Prolongacion Juarez S/N, Colonia La Loma, Monclova, Coahuila, C.P. 25770, Mexico
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Prolongacion Juarez S/N, Colonia La Loma, Monclova, Coahuila, C.P. 25770, Mexico Altos Hornos de México, S.A.B. de C.V. and Subsidiaries Annual Report presented pursuant to the general provisions applicable to securities issues and other market participants, corresponding to the year ended in December 31, 2018. As of December 31, 2018, the capital stock is represented by 585,542,3051 nominative common shares of a unique series, with no par value, of which 471,563,023 shares are fully subscribed and paid, and 113,979,2822 shares are pending subscription. Currently, such shares are in the process of restatement and registration with the National Securities Registry (“RNV”). “The registration with the RNV does not imply certification on the value of the securities, solvency of the issuer of the accuracy or veracity of the information contained in this annual report, or validates the acts which, where appropriate, have been carried out in contravention of the laws.” 1 Total capital stock resulting from the increase in variable capital approved by the general ordinary shareholders’ meeting of the company held on April 17, 2015 in the amount of MXN$13,762,229,785.70 through the issuance of 227,669,803 nominative common shares of a unique series, at no par value, plus the 357,872,502 shares previously subscribed and paid. 2 Shares that might be subscribed as a result of (i) minor adjustment for creditors, subscription, and (ii) eventual right of subscription of shareholders that are able to exercise their preemptive right. Contents Chapter 1. General Overview 3 1.1 Glossary of Terms and Definitions 3 1.2 Executive Summary 6 1.3 Risk Factors 11 1.4 Other Securities 17 1.5 Significant Changes to the Stock Rights Registered with the National Securities Registry (“RNV”) 18 1.6 Application of Funds 19 1.7 Public Documents 20 Chapter 2. The Company 21 2.1 History and Development 21 2.2 Business Description 23 2.3 Sales and Marketing 32 2.4 Environmental Matters 52 2.5 Human Resources 58 2.6 Raw Material Requirements 59 Chapter 3. Financial Situation 68 3.1 Relevant Financial Information 68 3.2 Management Comments and Analysis on the Results from the Financial Operation and Situation 70 3.3 Internal Control 84 3.4 Critical Accounting Estimates 85 3.5 New Accounting Criteria 88 Chapter 4. Management 91 4.1 External Auditors 91 4.2 Management and Employees 92 4.3 Bylaws and Other Agreements 94 4.4 Other Corporate Government Practices 95 4.5 AHMSA Control 99 4.6 Transactions with Related Parties 100 4.7 Other Events 102 Chapter 5. Stock Market 104 5.1 Share Behavior in the Stock Market 104 Chapter 6. People in Charge 105 Chapter 7. Appendixes 111 Chapter 1. General Overview 1.1 GLOSSARY OF TERMS AND DEFINITIONS In this document, the terms “AHMSA” and “Company” refer to Altos Hornos de México, S.A.B. de C.V. and its Subsidiaries, unless the text indicates otherwise. “GAN” refers to Grupo Acerero del Norte S.A. de C.V. (AHMSA’s holding). References to “Mexican pesos or “MXN$” mean the legal currency of the Mexican United States (“Mexico”), while “U.S. dollars or “USD$” refer to the legal currency of the United States of America. References to “euros” or “€$”means the legal currency of the countries of the European Union (“EU”) and the Eurozone. The term “Tons” refers to the metric tons of 1,000 kilograms. AHMSA prepares it consolidated financial statements in conformity with International Financial Reporting Standards (“NIIF” or “IFRS” by its initials in English) issued by the International Accounting Standards Board (“IASB” by its initials in English). This document contains conversions of certain amounts in Mexican pesos into U.S. dollars, at the specified exchange rates, only for the convenience of the reader. These conversions should not be interpreted as if the amounts in pesos truly represent these amounts in U.S. dollars or that can be translated into U.S. dollars at the exchange rate. Unless otherwise stated, when amounts in U.S. dollars are stated, means that they were converted from Mexican pesos at the exchange rate published by Banco de México in the Federal Official Gazette (“DOF”) as of December 31, 2018, 2017 and 2016, which were MXN$19.6829, MXN$19.7354 and MXN$20.6640 per USD$1.00 dollar, respectively. Unless otherwise stated, references to the market share of AHMSA, the market share of a particular product, and the market share of imports and exports, refer to the share in the apparent Mexican national consumption of steel products (which consists of the sum of domestic production of finished steel goods, plus imports of finished goods less exports of finished goods). With regard to the apparent Mexican national consumption and the information of certain market share not related to AHMSA, is based on information published by the National Chamber of the Iron and Steel Industry (“CANACERO”) and 2018 information is based on preliminary amounts published by this entity. The information published by CANACERO is based on information voluntarily provided by Mexican steel producers. Even though AHMSA has no reason to believe that this information provided to CANACERO by Mexican steel producers is incorrect, it cannot be assured that this information in completely correct. This report contains words such as “grow”, “expect” and “anticipate” and similar expressions that identify expectations. The use of these terms reflects our views about future events and financial performance. Actual results may differ from our expectations for the future as a result of various factors which may be beyond our control, including, but not limited, the effects for change in our relationship with and between our affiliate and related parties, movements in prices of raw materials, competition, significant changes in the economic or political situation in Mexico or other countries situation, or changes in our regulatory environment. As a result, we warn our readers not to put an undue trust in these expectations. In any case, these expectations refer solely to the moment they were issued, and the Company does not assume any obligation to update or revise any of them, whether as a result of new information, future events or any other cause. Particular names and technical terms are used throughout this document. To facilitate their understanding, below is a glossary of the most important ones. Pig Iron: Virgin iron produced in a Blast Furnace, raw material used in the manufacture of steel. Billet: Semi-finished steel product used to roll long products such as rod, wire rod, bars and structural products. The billet is different from steel slab for its external dimensions and its section, which is usually square, and measures between two and seven inches of edge, and the steel slab of the rectangular section measures between 30 and 80 inches wide and 2 and 10 inches thick. Installed Capacity: Nominal capacity to produce steel in a specific period of time. Collection Centers: Courtyards for mixing coal from different supply sources for delivery of a single coal according to the costumer’s specifications. Continuous Casting (“CC”): Method of casting steel directly from the furnace to a certain mold, either steel slab or billet. The steel in the furnace is casted into pots which are places on a distributor, which in turn, is located on top of the continuous casting. While the steel is casted from the distributor into a mold, it solidifies forming a hot steel ribbon. At the end of the continuous casting, a guillotine cuts the continuous flow forming billets or slabs. Descaling: Process in which the roll of steel is cleaned from rust, impurities and oil for use in subsequent processes. Through a continuous process, the roll is unrolled and goes through a bath of hydrochloric acid to remove oxidation. After, the blade is rinsed and dried. Dumping: Unfair trade practice sanctioned by Mexican law and the World Trade Organization (“WTO”), which consists of selling a product for export at a price lower than that in its domestic market. ISO: International organization for standardization and normalization (“International Organization for Standardization”) of operations for the assurance of production quality. ISO 9001: Certification concerning the standardization and normalization of operations for the assurance of production quality. ISO 14001: International voluntary certification that allows managing the impacts of an activity, a good or a service in relation to the environment in accordance with the ISO. Hot Rolled Steel Sheet: Hot steel roll flattened in a mill. It can be sold this way, or it can be further processed in other finished goods. Cold Rolled Steel Sheet: Steel Sheet that after being hot rolled has gone through a descaling process and cold reduction mills. Cold rolled steel sheets have a caliber considerably less than hot sheets; therefore, it is a product of higher value added. Environmental Laws: Means the laws, bylaws, ordinances, regulations, criteria, guidelines, federal, state and municipal official standards and rules currently in force in Mexico concerning to the regulation and protection of human health, safety, environment and natural resources, including air, surface waters, groundwater, wetlands, land, superficial or subsoil strata, flora and fauna, aquatic species and vegetation. Lims: Magnetic drums. Ingot: Steel semi-finished good. Liquid steel poured into molds or ingot molds where it solidifies. Once the steel cools, the mold is removed, and the ingot is overheated to subsequently go through hot mills. Iron Ore: A mineral that contains enough iron to be used in the production of steel. The iron is not found freely, but is trapped in the crust of the soil in the form or iron oxide.