -51 -384 -41 -124 Divestment of fi nancial assets 143 100 3 144 Short-term investments (net) 217 -1 846 -1 748 Other 13 23 11 78 -13 15 -9 -18 2 -38 Cash fl ow from investing activities -4 476 -4 446 -2 750 -976 -573 -1 050 -952 -1 128 -1 212 -1 250 Dividend -1 500 -520 -281 -351 -254 -233 -233 -233 -299 -430 Other from fi nancing activities -92 44 -145 -1 -12 -7 Cash fl ow for the year 70 554 -176 -101 265 -280 -41 -501 104 -14

GROUP KEY RATIOS Net sales 14 615 14 337 8 988 7 466 5 186 4 870 4 882 3 985 5 129 5 096 Growth in net sales, % 1,9 59,5 20,4 44,0 6,5 -0,2 22,5 -22,3 0,7 9,5 Operating margin,% 42,8 42,6 21,6 12,4 5,6 1,4 9,7 -11,2 12,6 15,6 Profi t margin, % 43,7 45,0 22,5 13,1 7,6 1,3 12,1 -6,1 18,7 23,7 Return on total capital, % 29,3 38,9 16,7 9,2 4,1 1,6 5,7 -1,7 8,5 11,0 Return on equity, % 27,1 36,6 16,5 7,8 3,5 0,5 4,8 -2,7 7,7 10,4 Equity/assets ratio, % 73,8 72,0 73,6 73,0 74,3 72,5 73,4 72,5 74,0 75,3 Average number of employees 3 737 3 563 3 482 3 433 3 078 3 172 3 210 3 279 3 568 3 524

* According to IFRS, from 2004, provisions are reported as long-term and short-term liabilities.

Defi nitions Operating margin: Operating income as a percentage of net sales Profi t margin: Income after fi nancial items as a percentage of revenue for the year. Return on total capital: Income after fi nancial items + fi nancial expenses as a percentage of average total assets Return on equity: Income for the year as a percentage of average shareholders’ equity

GROUP OVERVIEW 42 LKAB ANNUAL REPORT 2006 Contents – fi nancial reporting

REPORT OF THE DIRECTORS 44

FINANCIAL REPORTS – GROUP Statement of income 52 Balance sheet 53 Compilations of changes in shareholders´equity 54 Statement of cash fl ow 55

FINANCIAL REPORTS – PARENT COMPANY Stetement of income 56 Balance sheet 57 Compilations of changes in shareholders´equity 59 Statement of cash fl ow 60

NOTES NOTE 1 Accounting pronciples 61 NOTE 2 Revenue distribution 68 NOTE 3 Segment reporting 68 NOTE 4 Other operating revenues 69 NOTE 5 Other operating expenses 69 NOTE 6 Employees and personnel costs 70 NOTE 7 Auditors´ fees and compensation 72 NOTE 8 Operating expenses by nature of expense 72 NOTE 9 Net fi nancial income/expense 72 NOTE 10 Appropriations 73 NOTE 11 Taxes 74 NOTE 12 Intangible assets 77 NOTE 13 Tangible assets 80 NOTE 14 Investment properties 82 NOTE 15 Participations in associated companies and joint ventures 83 NOTE 16 Participations in Joint ventures 84 NOTE 17 Parent company´s participations in associated companies 84 NOTE 18 Receivables from Group comapnies and associated companies 85 NOTE 19 Financial investments 85 NOTE 20 Other long-term securities 86 NOTE 21 Long-term receivables and other receivables 86 NOTE 22 Inventories, etc. 87 NOTE 23 Accounts receivable 87 NOTE 24 Prepaid expenses and accrued revenues 87 NOTE 25 Shareholders´equity 88 NOTE 26 Earnings per share 89 NOTE 27 Pensions, senior executives´ benefi ts 89 NOTE 28 Provisions 93 NOTE 29 Accurued expenses and prepaid revenues 93 NOTE 30 Financial risks and fi nance policies 94 NOTE 31 Operatingl leasing 95 NOTE 32 Contractual obligations 96 NOTE 33 Assets pledged and contingent liabilities 96 NOTE 34 Related parties 96 NOTE 35 Patticipations in Group companies 97 NOTE 36 Untaxed reserves 98 NOTE 37 Cash-fl ow statement 99

Proposed disposition of unappropriated earnings 100 Audit report 101

XXXXXXXXXXXXXXXXCONTENTS LKABLKAB ÅRSREDOVISNING ANNUAL REPORT 2006 43 Annual Report 2006

The Board of Directors and the President and CEO of Luossavaara- secutive year. According to preliminary statistics from the Interna- Kiirunavaara AB (LKAB), (Corp. ID No. 556001-5835) hereby sub- tional Iron and Steel Institute (IISI), production increased by nearly mit their Annual Report and consolidated fi nancial statements cov- 9%, exceeding for the fi rst time more than 1.2 billion tonnes. The ering operations in 2006. strongest growth was seen in China, where crude steel produc- tion reached 419 Mt, an increase of 63 Mt or about 18%. Crude steel production also increased in the other major iron ore import regions; for example, in Japan by nearly 4 Mt or slightly more than Report of the directors 3%, and in the EU-25 by 11 Mt or almost 6%. The continued rise in global crude steel production meant OWNER STRUCTURE strong demand for iron ore throughout the entire year. Accord- LKAB is wholly owned by the Swedish state. The company con- ing to preliminary estimates, global trade in seaborne iron ore in- ducts business as a limited company and its registered offi ce is in creased by more than 10% to 740 Mt (2006), of which China’s Luleå, Sweden. share of imports rose by nearly 19% to about 326 Mt. Within the EU-15, the countries that were EU member na- GROUP tions prior to the 2004 enlargement, LKAB’s principal market for The consolidated fi nancial statements cover the operations in blast furnace products, crude steel production rose by about 5% 2006 of the Parent Company and its subsidiaries, together re- to 173 Mt. Production increased in Germany, Belgium, Finland ferred to as the Group. The Group also has ownership interests in and the UK. LKAB’s deliveries to these countries increased by joint venture companies. 1.1 Mt. In the Netherlands, where crude steel production declined, The LKAB Group includes the Mining Division, the Minerals Di- LKAB’s deliveries were unaffected, which is indicative of an in- vision and Special Businesses. crease in market share. Owing to maintenance work and techni- cal conditions, crude steel production in Sweden fell by nearly 5%, MINING DIVISION which meant a reduction in deliveries from LKAB of about 7%. General Consolidation of the world steel industry took a further step in The Mining Division consists of the Parent Company LKAB and as 2006, when the world’s largest steel producer, Mittal Steel, ac- of 2006, also the subsidiaries Malmtrafi k i Kiruna AB (MTAB) and quired the world’s second largest steelmaker, Arcelor. Arcelor Mit- Malmtrafi kk AS (MTAS). The Mining Division mines and process- tal, the product of the merger, produces about 120 Mt of crude es iron ore for products for steelmaking. The Mining Division’s steel per year, which is roughly 10% of the world’s crude steel pro- process chain stretches all the way from the iron ore deposits to duction. During the year, a bidding war began over the Anglo Dutch the customers. It starts with the production of crude ore in under- steel company Corus, Europe’s second biggest steelmaker. ground mines and upgrading of iron ore in processing plants at Global production of sponge iron, iron produced by direct re- surface level, and continues with rail transport of fi nished prod- duction, continued to rise in 2006. The increase was seen mainly ucts to shipping harbors and loading to vessels for delivery to the in India and Mexico, which are largely self-suffi cient in iron ore. In customers. Operations are conducted in Luleå, Malmberget, Svap- the Middle East and North Africa, LKAB’s main market for direct pavaara, Kiruna and Narvik. reduction pellets, production declined, which was due in part to Pellets are the Mining Division’s main product and account restricted production owing to investments in future capacity in- for about 70% of ore sales. Pellets are produced by mixing fi nely creases. The export market for direct reduction pellets stagnated, ground iron ore with various binders and additives, and then shap- and LKAB’s decreased exports of DR pellets favored an increase ing the mixture into centimeter-sized spheres, which are sintered in the company’s export of blast furnace pellets. at a temperature of 1 250ºC. LKAB’s magnetite-based pellets have The persistent shortage of iron ore on the world market in 2006 high iron content and are less energy demanding than competing contributed to an increase of 19% in the price of fi nes and lump pellet products. ore from the major producers. The fi rst benchmark price agree- ment was reached on 15 May 2006 between Brazilian CVRD and Objectives German Thyssen Krupp Stahl. Demand for pellets was not as LKAB is exposed to tough competition from considerably larger strong, which meant that prices of these products fell by 3%. For iron ore producers who enjoy the cost advantages associated with LKAB, the outcome of price negotiations was somewhat less fa- open-pit mining. The company will survive over the long term by vorable as a result of lower shipping rates. constantly improving cost-effectiveness, raising the quality and Industry analysts foresee continued stability in the steel mar- knowledge content of the products, and maintaining resource-ef- ket for 2007, even if the picture is somewhat clouded by increas- fi cient growth. Therefore, efforts are directed towards improving ing energy costs and unfavorable political decisions, e.g., with re- maintenance effi ciency, including preventive maintenance. The spect to trade in emissions rights. Global crude steel production is aim is to stabilize production at a higher and more consistent level. again expected to reach new record levels and it is expected that The work of assuring quality in the company’s processes has high the iron ore market will remain strong. priority, and here, too, the keyword is stability. Consistent quali- Once again, China will be the major driver of world crude steel ty, the right quality and delivery assurance are the most important production. A Chinese trade organization predicts that China’s success factors for the division’s customer relations. Work also fo- crude steel production will increase by 10% to 462 Mt in 2007. cuses on establishing best practice and making production more At the same time, it is expected that China’s iron ore imports will fl exible to enable maximum capacity utilization. rise by 9% to 355 Mt in 2007, thereby exceeding total imports by Japan and Europe. The steel and iron ore market The outlook is positive for LKAB’s home market, Europe, where World production of crude steel, which has driven demand for iron Germany is expected to produce just as much steel as in 2006, ore, increased in 2006 to a new record high for the eighth con-

REPORT OF THE DIRECTORS 44 LKAB ANNUAL REPORT 2006 about 47 Mt, and where Sweden has a chance to recover from the An initial pre-series of 70 ore cars of a new type with a 100- decline of 2006 and realize an upswing in 2007. tonne payload was delivered in March 2006. These have been In the Middle East, two new direct reduction plants will be tested with satisfactory results. The Board voted to manufacture commissioned during the fi rst half of 2007, and the market for a further three sets of cars, and a framework agreement for 680 DR pellets is expected to recover from the temporary downturn cars was signed. The fi rst delivery of production-series cars was of 2006. made according to plan in December. Iron ore prices for 2007 reached a record-early benchmark. During 2006, the Board voted on a new terminal structure for Anxious to assume a leading role in setting the price of iron ore, Kiruna, with loading of ore trains at surface level. The rail yard will the Chinese steel producers reached an agreement on 21 Decem- be rebuilt at a cost of 125 million kronor. A new receiving facili- ber 2006 with CVRD for a 9.5% price hike on fi nes in 2007. This ty, to be built at a cost of MSEK 80, includes a de-icing station for was the fi rst time China had a decisive infl uence over world mar- ore cars. ket prices. On 28 December 2006, CVRD reached an agreement Investments in fi xed assets amounted to MSEK 4 644 (2 314). with Italian Ilva for a 5.28% price increase on blast furnace pellets Time-critical development projects (driving of access roads, and 9.5 % on fi nes. The price agreements in China and Italy set ventilation shafts, etc.) for the planned new main levels in the the standard for other iron ore prices on both the Asian and Euro- Malmberget and Kiruna mines have commenced. The Board will pean markets. probably deliberate on a go-ahead for the new main levels dur- In light of these developments, the outlook for LKAB in 2007 is ing 2007. good. Demand for LKAB’s products is strong, which bodes well for full capacity utilization. LKAB’s increased pellet capacity in 2007 Research and Development (R&D) will be absorbed by established customers in Europe and the Mid- Within the strategic research work, a project is being conducted to dle East. The new pelletizing plant in Malmberget (MK3) will re- strengthen LKAB’s leading position in pellet production. The aim is place production of Kiruna pellets on the domestic market and will to establish a laboratory for pellet research (AggloLab) and an ex- enable increased exports of both blast furnace pellets and DR pel- perimental pelletizing plant (EPP), which together with the exist- lets from Kiruna. Sea freight rates have developed to LKAB’s ad- ing experimental blast furnace in Luleå will provide unique condi- vantage, which is why price increases of at least the same order tions for developing processes and products, as well as enabling as the established benchmark prices are to be expected. delivery of more customer-specifi c products. During the year, a pre-study for AggloLab has been conducted. Production results 2006 Within the framework of the Hjalmar Lundbohm Research Cen- In 2005, the focus has been on improving capacity, speed and tre for Mining and Metallurgy (HLRC) at Luleå University of Tech- availability in the production facilities in order to increase the vol- nology (LTU), research in mining engineering and metallurgy is ume of mining and processing while maintaining high quality. Min- conducted. Ten research projects have begun and are conduct- ing of iron ore during 2006 amounted to 40,5 (36.6) Mt of crude ed in close collaboration between the university’s and LKAB’s own ore. The volume of upgraded products amounted to 23.3 Mt researchers. (23.3), of which pellets accounted for 16.9 (16.5) Mt. In addition, Two larger joint projects have been carried out during the year. stocks of 1.3 (0.2) Mt crude ore, intended for production in MK3, In cooperation SSAB, Ruukki, Luleå University of Technology and have been produced. the metallurgical research center MEFOS, LKAB has participat- Deliveries to customers totaled 23.3 (23.2) Mt. Through contin- ed in the establishment of a knowledge center for steel research, uous improvement, greater effi ciency and the elimination of bot- the Centre for Process Integration in Steelmaking, (PRISMA) at tlenecks, production in existing facilities has increased in the past MEFOS in Luleå. The second research project, the ULCOS proj- four years from 20 to 23 Mt/yr, or 15%. ect (Ultra Low CO2 Steelmaking), is an initiative to investigate the possibilities for reducing steel-industry carbon dioxide emissions. Capital expenditures LKAB has contributed the use of the experimental blast furnace in

The fi rst volumes from the new pelletizing plant in Malmberget Luleå for studies of how CO2 emissions from blast furnaces can (MK3) were produced near the end of the year, after a construc- be reduced and has participated in the development of a new gas- tion period of about two years. based process for iron production with lower CO2 emissions. The Construction of new concentrating and pelletizing plants in aim of LKAB’s involvement in these projects is to gain an under- Kiruna is under way. The total cost is estimated at more than six standing of the energy and environmental impacts of customers’ billion kronor. At most, about 1300 people will be involved in the processes, which will bring about knowledge of future demands project on-site during 2007. Commissioning will take place in the on products. spring of 2008. During 2006, a new department was formed in LKAB to as- In January 2006, construction of a whole new storage and dis- sume responsibility for process- and systems engineering, ener- charging structure with underground silos began in Narvik (SILA). gy engineering and emissions. The objective is to minimize emis- The total investment is more than one billion Swedish kronor. sions of nitrogen oxide (NOx) from the pelletizing plants and to About 100 people are working on the construction project. Com- understand the processes that generate emissions, as well as to missioning of the new harbor facility is expected to begin during minimize the underlying causes of these. the fi rst quarter of 2009. In the area of rock mechanics, much of the work has to do During 2006, the foundations were laid for a future logistical with the growth of the deformation zones near the mines. Dur- structure in which increased payloads and shorter turn-around ing 2006, installation of new measurement devices began under times for trains will enable greater rail haulage capacity. This will the railway in Kiruna. Another monitoring technology is microseis- be accomplished mainly through the introduction of a uniform fl eet mic measurement, which is installed in both Kiruna and Malmber- of locomotives and ore cars for a minimum 30-tonne axle load, and get. During the year, extensive work has been carried out for initial better effi ciency in infrastructure, at sidings and at terminals.

REPORTXXXXXXXXXXXXXXXX OF THE DIRECTORS LKABLKAB ÅRSREDOVISNING ANNUAL REPORT 2006 45 rock-mechanical dimensioning of infrastructure and plant for the tegic business areas. The expectation for 2007 is that the Minerals planned main levels in the Malmberget and Kiruna. Division’s rate of growth, with greater market shares for selected A pre-study was conducted in 2006 to investigate the future minerals in strategic business areas, will be higher than the under- possibility of making the Kiruna mine a single-product mine. The lying rate of growth for the market as whole. Besides the ambition results are very promising and the proposed change would imply to grow in strategic areas, the division also has a number of other considerable simplifi cation and improved effi ciency in the mining priorities. One of these is to continue to improve capital effi cien- operation. Achieving this would necessitate investment in a fl o- cy. With less capital tied up in inventories and accounts receivable, tation plant in Svappavaara to reduce the phosphorus content of greater returns and profi tability will be realized. the ore. Currently, the ore is divided up into three product fl ows based on the different plants’ capacity for handling the phospho- Market and production rus and alkali content in the ore. The pre-study has proceeded to During 2006, the global demand for industrial minerals remained the pre-planning stage, and a new main level is being planned for strong. However, limited supply of magnetite products meant that, a single ore product. despite increased demand, deliveries were lower than in 2005. The world market for industrial magnetite is estimated at slight- Profi t/loss ly more than 2.0 Mt per year. With sales of more than 0.7 (1.0) Revenue increased, reaching MSEK 12 576 (12 349), due mainly to Mt, the Minerals Division is still a market leader. Despite strong a net increase in the price of iron ore over the previous year. Great- growth in Asia, Europe remained the principal market region, ac- er delivery volumes and a higher share of pellets also contributed counting for 60% of sales. This market is decreasing in relative im- to the increase in revenue. portance, however, while the USA and Asia are becoming increas- Operating income increased, amounting to MSEK 6 038 (5 720). ing important markets for the Minerals Division. A greater demand In addition to the above-mentioned factors, income has also been for magnetite, in combination with limited supply, has resulted in affected by higher production costs including costs for energy, ma- price increases. On the whole, price trends for industrial miner- terial and services. Financial results for fi scal year 2005 were af- als were positive. fected by provisions amounting to MSEK 241 which are attribut- In Finland and Turkey, construction of new processing plants able to structural changes in the Orefi elds. for minerals, mainly for the plastics industry, has been complet- ed. Minelco’s competitive advantage on this market is thereby fur- MINERALS DIVISION ther strengthened. With new production lines for upgrading mica General and UltraCarb products, the company not increases its production The Minerals Division, which operates under the name Minelco capacity but also its product offerings and the possibilities for a on the global market, develops, produces and markets industri- greater degree of product customization. al mineral products for many different application areas and in- The olivine market comprises three major application areas: the dustries. Among the most important are construction and civil en- steel, refractory and foundry industries. LKAB is a large consumer gineering, the oil and gas industry, the rubber, plastics and paint of olivine, which is a key ingredient in pellet manufacture. The Min- industries, the chemical industry, the automotive industry, found- erals Division’s olivine products for foundries offer environmental ries and manufacturers of refractory materials. advantages not seen in competing products. With sales of about 1.9 billion kronor, the Minerals Division ac- counts for 13% of the LKAB Group’s total sales. The division has Capital expenditures about 400 employees, most of them outside Sweden. With repre- Production facilities for processing mica and UltraCarb prod- sentation in Europe, the USA and Asia, the operation covers much ucts were completed in 2006. Plants for the production of mica of the world. There are subsidiaries with processing plants in Swe- products in Finland and fl ame retardant minerals in Turkey have den, Finland, Greenland, the UK, the Netherlands, Greece, Turkey been expanded with new production lines. At the turn of the year and China. The company has additional subsidiaries in Germany, 2006/2007, the olivine deposit Seqi in Greenland came into full the USA and Hong Kong, as well as representative offi ces in Slo- production, which means that LKAB is now self-suffi cient for vakia and Thailand. the supply of olivine to its pelletizing operation. Delivery of oliv- In many application areas, the Minerals Division has achieved a ine to the steel industry has also commenced. During the year, a leading position. This position is based on a high degree of exper- Chromesand operation was acquired. tise in mineral technology, production, applications and markets, In line with the pellets strategy, which is to create value for the as well as the ability to develop materials and processes in close customer, a section has been created to build a technology plat- collaboration with customers. The product portfolio includes more form for the Minerals Division’s product portfolio. than 30 different industrial minerals. At present, the selected min- Investments in fi xed assets amounted to MSEK 172 (192). erals are magnetite, olivine, mica and minerals with fl ame retar- dant properties (UltraCarb). Profi t/loss Revenue amounted to MSEK 2 100 (2 159). The trend in sales has Objectives been consistently positive. One exception, however, has been the Investments have been steered towards selected minerals, fulfi ll- delivery of zircon sand to China, where greater competition and ing the strategy “From mine to end user”, which means control consolidation in the market have resulted in a decline in sales of over the entire process chain from source to en user for the select- MSEK 130 or 24% following two years of strong growth. Exclud- ed industrial minerals: magnetite, olivine, mica and UltraCarb prod- ing sales of zircon sand, sales in 2006 rose by 4.4% compared to ucts (minerals with fl ame retardant properties). Investment during 2005. 2006 create a good basis for expansion in 2007. In late-2006, the Operating income amounted to MSEK 134 (148). Operating in- fi rst commercial deliveries of olivine from the Seqi mine in Green- come for the year was affected positively by the disposal of the land were made, and orders have been agreed upon for delivery in Vermiculite operation. Generally high sea freight rates and initial 2007. This will be the fi rst real year of production for Seqi, when overhead costs for mining and production of olivine in Greenland the operation reaches full capacity of more than 1 Mt. The aim is to have restricted an otherwise positive growth trend for the Miner- establish the company’s olivine products on the global market and als Division. to increase market shares of other selected minerals within stra-

REPORT OF THE DIRECTORS 46 LAKB ANNUAL REPORT 2006 SPECIAL BUSINESSES DIVISION a greater share of disbursements. In addition, short-term divest- General ments/investments (net) amounting to MSEK 217 (-1 846) were LKAB has organized most of its subsidiaries under the Special included. Liquid assets totaling MSEK 105 (101) accruing from the Businesses Division. These companies are today mainly subcon- sale of shares in SSAB are included. Liquid assets accruing from tractors to the Mining Division and the Minerals Division, but also the sale of shares in the associated company Orica Kimit Explo- support the Group by contributing towards effi ciency improve- sives amounted to MSEK 38. ment and technical development. The companies in Special Businesses have their origin in RISKS LKAB’s know-how as a manufacturer and user of products or ser- Risks can be divided into three main categories: operating risks, fi - vices. Wassara AB develops drilling systems. AB Kiruna Grus- och nancial risks and other risks. Stenförädling (KGS) works with rock, concrete, explosives manu- LKAB’s major competitors mine their ore in open pits. They facture and engineering services. Fastighets AB Malmfälten (FAB) therefore face considerably lower production costs. For LKAB, manages properties in locations where LKAB operates. consistently high quality and cost effi ciency are critical factors for Explosives manufacturer Kimit AB has been part of KGS since remaining competitive. The great advantage compared to compet- the close of 2004. LKAB Nät AB is an electricity network compa- itors is our high-quality magnetite ore. Potential threats are seen, ny with a concession as an electricity distributor. The Group’s in- for example, in a possible collapse in China’s economic growth, a tra-group insurance company is LKAB Försäkring AB. The compa- weak dollar, falling pellet prices, higher energy prices and energy ny works globally to provide the LKAB Group with property and taxes, and increased costs for emissions rights. risk insurance. The subsidiaries are wholly owned by LKAB, after acquisition in Operating risks 2006 of an additional 40% interest in Wassara AB, in which LKAB Volume dependence formerly had a 60% interest. Since pellets are largely used for the purpose of raising produc- tivity during expansionary periods and can be replaced by cheap- Profi t/loss er lump ore during recessionary periods, LKAB, with a pellet share Revenue amounted to MSEK 600 (1 091). As of 2006, the sub- of about 70%, is particularly sensitive to business cycle fl uctua- sidiary Malmtrafi k AB (MTAB) and its subsidiary Malmtrafi kk A/S tions. In recent years, LKAB has been able to sell all of its prod- (MTAS), which are responsible for the transport of ore products to ucts, but the company must improve its preparedness for future the harbors, are part of the Mining Division. This explains the de- cyclical fl uctuations. This is realized through greater fl exibility in cline in revenue. Operating income amounted to MSEK 98 (100). production and fi nancial strength. LKAB has a high proportion of fi xed costs; therefore, high ca- GROUP pacity utilization is decisive for profi tability. An increase in capacity Sales and earnings utilization by one percentage point leads to an earnings improve- Revenue increased, reaching MSEK 14 615 (14 337), due mainly to ment in the order of MSEK 140. a net increase in the price of iron ore over the previous year. Great- er delivery volumes and a higher share of pellets also contributed Price dependence to the increase in revenue. Iron ore trading is conducted in US dollars and the price is set once Operating income increased, amounting to MSEK 6 256 (6 109). a year in direct negotiations. Normally, an agreement between one In addition to the above-mentioned factors, income has also been of the major mining companies and the Asian or European steel affected by higher production costs including costs for energy, industry sets a global benchmark. A premium is paid for pellets material and outsourced services. Financial results for fi scal year compared with fi nes, and the price of DR pellets is generally high- 2005 were affected by provisions amounting to MSEK 241 which er than that of blast furnace pellets. are attributable to structural changes in the Orefi elds. Ocean freight costs have a great infl uence on the total price Profi t from fi nancial items reached MSEK 126 (342). Return on picture, since world market prices are compared with the freight market portfolios for the year amounted to MSEK 204 (212). Capi- cost included. LKAB is favored on the European market by high tal gains on the sale of shares in SSAB amounted to MSEK 99 (89), freight rates, while the competitiveness of more distant mines in- and on the sales of shares in the associated company Orica Kimit creases when ocean freight rates are low. Many sales include de- Explosives capital gains amounted to MSEK 35. Interest expens- livery to the customer’s premises, which entails a cost risk, since es attributable to forward exchange contracts have affected net fi - no extra charge can subsequently be added to compensate for nancial income/expense by MSEK 200 (84). Exchange rate losses higher freight costs. have affected net fi nancial income/expense by MSEK -99 (29). Net fi nancial expenses referring to pension commitments amounted Customer dependence to MSEK -57 (64). The global iron ore and steel market is subject to ongoing structur- al changes, and the number of players has diminished. The Min- Liquidity ing Division therefore has relatively few customers, which means Including short-term divestments/investments (net) totaling that the importance of each individual customer increases. Long- MSEK 217 (-1 846), cash fl ow for the period amounted to term customer relationships and a customer structure spread out MSEK 70 (554). among various markets have a certain stabilizing effect. High and For the full year 2006, the net infl ow of US dollars was MUSD consistent product quality in combination with value-adding ser- 1 620 (1 506), of which MUSD 1 155 (1 266) was hedged under vices is an important risk-mitigating factor. In order to minimize forward exchange contracts at an average rate of 7.58 (7.83) SEK/ the risk of bad debt losses, the Group is working actively with the USD. The average spot-market rate was 7.38 (7.48) SEK/USD. payment systems allowed by the banking systems. The Group is judged to have an effective credit monitoring function. With its di- Capital expenditures versifi ed customer base, the Minerals Division is able to spread its The Group’s net capital expenditures amounted to MSEK 4 476 risks more effectively. To a degree, this helps to counteract the ef- (4 446). Of investments in fi xed assets totaling MSEK 4844 fects of fl uctuations in business cycles, since different customer (2 648), the new pelletizing plants in the Orefi elds accounted for segments are subject to different trends.

REPORTXXXXXXXXXXXXXXXX OF THE DIRECTORS LKABLKAB ÅRSREDOVISNING ANNUAL REPORT 2006 47 Financial risks in the past fi ve years. According to LKAB’s investment policy, in- LKAB is exposed to various types of fi nancial risks. Financial risks vestments may only be made in borrowers with high creditwor- are associated with fl uctuations in the company’s earnings and thiness and high liquidity such as the Swedish state, companies cash fl ow as a result of currency exchange-rate fl uctuations, inter- wholly owned by the Swedish state, county councils, municipali- est rates, refi nancing and credit risks. Financial risks are managed ties or companies with the highest credit rating. As of closing day, according to Group policies established by the Board. LKAB has a 96% (96%) of investments in money-market instruments were centralized fi nance function, LKAB Treasury Center, which manag- issued by the Swedish state and Swedish banks. LKAB has not es most of the Group’s fi nancial risks. A selective strategy is ap- had any bad debt losses in short-term investments in the past fi ve plied, whereby potential costs and benefi ts are balanced, the aim years. LKAB does not have any substantial concentration of credit being to minimize and neutralize risks in commercial fl ows. LKAB risks in any single customer or counterparty. Treasury Center also acts as the Group’s internal bank and sup- ports subsidiaries with fi nancing, investment and currency trading, Liquidity risks and functions as an advisor with respect to fi nancial issues. LKAB maintains good fi nancial preparedness by following guide- lines which regulate risk-taking and the investment horizon. LKAB Currency risks has a high proportion of liquid assets and a low debt/equity ratio. Both LKAB’s future payment fl ows (transaction exposure) and re- A good balance between short and long investment horizons will valuation of receivables and liabilities in foreign currencies (revalu- meet the long-range fi nancing need. Liquid assets are invested ation exposure) are exposed to risks associated with fl uctuations primarily on the Swedish money market in securities with high li- in exchange rates. Other companies in the Group mainly conduct quidity. business in their local currencies, and both investment and fi nanc- ing are done mainly in local currencies so as to minimize revalua- SENSITIVITY ANALYSIS 2006 (PARENT COMPANY) tion exposure. Effect on Exposure Change earnings Transaction exposure Deliveries 23.3 Mt 1 Mt MSEK 450 1) The greatest transaction exposure within the LKAB Group is with- Price 1% MSEK 120 1) in the Mining Division. All prices of iron ore are set in US dollars, Personnel costs MSEK 1 756 10% MSEK 176 which means that the transaction risk is high without hedging. Energy costs MSEK 815 10% MSEK 82 The exact magnitude of this risk is diffi cult to ascertain far in ad- Transportation costs MSEK 920 10% MSEK 92 vance, since it is largely dependent on the market price of iron ore, Depreciation MSEK 849 10% MSEK 85 which is normally set annually. During 2006, the transaction expo- Dollar rate - without sure amounted to MUSD 1 620, and the effect of a difference of forward contracts MUSD 1 620 2) SEK 0.1 MSEK 162 SEK 0.1 in the USD/SEK exchange rate on LKAB’s operating prof- Interest level MSEK 4 907 1% MSEK 63 it, without hedging, is therefore about MSEK 162. The goal of LKAB’s current currency policy is to minimize the 1) Average value, fi gured on unchanged product mix impact of exchange rate fl uctuations on the income statement by 2) During 2006, the total exposure of 1 620, of which MUSD 1 155, means of selective risk-taking, so the value of future transaction was hedged. exposure is periodically hedged. The Board has set up a curren- cy committee that convenes whenever necessary to advise the Other risks Board on hedging of the Mining Division’s commercial fl ows. For Among other signifi cant risks, apart from operational and admin- other companies in the Group, transaction exposure arises main- istrative risks, may be mentioned risks associated with insuffi - ly when raw materials are purchased in foreign currencies. All cient insurance coverage, environmental requirements, and risks hedging of commercial transactions by subsidiaries must be done for non-competition-neutral costs such as costs for carbon-diox- through the LKAB Treasury Center. ide emissions rights.

Translation exposure Insurance coverage LKAB does not normally hedge its translation exposure, since it is To protect against unforeseen circumstances, LKAB insures inter- not substantial. ests including the Group’s facilities throughout the world. The larg- est single insurable risks are risks with respect to property and Interest rate risk disruptions, where production facilities and harbors are insured, LKAB’s fi nancing sources are shareholders’ equity, provisions and against fi re and stoppages due to fi re, partly by the Group’s own short-term operating credits, which means that LKAB is mainly ex- insurance company, LKAB Försäkrings AB and partly through pol- posed to interest rate risks with regard to investments of liquid as- icies with external insurers. An active and systematic effort is sets. According to LKAB’s investment policy, the average duration made on an ongoing basis to prevent damage and disruptions in of money-market investments may not exceed three years. As of production. Historically, stoppages due to fi re have resulted in the 31 December 2006, LKAB’s investments in money-market instru- greatest fi nancial losses, which is why preventive work in this area ments amounted to MSEK 4 907 (5 415). The duration was 507 has high priority. (356) days. A one-percent increase in the market rate as of closing In Sweden, liability for damage to third parties as a result of day would have affected income negatively by MSEK 63 (54). dam accidents is strict and unlimited. LKAB has therefore taken out so-called dam liability insurance. Credit risks Other insurance coverage includes liability insurance, product LKAB’s credit risks are mainly associated with trade accounts re- liability insurance, medical and business travel insurance, transport ceivable and short-term investments. As far as credit risks in trade insurance and liability insurance for the President and Board. accounts receivable are concerned, LKAB prioritizes long-term customer relations, which means that the majority of the custom- ENVIRONMENTAL INFORMATION ers are well-established contacts. Export letters of credit are used LKAB’s work will be characterized by concern for the environment. when deemed necessary. LKAB has not had any bad debt losses For this reason, LKAB has adopted an Environmental and Ener-

REPORT OF THE DIRECTORS 48 LKAB ANNUAL REPORT 2006 gy Policy that will guide LKAB’s actions while acknowledging the Future environmental legislation company’s objective to maintain a fi nancially sound and success- In 2003, the European Commission submitted a proposal for a ful business operation. mining waste directive, which has subsequently been reviewed by the European Parliament and Council of Ministers. The European Operations subject to regulation Parliament and Council of Ministers reached an agreement on a di- In the Parent Company and the subsidiary Kimit, the Group con- rective proposal during a conciliation meeting in December 2005. ducts operations that are subject to regulations embodied in the The offi cial text, including a Swedish translation, was published Environmental Code. Two environmental permits refer to handling in mid-April 2006 and will be incorporated in Swedish law in May of iron ore products and binders at the harbor facilities in Luleå 2008. Until then, the Commission will work according to guide- and Narvik. The impact of these operations on the external envi- lines for implementing the requirements of the directive, while at ronment is mainly a result of emissions of particulate matter and the national level, the necessary changes in environmental legis- dust. Several environmental permits refer to large-scale mining lation will be implemented. For LKAB, this may mean that further and facilities for processing iron ore products. Three permits re- economic guarantees for remediation costs must be pledged. fer to mining in Kiruna, Svappavaara (not currently applicable) and REACH, an acronym for Registration, Evaluation, Authorization Malmberget, and three permits refer to processing of ore in Malm- and restriction of Chemicals, is a new body of environmental leg- berget, Svappavaara and Kiruna. One permit refers to mining of islation that will be introduced within the EU. REACH is a compre- additives used in ore processing. Several permits refer to water hensive proposal for legislation that will replace 40 current pieces management in connection with LKAB’s dam facilities. The big- of legislation regulating the use and handling of chemicals. REACH gest environmental impact factors are alteration of the landscape concerns all substances whether manufactured, imported, used due to mining; emissions to air and discharges to water arising as intermediates or placed on the market, either on their own, in from production; noise, dust and vibration, and energy consump- preparations or in articles. According to plan, REACH will be imple- tion. In addition to these, there are a number of permits that are mented in June 2007. All registration, assessment and approval utilized either in part or only periodically, for example, permits for will subsequently take place over a transition period of 11 years. gravel pits. LKAB is subject to REACH in that we use a number of chem- LKAB has several permits for exploration and mining conces- ical substances such as fl otation chemicals, fl occulants, oils, etc. sions in Kiruna, Svappavaara and Malmberget. During the year, Depending on how the legislation is construed with respect to the LKAB applied to the Mining Inspectorate of Sweden to obtain a products LKAB produces/imports, LKAB may also be subject to mining concession for the Fabian orebody in Malmberget. In Kiru- REACH as a producer/importer of chemical products. na, deep drilling investigations are being conducted to ascertain the extent of the orebody towards the north. An extension of the System of trade in emissions rights mining concession for Kiruna will be sought during 2007. In Malm- The EU’s solution for reducing greenhouse gas emissions (GHG) is berget, the consequences of mining, in the form of deformation, based upon, among other measures, a system of trade in carbon- have been evident for some time and are now becoming apparent dioxide emissions rights. In the current system, which includes in Kiruna. In cooperation with the Swedish Geotechnical Institute, only EU member states, LKAB is the only pellet supplier that is ac- during the year, LKAB has conducted fi eld investigations of ground tive on the global market. The system also implies increased direct movement in the area. and indirect costs for the company. Ideally, the system of trade Two environmental permits refer to Kimit AB’s manufacture of in emissions rights should become a global-market based system explosives. The environmental impact of this activity is mainly the for reducing atmospheric emissions. At this level, such a system result of discharges of nitrogen compounds to the municipal sew- would increase competitiveness among companies like LKAB that age system. use energy and C02-effi cient technology, and consequently, emis- sions could be globally reduced. Remediation/decontamination An assessment of carbon-dioxide emissions during 2005 and Site remediation, which can be done successively and/or after op- 2006, which are the fi rst years of the EU’s three-year trial period, erations are concluded, is a statutory obligation where consider- shows that actual emissions from the pellet plants and oil-fi red ation must be given to safety, environmental, economic and es- boiler plants exceed the allocated rights. This is despite the fact thetic aspects. LKAB cooperates with the supervisory authority, that, since the allocation period, LKAB has signifi cantly reduced its the County Administrative Board, in devising long-range remedi- oil consumption for heating by using recovered surplus heat from ation plans for the mining sites. Some examples of initiated mea- processes. The increase is due mainly to increased production in sures are backfi lling of open pits, planned disposition of waste the pelletizing plants and increased use of carbonates in the prod- rock, grass sowing and tree planting. In 2006, LKAB completed re- ucts. Therefore, LKAB has purchased 30 000 emissions rights and mediation measures at a total cost of MSEK 6.6. These measures may, during the fi nal year of the trading period, be required to pur- included backfi lling of Kaptensgropen in Malmberget and remedia- chase additional rights in order to cover the company’s actual car- tion of the old Tuollavaara industrial park in Kiruna. bon dioxide emissions. Following the Environmental Court’s ruling of 2005, with re- LKAB appealed the allocation decision from 2004, but the ap- spect to ore processing in Kiruna (increasing pellet production peal was rejected by the County Administrative Court of Stock- from 8.8 Mt to 14.8 Mt/year), a guarantee amounting to MSEK holm in December 2005. LKAB claimed that the use of coal in the 63 has been pledged in 2006 to the County Administrative Board pellet process should be classed as raw-material related. Review of Norrbotten. In connection with the current permit application dispensation was granted by the Administrative Court of Appeals for all of LKAB’s operations in Malmberget, Vitåfors, with produc- in 2006, and a ruling is expected to be forthcoming in 2007. tion increases in both the mine and processing plants, it is expect- The total allocation of emissions rights for the trading period ed that a corresponding guarantee for future remediation will be 2008-2012 is not yet known. During 2006, LKAB was able to apply pledged during 2007. In addition, several lesser fi nancial guaran- for allocations for “existing facilities” in Kiruna, Svappavaara and tees have been pledged; for example, for the dolomite pit in Ma- Malmberget. The allocation for these, for which notifi cation has sugnsbyn, to the amount of MSEK 1. The total cost for remedia- been received, is preliminary until such time as Sweden’s alloca- tion of the sites cannot be accurately determined until complete tion plan has been fi nalized by the EU. Application for allocations and approved plans for all locations exist. for LKAB’s new pelletizing plants will be made in 2007. Again, our

REPORTXXXXXXXXXXXXXXXX OF THE DIRECTORS LKABLKAB ÅRSREDOVISNING ANNUAL REPORT 2006 49 principal competitors in Brazil and Australia will not be affected by REWARD SYSTEM the system during the coming trading period, which distorts com- The Parent Company’s reward system was introduced at mid-year petition to LKAB’s disadvantage. 2000. The President and senior executives are not included. The subsidiaries MTAB, MTAS, Minelco AB, Wassara AB and LKAB Secured electricity deliveries Norge AS are subject to the reward system. The system, which In the iron ore operation, vast amounts of electricity are used, follows the owner’s guidelines for incentive schemes, is based on mainly in mine operation and mineral processing. In the next year, three factors: quality, work environment and production targets. annual consumption of electricity will have increased from about The reward is maximized at SEK 30 000 per year and full-time em- 1.7 to more than 2 terawatt hours (TWh). Market prices on the ployee. All three factors led to rewards in 2006. The outcome was Nordic exchange have risen dramatically since deregulation. As- 15 600 (27 400) kronor per full-time employee (excluding social se- sured deliveries of competitively priced electricity are strategical- curity contributions), which adds up to about MSEK 49 (85). In ad- ly very important. Via a long-term energy agreement reached with dition, payments in respect of local incentive schemes in different Vattenfall in 1998, LKAB secured power deliveries at a predeter- subsidiaries amounted to MSEK 5 (5). mined price. The third phase of the agreement, renegotiated dur- ing 2005 to a 10-year agreement, also takes into consideration fu- WINDING UP OF FOREIGN BRANCH ture power demands for the new pelletizing plants to be built in LKAB’s operation in Narvik was formerly run as a foreign branch Malmberget and Kiruna. operation. The decision was taken during the year to form a com- pany for operations in Narvik. As of 2007, the company operates PERSONNEL AND WORK ENVIRONMENT under the name LKAB Norge AS. Recruiting and safety are two areas that are decisive for LKAB’s success. Safe and healthy workplaces are a pre-requisite for devel- CHANGE IN ACCOUNTING PRINCIPLE oping the operation and recruiting new employees. As of 1 January 2006, LKAB applies IFRS 6 “Exploration for and Evaluation of Mineral Assets”. Application of this recommenda- Equality and diversity tion has had no effect on the balance sheet or income statement LKAB must be an attractive employer for both present and future apart from information given in the notes to the fi nancial state- co-workers. We now have a plan of action to ensure the suitability ments. of LKAB’s workplaces for all employees, regardless of their ethnic Owing to a change in rules in RR 32 and taking into account origin or faith. Aspects of the plan include review of our recruiting the relationship between reporting and taxation, the rules referring work and organization. A big challenge is to improve our attractive- to fi nancial instruments and hedge accounting in IAS 39 are not ness as an employer of women, an endeavor that has been con- applied in the Parent Company as a legal entity. These rules are ducted successfully and in a determined manner for several years therefore applied henceforth only in the Group fi nancial reporting. within the framework of our effort to ensure an equal-opportuni- As of 2006, fi nancial results for the subsidiaries MTAB and ty workplace. MTAS have been reported under the Mining Division. Formerly, Of new employees during the year, 20 (26)% were women, they were included in Special Businesses. The comparative year which means that the number of women has risen from 353 to 2005 has not been restated, since the effect on operating income 382. However, we still face the challenge of placing more women is negligible. in male-dominated occupations, since a better balance between the sexes leads to greater effi ciency and increased safety. PARENT COMPANY The Parent Company’s revenue increased to MSEK 12 572 In-house training (12 349), of which 113 (158) refers to invoiced sales to subsidiar- Competence development is another strategic area, both respect ies. Operating income amounted to MSEK 6 056 (5 720). Income to the development of existing personnel and for attracting new after fi nancial items reached MSEK 6 188 (6 049). employees. The aim is that each employee should participate in At the turn of the year, assets and liabilities in the branch op- 10 days of competence development per year, of which 5 should eration in Narvik were sold to the wholly owned subsidiary LKAB be training days. Norge AS, which resulted in a positive effect of MSEK 107. The number of training days per employee in 2006 was 5.8 (4.5). Investments in fi xed assets amounted to MSEK 4 642 (2 314). The principal areas included work environment and safety, quality, Liquid assets and short-term investments amounted to MSEK management and personal development, and vehicle training. 6 416 (6 810). Dividends of MSEK 1 500 (520) have been paid out to the own- Safety er during the year. A safe work environment in which employees are attentive to the safety of those around them, as well as their own safety, is both THE BOARD OF DIRECTORS DURING 2006 a right and an obligation of all who work within LKAB. The aim Up until the Annual General Meeting for 2006, the Board of Di- of “Safety First”, a long-term campaign that began in 2005, is to rectors consisted of eight members elected by the Annual Gen- eliminate accidents in the company. The vision is zero accidents. eral Meeting, plus three members with three deputies appoint- The commitment of the company management is a factor for ed by the employees. No changes in the composition of the Board success. The majority of LKAB supervisors, key resource people have been made during the year. The President is not a member and larger contractors have undergone a 3-day training program of the Board. in safety. In 2007, a company-wide program will be implement- ed for all personnel. THE BOARD OF DIRECTORS’ RULES OF PROCEDURE LKAB’s work-environment focus is above all on preventive Each year, the Board of Directors establishes its rules of proce- safety practice. In 2005, a training program on alcohol and drugs dure, essentially following the recommendation issued by the Min- was conducted for all supervisors and safety offi cers. This work istry of Industry, Employment and Communications. The Board continued during 2006 in an effort to identify and assist people in held nine ordinary meetings during fi nancial year 2006. the risk zone. All people in LKAB’s workplaces, employees as well The meetings follow a set annual calendar aimed at satisfying as contractors, are subject to random drug tests. the Board’s need for information and are otherwise governed by

REPORT OF THE DIRECTORS 50 LKAB ANNUAL REPORT 2006 the special rules of procedure followed by the Board. Normally, six spect to a new railway in Kiruna. A meeting of the Board on 21 meetings are held each year. February 2007 voted to allocate funds to remunerate Banverket A board meeting held at the end of each quarter considers the for a share of the project costs. The total cost, as assessed by interim fi nancial reports for the most recent quarter as well as the Banverket, amounts to MSEK 287. The fi nal cost and distribution forecast for the coming four quarters. This allows the Board to thereof between the parties has not yet been established. LKAB make an ongoing assessment of strategies and delegations to the will endeavor to minimize the total project costs via negotiations President and to decide on specifi c investment projects. and by exercising its infl uence in the choice of construction alter- Normally the fi rst meeting of the year is at the year-end clos- natives. ing, when LKAB’s auditors also participate. The second is a strat- In January 2007, LKAB entered an agreement with the Munic- egy meeting with an emphasis on personnel issues. The third and ipality of Gällivare. The agreement regulates costs arising for the fourth meetings also address issues pertaining to operations and Municipality of Gällivare in connection with the expansion of the strategy. The emphasis of the fi fth meeting is on the market situa- mining area in Malmberget. The agreement includes the purchase tion. At the sixth and fi nal meeting, the strategic plan for the com- of properties amounting to MSEK 35.5. ing three to four years is revised. Since 2004, the traditional annual budget has been replaced EXPECTATIONS WITH RESPECT TO with a rolling business plan and 12-month forecast, updated after FUTURE DEVELOPMENTS each quarter. The rolling business plan is then monitored with key Industry analysts foresee continued stability in the steel market ratios and is driven by activities of various kinds. for 2007. Global crude steel production is again expected to reach The work of the Board is evaluated once per year. A written new record levels and it is expected that the iron ore market will survey of the Board’s work, prepared annually, includes questions remain strong. concerning how the Board collectively, and each member individu- Iron ore prices for 2007 reached a record-early benchmark. ally, has fulfi lled the tasks at hand. The evaluation report supports Anxious to assume a leading role in setting the price of iron ore, the work of the Board. The Chairman is responsible for follow- the Chinese steel producers reached an agreement on 21 Decem- ing up the results, which form a basis for discussion and improve- ber 2006 with CVRD for a 9.5% price hike on fi nes in 2007. This ment. The work of the Chairman is normally assessed by the own- was the fi rst time China had a decisive infl uence over world mar- er, but this may also be part of the work of the Board. ket prices. On 28 December 2006, CVRD reached an agreement with Italian Ilva for a 5.28% price increase on blast furnace pellets DIVIDEND POLICY AND PROPOSED DISTRIBUTION and 9.5 % on fi nes. The price agreements in China and Italy set OF UNAPPROPRIATED EARNINGS the standard for other iron ore prices on both the Asian and Euro- LKAB’s dividend policy entails that the dividend to the owner will, pean markets. over the long term, amount to 30-50% of income after tax and be The outlook for LKAB in 2007 is good. Demand for LKAB’s prod- adapted to the average earnings level over a business cycle. The ucts is strong, which bodes well for full capacity utilization. LKAB’s proposal for distribution of unappropriated earnings for the year is increased pellet capacity in 2007 will be absorbed by established given on page 100. customers in Europe and the Middle East. The new pelletizing plant in Malmberget (MK3) will replace production of Kiruna pel- STRUCTURAL CHANGES IN THE OREFIELDS lets on the domestic market and will enable increased exports of LKAB’s expansion in the operating locations in the Orefi elds en- both blast furnace pellets and DR pellets from Kiruna. Sea freight tails a successive expansion of deformation zones. Amendments rates have developed to LKAB’s advantage, which is why price in- to municipal plans are therefore inevitable in the long term. To- creases of at least the same order as the established benchmark gether with other concerned parties, such as government and lo- prices are to be expected. cal authorities, other companies and property owners, LKAB is In line with earlier assessments, with China continuing to drive seeking to fi nd solutions. Discussions concerning the necessary demand for various types of raw materials, the market outlook for measures and funding are in progress. Discussions concerning the both the Mining Division and the Minerals Division is expected to future rerouting of the railway line in Kiruna are at hand. Consid- remain positive. The US dollar is a factor of uncertainty, but for the erable expenditures for LKAB may arise during the coming years. current year much of the estimated dollar infl ow has been hedged Therefore, as agreements are reached or where an informal obli- under the forward exchange program. gation exists as a result of operations, LKAB is successively allo- For further information concerning the company’s fi nancial re- cating funds for this purpose (see Notes 28 and 33). sults and status, please see the following statements of income and balance sheets with accompanying comments. EVENTS AFTER CLOSING DAY In January 2007, LKAB and Banverket agreed on their joint intent to produce planning documentation and detailed planning with re-

REPORTXXXXXXXXXXXXXXXX OF THE DIRECTORS LKABLKAB ÅRSREDOVISNING ANNUAL REPORT 2006 51 Statement of Income – LKAB Group

1 January - 31 December MSEK Note 2006 2005 1, 34 Revenue 2,3 14 615 14 337 Cost of goods sold -7 706 -7 535 Gross income 6 909 6 802

Selling expenses -178 -174 Administrative expenses -333 -349 Research and development expenses -165 -159 Other operating revenues 4 351 248 Other operating expenses 5 -328 -259 Operating income 3,6,7,8, 31 6 256 6 109

Income from fi nancial items 546 550 Financial expenses -420 -208 Net fi nancial income/expense 9 126 342 Income before tax 6 382 6 451

Tax 11 -1 785 -1 904 Net income for the year 4 597 4 547

Attributable to: Parent Company shareholders 4 597 4 546 Minority interest - 1 4 597 4 547

Earnings per share (kronor) 26 6 567 6 494

NET SALES AND OPERATING INCOME COST STRUCTURE 2006

MSEK 15 000 Other 19% Personell 25% 12 000

9 000 Depreciation 12%

6 000 Transport 7% 3 000 Materials 26% Energy 11%

0 01 02 03 04 05 06

Net sales Operating income

STATEMENT OF INCOME – LKAB GROUP 52 LKAB ANNUAL REPORT 2006 Balance Sheet – LKAB Group

As of 31 December MSEK Note 2006 2005 1, 34 Assets 16, 32 Intangible assets 12 387 477 Tangible assets 13,14 11 746 7 928 Participations in associated companies and joint ventures 15 1 4 Financial investments 19, 30 2 135 1 327 Long-term receivables 21 72 62 Total fi xed assets 14 341 9 798

Inventories, etc. 22 1 631 1 423 Taxes recoverable 398 153 Accounts receivable 23 1 697 1 846 Prepaid expenses and accrued revenues 24 644 69 Other receivables 21 172 194 Short-term investments 19, 30 3 870 4 049 Liquid assets 37 3 112 3 042 Total current assets 11 524 10 776 Total assets 25 865 20 574

Shareholders’ equity 25 Share capital 700 700 Other reserves 1 843 666 Profi t brought forward 16 533 13 436 Shareholders’ equity attributable to Parent Company shareholders 19 076 14 802

Minority interest - 4 Total shareholders’ equity 19 076 14 806

Liabilities Long-term liabilities 1 2 Provisions for pensions 27, 28 1 751 1 690 Other provisions 28 240 303 Deferred tax liability 11, 28 2 635 1 603 Total long-term liabilities 4 627 3 598

Accounts payable - trade 1 250 833 Income tax payable 21 77 Other liabilities 164 171 Accrued expenses and prepaid revenues 29 557 921 Provisions for pensions 27, 28 141 109 Other provisions 28 29 59 Total current liabilities 2 162 2 170 Total liabilities 6 754 5 768 Total shareholders’ equity and liabilities 25 865 20 574

For information concerning the Group’s assets pledged and contingent liabilities, see Note 33.

BALANCE XXXXXXXXXXXXXXXXSHEET – LKAB GROUP LKABLKAB ÅRSREDOVISNING ANNUAL REPORT 2006 53 Compilations of changes in shareholders’ equity – LKAB Group

2005 Shareholders’ equity attributable to Parent Company shareholders MSEK Retained earnings Total share- Share incl. profi t Minority holders Note capital Reserves for the year Total interest equity Adjusted shareholders’ equity 1 Jan. 2005 700 1 146 9 410 11 256 3 11 259 Change in translation reserve for the year 25 25 25 25 Change in fair value reserve for the year 25 355 355 355 Change in hedge reserve for the year 25 -860 -860 -860 Net income recognized directly in equity, excluding transactions with the Company’s owners -480 -480 -480 Net income for the year 4 546 4 546 1 4 547 Net income excluding transactions with the Company’s owners -480 4 546 4 066 1 4 067 Dividends -520 -520 -520 Shareholders’ equity 31 December 2005 700 666 13 436 14 802 4 14 806

2006 Shareholders’ equity attributable to Parent Company shareholders MSEK Retained earnings Total share- Share incl. profi t Minority holders Note capital Reserves for the year Total interest equity Adjusted shareholders’ equity 1 Jan. 2006 700 666 13 436 14 802 4 14 806 Change in translation reserve for the year 25 -25 -25 -25 Change in fair value reserve for the year 25 538 538 538 Change in hedge reserve for the year 25 664 664 664 Net income recognized directly in equity, excluding transactions with the Company’s owners 1 177 1 177 1 177 Net income for the year 4 597 4 597 4 597 Net income excluding transactions with the Company’s owners 1 177 4 597 5 774 5 774 Acquisition of minority interest -4 -4 Dividends -1 500 -1500 -1 500 Shareholders’ equity 31 December 2006 700 1 843 16 533 19 076 - 19 076

COMPILATIONS OF CHANGES IN SHAREHOLDERS’ EQUITY – LKAB GROUP 54 LKAB ANNUAL REPORT 2006 Statement of Cash Flow - LKAB Group (indirect method)

1 January - 31 December MSEK Note 2006 2005 1, 37 Operating activities Profi t after fi nancial items 6 382 6 451 Adjustments for items not included in cash fl ow, etc. 874 1 156 Income tax paid -1 568 -1 534 Cash fl ow from operating activities before change in working capital 5 688 6 073

Cash fl ow from changes in working capital Increase (-)/Decrease (+) of inventories -208 -417 Increase (-)/Decrease (+) in operating receivables 282 -728 Increase (-)/Decrease (+) in operating liabilities 284 592 Cash fl ow from operating activities 6 046 5 520

Investing activities Acquisition of tangible assets -4 844 -2 648 Disposal of tangible assets 35 23 Acquisition of intangible assets -12 -75 Acquisition of minority interest -5 - Disposal of fi nancial assets 143 100 Lending -10 - Short-term divestments/investments investments (net) 217 -1 846 Cash fl ow from investing activities -4 476 -4 446

Financing activities Dividends paid to Parent Company shareholders -1 500 -520 Cash fl ow from fi nancing activities -1 500 -520

Cash fl ow for the year 70 554

Liquid assets at the beginning of the year 3 042 2 488 Liquid assets at year-end 3 112 3 042

STATEMENT OF CASH FLOW – LKAB GROUPXXXXXXXXXXXXXXXX (INDIRECT METHOD) LKABLKAB ÅRSREDOVISNING ANNUAL REPORT 2006 55 Statement of Income – Parent Company

1 January - 31 December MSEK Note 2006 2005 1, 34 Revenue 2 12 572 12 349 Cost of goods sold -6 120 -6 158 Gross income 6 452 6 191

Selling expenses -96 -104 Administrative expenses -227 -249 Research and development expenses -154 -147 Other operating revenues 4 292 210 Other operating expenses 5 -211 -181 Operating income 3, 6, 7, 8, 31 6 056 5 720

Income from fi nancial items: Income from participations in Group companies 21 17 Income from participations in associated companies - -5 Income from other securities and receivables held as fi xed assets 160 149 Other interest income and similar credits 309 305 Interest expense and similar profi t/loss items -358 -137 Profi t after fi nancial items 9 6 188 6 049

Appropriations 10 -1 893 -1 568

Income before tax 4 295 4 481

Tax 11 -1 242 -1 251 Net income for the year 3 053 3 230

NET SALES AND OPERATING INCOME IRON ORE DELIVERIES

MSEK 15 000 25 Mt 13 000 20 11 000

9 000 15 7 000 5 000 10 3 000 5 1 000 0 -1-1 000 000 0 01 02 03 04 05 06 01 02 03 04 05 06

Net sales Operating income

STATEMENT OF INCOME – PARENT COMPANY 56 LKAB ANNUAL REPORT 2006 Balance Sheet – Parent Company

As of 31 December MSEK Note 2006-12-31 2005-12-31 1, 34 ASSETS 32 Fixed assets Intangible assets 12 34 119 Tangible assets 13,14 9 606 6 437 Financial assets Participations in Group companies 35 775 607 Participations in associated companies 17 1 1 Receivables from Group companies 18 328 373 Receivables from associated companies 18 35 35 Other long-term securities held as fi xed assets 20, 30 105 110 Other long-term receivables 21, 30 135 107 Deferred tax asset 11 213 226 Total fi nancial assets 1 592 1 459 Total fi xed assets 11 232 8 015

Current assets Inventories, etc. 22 1 176 993 Current receivables Accounts receivable 23 1 314 1 555 Receivables from Group companies 1 282 904 Taxes recoverable 394 154 Other receivables 21 111 155 Prepaid expenses and accrued revenues 24 21 26 Total current receivables 3 122 2 794

Short-term investments 19 3 654 3 874 Cash and bank balances 37 2 762 2 936 Total current assets 10 714 10 597 Total assets 21 946 18 612

INVESTMENTS AND DEPRECIATON LIQUID ASSETS AND SHORT-TERM INVESTMENTS

MSEK 5 000 10 000 MSEK

4 000 8 000

3 000 6 000

2 000 4 000

1 000 2 000

0 0 01 02 03 04 05 06 01 02 03 04 05 06 Investments Depreciation

BALANCE SHEETXXXXXXXXXXXXXXXX – PARENT COMPANY LKABLKAB ÅRSREDOVISNING ANNUAL REPORT 2006 57 Balance Sheet – Parent Company

As of 31 December MSEK Note 2006-12-31 2005-12-31 SHAREHOLDERS’ EQUITY AND LIABILITIES 1, 34 Shareholders’ equity Restricted equity 25 Share capital (700 000 shares) 700 700 Statutory reserve 697 697

Non-restricted equity Accumulated profi t or loss 6 923 5 241 Net income for the year 3 053 3 230 Total shareholders’ equity 11 373 9 868

Untaxed reserves 36 6 455 4 562

Provisions Provisions for pensions and similar commitments 27, 28 1 241 1 542 Other provisions 28 265 360 Total provisions 1 506 1 902

Long-term liabilities Liabilities to Group companies 13 13 Total long-term liabilities 13 13

Current liabilities Accounts payable - trade 916 647 Liabilities to Group companies 1 049 929 Other liabilities 112 125 Accrued expenses and prepaid revenues 29 522 566 Total current liabilities 2 599 2 267 Total shareholders’ equity and liabilities 21 946 18 612

Pledged assets and contingent liabilities - Parent Company As of 31 December MSEK Not 2006-12-31 2005-12-31 Assets pledged 33 166 148 Contingent liabilities 33 160 477

BALANCE SHEET – PARENT COMPANY 58 LKAB ANNUAL REPORT 2006 Compilations of changes in shareholders’ equity – Parent Company

See note 25 2005 Restricted equity Non-restricted equity Total Statutory Accumulated Net income shareholders’ MSEK Share capital reserve profi t or loss for the year equity Opening balance 1 January 2005 700 697 6 028 7 425 Group contribution -371 -371 Tax 104 104 Net income recognized directly in equity, excluding transactions with the Company’s owners -267 -267 Net income for the year 3 230 3 230 Net income excluding transactions with the Company’s owners -267 3 230 2 963 Dividends -520 -520 Shareholders’ equity 31 December 2005 700 697 5 241 3 230 9 868

2006 Restricted equity Non-restricted equity Total Statutory Accumulated Net income shareholders’ MSEK Share capital reserve profi t or loss for the year equity Opening balance 1 January 2006 700 697 8 471 9 868 Group contribution -80 -80 Group contribution received 13 13 Tax (net) 19 19 Net income recognized directly in equity, excluding transactions with the Company’s owners -48 -48 Net income for the year 3 053 3 053 Net income excluding transactions with the Company’s owners -48 3 053 3 005 Dividends -1 500 -1 500 Shareholders’ equity 31 December 2006 700 697 6 923 3 053 11 373

SOLIDITY %

% 100

80

60

40

20

0 01 02 03 04 05 06

COMPILATIONS OF CHANGES IN SHAREHOLDERS’ EQUITYXXXXXXXXXXXXXXXX – PARENT COMPANY LKABLKAB ÅRSREDOVISNING ANNUAL REPORT 2006 59 Statement of Cash Flow – Parent Company (indirect method)

1 January - 31 December MSEK Note 2006 2005 1, 37 Operating activities Profi t after fi nancial items 6 188 6 048 Adjustments for items not included in cash fl ow, etc. 385 1 176 Income tax paid -1 450 -1 483 Cash fl ow from operating activities before change in working capital 5 123 5 741

Cash fl ow from changes in working capital Increase (-)/Decrease (+) of inventories -183 -296 Increase (-)/Decrease (+) in operating receivables -88 -857 Increase (-)/Decrease (+) in operating liabilities 332 1 022 Cash fl ow from operating activities 5 184 5 610

Investing activities Acquisition of tangible assets -4 642 -2 314 Disposal of tangible assets 677 21 Change in long-term receivables - -136 Acquisition of minority interest -5 - New share issue, subsidiary -163 - Disposal of fi nancial assets 105 100 Change in long-term receivables 17 - Short-term divestments/investments (net) 220 -1 846 Cash fl ow from investing activities -3 791 -4 175

Financing activities Dividends paid -1 500 -520 Group contribution received 13 - Group contribution -80 -371 Cash fl ow from fi nancing activities -1 567 -891

Cash fl ow for the year -174 544

Liquid assets at the beginning of the year 2 936 2 392 Liquid assets at year-end 2 762 2 936

STATEMENT OF CASH FLOW – PARENT COMPANY (INDIRECT METHOD) 60 LKAB ANNUAL REPORT 2006 Notes to the fi nancial statements

NOTE 1 Accounting principles

(a) Conformity with norms and legislation The consolidated fi nancial statements have been prepared in ac- IFRS 7 Financial Instruments: Financial Instruments: Disclosures, cordance with International Financial Reporting Standards (IFRS), and the Amendment to IAS 1 - Presentation of Financial State- published by the International Accounting Standards Board (IASB), ments: Capital Disclosures, require increased disclosures about the and in accordance with interpretations by the International Financial signifi cance of fi nancial instruments for an entity’s fi nancial position Reporting Interpretations Committee (IFRIC) as adopted within the and performance, and qualitative and quantitative disclosures on EU. In addition, Swedish Financial Accounting Standards Council the nature and extent of risks. IFRS 7 and the related amendments to (SFASC) recommendation RR 30:05 Complementary Reporting Rules IAS 1, which become mandatory for the Group’s 2007 fi nancial state- for Groups is used. ments, will require increased additional disclosures with respect to The Parent Company applies the same accounting principles as the Group’s fi nancial instruments and share capital. the Group, except in the cases indicated under the section “Parent IFRIC 9 - Reassessment of Embedded Derivatives, requires that Company’s accounting principles”. The variations between Parent a reassessment of whether embedded derivatives should be sepa- Company and Group accounting principles arise from the limitations rated from the underlying host contract should be made only when in applying IFRS in the Parent Company as a result of the Swedish there are changes to the contract. IFRIC 9, which becomes manda- Annual Report Act and the Swedish Act on Safeguarding of Pension tory for the Group’s 2007 fi nancial statements, is not expected to Commitments, and in certain cases for tax reasons. have any material impact on the consolidated fi nancial statements. The Annual Report and consolidated fi nancial statements have, IFRIC 10 - Interim Financial Reporting and Impairment, prohibits as stated above, been approved for publication by the Board of the reversal of an impairment loss recognised in a previous interim Directors on 16 March 2006. The consolidated income statement period in respect of goodwill, an investment in an equity instrument, and balance sheet, and the Parent Company income statement and or a fi nancial asset carried at cost. IFRIC 10 will become manda- balance sheet will be subject to approval by the Annual General tory for the Group’s 2007 fi nancial statements and will apply to Meeting on 26 April 2007. goodwill, investments in equity instruments, and fi nancial assets carried at cost prospectively from the date that the Group fi rst ap- (b) Conditions applying to the preparation of Parent Company and plied the measure_ment criteria of IAS 36 and IAS 39, respectively Group fi nancial reports (i.e., 1 January 2004 for goodwill and 1 January 2005 for fi nancial Assets and liabilities are stated at historical acquisition values, instruments). Since no such reversals of impairment losses have accept for certain fi nancial assets and liabilities that are reported at taken place, IFRIC 10 will have no impact on the Group’s fi nancial fair value. Financial assets and liabilities stated at fair value consist statements. of derivatives, fi nancial assets classifi ed as fi nancial assets reported at fair value in the income statement, or as fi nancial assets that can (g) Segment reporting be sold. In the accounts, a segment is an identifi able part of the Group that either offers products and services (lines of business), or goods (c) Functional currency and presentation currency or services within a certain economic environment (a geographic The Parent Company’s functional currency and the presentation region) that is exposed to risks and opportunities that differ from currency for the Group and Parent Company is the Swedish krona. those that apply to other segments. The Group’s primary segments Therefore, the fi nancial reports are presented in Swedish kronor. Un- are lines of business. Segment disclosures are reported in accor- less otherwise indicated, all amounts are rounded off to the nearest dance with IAS 14 for the Group only. million kronor. (h) Classifi cation, etc. (d) Assessments and estimates in the fi nancial reports Fixed assets and long-term liabilities in the Parent Company and To present the fi nancial reports in accordance with IFRS, the Group consist for the most part solely of amounts that are expected management must make certain estimates and assumptions that to be recovered or paid more than twelve months after the balance affect the application of the accounting principles and the reported sheet date. Current assets and long-term liabilities in the Parent amounts pertaining to assets, liabilities, revenue and expenses. Company and Group consist for the most part solely of amounts Actual outcomes may differ from these estimates and assumptions. that are expected to be recovered or paid within twelve months of The estimates and assumptions are regularly reviewed. Changes the balance sheet date. in estimates are reported in the period in which the change is made if the change affects only that period, or in the period in which the (i) Consolidation principles change is made and future periods if the change affects both the (i) Subsidiaries current and future periods. Subsidiaries are companies in which the Parent Company exercises a controlling infl uence over the operational and fi nancial manage- (e) Changed accounting principles ment. Controlling infl uence implies a direct or indirect right to de- The Group accounting principles listed below have been consis- cide the company’s fi nancial and operative strategies with an aim to tently applied to all periods presented in the Group’s fi nancial realizing economic advantages. When assessing whether a decisive, reports, unless otherwise stated below. Group accounting principles controlling infl uence exists, potential shares with voting rights that have been consistently applied to the accounts and consolidation can be utilized without delay shall be taken into account. of parent companies, subsidiaries, associated companies and joint Subsidiaries are reported according to the purchase method. The venture companies. acquisition of a subsidiary is considered a transaction through which As of 1 January 2006, LKAB applies IFRS 6 “Exploration for and the Group indirectly acquires the subsidiary’s assets and assumes Evaluation of Mineral Assets”. Application of this recommendation its liabilities and contingent liabilities. For the Group, the acquisi- has had no effect on the balance sheet or income statement apart tion value is determined by an acquisition analysis at the time of from information given in the notes to the fi nancial statements. the acquisition. The analysis establishes the acquisition value of the shares or business, and the fair value of acquired identifi able assets (f) New IFRS and interpretations not yet adopted and assumed liabilities and contingent liabilities. The acquisition Several new standards, amendments to standards and pronounce- value of subsidiaries’ shares or business comprises the fair values ments on interpretations, which take effect as of fi scal year 2007, as per date of transfer of the assets, accrued or assumed liabilities have not been applied in the preparation of these fi nancial state- and emitted equity instruments given in payment for the acquired ments. The respective changes that are deemed to be applicable to net assets and transaction costs that are directly attributable to the LKAB are described below. acquisition. Where the acquisition cost exceeds the net value of

NOTES TO THE FINACIALXXXXXXXXXXXXXXXX STATEMENTS LKABLKAB ÅRSREDOVISNING ANNUAL REPORT 2006 61 acquired assets, assumed liabilities and contingent liabilities, the dif- (iii) Net investment in a foreign entity ference is reported as goodwill. If the acquisition value is less than The differences that occur in connection with translating a foreign the fair value of the acquired company’s net assets, the difference is net investment and the related effects of hedging net investments reported directly in the income statement. are reported directly in the translation reserve in shareholders’ The subsidiary’s fi nancial reports are included in the consoli- equity. On disposal of a foreign entity, the cumulative translation dif- dated accounts as of the date of acquisition and are excluded from ference relating to the entity, after deductions for currency hedges, the consolidated accounts as of the date the decisive infl uence no where applicable, is realized in the Group’s income statement. longer exists. The cumulative translation differences for foreign entities are presented as a separate capital category and include the translation (ii) Associated companies differences accumulated as of 1January 2004. Accumulated transla- Shareholdings in associated companies in which the Group holds tion differences prior to 1 January 2004 are distributed over other at least 20% but at most 50% of the voting rights or has a signifi cant separate capital categories and are not disclosed. infl uence in the operational and fi nancial management, are reported according to the acquisition cost method, where they are of little (k) Revenue signifi cance with respect to the requirement of fair presentation. (i) Sale of goods and rendering of services The acquisition cost method implies that associated companies Revenue from the sale of goods is reported in the income statement are reported at acquisition value. In the owner company’s income when signifi cant risks or benefi ts associated with ownership of the statement, revenue from the associated company includes only goods has been transferred to the buyer. Revenue from the render- dividends received, provided that they stem from profi ts earned ing of services is reported in the income statement based on the after acquisition. degree of completion as per the balance sheet date. The degree of completion is measured via evaluation of work performed on the (iii) Joint ventures basis of completed surveys. Revenue is not recognized if it is prob- For accounting purposes, joint ventures are companies in which able that future economic benefi t will not accrue to the Group. If the Group has entered into collaboration agreements with one or there is considerable uncertainty as to payment, associated costs or several parties to share a controlling interest in their operational and risk of returns, and if the seller retains the controlling interest that is fi nancial management. In the consolidated accounts, holdings in normally associated with ownership, no revenue is recognized. joint ventures are reported according to the principle of proportional consolidation. This method implies that the Group’s share of the (ii) Revenue from the sale of property joint venture’s assets, liabilities, revenue and expenses, is reported Unless the risks and benefi ts associated with ownership have been in the Group’s balance sheet and income statement. To do so, the transferred to the buyer on an earlier date, revenue from the sale of joint owner’s share of assets, liabilities, revenue and expenses in a property is normally recognized on the date on which possession is joint venture is combined item-by-item with corresponding items in taken. Control over the asset may have been transferred at a point the joint owner’s consolidated accounts. Only shareholders’ equity in time prior to the date when possession was taken; in which case, accruing after acquisition is reported in the Group’s shareholders’ revenue from sale of the property is recognized on this earlier date. equity. The proportional consolidation principle is applied from the When establishing the date of revenue recognition, consideration is point in time at which the joint controlling infl uence is obtained until given to what has been agreed by the parties concerning risks and it ceases to exist. benefi ts, and controlling interest in the management of the asset. In addition, consideration is given to circumstances beyond the control (iv) Transactions to be eliminated on consolidation of the seller and/or buyer that may affect the outcome of the sale of Intra-group receivables and payables, revenue or expenses, and the property. unrealized profi ts or losses arising from intra-group transactions between subsidiaries are eliminated in their entirety when the con- (iii) Rental income solidated accounts are prepared. Rental incomes from investment properties are reported in a linear Unrealized profi ts arising from transactions with associated manner in the income statement, based on the terms of the lease. companies and jointly controlled companies are eliminated to an extent corresponding to the Group’s share of the ownership of the (iv) Government grants company. Unrealized losses are eliminated in a similar fashion to Government grants are recognized on the balance sheet as deferred unrealized profi ts, but only if there is no indication that a write-down income when there is a reasonable assurance of compliance is required. with conditions attached to the grants and that the grants will be received. Grants are periodized systematically; i.e., recognized in the (j) Foreign currencies same way and during the period in which the costs that the grants (i) Transactions in foreign currencies are intended to cover are reported. Government grants related to Foreign currency transactions are translated to the functional curren- assets are recognized on the balance sheet as a reduction in the cy at the exchange rate applying on the transaction day. Functional reported value of the assets. currency is the currency in the primary economic environments in which the companies operate. Monetary assets and liabilities (l) Operating expenses and fi nancial income/expenses in foreign currency are translated to the functional currency at the (i) Operating leases rate prevailing on the balance sheet date. Exchange rate differences Costs associated with operating leases are recognized in the income resulting from translations are reported in the income statement. statement on a straight-line method over the term of the lease. Ben- Non-monetary assets and liabilities reported at their historical efi ts received upon entering a leasing agreement are recognized in acquisition value are translated at the exchange rate applying on the the income statement on a straight-line method over the term of the transaction day. Non-monetary assets and liabilities reported at fair lease. Variable fees are expensed in the period in which they arise. value are translated to the functional currency at the rate applying at the time the fair value was established. (ii) Finance leases Minimum lease payments are allocated to interest expenses and (ii) Financial reports in foreign entities amortization of the outstanding liability. Interest expenses are dis- Assets and liabilities in foreign entities, including goodwill and tributed over the period of the lease, so that each accounting period other fair value consolidation adjustments, are translated from the is charged with an amount corresponding to a fi xed rate of interest functional currency to Swedish kronor at the rate applying on the for the liability reported in the respective period. Variable fees are balance sheet date. Revenue and expenses in foreign entities are expensed in the period in which they arise. translated to Swedish kronor at the average rate that constitutes an approximation of the rates applying when the transaction occurred. (iii) Financial revenue and expenses Differences that arise when translating currency in foreign entities Financial revenue and expenses include interest revenue from bank are reported immediately in shareholders’ equity as a translation assets, receivables and interest-bearing securities, interest expenses reserve. related to loans, dividend revenue, unrealized and realized gains on fi nancial investments, and derivative instruments used in fi nancial operations.

NOTES TO THE FINACIAL STATEMENTS 62 LKAB ANNUAL REPORT 2006 Interest revenue from receivables and interest expenses related acquires or divests listed securities when settlement date reporting to liabilities are estimated using the effective interest method. The is applied. effective interest is the rate that ensures that the present value of all Liquid assets are cash and immediately available credit in banks future receipts or payments through the expected life of a fi nancial and similar institutions, and current investments with a maturity of instrument is the same as the reported value of the receivable or less than three months from acquisition that are exposed to only payable. very marginal risk for fl uctuations in value. Interest revenue and interest expense, respectively, includes pe- riodized amounts of transaction expenses and discounts, premiums Classifi cation and measurement and other variations between the original value of the receivable, or Financial instruments that are not derivatives are initially recog- the liability, and the amount received or regulated on maturity. nized at an acquisition value corresponding to the fair value of the Dividend income is recognized as revenue when the right to instrument plus transaction expenses for all fi nancial instruments, obtain payment is certain. except those instruments categorised as fi nancial assets reported at Revenue from the sale of fi nancial instruments is reported in the their fair value in the income statement, which are reported at their income statement when signifi cant risks or benefi ts associated with fair value excluding transaction expenses. A fi nancial instrument ownership of the instrument has been transferred to the buyer and is classifi ed on initial recognition based on the purpose for which the Group no longer exercises control over the instrument. the instrument was acquired. Classifi cation determines how the The Group and Parent Company do not include capitalized interest fi nancial instrument is measured after the initial recognition, as in the acquisition value of assets. described below. Derivatives are initially recognized at fair value, implying that the (m) Taxes transaction costs are recognized in the income statement for the Income taxes consist of current tax and deferred tax. Income taxes period. After the initial recognition, the derivative is recognized in are recognized in the income statement unless the underlying trans- the manner described below. In hedge accounting, the derivative’s action is recognized directly in shareholders’ equity, in which case accumulated change in value is transferred to the income statement, the related tax effect is also recognized in shareholders’ equity. where it meets and matches the effects of the hedged transaction. Current tax is the tax paid or received for the current year, applying Even if hedge accounting is not applied, increases or decreases the tax rates that have been set or essentially set as of the closing in the value of the derivative are reported as income or expense, day to taxable income and adjusting for current tax attributable to respectively, within the operating profi t/loss or net fi nancial income/ previous periods. expense, based on the intended use of the derivative instrument and Deferred tax is calculated according to the balance sheet method whether that use relates to an operating item or to a fi nancial item. based on temporary differences between the carrying value of as- In hedge accounting, the ineffective part is reported in the same way sets and liabilities and their value for tax purposes. The following as fl uctuations in the value of derivatives that are not used in hedge temporary differences are not taken into account: temporary differ- accounting. ences arising when goodwill is fi rst reported; the initial reporting of assets and liabilities in a transaction other than a business combina- Financial assets recognized at fair value in the income statement tion and which, at the time of the transaction, do not affect either This category consists of two sub-groups: fi nancial assets held for the recognized or taxable result; temporary differences pertaining trading and other fi nancial assets that the company initially decided to shares in subsidiaries and associated companies that are not to invest in this category (according to the so-called Fair Value expected to be reversed in the foreseeable future. The valuation of Option). Financial instruments in this category are measured at fair deferred tax is based on how reported values of assets and liabilities value and changes in fair value are recognized in the income state- are expected to be realized or paid. Deferred tax is calculated by ap- ment. Derivatives with a positive fair value, with the exception of plying the tax rates and tax legislation that has been determined, or derivatives that are an identifi ed and effective hedging instrument, in practice determined, on the balance sheet date. are included in the fi rst sub-group. Deferred tax assets from deductible temporary differences and tax loss carryforwards are only recognized to the extent it is likely Loans and receivables that they will be utilized. The value of deferred tax assets is reduced Loans and receivable are non-derivative fi nancial assets with fi xed when it is no longer considered likely that they can be utilized. payments or determinable payments, which are not quoted on an Any additional income tax arising on dividends is reported at the active market. Assets in this category are valued at the accrued same time as the dividend is reported as a liability. acquisition value. Accrued acquisition value is determined based on the effective rate of interest calculated on acquisition. Accounts (n) Financial instruments receivable are reported in the amount at which they are expected to Financial instruments reported as assets on the balance sheet be received, less a deduction for bad debts. include, on the assets side, liquid assets, accounts receivable, fi nan- cial investments, credit claims and derivatives. Liabilities include Held-to-maturity investments accounts payable, borrowing and derivatives. Held-to-maturity investments are fi nancial assets. These include interest-bearing securities with fi xed or determinable payment Recognition and derecognition fl ows, with a fi xed term, and which a company intends and is able A fi nancial asset or fi nancial liability is entered on the balance sheet to hold to maturity. Assets in this category are valued at the accrued when the company becomes a party to the contractual provisions acquisition value. of the instrument. Accounts receivable are entered on the balance sheet when an invoice has been issued. Liabilities are entered when Financial assets held for sale the counterparty has performed and the agreed liability is due for The available-for-sale category includes fi nancial assets that are not payment, even if an invoice has not yet been received. Accounts classifi ed in any other category or fi nancial assets that the company payable are entered when an invoice is received. initially classifi ed in this category. Shares in subsidiaries, and A fi nancial asset is removed from the balance sheet when the holdings in associated companies and joint ventures are recog- rights in the agreement are realized, expire or the company loses nized here. Assets in this category are valued continuously at fair control over them. The same applies for a portion of a fi nancial as- value, with changes in value reported against shareholders’ equity, set. A fi nancial liability is removed from the balance sheet when the with the exception of assets that depend on impairment losses, undertakings in the agreement have been fulfi lled or extinguished. interest on debt instruments and dividend income or exchange The same applies for a portion of a fi nancial liability. rate differences on monetary items which are recognized in the A fi nancial asset and a fi nancial liability are offset and reported in income statement. When the investments are derecognized from the the balance sheet as a net amount only when there is a legal right balance sheet, the previously reported accumulated gain or loss in to set off the amount and an intention to adjust the items with a net shareholders’ equity is restored to the income statement. amount or, at the same time, realize the asset and settle the liability. Acquisition and divestment of fi nancial assets is recognized on Financial assets recognized at fair value in the income statement the trade day, i.e., the day upon which the company undertakes to Assets in this category consist of two sub-groups: fi nancial liabilities acquire or dispose of the asset, except in cases when the company held for trade and other fi nancial liabilities which the company has

NOTES TO THE FINACIALXXXXXXXXXXXXXXXX STATEMENTS LKABLKAB ÅRSREDOVISNING ANNUAL REPORT 2006 63 chosen to place in this category (the so-called Fair Value Option); see estimated costs of disassembly and removal of the assets and reme- description under the above heading “Financial assets recognized diation of the site or area in which it has been used. at fair value in the income statement”. Derivatives with a negative Tangible assets whose parts differ with respect to useful life are fair value, with the exception of derivatives that are an identifi ed and treated as separate components of tangible assets. effective hedging instrument, are included in this category. Change The reported value of a tangible asset is struck from the balance in fair value is reported in the income statement. sheet when the asset is retired or disposed of or when no future economic value is expected to accrue from the use or retirement/ Other fi nancial assets disposal of it. Gain or loss arising from the disposal or retirement of Loans and other fi nancial liabilities e.g., accounts payable trade, are an asset is the difference between the selling price and the asset’s included in this category. Liabilities are valuated at accrued acquisi- reported value with deductions for direct selling expenses. Gain or tion value. loss is reported as other operating income/expense.

Financial guarantees (ii) Underground installations The Group’s fi nancial guarantee agreements imply that the Group Installations underground, from which iron ore is extracted, can has a commitment to remunerate the bearer of a debt instrument be classed as installations for waste rock mining and installations for losses incurred as a result of the failure of a given debtor to for iron ore mining. Waste rock mining consists of work done to make full payment on due date in accordance with the original or expose the orebody in connection with the construction of a main amended terms of the agreement. haulage level, construction pertaining to transport and maintenance Financial guarantee agreements are reported initially at fair value, functions such as railways, roads, tunnels, shafts, inclined drifts (a i.e., normally in the amount the issuer received in compensation for system of access for vehicle traffi c from surface level to the work issuing the guarantee. Upon subsequent valuation, the liability for site underground), and facilities for service and electrical and air the fi nancial guarantee is reported as the greater of the amounts supply. These expenses, refering to plant that intended to be used reported according to IAS 37, Provisions and contingencies, and the for more than a year, are activated on the balance sheet. The de- amount that was originally reported after deductions, in applicable preciation period is based on an assessment of the useful life of the cases, for accumulated accruals, as recognized in accordance with respective asset. The average useful life of this category of tangible IAS 18, Revenue. assets is 12 years. Iron ore mining consists mainly of activities including develop- (o) Derivatives and hedge accounting ment, cave drilling, and loading, haulage and hoisting of the ore. The Group’s derivative instruments have been acquired to safeguard Expenses for these activities have a useful life of at most one year, against the interest rate and exchange rate risks to which the Group which is why they are expensed on a current basis. is exposed. An embedded derivative is recognized separately unless it is closely related to the host contract. Derivatives are initially (iii) Prospecting and evaluation expenses recognized at fair value, implying that the transaction costs are Increased knowledge of the extent of the iron mineralizations is nec- recognized in the income statement for the period. After the initial essary for providing a foundation for the continued development of recognition, derivative instruments are recognized at fair value and the Minerals Division’s opertation. Via exploration work with drilling changes in value are recognized as described below. campaigns, mainly via drifts adjacent to the orebody, the orebody is To comply with IAS 39 requirements concerning hedge account- surveyed and defi ned. Exploration work in existing and future areas ing, there must be a clear link between the hedging instrument of the mines is costed. This principle is also applied to prospecting and the corresponding hedged item. Furthermore, the hedging outside the present mines. instrument must effectively protect the hedged item, hedging must Within the Minerals Division, acquired mining concessions are be documented and the effectiveness must be measurable. Hedging recognized as intangible assets and are written down according to gains and losses are reported in the income statement at the same estimated economic life. Evaluation of existing mineral resources point in time as gains and losses for the corresponding hedged is conducted to a limited extent, mainly to provide a basis for the items are reported. so-called mining plan for the mineral resources.

Cash-fl ow hedges (iii) Investment properties The derivative instruments used to hedge future cash fl ows and Investment properties are properties held for the purpose of receiv- forecasted electricity consumption are recognized in the balance ing rental revenues or realizing appreciation in value, or a combina- sheet at fair value. Changes in value are reported in a hedging tion of the two. Investment properties are reported according to the reserve directly against shareholders’ equity until the hedged fl ow same principles as tangible assets. Concerning fair value of invest- is reported on the balance sheet, whereby the hedging instrument’s ment properties, see Note 14. accumulated change in value is transferred to the income statement, Rental income and income from the sale of property is reported where it meets and matches the profi t/loss effects of the hedged according to the principles described under the section on revenue transaction. The hedged fl ows can be both contracted and forecast recognition. transactions. (iv) Leased assets (p) Tangible assets and investment properties The LKAB Group applies IAS 17. Leases are classifi ed in the consoli- (i) Owned assets dated accounts as either fi nance leases or operating leases. A lease Tangible assets are reported as assets on the balance sheet if it is that transfers substantially all the risks and rewards of ownership likely that future fi nancial benefi ts will accrue to the company and to the lessee is classifi ed as a fi nance lease. All other leases are the acquisition value of the asset can be calculated in a reliable normally classifi ed as operating leases. manner. Assets leased under fi nance lease contracts have been reported Tangible assets are reported in the Group accounts at acquisi- as assets on the Group’s balance sheet. Commitments for future tion value after deductions for accumulated depreciation according rental payments have been reported as long-term and current to plan and any write-downs. The acquisition value includes the liabilities. The leased assets are depreciated according to plan, purchase price and expenses directly pertaining to the asset, such while rental payments are reported as interest and amortization on as the costs associated with delivery and installation of the asset liabilities. such that it can be utilized to fulfi l the purpose of the acquisition. Operating leasing entails that rental payments are expensed over Such costs include cost of delivery and handling, installation, title the entire period starting with the initial use of the asset, which may deeds, consulting services and legal services. Borrowing costs are differ from what is in fact paid in rent over the course of a year. not included in the acquisition value of tangible assets produced by Assets leased out under fi nance leases are not recognized as the company. tangible assets, since the risks associated with ownership are trans- The acquisition value of tangible assets produced by the com- ferred to the lessee. Instead, future minimum rental payments are pany includes costs of material, payroll expsenses, other fabrication booked as a fi nancial receivable. costs directly attributable to the tangible asset, if applicable, and

NOTES TO THE FINACIAL STATEMENTS 64 LKAB ANNUAL REPORT 2006 (v) Additional expenditures Development expenditures, i.e., expenses for research of which Additional expenditures are added to the acquisition value if it is the results or other knowledge is applied to realize new or improved probable that future economic benefi t associated with the asset will products or processes, are recognized as an asset on the balance accrue to the company, and if he acquisition value can be calculated sheet if the product or process is technically and commercially in a reliable way. All other additional expenditures are expensed in viable and the company has suffi cient resources to complete the the period in which they arise. development and subsequently use or sell the intangible asset. The Whether additional expenditures are added to the acquisition reported value includes expenditures for material, direct payroll value is decided on the basis of whether the expenditure refers to expenses or other indirect expenses that are reasonably and consis- replacement of identifi ed components of the asset, or parts thereof, tently attributable to the asset. Other expenditures for development whereupon such expenditures are capitalized. In cases where a new are reported in the income statement as expenses in the period in component is created, the expenditure is also added to the acquisi- which they are incurred. On the balance sheet, reported develop- tion value. Any undepreciated reported values on replaced compo- ment costs are recognized at their acquisition value less accumu- nents, or parts thereof, are retired and expensed in connection with lated amortization and write-downs. the replacement. Repairs are expensed on a current basis. (iii) Other intangible assets (vi) Depreciation principles Other intangible assets that have been acquired by the Group are The assets are depreciated on a straight-line basis over useful life. recognized at their acquisition value less accumulated amortization Land is not depreciated. The Group applies component depreciation, (see below) and write-downs. whereby the estimated useful life of the component constitutes the basis for depreciation. (iv) Additional expenditures Additional expenditures for capitalized intangible assets are recog- Estimated useful life: nized as an asset on the balance sheet only when they increase the - operating properties, investment properties, 15 - 100 years future economic benefi ts for the specifi c asset to which they pertain. - machinery and other technical plant 5 - 20 years All other expenditures are expensed as they arise. - inventories, tools and installations 5 - 20 years - underground installations (average) 12 years (v) Emissions rights In January 2005, LKAB received carbon-dioxide emissions rights for Operating properties are classifi ed mainly as buildings, land im- the years 2005 - 2007. LKAB reports allocated emissions rights as provements and land. Buildings and land improvements consist of intangible assets and these are valuated at the lowest of either the several components that are classifi ed on the basis of function; e.g., acquisition value or market (fair) value. The corresponding value is roads, surfacing, service facilities, processing plants, etc. included in Provisions and Other liabilities. Settlement is made an- Investment properties consist of several components that differ nually and any defi cit is reported as accrued expense. with respect to useful life. The main classifi cations are buildings and land. The land component is not depreciated, since its useful life is (vi) Amortization considered to be unlimited. Buildings, however, consist of several Amortizations are reported in the income statement straight-line components of varying useful life. The useful life of these compo- across the estimated useful life of the intangible assets, provided nents ranges from 15 to 100 years. such useful life can be determined. Goodwill and intangible assets with indeterminant useful life are assessed for write-down require- The following main groups of components have been identifi ed and ment, either annually or as soon as there are indications that the are the basis for depreciation of investment properties. value of the asset in question has diminished. Depreciable intangible - Framework, foundation and interior walls 100 years assets are written off from the date upon which they are available - Water, sewage, electrical and heating systems 50 years for use. - Facade 40 years - Windows 50 years The estimated periods of useful life are: - Interior fi nishing and appliances 15 years - Mining rights 30 - 50 years - Tenancy right 10 years Machines and other technical plant consist of several components - Customer-related intangible assets 3 - 5 years with varying useful life. The useful life of these components ranges from 5 to 20 years. (r) Inventories, etc. Residual value and useful life are assessed annually. Inventories are valuated at the lower of acquisition value or net real- izable value/net selling price. Acquisition value of other inventories (q) Intangible assets is calculated on the basis of the fi rst-in, fi rst-out (FIFO) method and (i) Goodwill includes costs arising from the acquisition of the inventory assets Goodwill represents the difference between the acquisition value and transport of them to their current location. In the case of manu- of a business acquisition and the fair value of the acquired assets, factured goods and work in progress, acquisition value includes a assumed liabilities and contingent liabilities. reasonable portion of indirect costs based on normal capacity. In respect of acquisitions occurring before 1 January 2004, after Net selling price is the estimated selling price (realizable value) in amortization requirements are assessed, goodwill is recognized at current operations, after deductions for estimated costs of comple- an acquisition value corresponding to the value reported according tion and for realizing a sale. to accounting principles applied earlier. Classifi cation and reporting of business acquisitions made prior to 1 January 2004 have not been (s) Write-downs reassessed according to IFRS 3 when preparing the Group’s opening Reported values for the Group’s assets are checked on each balance balance per 1 January 2004 according to IFRS. sheet date to ascertain whether any write-down need is indicated. Goodwill is valued at the acquisition value less any accumulated IAS 36 is applied in impairment testing for assets other than fi nan- write-downs. Goodwill is broken down into cash-generating units cial assets, which are tested in accordance with IAS 39, inventories, and is tested annually for impairment. Goodwill arising from the ac- plan assets used to fi nance employee benefi ts and deferred tax quisition of associated companies is included in the reported value assets. For the exceptional assets mentioned above, assessment is of participations in associated companies. done according to the respective standard. Where the acquisition cost is less than the net value of acquired assets, assumed liabilities and contingent liabilities, the difference is Impairment tests for tangible and intangible assets and holdings in reported directly in the income statement. subsidiaries,associated companies and joint ventures, etc. If a need for write-down is indicated, the recoverable amount of (ii) Research and development the asset is calculated in accordance with IAS 36 (see below). For Expenditures for research aimed at acquiring new scientifi c or goodwill and other intangible assets with indeterminate useful life, technical knowledge are expensed in the period in which they are and intangible assets that are not yet ready for use, the recoverable incurred. amount is calculated annually. If largely independent cash fl ows

NOTES TO THE FINACIALXXXXXXXXXXXXXXXX STATEMENTS LKABLKAB ÅRSREDOVISNING ANNUAL REPORT 2006 65 attributable to a single asset cannot be ascertained, when the write- that employees have earned through employment in present and down requirement is assessed, assets will be grouped at the lowest previous periods. This compensation is discounted to present value level at which largely independent cash fl ows can be identifi ed (a and the fair value of plan assets is deducted. The discount rate is so-called cash-generating unit). the interest rate on the closing day for a fi rst-class corporate bond A write-down is reported when an asset or cash-generating with a maturity corresponding to the Group’s pension obligations. unit’s (group of units) reported value exceeds its recoverable value. When there is no active market for such corporate bonds, the market A write-down is charged to the income statement. Write-down of interest rate on government bonds with a similar maturity is used assets attributable to a cash-generating unit (group of units) is fi rst instead. The calculation is made by a qualifi ed actuary using the allocated to goodwill. Subsequently, a proportionate write-down of projected unit credit method. other assets in the unit (group of units) is done. When the compensation in a plan improves, the portion of the The recoverable amount of other assets is the greater of their fair increased compensation attributable to the employees’ services in value minus selling expenses and value in use. In assessing value in previous periods is expensed through the income statement on a use, the estimated future cash fl ows are discounted to their present straight-line basis over the average period until the compensation value using a pre-tax discount rate that refl ects risk-free interest and is fully vested. If the compensation is fully vested, an expense is the risks specifi c to the asset. recognized directly through the income statement. The so-called corridor rule is applied. This means that the portion Impairment test for fi nancial assets of the cumulative actuarial gains and losses exceeding 10 percent of On each reporting occasion, the company assesses whether there the higher of the commitments’ present value and the fair value of are objective indications that a fi nancial asset or group of fi nancial plan assets is recognized over the expected average remaining pe- assets needs to be written down. Objective evidence constitutes riod of employment of the employees covered by the plan. Actuarial observable events that have an adverse impact on the potential to gains and losses otherwise are not taken into account. recover the purchase cost, and a signifi cant or long-term decrease in When the calculation leads to an asset, the carrying amount is the fair value of a component of a fi nancial investment classifi ed as limited to the lesser of the estimated asset and sum of unrecognized an available-for-sale fi nancial asset. actuarial losses and unrecognized costs associated with employ- The recoverable amount of assets belonging to the categories ment in previous periods as well as the present value of future held-to-maturity securities and loan receivables and accounts receiv- repayments from the plan or reduced future payments to the plan. able, which are reported at amortized cost, is calculated as the pres- When there is a difference in how the pension cost is determined for ent value of expected future cash fl ows, discounted at the original a legal entity and the Group, a provision or receivable for the special effective interest rate (i.e., the effective interest rate computed at employer’s contribution arises based on this difference. No present- initial recognition of these fi nancial assets). Receivables with a short value computation for the provision or receivable is made. duration are not discounted. A write-down is charged to the income statement. (iii) Other long-term employee benefi ts The Group’s net obligation for other long-term compensation, Reversal of write-downs besides pensions, corresponds to the value of future compensation A write-down is reversed if there is an indication that impairment is earned by employees as remuneration for the services they have no longer necessary, and there has been a change in the assump- performed during the present period and previous periods. The ob- tions which formed the basis of the recoverable amount calculation. ligation is calculated according to the so-called projected unit credit However, impairment of goodwill is never reversed. A reversal method and is discounted to present value and the fair value of plan is only made to the extent that the asset’s carrying amount after assets is deducted. The discount rate is the interest rate on the clos- reversal does not exceed the carrying amount that the asset would ing day for a fi rst-class corporate bond with a maturity correspond- have had, with a deduction for amortization, if no write-down had ing to the term of the obligations. When there is no active market been carried out. for such corporate bonds, the market interest rate on government Write-downs in respect of a held-to-maturity securities or loan re- bonds with a similar maturity is used instead. ceivables and accounts receivable, which are reported at amortized cost, are reversed if the subsequent increase in recoverable amount (iv) Severance can be related objectively to an event occurring after the write-down A provision is recognized in connection with termination of person- was recognized. nel only if the company is obligated to terminate an employment Write-downs of equity instruments classifi ed as available-for- before the customary time, e.g., when compensation is paid in sale fi nancial assets, which have previously been charged in the connection with a voluntary termination offer. In cases where the income statement, may not subsequently be reversed through the company terminates personnel, a detailed plan is drafted containing income statement. The written-down value is the value on which at the minimum the workplaces, positions and approximate number subsequent revaluations are based, which are charged directly to of individuals affected as well as compensation for each personnel equity. Write-downs of interest-bearing instruments classifi ed as category or position and a schedule for the plan’s implementation. available-for-sale fi nancial assets are reversed through the income statement if the fair value increases and the increase can objectively (x) Provisions be attributed to an event which occurred after the write-down was A provision is recognized on the balance sheet when the Group carried out. has a legal or informal obligation owing to an event that has oc- curred and it is likely that an outfl ow of economic resources will (t) Shareholders’ equity be required to settle the obligation and a reliable estimate of the (i) Dividends amount can be made. Where it is important when in time payment Dividends are recognized as a liability after they have been ap- will be made, provisions are estimated by discounting the forecast proved by the Annual General Meeting. future cash fl ow at a pre-tax interest rate that refl ects current market estimates of the time value of money and, where appropriate, the (u) Earnings per share risks associated with the liability. Profi t per share is calculated from Group profi t for the year attribut- able to Parent Company shareholders and from the weighted aver- (i) Restructuring age number of shares outstanding during the year. A provision for restructuring is recognized when a detailed, formal restructuring plan has been established and the restructuring has (v) Employee benefi ts either begun or been publicly announced. No provision is made for (i) Defi ned-contribution plans future operating losses. For defi ned-contribution plans, costs are expensed in the income statement as the contributions are paid in. (ii) Remediation of contaminated land (ii) Defi ned-benefi t plans In accordance with the Group’s publicly announced environmental The Group’s net obligation for defi ned benefi t plans is calculated principles and applicable legal requirements, provisions for soil and separately for each plan by estimating the future compensation land remediation are recognized when the land/soil has been con-

NOTES TO THE FINACIAL STATEMENTS 66 LKAB ANNUAL REPORT 2006 taminated. Financial guarantees may have to be provided to cover Accrual of forward exchange discounts and premiums is done in possible remediation costs. accordance with recommendation No. 7 of the Swedish Accounting Standards Board. The difference between the average exchange rate (y) Contingent liabilities and the year-end rate on forward exchange contracts entered into is A contingent liability is reported if there is a possible commitment reported as a contingent liability if the year-end rate is higher than stemming from events whose occurrence is dependent on one or the average rate. more uncertain future events as well as when there is a commitment that is not recognized as a liability or provision because it is unlikely Anticipated dividends that an outfl ow of resources will be required. Anticipated dividends from subsidiaries are reported only in cases where the Parent Company has the sole right to decide the size of THE PARENT COMPANY’S ACCOUNTING PRINCIPLES the dividend and the Parent Company has decided the size of the The Parent Company complies with the Swedish Annual Accounts dividend before the Parent Company has published its fi nancial Act (1995:1554) and SFASC recommendation RR 32 Reporting for Le- reports. gal Entities. Statements issued by the Swedish Financial Accounting Standards Council’s Emerging Issues Task Force for publicly listed Tangible assets companies are also applied. RR 32 entails that the Parent Company Owned assets in preparing the annual accounts for the legal entity shall apply all Tangible assets are reported in the Parent Company accounts, in IFRS and statements approved by the European Union as far as pos- the same way as in the Group accounts, at acquisition value after sible within the framework of the Swedish Annual Report Act and deductions for accumulated depreciation according to plan and any taking into account the relationship between reporting and taxation. write-downs, but also taking into account any possible write-ups. The recommendation states the exceptions and supplements that shall be made with respect to the IFRS. Leased assets Via amendments to the Swedish Financial Accounting Standards In the Parent Company, all leasing contracts are reported according Council’s recommendation RR 32 Reporting for Legal Entities, pub- to the principles for operating leases. lished in December 2006, the Council has for tax purposes allowed exceptions to the requirement that the parent company must report Intangible assets fi nancial instruments at fair value. LKAB has chosen to apply the ex- Research and development emption rules and elected not to report certain fi nancial instruments In the Parent Company, all development expenditures are reported at fair value in the parent company accounting. as expenses in the income statement.

Differences between Group and Parent Company accounting Employee benefi ts principles Defi ned-benefi t plans Differences between Group and Parent Company accounting In the Parent Company, principles other than those described in IAS principles are detailed below. The Parent Company accounting prin- 19 are applied when calculating defi ned-benefi t plans. The Parent ciples stated have been consistently applied during all the periods Company complies with the provisions of the Law on Safeguard- presented in the Parent Company’s fi nancial reports. ing of Pension Commitments and the regulations of the Financial Supervisory Authority, since this is a condition for tax deductibility. Subsidiaries, associated companies and joint ventures The essential differences, compared to IAS 19, are the way in which Shares in subsidiaries, and holdings in associated companies and the discount rate is determined, that calculation of defi ned-benefi t joint ventures are recognized by the Parent Company according to commitments is based on current salary levels without assuming the acquisition cost method. Revenue includes only dividends re- any furure salary increases, and that all actuarial gains and losses ceived, provided that they stem from profi ts earned after acquisition. are reported in the inscome statement when they arise. Dividends exceeding those earnings are considered a repayment of the investment and reduce the carrying value of the shares. Taxes In the Parent Company, deferred tax liabilities are recognized as part Financial instruments of untaxed reserves. In the consolidated accounts, untaxed reserves The Parent Company does not apply the valuation principles in IAS are divided between deferred tax liabilities and shareholders’ equity. 39. However, what has been written above in respect of fi nancial in- struments also applies to the Parent Company. Financial fi xed assets Group contributions and shareholders’ contributions are valued in the Parent Company at acquisition value less write- for legal entities down, where applicable, and fi nancial current assets are valued at The company reports group contributions and shareholder contri- the lower of cost or net realizable value. butions in accordance with pronouncement issued by the SFASC Liabilities are valued at accrued acquisition value. Derivative Emerging Issues Task Force. Shareholder contributions are taken assets are valued according to the lowest-value principle and deriva- directly to shareholders’ equity by the receiver and capitalized in tive liabilities according to the highest-value principle. the shares and participations by the giver, to the extent that no write-down is required. Group contributions are reported based on Derivatives and hedge accounting their economic signifi cance. This means that group contributions Currency exposure with respect to future forecasted fl ows is hedged rendered for the purpose of minimizing the Group’s total tax are either via forward exchange contracts or currency options. Forward reported directly against retained earnings after deducting their exchange contracts or currency options that protect the forecasted current tax effect. fl ow are not reported on the balance sheet. Changes in value in Group contributions equated with dividends are recognized as forward contracts are reported in the same period as the forecasted a dividend. This means that Group contributions received and the fl ow occurs. Since at most 80% of the forecasted fl ow is heged, no effect on current tax are recognized through profi t or loss. Group ineffi ciencies that should be taken to income arise. Forecasted fl ows contributions paid and the effect on current tax are recognized can be either invoiced or forecasted transactions. directly in retained earnings. The hedged volume in US dollars is matched against the esti- Group contributions equated with shareholders’ contributions mated net infl ow of US dollars. If the hedged volume exceeds the are recognized by the recipient directly in retained earnings taking value of the expected net infl ow and there is an unrealized exchange into account the effect on current tax. The contributor recognizes loss, it is recognized as a fi nancial expense. If there is an unrealized Group contributions and the effect on current tax as an investment exchange gain, it is not reported. in shares in Group companies to the extent that no write-down is Other hedging is normally in GBP and EUR. These currencies required. can be tied to special orders concerning the purchase and sale of industrial minerals.

NOTES TO THE FINACIALXXXXXXXXXXXXXXXX STATEMENTS LKABLKAB ÅRSREDOVISNING ANNUAL REPORT 2006 67 NOTE 2 Revenue distribution

Group Parent Company MSEK 2006 2005 2006 2005 Net sales: Sale of goods - iron ore 12 462 12 191 12 572 12 349 Sale of goods - industrial minerals 1 920 2 018 Other 233 128 Total 14 615 14 337 12 572 12 349

NOTE 3 Segment reporting

The Group’s reporting system is designed to track the rate of Lines of business return on the Group’s goods and services, due to which busi- Lines of business are the Group’s primary segments. The ness segments are its primary segment reporting format. Group consists of the following lines of business: Intra-group prices between segments are set based on the • Mining Division The Mining Division mines and processes arm’s length principle, i.e., between parties that are inde- iron ore for products for steelmaking. pendent of each other, well-informed and have a stake in the • Minerals Division The Minerals Division develops, transactions. produces and markets industrial mineral products for Income, assets and liabilities for the segments include several application areas and customers in many different directly attributable items and items that can be distributed industries throughout the world. by segment in a reasonable and reliable manner. Non-distrib- • Special Businesses LKAB has organized most of its uted items consist of net fi nancial income/expense and tax subsidiaries under the Special Businesses Division. These expenses. The segments’ investments in intangible and tangi- companies are mainly suppliers to the Mining Division and ble fi xed assets include all investments with the exception of the Minerals Division. those in short-term inventory and inventory of minor value. Geographic areas are the Group’s secondary segments. Information on the segment’s revenue refers to geographic areas grouped by customer locations. Segment assets and investments in tangible and intangible fi xed assets during the period are based on the geographic areas and are grouped on the basis of where the assets are located.

Lines of business

Group Special Mining Division Minerals Division Businesses Eliminations Group MSEK 2006 2005 2006 2005 2006 2005 2006 2005 2006 2005 External revenue 12 462 12 191 1 920 2 018 233 128 14 615 14 337 Intra-Group revenue 114 158 180 141 367 963 -661 -1 262 Total revenue 12 576 12 349 2 100 2 159 600 1 091 -661 -1 262 14 615 14 337

Operating income per line of business 6 038 5 720 134 148 98 100 6 270 5 974 Consolidation adjustments -14 141 -14 141 Operating income 6 038 5 720 134 148 98 100 -14 141 6 256 6 109 Net fi nancial income/expense 126 342 Income before tax 6 382 6 451 Tax expense for the year -1 785 -1 904 Net income for the year 4 597 4 547

Assets 23 433 18 612 1 747 1 527 520 1 808 165 -1 373 25 865 20 574

Liabilities 6 663 5 459 1 325 1 130 339 1 056 -1 573 -1 877 6 754 5 768

Capital expenditures *) 4 650 2 314 172 192 29 205 12 4 851 2 723 Depreciation 948 791 30 33 19 128 997 952 Write-downs - - 3 - - - 3 *) Refers to material and intangible fi xed assts.

NOTES TO THE FINACIAL STATEMENTS 68 LKAB ANNUAL REPORT 2006 NOTE 3 Segment reporting (cont.)

Lines of business

Parent company Special Mining Division Minerals Division Businesses Parent Company MSEK 2006 2005 2006 2005 2006 2005 2006 2005 Revenue 12 572 12 349 - - - - 12 572 12 349

Parent company Europe Asia Rest of world Parent Company MSEK 2006 2005 2006 2005 2006 2005 2006 2005 Revenue 9 408 8 982 2 119 2 310 1 045 1 057 12 572 12 349

Geographic areas

Group Europe Asia Other regions Group MSEK 2006 2005 2006 2005 2006 2005 2006 2005 External revenue 10 731 9 964 2 681 3 053 1 203 1 320 14 615 14 337 Assets 25 619 20 418 179 88 67 68 28 865 20 574 Capital expenditures *) 4 846 2 720 4 3 1 - 4 851 2 723 *) Refers to material and intangible fi xed assts.

NOTE 4 Other operating revenues

Group MSEK 2006 2005 Rental revenue, investment properties 116 115 Gain on sale of tangible assets 43 18 Exchange rate gains on receivables/liabilities of an operating nature 29 12 Other 163 103 351 248

Parent Company Mkr 2006 2005 Gain on sale of tangible assets 53 18 Exchange rate gains on receivables/liabilities of an operating nature 28 8 Leasing revenues from managed properties 88 77 Other 123 107 292 210

NOTE 5 Other operating expenses

MSEK Group Parent Company 2006 2005 2006 2005 Exchange rate gains on receivables/liabilities of an operating nature 62 58 Property expenses, investment properties 84 82 53 53 Other 182 177 100 128 328 259 211 181

NOTES TO THE FINACIALXXXXXXXXXXXXXXXX STATEMENTS LKABLKAB ÅRSREDOVISNING ANNUAL REPORT 2006 69 NOTE 6 Employees and personnel costs

Average number of employees 2006 of which of which 2005 of which of which women men women men Parent Company Sweden 2 752 11 % 89 % 2 615 9 % 91 % Norway 173 12 % 88 % 182 12 % 88 % Total, Parent Company 2 925 11 % 89 % 2 797 9 % 91 %

Subsidiaries Sweden 364 10 % 90 % 323 9 % 91% China 57 18 % 82 % 49 18 % 82 % Netherlands 21 24 % 76 % 22 18 % 82 % Norway 77 3 % 97 % 73 1 % 99 % UK 238 17 % 83 % 247 18 % 82 % Germany 18 61 % 39 % 17 65 % 35 % Other countries 37 30 % 70 % 35 34 % 66 % Total in subsidiaries 812 14 % 86 % 766 14 % 86 % Group total 3 737 12 % 88 % 3 563 10 % 90 %

Gender distribution in corporate management 2006 2006 2005 2005 Share of Share of Share of Share of women men women men Parent Company Board of Directors 27 % 73 % 27 % 73 % Other senior executives 0 % 100 % 0 % 100 %

Group total Board of Directors 3 % 97 % 3 % 97 % Other senior executives 0 % 100 % 0 % 100 %

Salaries, other remuneration and social security expenses MSEK 2006 2005 Salaries and Social security Salaries and Social security Remuneration expenses Remuneration expenses Parent Company 1 172 537 1 129 790 (of which pension expenses) 1) (157) (418)

Subsidiaries 307 115 287 136 (of which pension expenses) (32) (66) Koncernen totalt 1 479 652 1 416 926 (of which pension expenses) 2) (189) (484)

1) Of the Parent Company’s pension expenses, MSEK 12 (13) (including special employer’s contribution MSEK 2 (3)) refers to the group Board, President and former President. Of this, MSEK 0 (-3) refers to former President and MSEK 0 (6) to former Vice President. The company’s outstanding pension commitments to the group Board, President and former President amount to MSEK 74 (66) (excluding special employer’s contribution). Of this, MSEK 28 (27) refers to former President and MSEK 12 (13) to former Vice President.

2) Of the Parent Company’s pension expenses, MSEK 21 (19) (including special employer’s contribution MSEK 3 (3)) refers to the group Board, President and former President. The Group’s outstanding pension commitments to these amount to MSEK 81 (72) (excluding special employer’s contribution).

NOTES TO THE FINACIAL STATEMENTS 70 LKAB ANNUAL REPORT 2006 NOTE 6 Employees and personnel costs (cont.) Salaries and other remuneration by country and between Board members, other executives and other employees MSEK 2006 2005 Board Other Board Other and President employees and President employees Parent Company Sweden 51) 1 068 7 1) 1 020 Norway 99 102 Parent Company, total 5 1 167 7 1 122 (of which variable remuneration/incentive schemes) (0)2) (44) (1) 2) (100)

Subsidiaries in Sweden 6 140 6 125 (of which variable remuneration/incentive schemes) (0) (7) (10)

Foreign subsidiaries 20 141 20 136 (of which variable remuneration/incentive schemes) (1) (3) (0) (13) Subsidiaries, total 26 281 26 261 (of which variable remuneration/incentive schemes) (1) (10) (0) (4) Group total 31 1 448 33 1 383 (of which variable remuneration/incentive schemes) (1) (54) (1) (113)

1) The amount includes total remuneration to Board members, MSEK 1.0 (1.0), approved by the AGM. It also includes MSEK 0.5 (0.5) in remuneration to employee representatives on the Board. 2) Refers to former Vice-President, MSEK 0.1 (0.6).

SICK ABSENCE (in Parent Company, employees in Sweden only) 2006 2005 Total sick absence as percentage of regular working hours 4,1 % 4,7 % Percentage of total sick leave related to extended absences of 60 days or more 54,0 % 61,7 %

Sick leave absences by gender: Men 4,2 % 4,8 % Women 3,0 % 3,9 %

Sick leave absences by age category: 29 years or younger 2,2 % 1,9 % 30-49 years 3,4 % 4,0 % 50 years or older 5,7 % 6,4 %

For information on post-employment benefi ts, etc., see Note 27 Pensions and senior executives’ benefi ts.

NOTES TO THE FINACIALXXXXXXXXXXXXXXXX STATEMENTS LKABLKAB ÅRSREDOVISNING ANNUAL REPORT 2006 71 NOTE 7 Auditors’ fees and compensation

Goup Parent Company MSEK 2006 2005 2006 2005 KPMG Audit assignments 5 5 2 2 Other assignments 5 4 4 3

Other auditors Audit assignments 0 0 - -

Audit assignments involve examination of the annual report and fi nancial accounting as well as the administration by the Board and the President, other tasks related to the duties of the company’s auditors and consultation or other services that may result from observations noted during such examinations or implementation of such other tasks. All other tasks are defi ned as other assignments.

NOTE 8 Operating expenses by nature of expense

MSEK Goup Parent Company 2006 2005 2006 2005 Personnel costs 2 221 2 394 1 756 1 949 Materials, etc. 2 299 2 272 1 236 1 181 Energy 920 775 815 689 Transport costs 647 578 920 960 Depreciation/write-downs 1 001 959 849 791 Other operating expenses 1 622 1 498 1 232 1 269 8 710 8 476 6 808 6 839

The reduction in personnel costs is explained mainly by the fact that costs in 2005 included an increase in pension allocations in Narvik, of which MSEK 104 referred to restructuring of the operation, as well as other increases in pension allocations. A lower outcome in the incentive scheme also contributed to the reduction. The Parent Company’s personnel costs for 2006 include a cost reduction of MSEK 80, which refers to a transfer of pension obligations to the Norwegian subsidiary LKAB Norge AS. Energy expensitures increased in 2006, mainly as a result of higher electricity consumption and major price hikes for coal, oil and vehicle fuels. The Group’s transport costs increased over the previous year, largely as a result of the higher production volume in the Parent Company and higher sea-freight rates in the Minerals Division. Other operating costs increased during the year, owing to increased mine development work and maintenance. In other oper- ating costs for 2005, allocations amounting to MSEK 241 for structural changes in the Orefi elds are included.

NOTE 9 Net fi nancial income/expense

Group MSEK 2006 2005 Interest income 107 137 Dividends 52 47 Other investments including derivatives Capital gain on sales of fi nancial assets held for sale 135 89 Return on market portfolio 204 212 Return on assets under management 49 41 Net change from revaluation of fi nancial assets -1 -5 Net exchange rate differences 29 Income from fi nancial items 546 550

Interest expenses -311 -191 Write-down of receivables in associated companies 0 - Net exchange rate differences -99 - Other fi nancial expenses -10 -17 Financial expenses 420 -208 Net fi nancial income/expense 126 342

Interest income and similar income statement items include returns on money-market instruments and bonds amounting to MSEK 73 (121). Profi t from divestment of fi nancial assets held for sale refer mainly to capital gains on the sale of shares.

NOTES TO THE FINACIAL STATEMENTS 72 LKAB ANNUAL REPORT 2006 NOTE 9 Net fi nancial income/expense (cont.)

Capital gains on the sale of shares in SSAB amounted to MSEK 99 (89), and on the sales of shares in the associated company Orica Kimit Explosives, capital gains amounted to MSEK 35. Return on market portfolios amounting to MSEK 204 (212) includes unrealized appreciation MSEK 38 (101). Of interest expenses, MSEK 106 (105) refers to interest on pension liabilities and MSEK 200 (84) refers to forward exchange discounts/premiums. Currency fl uctuations, mainly with respect to the US dollar, have resulted in heavy exchange-rate losses during the year. Other fi nancial expenses consist mainly of bank and administration costs.

Parent Company Income from participations Income from participations in Group companies in associated companies MSEK 2006 2005 2006 2005 Dividend 21 17 0 Write-downs 0 -5 21 17 0 -5

Parent Company Income from other securities and receivables held Interest expense and as fi xed assets similar profi t/loss items MSEK 2006 2005 2006 2005 Interest income, Group companies 23 24 27 20 Interest income, other 103 131 Return on market portfolio 99 89 166 111 Dividends, shares 39 36 13 11 Write-down -1 Exchange rate differences, foreign currency 32 160 149 309 305

In income from securities held as fi xed assets, return on market portfolios refers to redemption of shares in SSAB amounting to MSEK 99 (89). Dividends refer to dividends on holdings in SSAB. Interest income and similar income statement items include returns on money-market instruments and bonds amounting to MSEK 73 (121). Return on shares amounted to MSEK 166 (111).

Parent Company Interest expense and similar profi t/loss items MSEK 2006 2005 Interest expenses, Group companies -12 -7 Interest expenses, pension liability -34 -34 Forward exchange discounts/premiums -202 -84 Interest expenses, other -2 -1 Exchange rate differences, foreign currency -98 Other -10 -11 -358 -137

Interest expenses on pension liabilities have been calculated at an interest rate of 4.2 (4.2)%. Other fi nancial expenses consist mainly of bank and administration costs.

NOTE 10 Appropriations

Parent Company MSEK 2006 2005 Difference between book depreciation and appreciation according to plan: Underground installations 6 3 Buildings and land 8 2 Machinery and inventories -580 -163 Tax allocation reserve, provisions for the year -1 400 -1 410 Tax allocation reserve, reversal for the year 73 Total -1 893 -1 568

Deferred tax on appropriations amounted to MSEK -530 (-439). Deferred tax is only reported in the consolidated income statement.

NOTES TO THE FINACIALXXXXXXXXXXXXXXXX STATEMENTS LKABLKAB ÅRSREDOVISNING ANNUAL REPORT 2006 73 NOTE 11 Taxes

Reported in income statement Group MSEK 2006 2005 Current tax expense (-) Tax expense for the period -1 238 -1 297 Adjustment for taxes related to previous years -29 -1 -1 267 -1 298 Deferred tax expense (-) /tax recoverable (+) Loss carryforwards -13 -3 Deferred tax related to temporary differences -505 -603 Total reported tax expense in Group - 1 785 -1 904

Parent Company MSEK 2006 2005 Current tax expense (-) Tax expense for the period -1 203 -1 284 Adjustment for taxes related to previous years -26 -2 -1 229 -1 286 Deferred tax expense (-) /tax recoverable (+) Deferred tax related to temporary differences -13 35 Total reported tax expense in Parent Company - 1 242 -1 251

Reconciliation of effective tax Group MSEK 2006 (%) 2006 2005 (%) 2005 Income before tax 6 382 6 451 Tax according to current tax rate for Parent Company 28,0 % -1 787 28,0 % -1 806 Non-deductible expenses 0,4 % -24 0,7 % -45 Tax-exempt income -1,1 % 71 -0,2 % 11 Tax related to previous years 0,5 % -30 0,0 % -3 Standard interest on tax allocation reserve 0,9 % -57 0,1 % -9 Other -0,7 % 42 0,9 % -52 Reported effective tax rate 28,0 % -1 785 29,5 % - 1 904

Parent Company MSEK 2006 (%) 2006 2005 (%) 2005 Income before tax 4 295 4 481 Tax according to current tax rate for Parent Company 28,0 % -1 203 28,0 % -1 255 Non-deductible expenses 0,3 % -13 0,1 % -7 Tax-exempt income -1,5 % 63 -0,2 % 8 Tax related to previous years 0,6 % -25 0,0 % -2 Standard interest on tax allocation reserve 1,3 % -57 0,2 % -8 Other 0,2 % -7 -0,2 % 13 Reported effective tax rate 28,9 % -1 242 27,9 % -1 251

Tax items reported directly in shareholders’ equity Group MSEK 2006 2005 Deferred tax attributable to change in accounting principles -471 Deferred tax attributable to fi nancial assets held for sale -209 -138 Deferred tax attributable to forward exchange contracts -256 334 Deferred tax, other -54 334 -519 -275 Parent Company MSEK 2006 2005 Tax on Group contributions paid 19 104 19 104

NOTES TO THE FINACIAL STATEMENTS 74 LKAB ANNUAL REPORT 2006 NOTE 11 Taxes (cont.)

Reported on balance sheet Reported deferred tax recoverable and liabilities Deferred tax recoverable and liabilities refer to the following: Group Deferred Deferred tax recoverable tax liability Net MSEK 2006 2005 2006 2005 2006 2005 Buildings and land -3 -12 -3 -12 Machinery and inventories 27 -1 029 -747 -1 002 -747 Pension provisions 325 265 325 265 Tax allocation reserves -1 094 -717 -1 094 -717 Provisions for insurance claims -99 -99 -99 -99 Financial assets -529 -320 -529 -320 Forward exchange contracts 66 -190 -190 66 Short-term investments -59 -49 -59 -49 Loss carryforwards 16 3 16 3 Other liabilities -1 -1 Other 27 8 27 8 Tax recoverable/liabilities 368 342 -3 003 -1 945 -2 635 -1 603 Offset -368 -342 368 342 Tax recoverable/liabilities, net - - -2 635 -1 603 -2 635 - 1 603

Reported deferred tax recoverable and liabilities Deferred tax recoverable and liabilities refer to the following: Parent Company Deferred Deferred tax recoverable tax liability Net MSEK 2006 2005 2006 2005 2006 2005 Buildings and land 25 23 - - 25 23 Pension provisions 163 200 - - 163 200 Other 25 3 - - 25 3 Taxes recoverable 213 226 - - 213 226

NOTES TO THE FINACIALXXXXXXXXXXXXXXXX STATEMENTS LKABLKAB ÅRSREDOVISNING ANNUAL REPORT 2006 75 NOTE 11 Taxes (cont.)

Change in deferred tax in temporary differences and loss carryforwards Group 2005 Closing balance Reported in Reported int Other Closing balance MSEK 1 Jan. 2005 income statement Shareholders’ equity Changes 31 Dec. 2005 Buildings and land 16 -28 -12 Machinery and inventories -650 -97 -747 Pension provisions 217 48 265 Tax allocation reserves -312 -405 -717 Provisions for insurance claims -42 -57 -99 Financial assets -320 -320 Forward exchange contracts 66 66 Short-term investments -28 -21 -49 Loss carryforwards 3 3 Other liabilities -2 1 -1 Other 49 -43 2 8 -724 -606 -275 2 -1 603

Change in deferred tax in temporary differences and loss carryforwards Group 2006 Closing balance Reported in Reported int Other Closing balance MSEK 1 Jan. 2006 income statement Shareholders’ equity Changes 31 Dec. 2006 Buildings and land -12 9 -3 Machinery and inventories -747 -255 -1 002 Pension provisions 265 60 325 Tax allocation reserves -717 -377 -1 094 Provisions for insurance claims -99 -99 Financial assets -320 -209 -529 Forward exchange contracts 66 -256 -190 Short-term investments -49 -10 -59 Loss carryforwards 3 13 16 Other liabilities -1 1 - Other 8 41 -54 5 27 -1 603 -518 -519 5 -2 635

Parent Company 2005 Closing balance Reported in Closing balance MSEK 1 Jan. 2005 income statement 31 Dec. 2005 Buildings and land 25 -2 23 Pension provisions 155 45 200 Other 11 -8 3 191 35 226 Parent Company 2006 Closing balance Reported in Closing balance MSEK 1 Jan. 2006 income statement 31 Dec. 2006 Buildings and land 23 2 25 Pension provisions 200 -37 163 Other 3 22 25 226 -13 213

NOTES TO THE FINACIAL STATEMENTS 76 LKAB ANNUAL REPORT 2006 NOTE 12 Intangible assets

All of the Group’s intangible and fi xed assets have been acquired. Group Mining Program- MSEK Goodwill rights software Other Total Accumulated acquisition values Opening balance 1 Jan. 2005 205 161 18 384 Capital expenditures 75 75 Allocation of emissions rights 175 175 Disposal, emissions rights -57 -57 Reclassifi cations 17 45 62 Exchange rate differences for the year 13 13 Closing balance 31 Dec. 2005 235 281 136 652

Opening balance 1 Jan. 2006 235 281 136 652 Capital expenditures 5 7 12 Purchase of emissions rights 3 3 Disposal, emissions rights -58 -58 Revaluation, emissions rights -35 -35 Exchange rate differences for the year -6 -5 -11 Closing balance 31 Dec. 2006 229 276 5 53 563

Accumluated amortization and write-downs Opening balance 1 Jan. 2005 -161 -13 -174 Write-downs for the year -1 -1 Reconciliation of emissions rights for the year -57 -57 Disposal, emissions rights 57 57 Closing balance 31 Dec. 2005 -1 -161 -13 -175

Opening balance 1 Jan. 2006 -1 -161 -13 -175 Depreciation/write-downs for the year -1 -1 Reconciliation of emissions rights for the year -58 -58 Disposal, emissions rights 58 58 Closing balance 31 Dec. 2006 -1 -161 -14 -176

Reported values 1 Jan. 2005 205 0 6 211 31 Dec. 2005 234 120 123 477

1 Jan. 2006 234 120 123 477 31 Dec. 2006 228 115 5 39 387

Depreciation and write-downs Amortization and write-downs, and reconciliation of emissions rights, are reported in the following lines in the income statement MSEK Group 2006 2005 Cost of goods sold -59 -58 -59 -58

Income corresponding to the amount of the cost has reduced the cost of goods sold, see Note 28.

NOTES TO THE FINACIALXXXXXXXXXXXXXXXX STATEMENTS LKABLKAB ÅRSREDOVISNING ANNUAL REPORT 2006 77 NOTE 12 Intangible asset (cont.)

Parent Company Mining Program- MSEK rights software Other Total Accumulated acquisition values Opening balance 1 Jan. 2005 161 1 162 Allocation of emissions rights 175 175 Disposal, emissions rights -57 -57 Closing balance 31 Dec. 2005 161 119 280

Opening balance 1 Jan. 2006 161 119 280 Investment 5 5 Purchase of emissions rights 3 3 Disposal, emissions rights -58 -58 Revaluation, emissions rights -35 -35 Closing balance 31 Dec. 2006 161 5 29 195

Accumulated amortization Opening balance 1 Jan. 2005 -161 -161 Reconciliation of emissions rights for the year -57 -57 Disposal, emissions rights 57 57 Closing balance 31 Dec. 2005 -161 -161

Opening balance 1 Jan. 2006 -161 -161 Reconciliation of emissions rights for the year -58 -58 Disposal, emissions rights 58 58 Closing balance 31 Dec. 2006 -161 0 -161

Reported values 1 Jan. 2005 0 1 1 31 Dec. 2005 0 119 119

1 Jan. 2006 0 119 119 31 Dec. 2006 0 5 29 34

Reconciliation of emissions rights is reported in the following lines in the income statement MSEK Group 2006 2005 Cost of goods sold -58 -57 -58 -57

Income corresponding to the amount of the cost has reduced the cost of goods sold, see Note 28.

NOTES TO THE FINACIAL STATEMENTS 78 LKAB ANNUAL REPORT 2006 NOTE 12 Intangible asset (cont.)

Write-down requirements for cash-generating units containing goodwill The following cash-generating units, which are part of the primary segment Minerals Division, have signifi cant goodwill values in relation to the Group’s total reported goodwill value.

MSEK 2006 2005 Minelco Specialities Ltd 106 108 Minelco Minerals Ltd 45 46 Minelco OY 36 37 187 191 Units without signifi cant goodwill value, compiled 41 43 228 234

Assessment of the recoverable amounts of cash-generating units is based on the same important principles.

Assessment of write-down requirement is based on value in use. This value is based on cash-fl ow forecasts where the fi rst three years are based on the three-year business plan established by the Minerals Division’s corporate manage- ment. The total forecast period corresponds to the useful life of the unit’s most important assets. The cash fl ow forecast after the fi rst three years has been based on an annual growth rate of 1%, which corresponds to the long-term growth rate of the unit’s markets. The forecast cash fl ows have been valuated at present value with a discount rate of 9% before tax. Important assumptions with respect to the three-year business plan are described below.

Important variables Method of estimating value Market share and growth Historically, demand for these products has kept pace with economic cycles. Expected market growth is based on a transition from the prevailing economic situation to the expected long-term growth. The forecast is in line with previous experience.

Personnel costs The forecast for personnel costs is based on the expected rate of infl ation, certain real wage/salary increases (historical average) and planned improvements in production effi ciency (according to a fi xed plan). The forecast is in agreement with previous experience.

Exchange rates Exchange-rate forecasts are based on currently quoted exchange rates. Existing forward exchange contracts have been taken into account.

It is the corporate management’s assessment that no reasonable changes in these assumptions will result in recoverable amounts that are lower than the reported values of the units.

NOTES TO THE FINACIALXXXXXXXXXXXXXXXX STATEMENTS LKABLKAB ÅRSREDOVISNING ANNUAL REPORT 2006 79 NOTE 13 Tangible assets

Group Machinery Inventories, Buildings Underground and other tools and Construction MSEK and land installations technical plant installations in progress Total Acquisition value Opening balance 1 January 2005 2 616 3 829 9 340 2 085 552 18 422 Acquisitions 37 49 409 72 2 081 2 648 Reclassifi cations -20 2 116 164 -355 -93 Disposals and retirements -4 -12 -52 -16 -41 -125 Exchange rate differences 19 22 5 46 Closing balance 31 December 2005 2 648 3 868 9 835 2 310 2 237 20 898

Opening balance 1 January 2006 2 648 3 868 9 835 2 310 2 237 20 898 Acquisitions 534 39 925 58 3 288 4 844 Reclassifi cations 475 76 1219 22 -1 792 -1 Disposals and retirements -14 -67 -20 -101 Exchange rate differences -7 -8 -5 -4 -24 Closing balance 31 December 2006 3 636 3 983 11 904 2 365 3 729 25 617

Depreciation and write-downs Opening balance 1 January 2005 -1 715 -2 327 -7 028 -1 036 -12 106 Depreciation for the year -50 -233 -502 -166 -951 Write-downs for the year -1 -1 -2 Reclassifi cations 46 2 -1 47 Disposals and retirements 3 12 38 14 67 Exchange rate differences -6 -15 -4 -25 Closing balance 31 December 2005 -1 723 -2 548 -7 506 -1 193 -12 970

Opening balance 1 January 2006 -1 723 -2 548 -7 506 -1 193 -12 970 Depreciation for the year -71 -230 -539 -156 -996 Disposals and retirements 6 63 18 87 Exchange rate differences -1 6 3 8 Closing balance 31 December 2006 -1 789 -2 778 -7 976 -1 328 -13 871

Reported values 1 January 2005 901 1 502 2 312 1 049 552 6 316 31 December 2005 925 1 320 2 329 1 117 2 237 7 928

1 January 2006 925 1 320 2 329 1 117 2 237 7 928 31 December 2006 1 847 1 205 3 929 1 037 3 729 11 746

Tax assessment value Group 2006-12-31 2005-12-31 Tax assessment value, buildings (in Sweden) 683 708 Tax assessment value, land (in Sweden) 79 78

Depreciation and write-downs are included in the following lines in the income statement Group Depreciation MSEK 2006 2005 Cost of goods sold 978 931 Selling expenses 3 3 Administrative expenses 6 8 Research and development 9 11 996 953

NOTES TO THE FINACIAL STATEMENTS 80 LKAB ANNUAL REPORT 2006 NOTE 13 Tangible assets (cont.)

Parent Company Machinery Inventories, Buildings Underground and other tools and Construction MSEK and land installations technical plant installations in progress Total Acquisition value Opening balance 1 January 2005 2 161 3 829 8 980 485 529 15 984 Acquisitions 29 49 372 27 1 837 2 314 Reclassifi cations 24 2 132 26 -184 Disposals and retirements -3 -12 -42 -11 -41 -109 Closing balance 31 December 2005 2 211 3 868 9 442 527 2 141 18 189

Opening balance 1 January 2006 2 211 3 868 9 442 527 2 141 18 189 Acquisitions 521 39 909 26 3 147 4 642 Reclassifi cations 474 76 1 203 19 -1 772 Disposals and retirements -301 -713 -37 -486 -1 537 Closing balance 31 December 2006 2 905 3 983 10 841 535 3 030 21 294

Depreciation Opening balance 1 January 2005 -1 149 -1 925 -6 295 -354 -9 723 Depreciation for the year -41 -233 -477 -39 -791 Disposals and retirements 2 9 30 9 51 Closing balance 31 December 2005 -1 188 -2 149 -6 742 -384 -10 463

Opening balance 1 January 2006 -1 188 -2 149 -6 742 -384 -10 463 Depreciation for the year -62 -230 -517 -40 -849 Disposals and retirements 250 636 28 914 Closing balance 31 December 2006 -1 000 -2 379 -6 623 -396 -10 398

Write-downs Opening balance 1 January 2005 -387 -402 -495 -9 -1 293 Disposals and retirements 1 3 4 Closing balance 31 December 2005 -386 -399 -495 -9 -1 289

Opening balance 1 January 2006 -386 -399 -495 -9 -1 289 Disposals and retirements -1 -1 Closing balance 31 December 2006 -387 -399 -495 -9 -1 290

Reported values 1 January 2005 625 1 502 2 190 122 529 4 968 31 December 2005 637 1 320 2 205 134 2 141 6 437

1 January 2006 637 1 320 2 205 134 2 141 6 437 31 December 2006 1 518 1 205 3 723 130 3 030 9 606

Tax assessment value Parent Company 2006-12-31 2005-12-31 Tax assessment value, buildings (in Sweden) 591 612 Tax assessment value, land (in Sweden) 56 54

Depreciation is included in the following lines in the income statement Parent Company Depreciation MSEK 2006 2005 Cost of goods sold 837 776 Selling expenses - - Administrative expenses 3 5 Research and development 8 10 849 791

NOTES TO THE FINACIALXXXXXXXXXXXXXXXX STATEMENTS LKABLKAB ÅRSREDOVISNING ANNUAL REPORT 2006 81 NOTE 14 Investment properties

Group Investment properties are reported, in the Group, according to the acquisition value method and are included under Buildings and land according to Note 13.

Group MSEK 2006-12-31 2005-12-31 Accumulated fair values*) At start of year 76 70 At year-end 78 76

Group MSEK 2006-12-31 2005-12-31 Accumulated acquisition values At start of year 294 291 New acquisitions 5 3 299 294 Accumulated depreciation according to plan At start of year -175 -170 Accumulated depreciation for the year -5 -5 -180 -175

Reported value at end of period 119 119

*) Fair values are based on valuations by qualifi ed, independent assessors who have current knowledge of property assessment principles relevant to the type of property and locations in question.

Investment properties - effect on profi t/loss for the period Group MSEK 2006-12-31 2005-12-31 Rental income 116 115 Direct costs associated with investment properties -84 -82

Tax assessment values - investment properties Group MSEK 2006-12-31 2005-12-31 Tax assessment values, buildings (in Sweden) 229 224 Tax assessment value, land (in Sweden) 56 54

NOTES TO THE FINACIAL STATEMENTS 82 LKAB ANNUAL REPORT 2006 NOTE 14 Investment properties (cont.)

Parent Company Information concerning fair value of investment properties (if acquisition value method is applied) Investment properties are reported according to the acquisition value method.

Parent Company MSEK 2006-12-31 2005-12-31 Accumulated fair values*) At start of year 19 20 At year-end 25 19

*) Fair values are based on valuations by qualifi ed, independent assessors who have current knowledge of property assessment principles relevant to the type of property and locations in question.

Parent Company MSEK 2006-12-31 2005-12-31 Accumulated acquisition values At start of year 166 166 New acquisitions 4 170 166 Accumulated depreciation according to plan At start of year -81 -78 Accumulated depreciation for the year -3 -3 -84 -81

Reported value at end of period 86 85

Investment properties - effect on profi t/loss for the period Parent Company MSEK 2006-12-31 2005-12-31 Rental income 88 77 Direct costs associated with investment properties -53 -53

Tax assessment values - investment properties Parent Company MSEK 2006-12-31 2005-12-31 Tax assessment values, buildings (in Sweden) 153 153 Tax assessment value, land (in Sweden) 39 39

NOTE 15 Participations in associated companies and joint ventures

Group MSEK 2006-12-31 2005-12-31 Reported value at start of year 4 33 Divestment of associated company -3 Reclassifi cation -29 Reported value at year-end 1 4

During the year, the subsidiary Kimit AB sold its holdings in the associated company Orica Kimit Explosives AB. The Parent Company’s holdings in associated companies are reported in Note 17.

NOTES TO THE FINACIALXXXXXXXXXXXXXXXX STATEMENTS LKABLKAB ÅRSREDOVISNING ANNUAL REPORT 2006 83 NOTE 16 Participations in joint ventures

Group The Group has a 50-percent interest in the joint venture company Likya Minelco. In the Group’s fi nancial reports, the following items comprise the Group’s share of the joint venture company’s assets, liabilities, income and expenses.

MSEK 2006 2005 Revenue 1 2 Expenses -3 -2 Profi t/loss -2 0

Fixed assets 33 32 Current assets 2 3 Total assets 35 35

Current liabilities -3 -1 Long-term liabilities -3 -2 Total liabilities -6 -3 Net assets/net liabilities 29 32

NOTE 17 Parent Company’s participations in associated companies

Parent Company MSEK 2006-12-31 2005-12-31 Accumulated acquisition values At start of year 2 2 Closing balance 31 December 2 2

Accumulated write-downs At start of year -1 -1 Divestment of associated company 0 Closing balance 31 December -1 -1 Reported value at year-end 1 1

Specifi cation of the Parent Company’s direct ownership of participations in associated companies 2006 Associate company Corp. ID No. and registered offi ce Voting and equity share in percent Reported value Associated companies Swedish associated companies Progressum AB /556540-0768/ Kiruna 42,8 0 Norrskenet AB /556537-7065/ Kiruna 33,3 0 Expandum AB /556252-3281/ Gällivare 33,3 0 MCC AB /556644-8295/ Kiruna 33,3 0

Foreign associated companies Futurum AS /-/ Narvik, Norge 23,8 0 1

NOTES TO THE FINACIAL STATEMENTS 84 LKAB ANNUAL REPORT 2006 NOTE 18 Receivables from Group companies and associated companies

Parent Company Receivables from Group companies Receivables from associated companies MSEK 2006-12-31 2005-12-31 2006-12-31 2005-12-31 Accumulated acquisition values Opening balance 1 January 373 267 40 40 Net change -45 106 Closing balance 31 December 328 373 40 40

Accumulated write-downs Opening balance 1 January -5 Write-downs for the year -5 Closing balance 31 December 35 -5 Reported value at year-end 328 373 35 35

NOTE 19 Financial investments

Group MSEK 2006-12-31 2005-12-31 Financial investments that are tangible assets Financial assets held for sale Shares and participations 1 996 1 253 Financial assets attributable to reserves for pension commitments 139 74 2 135 1 327 Short-term investments that are current assets Financial assets recognized at fair value in the income statement Shares and participations 818 784 Interest-bearing securities 3 052 3 265 3 870 4 049

Financial investments that are tangible assets refer to shares in SSAB and are valuated at fair value as of 31 Dec. 2006 in accordance with IAS 39.

Parent Company 2006-12-31 2005-12-31 MSEK Market value or similar Reported value Market value or similar Reported value Reported value Money-market instruments 5 367 5 352 5 961 5 951 Listed shares/mutual funds 818 621 784 619 Transfer to liquid assets1) -2 319 -2 319 -2 696 -2 696 3 866 3 654 4 049 3 874

Short-term investments include both money market and stock market investments.

1) Liquid assets include short-term investments (money-market instruments) that have been classifi ed as liquid assets according to IAS 7.

NOTES TO THE FINACIALXXXXXXXXXXXXXXXX STATEMENTS LKABLKAB ÅRSREDOVISNING ANNUAL REPORT 2006 85 NOTE 20 Other long-term securities held as fi xed assets

Parent Company MSEK 2006-12-31 2005-12-31 Accumulated acquisition values At start of year 110 121 Sales -5 -11 Closing balance 31 December 105 110

The change for the year of MSEK 5 refers mainly to redemption of shares in SSAB.

Parent Company 2006-12-31 2005-12-31 MSEK Market value or similar Reported value Market value or similar Reported value SSAB 1 994 103 1 253 109 Other 2 2 - 1 1 996 105 1 253 110

NOTE 21 Long-term receivables and other receivables

Group MSEK 2006-12-31 2005-12-31 Long-term receivables that are tangible assets Receivables from associated companies 35 35 Other 37 27 72 62

Other receivables that are current assets Receivables from associated companies 1 2 Receivables from related parties 2 Custody accounts and PRI balance 15 107 VAT recoverable 88 23 Other 68 60 172 194

Parent Company MSEK 2006-12-31 2005-12-31 Long-term receivables Company-owned endowment insurance 102 85 Other 33 22 135 107 Other receivables (current) Custody accounts and PRI balance 15 107 VAT recoverable 88 23 Other 8 25 111 155

Parent Company MSEK 2006-12-31 2005-12-31 Long-term receivables Accumulated acquisition values At start of year 107 77 Net change 28 30 Closing balance 31 December 135 107

Interest-free loans to Banverket amounting to MSEK 33 (18) are included.

NOTES TO THE FINACIAL STATEMENTS 86 LKAB ANNUAL REPORT 2006 NOTE 22 Inventories, etc.

Group MSEK 2006-12-31 2005-12-31 Raw materials and consumables 791 750 Work in progress 215 64 Finished products and goods for resale 625 609 1 631 1 423

The main reason for the increased values in raw materials and consumables are the higher levels of reserves stocks in Kiruna and Malmberget. The value of work in progress increased dramatically during the year, since stocks of crude ore for the new pelletizing plant in Malmberget were laid up. Of the Parent Company’s stocks of fi nished iron ore products, MSEK 6 (3) or 1 (0)% has been valuated at net selling price.

Parent Company MSEK 2006-12-31 2005-12-31 Raw materials and consumables 596 539 Work in progress 203 62 Finished products 377 392 1 176 993 See comments for the Group, above.

NOTE 23 Accounts receivable

Accounts receivable are reported taking into account bad debts that have arisen in the Group. These amounted during the year to MSEK 3 (2).

NOTE 24 Prepaid expenses and accrued revenues

Group Parent Company MSEK 2006-12-31 2005-12-31 2006-12-31 2005-12-31 Forward exchange contracts 564 Insurance premiums 12 5 3 Other 68 64 21 23 644 69 21 26

NOTES TO THE FINACIALXXXXXXXXXXXXXXXX STATEMENTS LKABLKAB ÅRSREDOVISNING ANNUAL REPORT 2006 87 NOTE 25 Shareholders’ equity

The Group’s specifi cation of the shareholders’ equity item reserves

Translation reserve 2006 2005 Opening translation reserve 14 -11 Translation differences for the year -25 25 Closing translation reserve -11 14

Fair value reserve 2006 2005 Opening fair value reserve 823 468 Financial assets held for sale: Revaluations reported directly in shareholders’ equity 804 558 Dissolved through income statement (including tax) -41 -47 Tax attributable to revaluations for the year -225 -156 Closing fair value reserve 1 361 823

Hedge reserve 2006 2005 Opening hedge reserve -171 689 Cash-fl ow hedges Reported directly in shareholders’ equity 668 -237 Dissolved through income statement (including tax) 183 -689 Tax attributable to hedges for the year -187 66 Closing hedge reserve 493 -171

Total reserves 2006 2005 Opening reserves 666 1 146 Change in reserves for the year Translation reserve -25 25 Fair value reserve 538 355 Hedge reserve 664 -860 Closing reserves 1 843 666

Share capital As of 31 December 2006, the registered share capital comprised 700 000 (700 000) common shares. The holder of common shares is entitled to a dividend that is decided by the Annual General Meeting, and each share entitles the holder to one voting right.

Translation reserve The translation reserve covers all exchange rate differences that arise in the translation of fi nancial reports of foreign subsidiaries and associated companies whose counts are reported in a currency other than the Group’s reporting currency. The Parent Company and Group accounts are reported in Swedish kronor.

Fair value reserve Financial assets The fair value reserve includes the net change in fair value of available-for-sale fi nancial assets up until the assets are removed from the balance sheet.

Hedge reserve The hedge reserve includes the effective share of the accumulated net change in fair value of a cash-fl ow hedging instrument attributable to hedging transactions that have not yet occurred.

Dividend After the balance sheet date, the Board has proposed the following dividend. The dividend is subject to approval by the Annual General Meeting on 26 April 2007.

MSEK 2006 2005 2 857 (2 143) kr per common share 2 000 1 500 2 000 1 500

NOTES TO THE FINACIAL STATEMENTS 88 LKAB ANNUAL REPORT 2006 NOTE 25 Shareholders’ equity (cont.)

Parent Company Restricted reserves Restricted reserves may not be reduced through dividends.

Statutory reserve The purpose of the statutory reserve is to save a part of the net profi t that is not used to cover loss brought forward.

Non-restricted equity Profi t brought forward Comprises the previous year’s non-restricted equity after any dividend has been paid. Together with net profi t for the year and any fair value reserve, it makes up non-restricted equity, i.e., the sum that is available to be paid as a dividend to shareholders.

NOTE 26 Earnings per share

The number of shares for the years 2006 and 2005, respectively, is 700 000. Net income attributable to Parent Company shareholders amounts to MSEK 4 597 (4 546). Earnings per share thereby amount to 6 567 (6 494) kronor per share.

NOTE 27 Pensions, senior executives’ benefi ts

Defi ned-benefi t plans Group MSEK 2006 2005 Present value of unfunded obligations 1 914 1 960 Present value of wholly or partially funded obligations 951 948 Total present value of obligations 2 865 2 908 Fair value of plan assets -917 -891 Present value of net obligation 1 948 2 017

Unreported actuarial gains (+) and losses (-) -187 -282 Unreported costs for previous years’ employment -8 -10 Net reported obligation, defi ned-benefi t plans (see below) 1 753 1 725

The net amount is reported in the following balance sheet items: Financial investments -139 -74 Provisions for pensions 1 892 1 799 Net balance sheet amount 1 753 1 725

Defi ned-benefi t plans Most of LKAB’s pension plans for employees in Sweden are defi ned-benefi t plan. The ITP pension plan insured via Alecta defi ned-benefi t plans, which means that LKAB guarantees is therefore reported as a defi ned-contribution plan. Alecta’s pensions based on a certain percentage of salary. Pension surplus can be distributed to the policyholders and/or the commitments in Sweden are secured by the company mainly insured parties. At year-end 2006, Alecta’s surplus in the form via provisions reported on the balance sheet, whereof most of the collective funding ratio amounted to 143.1 (128.5)%. are secured through credit insurance In FPG (Försäkringsbo- The collective funding ratio is the market value of Alecta’s laget Pensionsgaranti). Promises of future retirement before assets as a percentage of the insurance obligations calculated the age of 65 are to a degree contingent upon underground according to Alecta’s actuarial assumptions, which does not work and are secured by the company via provisions, re- conform to IAS 19. ported on the balance sheet, without credit insurance. For employees in Belgium, Norway, the UK and Germany, Commitments for retirement pensions and survivor ben- LKAB has defi ned-benefi t plans as a complement to social in- efi ts for salaried employees in Sweden are insured by Alecta. surance. In Belgium, pensions are secured via pension insur- According to a pronouncement from the Swedish Financial ance; in the UK, via two company-managed pension funds; Accounting Standards Council’s Emerging Issues Task in Germany, via provisions reported in the balance sheet and Force, URA 42, this is a defi ned-benefi t plan that involves through credit insurance, and in Norway via a company- several employers. The company has not had access to the managed superannuation fund, via provisions reported in the information that is necessary for reporting this plan as a balance sheet and through credit insurance.

NOTES TO THE FINACIALXXXXXXXXXXXXXXXX STATEMENTS LKABLKAB ÅRSREDOVISNING ANNUAL REPORT 2006 89 NOTE 27 Pensions, senior executives’ benefi ts (cont.)

Changes in present value of obligations for defi ned-benefi t plans Group MSEK 2006 2005 Net obligations for defi ned-benefi t plans as of 1 January 2 908 2 234 Compensation paid -127 -136 Cost for employment during current period and interest cost (see below) 250 439 Actuarial gains and losses -97 284 Costs for employment during previous periods -2 12 Exchange rate differences -67 75 Net obligations for defi ned-benefi t plans as of 31 December 2 865 2 908

Changes in plan assets Group SEK ‘000 2006 2005 Present value of plan assets as of 1 January 891 655 Charges from the employer 45 137 Compensation paid -26 -27 Assumed return 49 41 Difference between assumed and actual return (actuarial gain or loss) 2 34 Exchange rate differences -44 51 Present value of plan assets as of 31 December 917 891

Cost reported in income statement Group MSEK 2006 2005 Costs for employment during current period 144 334 Interest expense for obligation 106 105 Assumed return on plan assets -49 -41 Reported actuarial gains (-) and losses (+) 32 4 Effects of reductions and settlements 1 38 Total net cost in income statement 234 440

The cost is reported on the following lines in the income statement: Group MSEK 2006 2005 Cost of goods sold 177 376 Income from fi nancial items -49 -41 Financial expenses 106 105 234 440

Assumptions for defi ned-benefi t obligations Signifi cant actuarial assumptions as of closing day (expressed as weighted averages) Group Percent 2006 2005 Discount rate, 31 December 4,25 4,0 Assumed return on plan assets, 31 December 5,25 5,0 Future salary increase 3,0 3,0 Employee turnover 3,5 3,5 Future increase in pensions 2,0 2,0

Assumed future mortality rate is based on published statistics and mortality fi gures. The average life expectancy (years of life remaining) for an individual who retires at 65 years of age is 18 years for men and 20 years for women. The total assumed long-term return on plan assets is 5.25% (with certain deviations in Belgium and the UK). The assumed long-term return is based on the plan assets portfolio as a whole and not on the sum of the returns on the individual assets.

NOTES TO THE FINACIAL STATEMENTS 90 LKAB ANNUAL REPORT 2006 NOTE 27 Pensions, senior executives’ benefi ts (cont.)

Historical information Group SEK ‘000 2005 2006 Present value of defi ned-benefi t obligations 2 865 2 908 Fair value of plan assets - 917 -891 Surplus/defi cit in plan 1 948 2 017

Experience-based adjustment of plan assets 1 Experience-based adjustment of plan liabilities 7

The Group estimates that MSEK 43 will be paid to defi ned-benefi t plans in 2007.

Parent Company pension obligations MSEK 2006 2005 Provisions subject to the Act on Income Security 657 818 Provisions not subject to the Act on Income Security 584 724 1 241 1 542 Of which credit guarantees via FPG/PRI 657 818

The reduction is explained mainly by the transfer of pension obligations to the subsidiary LKAB Norge AS.

Defi ned-contribution pension plans In Sweden, the Group has defi ned-contribution pension plans for which the company assumes full cost. In foreign subsidiaries, defi ned-contribution plans are fi nanced partly by the companies and partly by contributions paid by the employees. Premiums for these plans are paid on a current basis in accordance with regulations for each plan.

SEK ‘000 Group Parent Company 2006 2005 2006 2005 Costs for defi ned-contribution pension plans 62 92 47 74

NOTES TO THE FINACIALXXXXXXXXXXXXXXXX STATEMENTS LKABLKAB ÅRSREDOVISNING ANNUAL REPORT 2006 91 NOTE 27 Pensions, senior executives’ benefi ts (cont.)

Personnel costs Senior executives’ remuneration Senior executives Senior executives include members of the highest level of The President is entitled to a period of notice of two years Group Management and other senior executives. Members on termination by the company and six months on termina- of the highest level of Group Management are the Chairman tion by the President. No severance payments are made. of the Board, and the Group President and CEO. The group For fi ve people in the group ‘other senior executives’, the ‘other senior executives’ includes eight employees who are retirement age is 60 and one person in this group will retire members of Group Management, which also includes the at 58. Pension is payable at 65% of the pension-carrying President. salary (defi ned according to ITP plan, and free car benefi t) at the time of retirement for the period up to the age of 65. The The preparation and decision process for establishing remu- pension commitment is secured via endowment insurance neration to senior executives taken out by LKAB with an insurance company. The pension Compensation for the President as well as salary setting commitment is benefi t-defi ned and vested. principles are drafted and determined by a compensation From the age of 65, pension is payable in accordance with committee that is appointed by the Board. The committee the ITP plan with a supplement for salary segments between consists of the Chairman and two other board members. The 30 and 50 base amounts. The supplement is 32.5% of the Board votes on the proposals of the committee. The Chair- pensionable salary (defi ned according to the ITP plan). The man of the Board approves the annual salary review of other obligation above and beyond the general pension plan is members of Group Management. secured via endowment insurance taken out by LKAB with an insurance company. In addition to the ITP plan’s family pen- Principles for remuneration to senior executives sion (survivor annuity), a special family pension is payable The President and seven other members of Group Manage- (extended survivor annuity). ment are paid a fi xed salary. Remuneration to the Vice Presi- Any bonus paid on endowment or pension insurance dent, Market Division, is a combination of a fi xed salary and policies accrues in its entirety to the senior executives as variable remuneration. The variable remuneration amounts increased pension. to a maximum of 50% of the fi xed salary, at 15% return on For the senior executives (two persons) who were ap- the Parent Company’s Operating assets over a period. Both pointed to Group Management during 2005, the retirement portions of the salary are pensionable. age is 62 years. In addition to pension benefi ts regulated by Retirement age for the President is 60 years. Pension collective agreements (defi ned according to ITP plan), 14-17% is payable at 65% of the pension-carrying salary (defi ned of basic annual salary is allocated as a pension premium. according to ITP plan, and free car benefi t) at the time of For other senior executives, notice of termination is six retirement for the period up to the age of 65. The pension months for both parties. When notice of termination of em- commitment is secured via endowment or pension insurance ployment is given by the company, the severance pay is the taken out by LKAB with an insurance company. The pension equivalent of 18 monthly salaries. commitment is benefi t-defi ned and vested. From the age of 65, pension is payable in accordance with Remuneration and benefi ts to Board members and senior the ITP plan with a supplement for old-age pension of at least management 50% of the pension-carrying salary (defi ned according to ITP The Chairman of the Board, Björn Sprängare, received a plan) at the time of retirement. The supplementary pension director’s fee of MSEK 0.2 (0.2) for 2006. Other members of commitment is secured via endowment or pension insurance the Board, elected by the Annual General Meeting, received taken out by LKAB with an insurance company. In addition MSEK 0.1 (0.1) each. Remuneration in addition to a director’s to the ITP plan’s family pension (survivor annuity), a special fee was not paid to Board members who are not employed family pension is payable (extended survivor annuity). by the company. Employee representatives who are Board Any bonus paid on endowment or pension insurance members have each received MSEK 0.1 (0.1). A summary of policies accrues in its entirety to the President as increased taxable remuneration and benefi ts, as well as pension costs pension. for the President and other senior executives in 2006 is given below (amounts in SEK ‘000).

Remuneration and other benefi ts during the year Variable Other Pension Salary remuneration benefi ts1) cost 2) Total President and CEO Martin Ivert 3 915 86 8 990 12 991 VP Lars-Eric Aaro 1 997 97 1 225 3 319 VP Leif Boström 1 619 80 938 2 637 VP Anders Furbeck 1 670 74 876 2 620 VP Bengt Hjärpe 1 507 723 15 2 934 5 179 VP Jan-Erik Jatko 1 831 84 5 815 7 730 VP Ola Johnsson 2 089 73 1 796 3 958 VP Mats Pettersson 1 438 79 402 1 919 VP Per-Erik Lindvall 1 877 107 1 372 3 356 Total 17 943 723 695 24 348 43 709

1) Other benefi ts include allowances for car, food and life insurance benefi ts. 2) Pension cost excluding special employer’s contribution (tax).

NOTES TO THE FINACIAL STATEMENTS 92 LKAB ANNUAL REPORT 2006 NOTE 28 Provisions

Group MSEK 2006-12-31 2005-12-31 Provisions that are long-term liabilities Pensions 1 751 1 690 Deferred tax liability 2 635 1 603 Other provisions 240 303 Total 4 626 3 596

Provisions that are current liabilities Pensions 141 109 Emissions rights 29 59 Total 170 168

Parent Company MSEK 2006-12-31 2005-12-31 Provisions Pensions and similar commitments 1 241 1 542 Other provisions 265 360 Total 1 506 1 902

Other provisions include MSEK 236 (241) attributable to ground deformations in Kiruna that have been caused by mining. In addition, MSEK 29 (119) is included for allocated emissions rights for 2007, of which MSEK 29 (59) is reported as short-term liability in the Group. The reduction in Pensions and similar obligations in the Parent Company is explained mainly by the transfer of pension obligations to the subsidiary LKAB Norge AS (see Note 27).

Group Emissions rights SEK ‘000 2006 2005 Reported value at end of period 119 - Allocation 176 Reconciliation of emissions rights for the year -58 -57 Purchases during the year 3 Revaluation -35 Reported value at end of period 29 119

Payments MSEK 2006-12-31 2005-12-31 Group Amount of provision expected to be paid after more than 12 months 4 626 3 537

Parent Company Amount of provision expected to be paid after more than 12 months 1 410 1 688

NOTE 29 Accrued expenses and prepaid revenues

Group Parent Company MSEK 2006-12-31 2005-12-31 2006-12-31 2005-12-31 Electricity 32 52 9 46 Payroll and employee costs 305 335 259 294 Forward exchange contracts, deduction 61 123 61 Forward exchange contracts 6 237 Accrued accounts payable 162 160 118 136 Other 52 76 13 29 557 921 522 566

NOTES TO THE FINACIALXXXXXXXXXXXXXXXX STATEMENTS LKABLKAB ÅRSREDOVISNING ANNUAL REPORT 2006 93 NOTE 30 Financial risks and fi nance policies

In addition to the information below, see the section on RISKS, on page 6, for further information.

The Group’s transaction exposure, distributed over the following contract currencies: Group 2006 2005 Effect on Effect on Currency Amount Change Profi t/loss Amount Change Profi t/loss USD 1 600 SEK 0.01 MSEK 16 1 500 SEK 0.01 MSEK 15 NOK -386 SEK 0.01 MSEK 4 -200 SEK 0.01 MSEK 2 EUR -24 SEK 0.01 MSEK 2.4 -34 SEK 0.01 MSEK 3.4 GBP 8 SEK 0.01 MSEK 0.1 10 SEK 0.01 MSEK 0.1

Transaction exposure in US dollars during 2006 was hedged to 71 (84)% via currency derivatives.

Outstanding forward exchange contracts at closing day Maturity MUSD Hedging rate 2007 -1 000 7,69

The Group applies hedge accounting for USD and classifi es its forward contracts used to hedge forecasted transactions as cash fl ow hedges. The net fair value of forward exchange contracts used to hedge forecasted fl ows amounted to MSEK 564 (-298) as of 31 December 2006.

Outstanding forward exchange contracts at closing day Maturity 2007 Maturity 2008 Outstanding Outstanding amount Spot amount Spot Currency (millions) rate (millions) rate NOK 272 1,11 150 1,10

Translation exposure LKAB does not normally hedge its translation exposure. Over time, this is not considered to add any value for the Group, even though the level of exposure has increased in recent years due to the expansion of the Minerals Division. Revaluation exposure in the Group refers to net foreign assets in the group.

Revaluation exposure (millions, local currency) Group MSEK 2006 2005 EUR 6 6 GBP 30 32 USD -1 0 DKK 8 -4 NOK 212 44 CNY 7 7 HKD 61 39

NOTES TO THE FINACIAL STATEMENTS 94 LKAB ANNUAL REPORT 2006 NOT 30 Financial risks and fi nace policies (cont.)

Fair value Fair value and reported value are stated on the balance sheet below. Group Reported Fair Reported Fair value value value value MSEK 2006 2006 2005 2005 Shares, fi nancial assets 1 996 1 996 1 253 1 253 Interest-bearing instruments, short-term holdings 3 052 3 052 3 265 3 265 Shares, short-term holdings 818 818 784 784 Trade accounts receivable and other receivables 1 941 1 941 2 102 2 102 Liquid assets (incl. short-term investments, equated with liquid assets) 3 112 3 112 3 042 3 042 Forward exchange contracts (USD) 564 564 -298 -298 Embedded derivatives 0 0 -4 -4 Accounts payable and other liabilities -1 415 -1 415 -1 006 -1 006 10 068 10 068 9 138 9 138 Undisclosed profi ts

Parent Company Reported Fair Reported Fair value value value value MSEK 2006 2006 2005 2005 Shares, fi nancial assets 105 1 996 110 1 253 Interest-bearing instruments, short-term holdings 3 033 3 048 3 255 3 265 Shares, short-term holdings 621 818 619 784 Trade accounts receivable and other receivables 3 205 3 205 3 129 3 129 Liquid assets (incl. short-term investments, equated with liquid assets) 2 762 2 762 2 936 2 936 Forward exchange contracts (USD) -123 564 -61 -298 Embedded derivatives 0 -4 Accounts payable and other liabilities -2 090 -2 090 -1 714 1 714 7 513 10 303 8 274 9 351 Undisclosed profi ts 2 790 1 077

Fair value calculation The following is a summary of the principal methods and assumptions used in determining the fair value of fi nancial instruments reported in the table above.

Securities For listed fi nancial assets, fair values correspond to the asset’s buying rate on the balance sheet date.

Derivative instruments Forward exchange contracts are valuated at current market price by using quoted market prices. The discount rate used is the market interest rate on similar instruments quoted on closing day.

NOTE 31 Operating leasing

Leasing agreements in which the company is the leasee Non-cancellable lease payments amount to: Group MSEK 2006 2005 Within one year 5 5 Between one and fi ve years 77 12 Longer than fi ve years 8 10 90 27

The Group’s future lease payments refer mainly to leased land, machines and computers. In the fi nancial statement for 2006, an expense that refers to operating leasing in the Group is reported at MSEK 2 (3), of which MSEK 2 (3) is attributable to minimum leasing fees and MSEK - (-) variable fees. The Parent Company’s leasing agreements amount to MSEK 63 (-), of which MSEK 35 refers to leasing of machines and other technical equipment.

NOTES TO THE FINACIALXXXXXXXXXXXXXXXX STATEMENTS LKABLKAB ÅRSREDOVISNING ANNUAL REPORT 2006 95 NOTE 32 Contractual obligations

At year-end, the Group’s remaining contractual obligations to acquire tangible assets amounted to MSEK 5 086. Of these obligations, MSEK 4 382 is expected to be paid during the following fi scal year. The Parent Company’s obligations amounted to 4 446, of which MSEK 4 062 is expected to be paid during 2007.

NOTE 33 Assets pledged and contingent liabilities

Group Parent Company MSEK 2006-12-31 2005-12-31 2006-12-31 2005-12-31 Assets pledged In the form of assets pledged for liabilities and provisions Property mortgages 1 1 Chattel mortgaes 2 2 Company-owned endowment insurance 104 86 102 85 Deposit of liquid assets 64 63 64 63 Total assets pledged 171 152 166 148

Contingent liabilities Guarantees, FPG/PRI 10 9 9 9 Guarantees, GP plan 3 1 2 2 Sureties for the benefi t of subsidiaries 148 25 Sureties, other 8 - Other 65 48 1 - Forward exchange contracts 441 Total contingent liabilities 78 66 160 477

There are obligations (both formal and informal) with respect to structural transitions in the Orefi elds as a consequence of the deformation zones resulting from mining operations. Considerable expenditures for LKAB may arise as a result of this during the coming years. The future costs, or the share of costs to be assumed by LKAB, cannot be estimated in a reliable way, which is why no provisions have yet been made with the exception of those stated in Note 28.

NOTE 34 Related parties

Related-party relations The Group is subject to the controlling infl uence of the Swedish state. Aside from the close relationships that the Parent Company has with its subsidiaries (see Note 35), the Group has related-party transactions with Svenskt Stål AB (SSAB) via shareholding, and with Vattenfall AB via a long-term energy agreement.

Summary of related-party transactions Group

Sales of Received Purchase of Liabilities to Receivables from goods to Interest and goods from Related parties Related parties Related-party relation Year Related parties dividend Related parties 31 December 31 December Associated companies 2006 0 13 2 35 Associated companies 2005 - 13 1 37

Parent Company Sales of Received Purchase of Liabilities to Receivables from goods to Interest and goods from Related parties Related parties Related-party relation Year Related parties dividend Related parties 31 December 31 December Subsidiaries 2006 184 58 1 132 1 062 1 610 Subsidiaries 2005 237 54 1 102 942 1 277

Associated companies 2006 0 13 2 35 Associated companies 2005 - 13 1 35

Deliveries of iron ore to SSAB have amounted during the year to 4.9 (5.3) Mt. For information concerning related-party transactions with Vattenfall AB, please refer to the section on Secured electricity deliveries in the Report of the Directors. In 1997, LKAB made a participating loan with a nominal amount of MSEK 40 to the associated company Norrskenet AB. The loan has a remaining maturity of 5 years. Interest is paid annually and amounted to SEK 488 000 (172 000) in 2006. The principal will be repaid in full in 2011, at which time profi t shares will also be distributed. Transactions with key individuals in leading positions are reported in Note 6 and Note 27. Transactions with related parties are priced and conducted in accordance with commercial principles.

NOTES TO THE FINACIAL STATEMENTS 96 LKAB ANNUAL REPORT 2006 NOTE 35 Participations in Group companies

Parent Company MSEK 2006-12-31 2005-12-31 Accumulated acquisition values At start of year 607 607 New share issue, subsidiary 163 Acquisition of minority interest 5 Closing balance 31 December 775 607

During the year, a new share issue of MSEK 163 in the subsidiary LKAB Norge AS was realized. Minority interest of MSEK 5 in Wassara AB was acquired during the year. Specifi cation of the Parent Company’s ownership of participations in associated companies Ownership Ownership 2006-12-31 2005-12-31 in % in % Reported Reported Subsidiary /Corp. ID No./ Registered offi ce Total shares 2006 2005 value value Swedish subsidiaries Fastighets AB Malmfälten /556009-8849/ Kiruna 5 000 100,0 100,0 0 0 Wassara AB /556331-8566/ Stockholm 200 000 100,0 60,0 10 5 AB Kiruna Grus & Stenförädling /556074-8237/ Kiruna 24 000 100,0 100,0 47 47 LKAB Nät AB /556059-9796/ Kiruna 10 100,0 100,0 0 0 Minelco AB /556223-1786/ Luleå 2 000 000 100,0 100,0 200 200 LKAB Försäkrings AB /516406-0187/ Luleå 10 000 100,0 100,0 100 100 Malmtrafi k i Kiruna /556031-4808/ Kiruna 208 000 100,0 100,0 252 252

Foreign subsidiaries AS Bukserbåter /918 271 252/ Narvik, Norge 99 99,0 99,0 0 0 LKAB Norge AS /918 400 184/ Narvik , Norge (f.d. AS Taraldsvik) 300 000 100,0 100,0 163 0 LKAB Far East Pte Ltd /198401144W/ Singapore, Singapore 200 000 100,0 100,0 1 1 LKAB S.A. /403 455 761/ Bryssel 100 100,0 100,0 0 0 LKAB Schwedenerz GmbH /HRB 718/ Essen 100 100,0 100,0 2 2 Total, Parent Company 100,0 100,0 775 607

Indirect ownership via the subsidiary Minelco AB Minelco B.V /24236591/ Breda, Nederländerna 100,0 100,0 Minelco Inc /02-0551509/ Cincinnati, USA 100,0 100,0 Minelco GmbH /HRB 16692/ Essen, Tyskland 100,0 100,0 Minelco Asia Pacifi c Ltd /876455/ Hong Kong, Hong Kong 100,0 100,0 Minelco Ltd /0245817/ Welton, Storbritannien 100,0 100,0 Minelco OY /1934671-4/ Helsingfors, FInland 100,0 100,0 Likya Minelco /-/ Izmir, Turkiet 50,0 50,0 Seqi Olivine AS/A /S277716/ Nuuk, Grönland 100,0 100,0

Minelco Holding Ltd /04621769/ Derby, Storbritannien 100,0 100,0 Minelco Tianjin Minerals Co /70051551-5/ Dongli District Tianjin, Kina 100,0 100,0 Minelco Minerals Ltd /00103751/ Derby, Storbritannien 100,0 100,0 Quay Minerals Ltd /02732626/ Flixborough, Storbritannien 100,0 100,0 Tianjin Jindalai Mineral /60089030-X/ Dongli District Tianjin, Kina 100,0 100,0 Fergusson Wild & Co Ltd /2529921/ West Sussex, Storbritannien 100,0 100,0 Fordamin Company Ltd /00925517/ Storbritannien 100,0 100,0 Minelco Specialities Ltd /1151578/ Derby, Storbritannien 100,0 100,0 Microfi ne Hellas A.E. /-/ Thessaloniki, Grekland 100,0 100,0

Indirect ownership via the subsidiary AB Kiruna Grus & Stenförädling AB KGS Mekaniska /556013-3059/ Kiruna 100,0 100,0 AB KGS Contracting /556412-5010/ Kiruna 100,0 100,0 Kimit AB /556190-6115/ Kiruna 100,0 100,0

Indirect ownership via the subsidiary Malmtrafi k i Kiruna AB Malmtrafi kk AS /974 644 991/ Narvik, Norge 100,0 100,0

Indirect ownership via the subsidiary LKAB Norge AS AS Taraldsvik /930 033 510/ Narvik, Norge 100,0 100,0

NOTES TO THE FINACIALXXXXXXXXXXXXXXXX STATEMENTS LKABLKAB ÅRSREDOVISNING ANNUAL REPORT 2006 97 NOTE 36 Untaxed reserves

Parent Company MSEK 2006-12-31 2005-12-31 Accumulated depreciation in excess of plan: Buildings and land Opening balance 1 January 13 15 Accelerated depreciation dissolved -8 -2 Closing balance 31 December 5 13

Machinery and inventories Opening balance 1 January 2 045 1 882 Accumulated depreciation in excess of plan for the year 649 163 Closing balance 31 December 2 694 2 045

Construction in progress Opening balance 1 January 69 69 Accelerated depreciation dissolved -69 Closing balance 31 December 0 69

Underground installations Opening balance 1 January 11 14 Disposals, retirements and dissolution -6 -3 Closing balance 31 December 5 11

Tax allocation reserves Allocated at 2001 assessment - 73 Allocated at 2003 assessment 147 147 Allocated at 2004 assessment 294 294 Allocated at 2005 assessment 500 500 Allocated at 2006 assessment 1 410 1 410 Allocated at 2007 assessment 1 400 - Closing balance 31 December 3 751 2 424 Total untaxed reserves 6 455 4 562

NOTES TO THE FINACIAL STATEMENTS 98 LKAB ANNUAL REPORT 2006 NOTE 37 Cash fl ow statement

Liquid assets - Group MSEK 2006-12-31 2005-12-31 The following sub-components are included in liquid assets Cash and bank balances 789 336 Short-term investments, equated with liquid assets1) 2 323 2 706 Total according to balance sheet 3 112 3 042 Total according to cash fl ow statement 3 112 3 042

Liquid assets - Parent Company MSEK 2006-12-31 2005-12-31 The following sub-components are included in liquid assets Cash and bank balances 443 240 Short-term investments, equated with liquid assets1) 2 319 2 696 Total according to balance sheet 2 762 2 936 Total according to cash fl ow statement 2 762 2 936

1) Liquid assets include short-term investments (money-market instruments) that have been classifi ed as liquid assets according to the following: • They entail insignifi cant risk for value fl uctuations • They can be easily converted to cash • They have a maturity of at most three months from the balance sheet date.

Interest paid and dividends received Group Parent Company MSEK 2006 2005 2006 2005 Dividends received 52 47 73 65 Interest received and return on securities 273 337 320 374 Interest paid -1 -2 -14 -8 324 382 379 431

Adjustments for items not included in cash fl ow Group Parent Company Mkr 2006 2005 2006 2005 Depreciation 997 951 849 791 Write-downs 6 8 2 5 Unrealized exchange rate differences 27 -34 Changes in value of fi nancial instruments -38 -101 Income from sale and retirement of tangible assets -20 55 -54 34 Income from sale of fi nancial assets -134 -89 -100 -89 Provisions for pensions 28 108 -301 193 Other items that do not affect liquidity -4 244 -4 242 Other provisions 12 14 -7 874 1 156 385 1 176

Tax paid Group Parent Company Mkr 2006 2005 2006 2005 Tax expense according to income statement -1 785 -1 904 -1 242 -1 251 Change in tax recoverable/liability -301 -236 -240 -302 Adjustment for deferred tax 518 606 13 -35 Adjustment for tax effect of Group contributions 19 105 -1 568 - 1 534 -1 450 -1 483

NOTES TO THE FINACIALXXXXXXXXXXXXXXXX STATEMENTS LKABLKAB ÅRSREDOVISNING ANNUAL REPORT 2006 99 Proposed disposition of unappropriated earnings

The Board of Directors and President propose that unappropriated earnings of MSEK 9,976 be distributed as follows:

Dividend, 700 000 shares x 2 857 kronor per share MSEK 2 000 Funds to be carried forward MSEK 7 976 Total MSEK 9976

The Board of Directors and the President certify that, to the best of our knowledge, the fi nancial statements have been prepared in accordance with generally accepted accounting principles. The information presented is consistent with the actual conditions and that nothing of material importance has been omitted that would affect the picture of the Group and Parent Company presented in the fi nancial statements.

Luleå den 16 March 2007

Björn Sprängare Chairman

Christer Berggren Stina Blombäck Per-Ola Eriksson

Lars-Åke Helgesson Anna-Greta Sjöberg Ursula Tengelin Egil M. Ullebø

Tomas Nilsson Bertil Thornberg Karl Wikström Employee representative Employee representative Employee representative

Martin Ivert President and CEO

The Annual Report and consolidated fi nancial statements have, as stated above, been approved for publication by the Board of Directors on 16 March 2007. The consolidated income statement and balance sheet, and the Parent Company income statement and balance sheet will be subject to approval by the Annual General Meeting on 26 April 2007.

Our audit report has been submitted on 19 March 2007

KPMG Bohlins AB

Roland Nilsson Annicka Brännström Filip Cassel Authorized Public Accountant Authorized Public Accountant Authorized Public Accountant Chief accountant Appointed by the Swedish National Audit Offi ce

PROPOSED DISPOSITIONS OF UNAPPROPRIATED EARNINGS 100 LKAB ANNUAL REPORT 2006 Audit Report

To the Annual General Meeting of the shareholders of Luossavaara-Kiirunavaara AB Corporate identity number 556001-5835

We have audited the annual accounts, the consolidated accounts, the accounting records and the administration of the Board of directors and the President of Luossavaara-Kiirunavaara AB for the year 2006. The Board of directors and the President are responsible for these accounts and the administration of the company as well as for the application of the Annual Accounts Act when preparing the annual ac- counts and the application of International Financial Reporting Standards IFRS’s as adopted by the EU, and the Annual Accounts Act when preparing the consolidated accounts. Our responsibility is to express an opinion on the annual accounts, the consolidated accounts and the administration based on our audit. We conducted our audit in accordance with generally accepted auditing standards in Sweden. Those standards require that we plan and perform the audit to obtain high but not absolute assurance that the annual accounts and the consolidated accounts are free of mate- rial misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the accounts. An au- dit also includes assessing the accounting principles used and their application by the Board of directors and the President and signifi cant estimates made by the Board of directors and the President when preparing the annual accounts and the consolidated accounts as well as evaluating the overall presentation of information in the annual accounts and the consolidated accounts. As a basis for our opinion con- cerning discharge from liability, we examined signifi cant decisions, actions taken and circumstances of the company in order to be able to determine the liability, if any, to the company of any board member or the President. We also examined whether any board member or the President has, in any other way, acted in contravention of the Companies Act, the Annual Accounts Act or the Articles of Association. We believe that our audit provides a reasonable basis for our opinion set out below. The annual accounts have been prepared in accordance with the Annual Accounts Act and give a true and fair view of the company’s fi nancial position and results of operations in accordance with generally accepted accounting principles in Sweden. The consolidated ac- counts have been prepared in accordance with International Financial Reporting Standards IFRS as adopted by the EU and the Annual Ac- counts Act and give a true and fair view of the Group’s fi nancial position and results of operations. The statutory administration report is consistent with the other parts of the annual accounts and the consolidated accounts. We recommend to the Annual General Meeting of shareholders that the income statements and balance sheets of the Parent Compa- ny and the Group be adopted, that the profi t of the Parent Company be dealt with in accordance with the proposal in the administration re- port and that the members of the Board of Directors and the President be discharged from liability for the fi nancial year.

Luleå, 19 March 2007

KPMG Bohlins AB

Roland Nilsson Annicka Brännström Filip Cassel Authorized Public Accountant Authorized Public Accountant Authorized Public Accountant Chief accountant Appointed by the Swedish National Audit Offi ce

NOTES TO THE FINACIALXXXXXXXXXXXXXXXX STATEMENTS LKABLKAB ÅRSREDOVISNING ANNUAL REPORT 2006 101 Organization, legal structure

LKAB is wholly owned by the Swedish state and is operated as a limited company. The Group consists of the Parent Company and subsidiaries, each of which is subject to the controlling infl uence of the Parent Company.

LKAB (556001-5835)

WASSARA AB LKAB NÄT AB LKAB AS BUKSERBÅTER LKAB FAR EAST LKAB SCHWEDENERZ FÖRSÄKRING AB (Norway) PTE LTD GMBH (Singapore) (Germany) FASTIGHETS AB AB KIRUNA MINELCO AB MALMTRAFIK LKAB NORGE AS LKAB SA MALMFÄLTEN GRUS & STENFÖRÄDLING I KIRUNA AB (Norway) (Belgium)

MALMTRAFIKK AS AS TARALDSVIK (Norway) (Norway)

AB KGS AB KGS KIMIT AB MEKANISKA CONTRACTING

MINELCO B.V. MINELCO INC MINELCO GMBH MINELCO ASIA MINELCO MINELCO LTD MINELCO OY SEQI OLIVINE AS LIKYA MINELCO (The Netherlands) (USA) (Germany) PACIFIC LTD HOLDING LTD (UK) (Finland) (Greenland) (Turkey) (Hong Kong) (UK)

MINELCO MINELCO TIANJIN MINELCO SPECIALITIES LTD MINERALS CO MINERALS LTD (UK) (China) (UK)

MICROFINE HELLAS A.E. (Greece)

QUAY MINERALS LTD FERGUSSON WILD & CO LTD (UK) (UK)

TIANJIN JINDALAI FORDAMIN MINERALS COMPANY LTD (China) (UK)

ORGANIZATION, LEGAL STRUCTURE 102 LKAB ANNUAL REPORT 2006 Corporate Governance of LKAB

LKAB is wholly owned by the Swedish state. The basis for corporate governance of LKAB is Swedish legislation, guidelines from the state and internal guidelines.

Corporate Governance report

The State ownership policy dictates that the Swedish Code OWNERSHIP of Corporate Governance (the Code) must serve as part of LKAB is wholly owned by the Swedish state, represented the government’s framework for ownership administration. by the government via the Ministry of Industry, Employment LKAB has decided to adhere as much as possible to the and Communications. The owner’s principal objective is to Code, accept in areas where state ownership does not per- create value. State-owned companies can in principle be di- mit. vided into two groups: companies that primarily have special societal interests to fulfi ll and companies operating under LKAB’S OPERATIONS market conditions and requirements. LKAB, which belongs LKAB’s operations are capital intensive. Compared to oth- to the latter category, will develop a successful business er iron ore companies, nearly all of which mine their ore in operation by mining, processing and marketing minerals. open pits, LKAB has a heavier capital burden, since under- The owner’s income and yield requirements for LKAB are ground mining demands more extensive investments. on normal market terms. LKAB’s dividend policy entails that The operation is also strongly dependent on business the dividend to the owner will, over the long term, amount cycles. Therefore, LKAB must have substantial fi nancial to 30-50% of income after tax and be adapted to the avera- strength to be able to cope with cyclical fl uctuations over ge earnings level over a business cycle. The state exercises several years and to be able to fi nance the heavy invest- its ownership via an established ownership policy, nomina- ments that will secure the company’s future. tions to the Board and requirements for fi nancial and other Against this background, the long-term requirement on reporting. The state’s requirement of insight is assured by rate of return on operating assets has been set by LKAB direct owner representation on the Board. Reports to the at 10%, measured over a business cycle. During the years owner are important steering instruments for the ongoing 2002-2006, return on operating assets has been 2, 11, 22, monitoring and assessment of the companies. State-owned 58 and 45%, respectively. companies should have at least the same level of transpa- LKAB has a high proportion of liquid assets and a low rency as listed companies. debt/equity ratio. Liquid assets are invested primarily on the The Board, via the Chairman, coordinates its views on is- Swedish money market in securities with high liquidity and sues of decisive importance with the owner’s representati- low credit and interest-rate risk. The goal is that the rate of ves. Such issues include strategic changes in the company’s return on managed cash assets should exceed the money operations, major acquisitions, mergers or divestments, market index over the long term. as well as decisions affecting signifi cant changes in the LKAB is in a phase of strong development, due in part company’s risk profi le or balance sheet. to the broadening into new minerals and market segments that is now under way, and partly owing to strong growth ANNUAL GENERAL MEETING in the Mining Division. Our assessment is that demand for LKAB’s Annual General Meeting is open to the public. No- LKAB’s products will grow in the coming years. This will cre- tice of the Annual General Meeting is made via LKAB’s web- ate conditions for further growth through investments in, for site and via newspaper advertisements. The public is entit- example, new pelletizing plants and new main levels. LKAB led to present questions to the AGM. Questions to the AGM can then use the strong fi nancial platform the company now may also be presented via the website. As of 2005, the mi- has to ensure continued profi table development within its nutes of Annual General Meetings are posted on LKAB’s business areas. website. The Board believes that the company is capable of ma- The meeting decides, in addition to what is specifi ed in naging this growth on its own strength. During 2006, the the articles of the Swedish Companies Act, on remuneration Board has given the management the task, in dialogue with to the Chairman and other board members, as well as any the owner, of reviewing appropriate objectives with respect remuneration for committee work. to capital structure, profi tability and dividend policy. The Annual General Meeting for 2006, which was LKAB’s second shareholders’ meeting open to the public, was held on 25 April. About 100 people attended the meeting.

CORPORATE GOVERNANCE OF LKAB LKAB ANNUAL REPORT 2006 103 NOMINATIONS/ APPOINTMENT The emphasis of the fi fth meeting is on the market situa- OF THE BOARD AND AUDITORS tion. At the sixth and fi nal meeting, the strategic plan for the Since LKAB is wholly state-owned, it does not have a no- coming three to four years is revised. mination committee per se, as defi ned by the Code. The Each year, the Board of Directors establishes its rules nomination process is in compliance with the Swedish state of procedure, essentially following the recommendation is- ownership policy 2006. The Chairman of the meeting is ap- sued by the Ministry of Industry, Employment and Commu- pointed by the owner’s representative at the meeting. nications.

BOARD OF DIRECTORS COMPOSITION OF THE BOARD According to LKAB’s Articles of Incorporation, the Board of The Board of Directors of LKAB has consisted during the Directors, will consist of not less than six and not more than year of eight members who have no relation to the compa- 11 members with not more than seven deputies. The Pre- ny or its senior management and have been elected by the sident is responsible for ensuring that newly elected board Annual General Meeting, plus three members with three members undergo an introductory course. Owing to the in- deputies appointed by the employees. Deputies of the em- troduction of the Code and the new Companies Act, the ployee representatives also participate in board meetings. Articles of Incorporation were updated during 2006. The secretary of the Board is an independent legal advisor. Normally, six ordinary meetings are held each year: in Fe- The President is not a member of the Board, but attends bruary, April, June, August, November and December. The meetings of the Board. The Chairman is elected, as are the meetings follow a fi xed calendar to ensure that the Board’s other board members, by the general meeting of sharehol- need for information is satisfi ed. ders, for one year. A board meeting held at the end of each quarter consi- ders the interim fi nancial reports for the most recent quarter THE WORK OF THE BOARD OF as well as the forecast for the coming four quarters. This DIRECTORS DURING 2006 allows the Board to make an ongoing assessment of stra- During the year, the Board has held nine meetings, one of tegies and delegations to the President and to decide on which via telephone and one per capsulam. Meetings are specifi c investment projects. normally held in locations where LKAB has operations, in Normally the fi rst meeting of the year is at the year-end Stockholm, or in conjunction with trips to LKAB’s market closing, when LKAB’s auditors also participate. The second areas. In 2006, the Board visited China. Attendance of the is a strategy meeting with an emphasis on personnel deve- members of the Board is presented in the table below. lopment matters combined with a presentation of the inte- rim accounts. The third and fourth meetings also address issues pertaining to operations and strategy.

ATTENDANCE OF THE MEMBERS OF THE BOARD DURING 2006

Board members 22/2 28/3 25/4 20-21/6 21/8 2/10 25/10 20/11 19/12 telephone per capsulam

Björn Sprängare x x x x x x x x x Christer Berggren x x x x x x x x x Stina Blombäck x x x x x x x x Per-Ola Eriksson x x x x x x x x x Lars-Åke Helgesson x x x x x x x x x Anna-Greta Sjöberg x x x x x x x x x Ursula Tengelin x x x x x x x x Egil M. Ullebø x x x x x x x x x Hans Fängvall x x x x x x x Tomas Nilsson x x x x x x x x Tomas Kohkoinen x x x x x x x x x Torsten Thorneus x x x x x x x x Bertil Thornberg x x x x x x x Karl Wikström x x x x x x x x x

CORPORATE GOVERNANCE OF LKAB 104 LKAB ANNUAL REPORT 2006 BOARD COMMITTEES ASSESSMENT OF THE WORK OF THE PRESIDENT Currency and fi nance committee Evaluation of the President’s work is a fundamental task of The Board has appointed a currency and fi nance committee the Board. A summary of the Board’s views is made by the that prepares and oversees the hedging program and fi nan- Chairman, who presents a detailed outline of the President’s cial guidelines. The committee, which is led by the Chair- strengths and weaknesses as identifi ed by the Board. man of the Board, Björn Sprängare, includes board members Anna-Greta Sjöberg and Christer Berggren; Martin Ivert, Pre- EXTERNAL AUDITORS sident and CEO; Leif Boström, Vice President Treasury; Lars The Annual General Meeting of 2003 appointed as the Lund, CFO, and Karl Wikström (employee representative on company’s auditors KPMG Bohlins until the close of the An- LKAB’s Board). The committee held four meetings during nual General Meeting of 2007. The Chief Auditor is Roland 2006. Minutes and reports from the meetings are submitted Nilsson. to LKAB’s Board. During 2006, a decision was taken on the appointment an auditor and deputy auditor from the Swedish National Au- Remuneration committee dit Offi ce. The National Audit Offi ce appointed authorized Terms of compensation for the President as well as salary public accountant Filip Cassel to act as auditor of LKAB from setting principles for other senior executives (Group Mana- 1 Sept. 2006 until the AGM of 2010. To act as deputy for gement) are drafted and determined by a compensation Cassel during the same period, authorized public accountant committee that is appointed by the Board. The committee, Per Redemo has been appointed. which is led by the Chairman of the Board, Björn Sprängare, Remuneration to the auditors is stated in Note 7 of the includes board members Christer Berggren and Lars-Åke Report of the Directors for 2006. Helgesson. The Board votes on the proposals of the com- The auditors have been engaged to review the interim mittee. The Chairman of the Board approves the annual sa- reports as of 2005. lary review of other members of Group Management. Deci- sions are documented and kept on record by the secretary EXECUTIVE MANAGEMENT of the Board. The executive management consists of nine persons. The President’s duties and obligations are stated in the instruc- Audit committee tions for the President and the formal work plan for the The Board is responsible for the company having a forma- Board. According to these, the President shall lized and transparent system which ensures that the esta- • manage, plan, develop and control the company’s blished principles for fi nancial reporting and internal con- operations in accordance with goals and strategies trol are complied with and that functional relations with established by the Board; the company’s auditors are maintained. An audit commit- • make provisions to ensure that the company’s tee was appointed in February 2006. The committee, led accounting complies with the law and that fi nancial by board member Lars-Åke Helgesson, also includes board assets are managed in a satisfactory manner; members Anna-Greta Sjöberg and Christer Berggren. Leif • oversee the company’s operations with respect to Boström, Vice President Treasury, also participates in the compliance with legislation and regulations, ensure committee’s meetings. that the decisions of the Board and other decided measures pertaining to the operation of the company ASSESSMENT OF THE WORK OF THE BOARD are implemented, and that the company’s operations A written survey of the Board’s work, prepared annually, are organized in a functional manner and conducted in includes questions concerning how the Board collectively, accordance with the Articles of Incorporation; and each member individually, has fulfi lled the tasks at hand. • assume responsibility for presentations and other The evaluation report supports the work of the Board. The reporting to the Board; Chairman is responsible for following up the results, which • establish instructions and functional descriptions that form a basis for discussion and improvement. The work of are deemed necessary but have not been established the Chairman is normally assessed by the owner, but this by the Board; may also be part of the work of the Board. • assume responsibility for the company’s ongoing Since 2004, this assessment has been either by ques- media contacts; Media contacts with respect to tionnaire survey or by an in-depth interview, whereby the issues pertaining to ownership and major structural Chairman interviews each AGM-elected board member and considerations are the responsibility of the Chairman. the employee representatives. The entire Board has access • ensure that introductory courses are provided for to the results of this evaluation, as does President, where newly elected members of the Board. applicable. Via the owner’s board representative, the owner sees the results of the assessment prior to the nomination The Chairman of the Board approves any directorships held process. by the President outside of the company.

CORPORATE GOVERNANCE OF LKAB LKAB ANNUAL REPORT 2006 105 Description of the internal control over fi nancial reporting

According to the Swedish Companies Act and the Swedish The company has successfully introduced quality and en- Code of Corporate Governance, the Board of Directors is vironmental and energy management systems. According responsible for internal control, the quality of which shall be to the same model and philosophy, a management system independently assured by the Board. Review of internal con- for quality assurance of fi nancial reporting will also be intro- trol is also in consultation with the company’s auditors, who duced. The foundation for this work has been laid in 2006 normally attend the fi rst board meeting of the year. with the introduction of a group-wide business manage- To ensure the quality of the fi nancial statements, the ment system. Board considers all critical accounting questions and the fi - nancial reports presented by the company. The Board also CONTROL ACTIVITIES considers issues of internal control, compliance with regula- Important aspects of LKAB’s control structure are authori- tions, signifi cant uncertainties in reported values, non-reme- zation manuals, descriptions of authorities, and instructions died errors, events after closing day, changes in estimates, for year-end fi nancial reporting. In addition, there are speci- any possible improprieties, and other conditions affecting fi c control procedures for managing unique risks of errors the quality of fi nancial reporting. in fi nancial reporting. Together with the identifi ed risks, the control activities are being documented in the process re- CONTROL ENVIRONMENT views. Introduction of the new group-wide business mana- The basis of internal control is the control environment gement system has meant that a more in-depth analysis of within LKAB. This includes the organization, decision-ma- the processes that infl uence the fi nancial reporting will be king processes, authorities and responsibilities, as well as conducted in 2007. In addition, a new IT-based instrument the management culture adopted by the Board and Mana- for documentation of the Group’s procedures for accoun- gement. The keyword within the Group is quality. As expres- ting and fi nancial reporting was introduced at the end of the sed in the quality policy, the basis for quality is that each year. individual must assume responsibility for the quality of his or her work and strive for zero-defects in everything he or INFORMATION AND COMMUNICATION she does. Upholding these values entails a process of conti- Information on the applicable control structure is available nuous improvement. Personnel turnover is low, and policies on LKAB’s intranet, to which all employees have access. The and procedures are well established within the Group. This forms of work for how identifi ed defi ciencies are to be dealt is indicative of a long-term approach and stability in the com- with will be established during 2007. The aim is to be able pany. Controlling documents such as the policies for ethics, to regularly review the changes in, and underlying reasons fi nance, currency, information and quality are published on for, the existing controls, and to develop these so that good the company’s intranet. LKAB has an incentive system, but internal control of fi nancial reporting can be maintained. this is not directly dependent on the company’s fi nancial outcome. FOLLOW-UP Responsibilities and roles concerning fi nancial reporting In conjunction with review of the control structure, respon- have been defi ned and communicated to employees in the sibility for ensuring that the control structure is in place and fi nance and fi nancial control functions. To maintain a good is known, and that controls are carried out in the manner level of expertise within the fi nance function, regular train- prescribed, is identifi ed. This follow-up procedure will also ing programs are given. Finance personnel meet regularly be documented. throughout the year, and prior to preparation of the year-end Controllers in each line of business receive the fi nancial statements, instructions for year-end fi nancial reporting are information and comment upon it based on their reviews distributed. with mangers of the lines of business. The most important procedures and principles for fi nan- LKAB’s central fi nance and control function follows up cial reporting have been summarized in a fi nancial manual. the fi nancial outcome and key ratios on an ongoing basis and closely monitors current investments and capital expen- RISK ASSESSMENT ditures within LKAB. Expenditures exceeding MSEK 5 are LKAB’s fi nancial reporting follows guidelines from the Swe- subject to the approval of the President. Expenditures ex- dish state, entailing that reporting should maintain the same ceeding MSEK 10 are subject to the approval of the Board. level as that of listed companies. The priority area during the year has been the investment The company identifi es, analyzes and decides on mana- process. During the year, follow-up of internal control acti- gement of risks, both in operations and with respect to fi - vities has been conducted with respect to the two largest nancial reporting. Work on structuring this process began in capital expenditure projects in LKAB, the new pelletizing 2005. Where the balance sheet and income statement are plants in Malmberget and Kiruna. These two projects repre- concerned, the most important processes have been iden- sent a total fl ow of disbursements of more than 9 billion tifi ed, and these are successively documented as risks are kronor. During 2006, four independent investigations have analyzed. been conducted in consultation with external auditors, whe-

CORPORATE GOVERNANCE OF LKAB 106 LKAB ANNUAL REPORT 2006 reby each separate investigation has been defi ned based on LKAB has at present no internal auditing function. The a risk assessment. These investigations have covered the Board fi nds that the existing structures for follow-up and internal control of, and within, an investment project, eva- evaluation of the internal control provide a satisfactory basis luation of forms of work with contractors, follow-up of cont- for the Board’s assessment of the internal control. For cer- racts, control of sub-contractors and precision of economic tain special audits, external auditing work may also be done. forecasts. Each investigation activity has been summarized The decision is reviewed annually. in an investigative report. In February 2006, the Board established an audit com- Experiences from the above internal control activities, as mittee whose tasks include preparation of the Board’s work well as changes in procedures owing to the introduction of towards quality assurance of the company’s fi nancial re- the new business management system, should mean that porting. work with respect to internal control will be further formali- zed and developed during the coming fi scal year. Luleå, 16 March 2007

STATEMENT 2006 In accordance with pronouncements by the Swedish Cor- porate Governance Board, the Board of Directors will not express an opinion on how well the internal control has fun- On behalf of the Board of Directors of LKAB, ctioned during the year. Chairman of the Board of Directors, Björn Sprängare

CORPORATE GOVERNANCE OF LKAB LKAB ANNUAL REPORT 2006 107 Board of Directors and Auditors

CHAIRMAN BJÖRN SPRÄNGARE (1940) Director. Elected to the Board in 1997. Graduate Forester 1967; Dr. of Forestry Skogshögskolan 1973; President and CEO Mo och Domsjö AB 1981-1986; President and CEO Trygg Hansa 1986-1994; Governor of the Royal Palaces 1996-2004. Other directorships: Chairman of Concert House Foundation in Stockholm; Chairman of Skogssällskapet; Chairman SJR in Scandinavia AB. Member of the Royal Swedish Academy of Engineering Sciences; member of the Royal Swedish Academy of Agriculture and Forestry.

CHRISTER BERGGREN (1944) Deputy Director, Ministry of Industry, Employment and Communications Deputy Board Member 2001, Board Member since 2002. MA Pol. Sci., Stockholm University 1972; employed with Statens Pris- och Kartellnämnd (SPK) 1971-1978; employed with the Ministry of Industry, Employment and Communications since 1978. Other directorships: Member of the boards of IRECO Holding AB, SP Swedish National Testing Björn Sprängare Christer Berggren and Research Institute, and Zenit Shipping AB.

STINA BLOMBÄCK (1951) President of Billerud Karlsborg AB. Elected to the Board in 2002. MSc Chem. Eng., Royal Institute of Technology 1974. Various positions in the Swedish forestry industry 1974-1999: ASSI Karlsborg, Billerud Gruvön, ASSI Kraftliner, ÅF-IPK and AssiDomän. Director of Research AssiDomän 1999-2001 and President Billerud Karlsborg since 2001. Other directorships: Member of the Business Executives Council of the Royal Swedish Academy of Engineering Sciences, STFI-Packforsk AB and the Swedish Association of Pulp and Paper Engineers.

PER-OLA ERIKSSON (1946) Governor, County of Norrbotten. Board Member 1991-1999 and since 2004. Member of Parliament 1982-1998; Chairman and Vice Chairman of the Standing Committee on Finance 1991-1998; Chairman, Landshypotek AB 1994-2005; Director General, NUTEK 1999-2003, Chairman, Teracom AB 2001-2003, and Governor of Norrbotten County since 2003. Stina Blombäck Per-Ola Eriksson Other directorships: Chairman, Längmanska företagarfonden, Norrbottens läns Hushållningssäll- skap, Länsarbetsnämnden i Norrbotten and Skogsvårdsstyrelsen Norrbotten.

LARS-ÅKE HELGESSON (1941) Director. Elected to the Board in 2000. Graduate Engineer; MBA, Handelshögskolan Göteborg 1971; President and CEO,Haldex 1981-1988; Division Manager, Stora 1988-1992; President and CEO, Stora 1992-1998. Other directorships: Chairman of the Boards of Ballingslöv International AB, Generic Sweden AB and TransLink Holding AB. Vice Chairman, British-Swedish Chamber of Commerce. Board Member Axel Christiernsson AB, Crane AB, and the Royal Swedish Academy of Engineering Sciences.

ANNA-GRETA SJÖBERG (1967) Senior Director, Royal Bank of Scotland, Nordic Region and VP RSB Nordisk Renting AB. Elected to the Board in 2005. MBA, Handelshögskolan Stockholm 1989; Sandvik de Mexico 1989-1991; BPA 1991-1993; Lars-Åke Helgesson Anna-Greta Sjöberg Bergaliden AB 1993-1998 (VP 1997-1998), and RSB Nordisk Renting AB since 1998. Other directorships: Board Member, Hufvudstaden AB.

URSULA TENGELIN (1956) Secretary-General of the Swedish Cancer Society. Elected to the Board in 1999. BA, Lund University 1983; Executive MBA Handelshögskolan Stockholm 2000; employed with Roussel Nordiska AB 1979-1995 (VP 1989-1995); VP Hoechst Marion Roussel AB, Nordic and Baltic region 1995-1999; VP Proffi ce Sverige AB 2000-2002 and Swedish Cancer Society since 2003. Other directorships: Samhall AB and Norrland Center AB.

EGIL M. ULLEBØ (1941) Director. Elected to the Board in 2001. MSc Norges tekniske høgskole; MSc Bus. Adm. Norges Handelshøgskole, and studies at Tempelton College, Oxford. Employed with the Orkla Group 1970-2006. Other directorships: Chairman, Østfold Energi AS; Board Member, Borregaard Industries Ltd, Ursula Tengelin Egil M. Ullebø Borregaard Skoger AS, Hustadmarmor AS and Innovasjon Norge Oslo, Akershus and Østfoldo.

BOARD OF DIRECTORS AND AUDITORS 108 LKAB ANNUAL REPORT 2006 EMPLOYEE REPRESENTATIVES TOMAS NILSSON (1965) Ore developer. Elected to the Board in 2004. Secondary school and Runöskolan. Employed with LKAB since 1985. Other directorships: Chairman, Swedish Metalworkers’ Union chap. Gruv 4, Malmberget.

BERTIL THORNBERG (1950) Process operator. Elected to the Board in 2003. Commercial secondary school. Employed with LKAB since 1970. Other directorships: Chairman, SAK-klubben; Secretary and Treasurer, Swedish Metalworkers’ Union chap. 612, Kiruna.

KARL WIKSTRÖM (1951) Tomas Nilsson Bertil Thornberg Head of operations for mining law matters. Deputy Board Member 1993-1999; Board Member since 1999. Employee representative for PTK. Mining engineering qualifi cation. Employed with LKAB since 1969. Other directorships: Vice Chairman and Treasurer, Ledarklubben LKAB.

HANS FÄNGVALL (1963) Process serviceman. Deputy Board Member since 2003. Secondary school, natural sciences, and training in forestry management. Formerly employed with Modo and Domänverket. LKAB since 1989. Other directorships: Chairman, Swedish Metalworkers’ Union chap. Gruv 135, Svappavaara and Chairman, Swedish Metalworkers’ Union chap. 1, Malmfälten.

TORSTEN THORNEUS (1946) Ore harbor worker. Deputy Board Member since 1999. Trade school. Employed with LKAB since 1968. Other directorships: Chairman,Klubb Svartöstaden, Swedish Metalworkers’ Union Karl Wikström Hans Fängvall chap. 2 Luleå.

TOMAS KOHKOINEN (1965) Chief design engineer. Deputy Board Member since 1999. Employee representative for PTK. Secondary engineer, el/tel and training in electrical engineering/design, maintenance. Employed with LKAB since 1986.

AUDITORS KPMG Bohlins AB Torsten Thorneus Tomas Kohkoinen Roland Nilsson (1943) Authorized public accountant Chief accountant.

Annicka Brännström (1958) Authorized public accountant.

Appointed by the Swedish National Audit Offi ce Filip Cassel Authorized public accountant.

Per Redemo Authorized public accountant. Deputy auditor.

SECRETARY Göran Ekdahl (1940) Attorney in the law fi rm of Bird & Bird Advokatbyrå. Secretary of the Board since 1984.

BOARD AND DIRECTORS AND AUDITORS LKAB ANNUAL REPORT 2006 109 Group Management

Martin Ivert Lars-Eric Aaro Leif Boström Anders Furbeck Bengt Hjärpe

Jan-Erik Jatko Ola Johnsson Per-Erik Lindvall Mats Pettersson

MARTIN IVERT (1948) ANDERS FURBECK (1957) OLA JOHNSSON (1955) President and Group CEO. Vice President, Total Quality Vice President, Mining Division. Education: MSc, Royal Institute of Management (TQM). Education: MSc Mechanical Engineering, Technology, 1972. Education: MBA, Göteborg University, Luleå University of Technology, 1980. Employment: SKF 1974-2001, divisional School of Business, 1985. Employment: HTM 1980-1982; Luleå manager 1995-2001;LKAB since 2002. Employment: LKAB since 1985. University of Technology 1982-1984; Directorships: Chairman, SveMin and Directorships: Board member, WM-Data i LKAB since 1984. Underhållsföretagen, Board member Norr AB and Euromines. Directorships: Board member, Handelsbanken, Luleå. Progressum AB. BENGT HJÄRPE (1947) LARS-ERIC AARO (1956) Vice President, Market Division. PER-ERIK LINDVALL (1956) Vice President, Technology & Business Education: MSc, Royal Institute of Vice President, Minerals Division. Development. Technology, 1972. MSc, Luleå University of Technology, Education: MSc, Luleå University of Employment: SKF 1974-1994; LKAB 1980. Technology, 1981. since 1994. Employment: LKAB 1980-1989; Employment: LKAB 1976-1986; Boliden Bergbygg AB 1989-1991; Boliden 1988-1989 and 1992-1998; Secoroc JAN-ERIK JATKO (1949) 1991-2000; LKAB since 2001. 1989-1992; ASSI Domän 1998-2001 and Vice President, Special Businesses Directorships: Board member, SGU. LKAB since 2001. Division. Directorships: Board member, Luleå Education: MBA, Stockholm Universi- MATS PETTERSSON (1965) University of Technology. ty, 1976. Vice President, Human Resources. Employment: LKAB since 1976. Education: MBA Umeå University, Umeå LEIF BOSTRÖM (1959) Directorships: Board member, SveMin, School of Business, 1991. Vice President, Finance. Expandum AB and Norrskenet AB. Employment: LKAB since 1991. Education: MBA, Luleå University of Directorships: Board member, Technology, 1990. Teknikens hus Employment: NCC 1980-1992; LKAB since 1992.

GROUP MANAGEMENT 110 LKAB ANNUAL REPORT 2006 Organization

Operations are organized in four divisions. Development work and issues pertaining to quality, environment, human resources, fi nance and information within the entire group are managed by several units.

President and CEO Martin Ivert

TECHNOLOGY & BUSINESS DEVELOPMENT Lars-Eric Aaro FINANCE Leif Boström

TOTAL QUALITY MANAGEMENT Anders Furbeck

HUMAN RESOURCES Mats Pettersson

COMMUNICATION Martin Ivert

SPECIAL BUSINESSES MARKET DIVISION MINING DIVISION MINERALS DIVISION DIVISION Bengt Hjärpe Ola Johnsson Per-Erik Lindvall Jan-Erik Jatko

ORGANIZATION LKAB ANNUAL REPORT 2006 111 Addresses

LKAB Group Offi ce Minelco Specialities Ltd Box 952, SE-971 28 Luleå, Sweden. Raynesway, Derby, DE21 7BE, England. Phone +46 920 380 00. Fax +46 920 195 05. Phone +44 1332 673131. Fax +44 1332 677590. Martin Ivert, President and CEO [email protected] Stuart Larbey, President MARKET DIVISION Minelco Minerals Ltd LKAB Norden Flixborough Industrial Estate, Flixborough, North Lincolnshire, Sweden, Finland, Noway, Denmark och Iceland DN15 8SF, England. Box 952, SE-971 28 Luleå, Sweden. Phone +44 1724 277411. Fax +44 1724 866405. Phone +46 920 380 00. Fax +46 920 148 63. [email protected] [email protected] Robert Boulton, President Stig Nordlund, Sales Manager Minelco GmbH LKAB S.A. P.O. Box 10 25 54, DE-450 25 Essen, Germany. Benelux, France, UK, Italy, Spain, Phone +49 201 45060. Fax +49 201 4506 490. Portugal, Turkey, Africa and America [email protected] Chaussée de la Hulpe 150, BE-1170 Brussels, Belgium. Ian Yates, President Phone +32-2 663 36 70. Fax +32-2 675 05 91. Minelco B.V. [email protected] Vlasweg 19, Harbour M164, P.O. Box 16, Staffan Stenström, President NL-4780 AA Moerdijk, The Netherlands. LKAB SCHWEDENERZ GmbH Phone +31 168 388 500. Fax +31 168 388 599. Germany, Austria, Central Europe and Eastern Europe [email protected] Rüttenscheider Strasse 14, DE-45128 Essen, Germany. Peter Duifhuis, President Phone +49 201 879 440. Fax +49 201 879 4444. Minelco Asia Pacifi c Ltd. [email protected] 4502 China Resources Building, 26 Harbour Road, Wanchai, Hong Kong Göran Ottosson, President Phone+852 2827 4138. Fax +852 2827 5574. LKAB FAR EAST Pte. Ltd [email protected] Far East, Southeast Asia, Middle East and Australia John Engel, President 300 Beach Road #29-02, The Concourse, Singapore 199555. Minelco (Tianjin) Minerals Co., Ltd Phone +65 6392 49 22. Fax +65 6392 49 33. Yicun Industrial Park, Jungliangcheng, Dongli District, Tianjin, [email protected] P.R. China 300301. Johan Heyden, President Phone +86 22 2435 1706. Fax +86 22 2435 1708. [email protected] MINING DIVISION Bin Zhou, President LKAB Minelco Thailand SE-981 86 Kiruna, Sweden. Representative Offi ce Bangkok, 10th Floor, Boonmitr Building, Phone+46 980 710 00. Fax +46 980 109 02. 138 Silom Road, Suriwong, Bangrak, Bangkok 10500, Thailand. LKAB Phone +66 634 4171. Fax +66 634 4172. SE-983 81 Malmberget, Sweden. [email protected] Phone +46 970 760 00. Fax +46 970 236 00. Nick Mellor, President LKAB, Narvik malmhamn Minelco A/S Postboks 314, NO-8504 Narvik, Norway. Boks 1329, DK-3900 Nuuk, Greenland. Phone +47 769 238 00. Fax +47 769 449 25. Phone +299 1991 10 Svein Sivertsen, General Manager [email protected] Robert Näslund, President LKAB, Luleå malmhamn Box 821, SE-971 25 Luleå, Sweden. Minelco Slovak Republic Phone +46 920 380 50. Fax +46 920 380 60. Panenska 13, SK-81103 Bratislava, Slovak Republic. Lars Andersson, General Manager Phone +421 2 5930 5753. Fax +421 2 5930 5754. [email protected] MINERALS DIVISION Marian Zilinsky, Sales Manager MINELCO AB SPECIAL BUSINESSES DIVISION Box 952, SE-971 28 Luleå, Sweden. Phone +46 920 381 60. Fax +46 920 190 88. Wassara AB [email protected] Head Offi ce, Götgatan 62, SE-118 26 Stockholm, Sweden. Per-Erik Lindvall, President Phone +46 8 84 95 50. Fax +46 8 84 02 71. [email protected] Minelco Oy Peter Johansson, President P.O. Box 57. FI-718 01 Siilinjärvi, Finland. Phone +358 17 266 0160. Fax +358 17 266 0161. AB Kiruna Grus & Stenförädling [email protected] Box 817, SE-981 28 Kiruna, Sweden. Kari Laukkanen, President Phone +46 980 681 90. Fax +46 980 832 79. [email protected] Minelco Inc. Peter Söderman, President 2020 Scripps Center, 312 Walnut Street Cincinnati, OH 45202, USA. Fastighets AB Malmfälten Phone +1 513 322 5530. Fax +1 513 322 5531. SE-981 86 Kiruna, Sweden. [email protected] Phone +46 980 710 00. Fax +46 980 728 95. Mats Drugge, President [email protected] Lennart Thelin, President

ADDRESSES 2007 112 LKAB ANNUAL REPORT 2006 Reporting dates 2007

Annual General Meeting 2007 To be held in the LKAB Auditorium, Luleå University of Technology, 26 April 2007

LKAB will publish the following fi nancial reports for fi scal year 2007: • 26 April 2007, interim report for the period 1 January - 31 March. • 21 August 2007, interim report for the period 1 January - 30 June • 25 October 2007, interim report for the period 1 January - 30 September • February 2008, year-end statements for fi scal year 2007 • April 2008, the annual report for fi scal year 2007

Financial reports in Swedish and English are published on the Group website, www.lkab.com.

Print versions of annual reports are available on request from LKAB Communication, Box 952, SE-971 28 Luleå, Sweden. telephone: +46 (0)920 380 00, fax: +46 (0)920 195 05, e-mail: [email protected]

LKAB’s ANNUAL REPORT 2006 Produced by: LKAB in cooperation with JOB Reklambyrå AB, Luleå. Photo: Fredric Alm, Jennie Segerberg and LKAB. Translation: Mark Wilcox. Printing: Luleå Grafi ska AB, April 2007. Box 952, SE-971 28 Luleå, Sweden Phone+46 (0)920 380 00 Fax +46 (0)920 195 05 www.lkab.com