This document, which comprises a prospectus (the “Prospectus”) relating to Ruukki Group Plc (the “Company” or “Ruukki”) has been prepared in accordance with the requirements of the Finnish Securities Markets Act (26.5.1989/495, as amended) (the “Finnish Securities Markets Act”), the Decree of the Finnish Ministry of Finance on offering circulars referred to in Chapter 2 of the Finnish Securities Markets Act (23.6.2005/452, as amended), the EU Prospectus Regulation (EC) No 809/2004, and the regulations and guidelines issued by the Finnish Financial Supervisory Authority (the “Finnish FSA”). The Finnish FSA has approved this Prospectus. However, it assumes no responsibility for the correctness of the information contained herein. The journal number of the approval decision by the Finnish FSA is 60/212/2010. The Finnish FSA has requested that the Company obtain a Finnish language translation of the summary set out herein. This Prospectus and the Finnish language translation of the summary set out in this Prospectus has been made available to the public in Finland as required under Chapter 2, Section 3 of the Finnish Securities Markets Act (26.5.1989/495, as amended) by the same being available, free of charge, in electronic form on the Company’s website at: www.ruukkigroup.fi and in printed form at the offices of the Company at Keilasatama 5, 02150 Espoo, Finland until and including the date of Admission. The Company has also requested that the Finnish FSA provides a copy of this Prospectus and the certificate of approval of the Finnish FSA to the UK FSA. The Company is not offering any new Ordinary Shares in the Company or other securities in connection with Admission. This document does not constitute an offer, the solicitation of an offer, or an invitation to any person to subscribe for or purchase any Ordinary Shares in the Company. Applications have been made to the UK FSA and to the London Stock Exchange for the Company’s Ordinary Shares (being 247,982,000 Ordinary Shares as at 29 June 2010, the latest practicable date prior to the publication of this document), to be admitted to the premium segment of the Official List of the UK FSA and to trading on the London Stock Exchange’s main market for listed securities respectively. Admission to the Official List, together with admission to the London Stock Exchange’s main market for listed securities, constitutes admission to official listing on a regulated market. The Ordinary Shares are currently admitted to trading on the stock exchange list of the Helsinki Stock Exchange, which is a regulated market, and will continue to be after Admission. It is expected that Admission will become effective and that dealings on the London Stock Exchange in the Ordinary Shares will commence at 8.00 a.m. (London time) on or around 16 July 2010. No application has been, or is currently intended to be, made for such Ordinary Shares to be admitted to listing or dealt with on any other stock exchange. All references to Ordinary Shares shall be deemed, where the context permits, to include reference to the Depositary Interests. You should read the whole of this document (including the information incorporated by reference) in full. In particular, see Part II: “Risk Factors” for a discussion of certain risks and other factors that should be considered in connection with any investment decision relating to the Ordinary Shares.
RUUKKI GROUP RUUKKI GROUP PLC (Incorporated as a public limited company governed by the laws of Finland with business identity code 0618181-8 and trade register number 360.572) Admission of Ordinary Shares to the premium segment of the Official List and to trading on the London Stock Exchange Sponsor: Ernst & Young LLP
Ernst & Young LLP, which is authorised and regulated in the United Kingdom by the UK FSA, is acting exclusively for the Company and no-one else in connection with the Admission and will not regard any other person (whether or not a recipient of this document) as its client in relation to Admission nor be responsible to anyone other than the Company for providing the protections afforded to clients of Ernst & Young LLP nor for providing advice in relation to the Admission or any other matter referred to herein. Save for the sponsor’s responsibilities of Ernst & Young LLP under the FSMA, Ernst & Young LLP accepts no responsibility whatsoever and makes no representation or warranty express or implied for the contents of this document, including its currency, accuracy, reliability, timeliness, continued availability, correctness, completeness or verification or for any other statement made or purported to be made by it, its affiliates, officers, employees or advisers, or on its behalf, in connection with the Company or Admission (“Information”), and any information provided by Ernst & Young LLP in respect of Admission is provided merely as a conduit for the Company and nothing contained in this document is, or shall be relied upon as, a promise or representation in this respect, whether as to the past or the future. Ernst & Young LLP disclaims to the maximum extent permitted by applicable law all and any responsibility or liability whether arising in tort, contract or otherwise and whether arising as a result of any omission from, or inadequacy or inaccuracy in, the Information or the distribution, responsibility or possession or use of the Information in or from any jurisdiction which they might otherwise have in respect of this document or any such statement. No person has been authorised to give any information or make any representation other than those contained in this document and, if given or made, such information or representation must not be relied upon as having been so authorised by the Company, the Directors or Ernst & Young LLP. In particular, the content of the Website does not form part of this document and you should not rely on it. The distribution of this document in certain jurisdictions other than the United Kingdom and Finland may be restricted by law and therefore persons into whose possession this document may come should inform themselves about and observe any such restrictions. Any failure to comply with these restrictions may constitute a violation of the securities laws of any such jurisdiction. No action has been or will be taken by the Company or Ernst & Young LLP that would permit possession or distribution of this document or any other material relating to the Ordinary Shares in any country or jurisdiction where action for that purpose is required, other than in the United Kingdom or Finland. In particular, this document is not for distribution in the United States, Australia, Canada, South Africa or Japan. The Ordinary Shares have not been and will not be registered under the US Securities Act of 1933 (as amended) (the “Securities Act”) and may not be offered or sold in the United States of America (the “United States”) unless registered under the Securities Act or an exemption thereunder is available. Without prejudice to any legal or regulatory obligation on the Company to publish a supplementary prospectus or other supplementary document neither the delivery of this document, nor Admission, shall under any circumstances create any implication that there has been no change in the affairs of the Company or the Group since the date of this document or that the information contained herein is correct at any time subsequent to the date of this document. The contents of this document should not be construed as legal, business or tax advice. You should consult your own legal adviser, independent financial adviser or tax adviser for legal, financial or tax advice. The date of this document is 30 June 2010. TABLE OF CONTENTS
Clause Headings Page PART I SUMMARY 3 PART II RISK FACTORS 12 PART III DIRECTORS, EXECUTIVE MANAGEMENT, REGISTERED OFFICE AND ADVISERS 29 PART IV FORWARD LOOKING STATEMENTS AND OTHER IMPORTANT INFORMATION 30 PART V INFORMATION ON THE GROUP 32 PART VI DIRECTORS, SENIOR MANAGEMENT AND CORPORATE GOVERNANCE 48 PART VII OPERATING AND FINANCIAL REVIEW 54 PART VIII HISTORICAL FINANCIAL INFORMATION 112 Section A – Historical financial information on the Company 112 Section B – Historical financial information on Mogale Alloys (Pty) Ltd 208 Section C – Historical financial information on Junnikkala Oy 236 Section D – Historical financial information on EWW 262 PART IX PRO FORMA FINANCIAL INFORMATION 290 PART X DETAILS OF ADMISSION 293 PART XI TAXATION 299 PART XII ADDITIONAL INFORMATION 303 PART XIII INFORMATION INCORPORATED BY REFERENCE 338 PART XIV DEFINITIONS 339
2 PART I SUMMARY
The following summary is extracted from, and should be read as an introduction to, and in conjunction with, the full text of this document. Any investment decision relating to the Ordinary Shares should be based on the consideration of this document as a whole. Where a claim relating to the information contained in this document is brought before a court, a claimant investor might, under the national legislation of an EEA state, have to bear the costs of translating this document before legal proceedings are initiated. Civil liability attaches to those persons who are responsible for this summary, including any translations of this summary, but only if this summary is misleading, inaccurate or inconsistent when read together with other parts of this document.
1. Introduction The Group has announced its intention to obtain an admission of its Ordinary Shares to the Official List and to trading on the London Stock Exchange.
2. The Group 2.1 Overview of the Group The Group is primarily engaged in the processing of natural resources, and currently has minerals processing operations in South Africa and Europe and house building and wood processing operations in Finland. The Group has undergone a series of strategic changes in recent years, investing in a number of different sectors and shifting the focus of its interests. The Group’s minerals processing operations are based at locations in South Africa and Europe. The facilities and expertise of the Group’s minerals processing businesses enable them to produce a diverse range of products, including specialised low carbon and ultralow carbon ferrochrome, charge chrome ferrochrome, silico manganese and chromium-iron-nickel alloy (stainless steel alloy). Once processed, the end-products are distributed internationally by the Group’s minerals sales team, to customers operating in the stainless steel, automotive, aerospace and power plant industries and located in the USA, Brazil, China, India, Korea, Japan, Taiwan, Singapore, Nigeria, South Africa and a number of European countries. The Group entered the minerals sector with the acquisition of its Southern European minerals processing business in November 2008, prior to which its focus had been as a Finnish based group with interests in a variety of sectors, including house building and wood processing. The Group expanded its mineral processing businesses with the acquisition of Mogale in South Africa in May 2009. The Group continues to be engaged in house building and wood processing operations at sites in northern Finland, which produce pre-fabricated ready-to-move-in wooden houses, process softwood timber, primarily pine and spruce, and produce wooden pallets. The Group is currently reviewing its interests in the house building and wood processing sectors. The outcome of this review may be a decision to retain these businesses and develop them to maximise their value or may include a disposal of, and/or demerger and separate listing of, the Group’s house building and wood processing businesses. 2.2 Key strengths The Directors believe that the Group’s key strengths are: Minerals processing business • Application of direct current technology to smelting operations • Cost and quality competitiveness • Technical expertise in smelting and mining operations including the use of direct current furnaces
3 • Management expertise in smelting and mining operations including the use of direct current furnaces • Diversity of products and flexibility of production • Specialised custom ferrochrome products form an integrated part of customers’ supply chains • In-house sales and marketing House building and wood processing businesses • Strong house building business, one of the pioneers and leading ready-to-move-in house producers in Finland 2.3 Strategy The Group’s strategy is to: • Expand production and increase market share of the minerals processing business • Increase vertical integration of the minerals processing business • Target the processing of closely-related metals and minerals • Target organic growth of the house building business • Review of the house building and wood processing businesses
3. Admission 3.1 Process and consequences Applications have been made to the UK FSA and to the London Stock Exchange for the Company’s Ordinary Shares to be admitted to the premium segment of the Official List of the UK FSA and to trading on the London Stock Exchange’s main market for listed securities respectively. It is expected that Admission will become effective and that dealings on the London Stock Exchange in the Ordinary Shares will commence at 8.00 a.m. (London time) on or around 16 July 2010. No new Ordinary Shares are being issued by the Company as part of or in connection with Admission. Upon Admission, dealings in the Company’s Ordinary Shares on the London Stock Exchange will be able to take place in the CREST system as more particularly described in paragraph 2 of Part X of this document. The Company’s Ordinary Shares will continue to be listed on the Helsinki Stock Exchange in accordance with the rules of that exchange. 3.2 Rationale The Directors expect Admission to (i) enhance the Group’s profile and status in the markets in which it operates and (ii) to benefit the Shareholders by providing them with increased liquidity in their Ordinary Shares. The Directors believe that Admission will (i) assist the Group’s ability to pursue strategic mergers and acquisitions, alliances, and other forms of co-operation with leading international minerals business customers, suppliers and other companies; (ii) give Ruukki direct and indirect access to additional international institutional investors and financiers, providing the Group with opportunities to enlarge its shareholder base and (iii) positively contribute to the Group’s growth by enabling it in the future to access equity, debt or funding opportunities that may not otherwise be possible, feasible or open to the Group.
4. Summary Financial Information The summary financial information set out below has been extracted without material adjustment (except where restated as noted below) from, and should be read together with, the Company’s audited consolidated IFRS financial statements for the years ended 31 December 2007, 31 December 2008 and
4 31 December 2009, which are incorporated by reference into and/or included in full in Part of VIII of this document. Information for the years ended 31 December 2007 and 31 December 2008 have been extracted from the 2008 and 2009 annual financial statements respectively to reflect reclassification adjustments (as noted below). The numbers set for the year ended 31 December 2009 are audited. Although the 2007 and 2008 numbers had originally been audited, due to certain reclassifications and restatements, which have been made for consistency with the presentation and policies used in the 2009 financial statements the 2007 and 2008 numbers presented above are considered to be unaudited. Ruukki has made certain acquisitions and disposals since 1 January 2007 and its current business activities have not all been carried on during the three year period. This is reflected in the financial information in Section A of Part VIII and the operating and financial review in Part VII of this document. 4.1 Consolidated income statement The following table sets out the Group’s consolidated income statement for periods indicated: Consolidated profit and loss (IFRS) For the years ended 31 December 2007 2008 2009 €’000 €’000 €’000 Revenue 213,910 247,361 193,359 Other operating income(1) 6,874 3,648 7,587 Changes in inventories of finished goods and work in progress 1,650 (9,050) (17,495) Raw materials and consumables used (140,802) (171,595) (115,255) Employee benefits expense (32,037) (37,358) (28,230) Depreciation and amortisation (8,022) (14,168) (26,960) Other operating expenses(1) (24,242) (27,691) (20,611) Impairment, net (1,034) (41,034) (17,020) Items related to associates (core)(1) 74 — 6 Operating profit/loss(1) 16,371 (49,886) (24,617) Finance income 7,467 16,783 5,871 Finance cost (3,983) (12,958) (9,306) Items related to associates (non-core)(1) (697) 171 (284) Profit/loss before taxes 19,158 (45,891) (28,336) Income taxes (5,478) 1,171 5,609 Gain on disposal from discontinued operations — 12,033 — Profit/loss for the period 13,680 (32,687) (22,727) Profit attributable to equity shareholders 12,651 (31,386) (19,744) to minority shareholders 1,030 (1,301) (2,983) 13,680 (32,687) (22,727)
Notes: (1) Ruukki decided to change the way it presents certain information in its 2009 financial statements. The “items related to associates (core)” and “items related to associates (non-core)” for 2007 and 2008 have been restated accordingly. Further details are set out in paragraph 5.1 of Part VII.
5 4.2 Key financial information by segment For the year ended 31 December 2007 House building Other & Minerals and wood discontinued processing processing operations €’000 €’000 €’000 Revenue — 119,930 93,930 Operating profit/(loss), EBIT — 19,576 (3,279) EBITDA — 23,605 1,747 For the year ended 31 December 2008 House building Other & Minerals and wood discontinued processing processing operations €’000 €’000 €’000 Revenue 12,308 144,066 90,988 Operating profit/(loss), EBIT (999) (13,718) (23,136) EBITDA 1,880 14,483 986 For the year ended 31 December 2009 House building Other & Minerals and wood discontinued processing processing operations €’000 €’000 €’000 Revenue 71,035 122,324 1 Operating profit/(loss), EBIT (30,066) 13,610 (8,161) EBITDA 10,380 17,086 (8,104) 4.3 Summary balance sheet The following table sets forth balance sheet data for the periods indicated: Gross capital expenditures (IFRS) for the years ended 31 December 2007 2008 2009 €’000 €’000 €’000 Assets Non-current assets 81,656 254,154 386,583 Current assets 415,440 309,121 163,900 Assets held for sale 2,893 — 12,714 Total assets 499,990 563,275 563,198 Equity and Liabilities Equity attributable to equity holders of the parent 409,655 348,942 268,144 Minority interest 1,995 7,768 17,878 Total equity 411,650 356,710 286,022 Non-current liabilities 29,188 140,925 169,318 Current liabilities 58,566 65,640 101,577 Liabilities classified as held for sale 585 — 6,280 Total liabilities 88,340 206,565 277,175 Total equity and liabilities 499,990 563,275 563,198
6 4.4 Summary cash flow The table below sets out summarised consolidated cash flows for the periods indicated: (IFRS) for the years ended 31 December 2007 2008 2009 €’000 €’000 €’000 Net cash flow from operating activities 5,783 (952) 185 Net cash flows used in investing activities (14,114) (118,334) (107,443) Net cash flows from financing activities 32,089 116,214 117,706 Increase in cash and cash equivalents 23,758 (3,071) 10,449 Cash at beginning of period 24,768 48,527 45,413 Exchange rate differences — (42) (10) Cash at end of period 48,527 45,413 55,852 Change in balance sheet 23,758 (3,071) 10,449
4.5 Summary pro forma income statement of Ruukki The following summary unaudited pro forma income statement of Ruukki for the year ended 31 December 2009 is extracted from the unaudited pro forma income statement in Part IX of this document which was prepared in the manner set out in Part IX to illustrate the effect on Ruukki’s consolidated profit and loss for that year, as if the acquisition of Mogale and the disposal of the Tervola Group had taken place on 1 January 2009. This pro forma financial information addresses a hypothetical situation and does not represent Ruukki’s actual financial position or results.
Adjustments Eliminations and Tervola adjustments Group Mogale Adjustments Group Tervola Pro forma 1-12/2009 1-5/2009 to Mogale 1-12/2009 Group Group €’000 €’000 €’000 €’000 €’000 €’000 Revenue 193,359 10,541 — (11,986) 970 192,884 Operating profit/(loss) (24,617) (1,293) (3,920) (1,204) 448 (30,588) Profit/(loss) before taxes (28,336) (9,443) 4,446 (1,245) 448 (34,132) Profit/(loss) for the period (22,727) (8,955) 5,357 (908) 332 (26,903) Profit/(loss) attributable to: equity shareholders (19,744) (7,603) 4,548 (908) 332 (23,377) minority shareholders (2,983) (1,352) 809 — — (3,526)
7 4.6 Summary consolidated income statement The following table sets out the Group’s summary consolidated income statement for the periods indicated: Consolidated profit and loss (unaudited IFRS) 3 months ended 31 March 2009 2010 €’000 €’000 Revenue 44,488 54,429 Other operating income 158 392 Operating expenses (42,959) (52,634) Depreciation and amortisation (5,614) (7,236) Impairment — (517) Items related to associates (core) — (1) Operating profit/loss (3,927) (5,567) Finance income and expense (1,936) (215) Items related to associates (non-core) (11) 42 Profit/loss before taxes (5,874) (5,740) Income taxes 236 1,300 Profit/loss for the period (5,638) (4,440) Profit attributable to: Owners of the parent (3,572) (3,459) Non-controlling interests (2,065) (981) (5,638) (4,440)
5. Current Outlook Although the global economy remains fragile, the Company expects demand for Ruukki’s products to be better in 2010 than in 2009 in its major product markets. However, the Company expects the minerals processing sector will remain volatile. There is also pressure for price increases for the raw materials used by the house building and wood processing businesses. The Group is looking for expansion opportunities and potential acquisition targets within its main business areas and is evaluating alternative structures for reorganising its house building and wood processing businesses.
6. Directors, Management and Advisers 6.1 Directors Jelena Manojlovic (Chairperson), Philip Baum, Paul Everard, Markku Kankaala, Terence McConnachie, Chris Pointon and Barry Rourke. 6.2 Senior Management Mr. Alwyn Smit Chief Executive Officer, Group Dr. Danko Koncar Chief Executive Officer, Minerals Processing Businesses Dr. Alistair Ruiters Chief Executive Officer, Ruukki South Africa Mr. Thomas Hoyer Chief Executive Officer, House Building and Wood Processing Businesses Ilona Halla Chief Financial Officer, Group
8 6.3 Advisers Sponsor Ernst & Young LLP English legal advisers to the Company Herbert Smith LLP Finnish legal advisers to the Company Hannes Snellman Attorneys Ltd English legal advisers to the Sponsor Hogan Lovells International LLP Reporting accountant Ernst & Young LLP Auditors of the Group Ernst & Young Oy
7. Major Shareholders
Number of Percentage Ordinary of issued Name of Shareholder Shares share capital Kermas Limited 70,766,500 28.54 Atkey Limited(1) 51,176,401 20.64 Hanwa Company Limited 30,000,000 12.10 Nordea Bank Finland (nominee registered) 22,620,511 9.12 Evli Pankki Oyj (nominee registered)(1)(2) 21,052,500 8.50
Note: (1) In aggregate, Atkey Limited and Aida Djakov hold 67,228,901 Ordinary Shares (27.11 per cent. of the issued share capital). (2) Of the Ordinary Shares held by Evli Pankki Oyj, 16,052,500 Ordinary Shares representing 6.47 per cent. of the issued share capital are held for Aida Djakov.
8. Related Party Transactions Since 1 January 2007, the Company has entered into a number of related party transactions, including the acquisition of the Southern European minerals processing business from Kermas (a major shareholder), entry into a standby loan from Kermas, payment of earn out and deferred purchase consideration relating to previous acquisitions and the acquisition and disposal of interests in subsidiaries and associated companies. Further details of related party transactions are set out in paragraph 13 of Part XII.
9. Summary of Risk Factors Shareholders and prospective investors should consider, together with the other information contained in this document, the factors and risks attaching to an investment in the Company, including the following risks: Risks relating to the Group’s business • The Group’s financial performance is dependent on cyclical businesses and on commodity prices which are cyclical and volatile. • The price and availability of raw materials has a significant effect on the Group’s businesses. • The Group will incur costs and forego revenues as a result of curtailed production. • The Group’s plans have involved and are likely to involve further acquisitions and development of existing and new business interests, which require project management, execution and integration. • The Group may be unable to manage effectively the expansion of its operations. • The Group is dependent on its relationship with Kermas and Danko Koncar. • The Group is dependent on the attraction and retention of key employees. • The Group is dependent upon transport infrastructure for the operation of its businesses. • Labour disputes could lead to lost production and/or increased costs. • The Group is in the processes of centralising various management functions and may incur costs and/or suffer inefficiencies as a result of its management structure and the changes.
9 • The Group’s financial reporting function was stretched in 2008 and 2009 and to the extent the Group is required to make further changes to its financial reporting procedures it may incur additional expenses and/or demands on management time. • The Group is exposed to fluctuations in currency exchange rates. • The Group’s insurance policies may be insufficient to cover potential losses. • The economic situation has affected payments and credit risks in relation to some of the Group’s customers and availability of credit insurance. • The Group’s existing indebtedness and any new facilities may affect its operating flexibility. • The Group is exposed to fluctuations in interest rates. • Preparation of the Group’s financial statements requires management to exercise discretion to make estimates that are inherently subject to uncertainties. • The Group’s results of operations could be materially adversely affected by the impairment of assets and goodwill under IFRS. • The Group may be subject to additional tax liabilities. Risks relating to the minerals processing businesses • Increases in energy and fuel prices and any interruptions in supply will adversely affect the Group. • The minerals processing businesses’ revenue and earnings depend upon prevailing prices for the commodities. • The minerals processing businesses operate in competitive markets and the Group’s failure to compete effectively could adversely affect the Group. • The Group’s furnaces are vulnerable to interruptions necessitating stoppages. • The nature of mining and mineral extraction activities involves a high degree of risk. • The minerals processing businesses are subject to numerous laws and regulations, changes to which could adversely affect the Group. • The Group is subject to significant and increasing environmental regulation due to the nature of its activities. • Increased regulation of greenhouse gas emissions could adversely impact the Group’s cost of operations. • New technologies and development of existing technologies may affect the Group’s ability to compete successfully. Risks relating to South Africa • The Group may be affected by political, economic and other risks relating to its operations in South Africa. • Electricity supply in South Africa is less reliable and may be subject to greater price rises than in certain other countries. • The Group’s South African minerals processing operations may be affected by local empowerment rights. • Some of the properties on which the Group conducts its South African mineral processing operations may be subject to successful land claims. • South African foreign exchange control restrictions could hinder the Group’s ability to extract dividends from, make investments in or procure foreign denominated financings to support its South African subsidiaries.
10 • The high rate of HIV infection and other chronic health conditions in South Africa may adversely affect the Group’s businesses. • Inflation or other macro-economic conditions in South Africa may increase costs and consequently could materially adversely affect the Group. Risks relating to the house building and wood processing businesses • The house building business is affected by the slowdown in the construction industry and additional liability risks compared to other wood processing industries. • The sawmill business is affected by timer pricing, timber demand and supply and its position in the wood processing supply chain. • The house building and wood processing businesses operate in competitive markets and the Group’s failure to compete effectively could adversely affect the Group. • The wood processing and house building businesses are subject to customer concentration risks and local market risks. • The Group is subject to various laws and regulations, changes to which could have an adverse effect on the Group’s earnings and cash flows. Risks relating to Ordinary Shares and Depositary Interests • Trading volumes and liquidity of the Ordinary Shares on the Helsinki Stock Exchange have historically been low and an active trading market may not develop or be sustained on the London Stock Exchange in the future. • The share prices of publicly traded companies can be highly volatile. • A small number of major Shareholders would be able to influence matters requiring Shareholder approval. • Future sales or issues of Ordinary Shares may decrease the price of the Ordinary Shares. • As a holding company, Ruukki’s ability to pay dividends will depend upon the level of distributions, if any, received from its operating subsidiaries and the level of cash balances. • Certain Shareholders may be unable to exercise pre-emptive rights. • The exercise of voting rights and other rights by holders of Depositary Interests is not identical to those of holders of Ordinary Shares. • Shareholder’s rights are governed by Finnish law. • The Finnish FSA will have jurisdiction in the event of any public takeover bid for Ruukki.
11 PART II RISK FACTORS
An investment in the Ordinary Shares is subject to a number of risks. Accordingly Shareholders and prospective investors should consider the following risks and uncertainties together with all the other information set out in this document (including all of the information incorporated by reference) and other information published by Ruukki under its existing regulatory obligations including Ruukki’s annual and interim reports and regulatory news releases prior to making any investment decision. If any of the following risks actually materialises, the Group’s business, financial condition or operating or financial results could be materially adversely affected and the value of the Ordinary Shares could decline. The risks and uncertainties described below are not the only ones the Group faces. Additional risks and uncertainties not presently known to the Directors or that the Directors currently deem immaterial may also have a material adverse effect on the Group’s business, financial condition or operating or financial results and could negatively affect the price of the Ordinary Shares.
1. Risks Relating to the Group and its Businesses The Group’s financial performance is dependent on cyclical businesses and on commodity prices and other product prices which are cyclical and volatile. The Group’s business portfolio comprises two main business divisions: (i) its minerals processing businesses and (ii) its house building and wood processing businesses, both of which are cyclical in nature and significantly affected by changes in the world and regional economies and changes in industry capacity and output levels. There has been a significant drop in demand for and prices of the Group’s minerals processing businesses’ products due to the current economic environment and in particular the reduction in demand for specialist steels in end products in the automotive, aerospace and other industries in which the majority of the Group’s chrome and ferrochrome products are used. There has also been a significant drop in demand for and prices of the house building and wood processing businesses’ products due to the economic downturn, in particular the reduction in demand for houses and the reduction in the use of wood in the construction industry. As a consequence of reduced demand, a number of the Group’s biggest competitors have reduced their output and some have temporarily closed certain production facilities. However, if competitors’ minerals processing facilities and sawmills which are temporarily closed restart their production earlier than expected or with higher volumes than expected, whether due to the recovery of particular markets or for other reasons, market prices may decline from the forecasted levels, which would have a material adverse effect on the business, financial condition or operating or financial results of the Group. If market prices trend downwards and/or if demand does not improve, some competitors and/or the Group might have to sell their products at low prices, which could directly and indirectly have a material adverse effect on the business, financial condition or operating or financial results of the Group. The price and availability of raw materials has a significant effect on the Group’s businesses. Although the Group’s goal is to become a fully integrated mine-to-metals minerals producer and processor, the Group is currently not fully vertically integrated and the majority of raw materials used in its businesses are purchased from third parties. As a result, the price of raw materials plays an important role in the profitability of various companies within the Group. If the price of raw materials develops unfavourably from the Group’s perspective and/or if the availability of raw material is hindered or prevented, this may limit the profitability or viability of any pending or future investments and might have a material adverse effect on the business, financial condition or operating or financial results of the Group.
12 The Group will incur costs and forego revenues as a result of curtailed production. In an effort to avoid over-supplying markets or building up inventory of unsold products during the current environment of depressed pricing and demand, the Group has curtailed its production by temporarily closing certain production facilities and running facilities at significantly below full capacity. This practice imposes costs both directly, in the form of closing costs, the costs of then resuming production and redundancy payments, and indirectly, in the form of revenue foregone, deterioration of assets and the resulting increase in unit costs from reduced economies of scale. These costs may have a material adverse effect on the business, financial condition or operating or financial results of the Group. The Group’s plans have involved and are likely to involve further acquisitions and development of existing and new business interests, which requires project management, execution and integration. Acquisitions have formed an integral part of the Group’s operational development and the Group expects to continue a strategy of identifying and, subject to market conditions, at the appropriate time, acquiring and investing in businesses with a view to expanding and/or diversifying its operating businesses. There can be no assurance that the Group will continue to identify suitable acquisition opportunities, obtain the financing necessary to complete and support such acquisitions or its planned investment or acquire businesses on satisfactory terms, or that any business acquired will prove to be profitable. Furthermore, there can be no assurance that any particular transaction will ultimately be completed. For example, although the Group entered into a merger implementation agreement for the acquisition of Sylvania Resources Limited in June 2009, a number of obstacles hampering the potential acquisition were encountered and the transaction was called off. Acquisitions and investments involve a number of risks, including possible adverse effects on the Group’s operating results, diversion of management’s attention, failure to retain key personnel, risks associated with unanticipated events or liabilities, difficulties in the assimilation of the acquired operations, technologies, systems, services and products, difficulties in integrating the accounting processes of any acquired business into the Group’s financial reporting procedures and risks arising from change of control provisions in contracts of any acquired company. Some of the businesses that the Group may in future acquire may require substantial capital investments to be made in order to maximise their economic potential to Shareholders. Further, the Group’s integration strategy may also be influenced by local factors in the markets in which it has made and makes acquisitions, such as black empowerment in South Africa. Any failure to successfully make further acquisitions and to achieve successful integration of such acquisitions could have a material adverse effect upon the results of operations or financial condition of the Group. The Group may be unable to manage effectively the expansion of its operations. The Group’s plans involve the expansion of certain of its existing businesses and the Group may also wish to expand and develop any new business it acquires. There can be no assurance that the Company will be able to manage effectively the expansion of its operations or that the Group’s current personnel, systems, procedures and controls will be adequate to support the Group’s operations. Any failure of management to manage effectively the Group’s growth and development could have a material adverse effect upon the results of operations or financial condition of the Group. In addition to potential acquisitions, the Group is considering entering into joint ventures in the future, which may not be successful and which necessarily involve special risks in addition to risks applicable to general acquisitions and other investments. Joint venture partners may have economic or business interests or goals that are inconsistent with or opposed to those of the Group and they may block actions that the Group believes to be in its or the joint venture’s best interests, take action contrary to the Group’s policies or objectives, or be unable or unwilling to fulfil their obligations under the joint venture. Any failure to successfully invest in a joint venture and any failure to operate the joint venture successfully with any joint venture partner could materially adversely affect the business, financial condition or operating or financial results of the Group.
13 The Group is dependent on its relationship with Kermas and Danko Koncar. The Group is dependent on its relationship with Kermas and Danko Koncar to implement its business strategy. The Group’s relationship with Kermas and Danko Koncar is reflected in the Relationship Agreement (see paragraph 10.5 of Part XII). The Group expects that Danko Koncar will play a key role in presenting potential business opportunities including potential acquisitions and development opportunities to the Group, which the Company will then review before deciding whether any such opportunity should be pursued. If Danko Koncar does not present suitable business opportunities or they are not available to the Group on appropriate terms it may adversely affect the Group’s ability to pursue its business strategy which could have a material adverse effect on the business, financial condition or operating or financial results of the Group. Pursuant to the master purchase agreement with Kermas in relation to TMS, RCS and EWW (see paragraph 10.3 of Part XII), the Group cannot sell or transfer its shares in TMS or RCS without the prior consent of Kermas before the end of the 2013 calendar year, unless such sale or transfer is to Kermas pursuant to the Put Option (which is in respect of the TMS Shares only) referred to therein. Should the Company’s relationship with Kermas change, the Company may be limited in its ability to dispose of the TMS Shares or the RCS Shares. Further, Kermas has agreed to provide the Group with management services in relation to the operations of RCS and TMS, including by transferring relevant know-how and expertise such that the Group will be able to independently manage the businesses acquired by 31 December 2013 at the latest. If Kermas does not comply with this obligation, the management of these businesses may be adversely affected, which could also have a material adverse effect on the business, financial condition or operating or financial results of the Group. A number of other relationships with third parties are due to varying extents to the relationship of Kermas and/or Danko Koncar with such third parties. Should Kermas and/or Danko Koncar change their relationship with the Company, the relationships with such third parties may be adversely affected, which could also have a material adverse effect on the business, financial condition or operating or financial results of the Group. The Group is dependent on the attraction and retention of key employees. The Group is dependent on the technical and management expertise of a small number of key personnel. The loss of key personnel may have an adverse effect on the Group’s ability to operate certain facilities, duly produce and process information and its ability to carry out carry out the Group’s intended strategy which may affect the result of its operations. The Group’s future success will depend on its ability to attract, train and retain suitably skilled and qualified personnel at the relevant locations (some of which are remote), which is not guaranteed. Any failure to retain such existing personnel and to attract appropriately skilled new personnel may materially adversely affect the business, financial condition or operating or financial results of the Group. The Group is dependent upon transport infrastructure for the operation of its businesses. The Group requires reliable roads, rail networks and ports to access and conduct its operations. In particular, the Group exports a large proportion of its products by sea following road and/or rail transport from its production facilities to ports. Disruption of these transport services, in the countries of operation or the countries of delivery, because of any impact of equipment or infrastructure failures, strikes, lock-outs, piracy, terrorism, weather-related problems, or other events, could temporarily impair the Group’s ability to supply its products to its customers which could have a material adverse effect on the business, financial condition or operating or financial results of the Group. Increases in transport costs, whether the result of disruption or otherwise, could also have a material adverse effect on the business, financial condition or operating or financial results of the Group. Labour disputes could lead to lost production and/or increased costs. Some of the Group’s employees are represented by labour unions and collective labour agreements. The Group may not be able to satisfactorily renegotiate its collective labour agreements when they expire and may face tougher negotiations or higher wage demands than would be the case for non-unionised
14 labour. In addition, existing labour agreements may not prevent a strike or work stoppage at its facilities in the future, which could have a material adverse effect on the business, financial condition or operating or financial results of the Group. Many of the Group’s employees are based in jurisdictions where wages are typically significantly below levels in more mature markets. As the economies of such emerging markets develop, it is possible that there will be above average inflationary pressures on wages compared to more mature markets, which may have a material adverse effect on the business, financial condition or operating or financial results of the Group. The Group is in the processes of centralising various management functions and may incur costs and/or suffer inefficiencies as a result of its management structure and the changes. The Group has historically operated a decentralised management structure, with a small central management team and significant autonomy being exercised by the Group’s subsidiary companies. Members of the central management team may not have prior personal operational experience of the Group’s main business areas or any new business areas which the Group may acquire or expand into in future. The Group’s senior management structure has undergone significant changes in the last twelve months and a number of the current management team are new to the Group. The Group is in the process of centralising various head office functions, including treasury, budgeting, contract management, risk management or IT arrangements, and functions within its minerals processing division and also within its house building and wood processing division. The Group will incur costs as a result of this restructuring and the benefits it hopes to realise by implementing the changes may not be realised. Where functions are duplicated as a result of the Group’s current and/or future arrangements, the Group may suffer from inefficiencies and additional costs which would not be incurred or suffered had the Group adopted other management arrangements. The Group has also outsourced functions which other more integrated groups may conduct internally, which may be more expensive and/or less efficient than carrying out these functions internally. Any such costs and inefficiencies could have a material adverse effect on the business, financial condition or operating or financial results of the Group. The Group’s financial reporting function was stretched in 2008 and 2009 and to the extent the Group is required to make further changes to its financial reporting procedures it may incur additional expenses and/or demands on management time. In 2008 and 2009 Ruukki made a number of acquisitions, a consequence of which was added complexity in the Group’s financial statements to take into account operations in new business areas. Following these acquisitions and in response to the accounting challenges posed by the complexity of the new Group structure, Ruukki changed its financial reporting structure. Initially, the Group’s financial reporting function was relatively thinly staffed and the Group made use of external resource to enable it to meet its financial reporting obligations following the acquisitions in 2008 and 2009. The Company has upgraded its financial reporting procedures in preparation for Admission and the Directors believe that Ruukki has in place procedures which provide a reasonable basis for them to make proper judgements on an ongoing basis as to the financial position and prospects of the Company and the Group. The upgraded procedures implemented and to be implemented by the Group to improve its financial reporting could be more expensive or time consuming or burdensome on management time than anticipated. If Ruukki makes further acquisitions, further changes to the Group’s financial reporting procedures may be required to integrate the accounting processes of any acquired business and/or the Group in order to integrate any acquired business into the Group’s financial reporting procedures. This process could be more expensive or time consuming or burdensome on management time than anticipated at the point of entering into any such transaction. Any additional costs or demands on management time which may be incurred in respect of such matters in future, could have material adverse effect on the operating or financial results of the Group.
15 The Group is exposed to fluctuations in currency exchange rates. The Group is exposed to risk from currency fluctuations because of mismatches between the currencies in which operating costs and purchase liabilities are incurred and those in which revenues are received or deposits and finance facilities are denominated. The Group is also exposed to indirect risk from currency exchange risks which may benefit its competitors and correspondingly reduce its relative competitiveness. The exchange rate risks are not hedged either at a Group level or by the individual companies concerned. Fluctuations in currency exchange rates could have a material adverse effect on the business, financial condition or operating or financial results of the Group. Foreign exchange rate risks have increased significantly as a consequence of the Group’s acquisitions of its minerals businesses, particularly the Mogale acquisition. The unpaid nominal purchase consideration plus second payment for the management incentive trust (excluding interest expenses) is ZAR 600 million (approximately €61.7 million at €/ZAR 9.73). Moreover, since the commodities bought and sold by the minerals businesses are predominantly denominated in US Dollars, and expenses and investment are partly in Euros and other foreign currencies including the South African Rand and Turkish Lira in addition to US Dollars, the Group’s operational foreign exchange risks have increased. The Group’s insurance policies may be insufficient to cover potential losses. Ruukki considers that the Group’s insurance cover is in line with market practice for companies in its industries. However, insurance fully covering many environmental risks (such as liabilities for breach of environmental laws and regulations in the event of an accident or otherwise) and political risks (such as adverse financial consequences resulting from shifts in political attitudes) is not generally available to the Group or to other companies in its industries. Furthermore, most insurance policies are arranged by Ruukki’s subsidiaries and do not cover the Group’s parent company. No assurance can be given that any insurance will continue to be available, or that it will be available at economically feasible premiums. The actual losses suffered by the Group may exceed the Group’s insurance coverage and would be subject to limitations and excesses, which could be material. The realisation of one or more damaging event for which the Group has no or insufficient insurance cover might have a material adverse effect on the business, financial condition or operating or financial results of the Group. The economic situation has affected payments and credit risks in relation to some of the Group’s customers and availability of credit insurance. The ongoing economic recession has changed the payment behaviour of some of the Group’s customers and they have prolonged their payments. The risk of payment defaults, or even credit losses, has therefore increased. As a result, credit insurance for such risks is only available on less favourable terms (including at higher premiums). Any deterioration in the economic situation, either generally or in the particular industries in which the Group’s customers and counterparties operate, could increase the credit risk. This may have a material adverse effect on the business, financial condition or operating or financial results of the Group. The Group’s existing indebtedness and any new facilities may affect its operating flexibility. The Group finances its operations with equity-based funding and debt financing. Part of the Group’s debt financing has covenants and other conditions that are tied to the Company’s or its subsidiaries’solvency, profitability or to the Group’s share of ownership in particular group companies. These restrictions could affect the Group’s ability to obtain future funding which may in turn limit the Group’s ability to grow via acquisitions and to invest capital into expansion projects within its current businesses, correspondingly, they could to a certain degree delay the repayment of debts from a subsidiary to Ruukki which may limit the cash available for such acquisitions or expansion projects. If the negative outlook for global banking and credit markets continues for a prolonged period, the Group’s access to future finance may be restricted, which in turn may limit the Group’s ability to grow via acquisitions and to invest capital into expansion projects within its current businesses. Moreover, the cost of financing may be significantly increased and the terms on which any new or renegotiated finance facilities are available may be considerably less favourable to the Group compared to its
16 historical situation (which could include requirements to agree to covenants that place additional restrictions on its businesses). Any such funding restriction, additional costs and the impact of any covenant could have a material adverse effect on the business, financial condition or operating or financial results of the Group. The Group is exposed to fluctuations in interest rates. The Group’s debt finance is entirely subject to floating interest rates. Although a small proportion of the Group’s liabilities, such as certain earn-out liabilities, are non-interest bearing, the majority of these, including the Mogale nominal purchase consideration and Junnikkala Oy’s investment and working capital facilities, are also interest bearing, again at floating rates. The Group does not currently hedge its interest rate exposures. These interest payments are partially offset by the interest receivable on the Group’s cash in hand; however, there is no guarantee that increases in interest rates on the Group’s debt will be matched by increased interest received on its deposits. Accordingly, changes in interest rates may have a material adverse effect on the business, financial condition or operating or financial results of the Group. Interest rate changes may also indirectly affect the conditions in which the business units operate; for example the demand for ready-to-move-in houses, constructed by the Group’s house building business, is dependent on the prevailing interest rate, given the impact this has on customers’ finance arrangements. Preparation of the Group’s financial statements requires management to exercise discretion to make estimates that are inherently subject to uncertainties. Preparation of the Group’s financial statements requires the Group’s management to make estimates, assumptions and forecasts regarding the future. These estimates, assumptions and forecasts may be inaccurate and are inherently subject to uncertainties. Future developments may deviate significantly from the assumptions made if changes occur in the business environment and/or business operations. In addition, the Group’s management is required to use its discretion in the application of the accounting principles in the preparation of the financial statements. Ruukki is engaged in several different lines of business, and each business requires different kinds of estimates and assumptions. Group companies vary by their size and they are located both in different parts of Finland and abroad. The nature of Ruukki’s operations essentially involves business acquisitions and other arrangements, which often requires the Group’s management to exercise discretion in the application of the accounting policies. The principal accounting policies which require management discretion are: (i) allocation of the cost of a business combination; (ii) determination of the amount of the earn-out and contingent liabilities associated with business acquisitions; (iii) impairment testing; (iv) assessment of trade receivables; (v) determining the lives of tangible and intangible assets; (vi) valuation of inventories; (vii) recognising provisions in respect of potential liabilities; (viii) assessment of taxes; and (ix) recording share based payments. The assets and liabilities which are most affected by management’s discretion in the exercise of accounting policies and which the Directors believe are most likely to be affected by uncertainties in future are goodwill, technology and client lists. As at 31 March 2010, the Group’s assets included €180.7 million of goodwill (of which €155.2 million related to the minerals processing businesses and €25.5 million related to the house building and wood processing businesses) and €102.1 million of other intangible assets (the principal components of which are the technology and customer lists of the Group’s mineral processing businesses). The discretion the Group has in respect of its accounting policies may affect the Group’s results either in the year in which a decision is taken or in a future year. If the assumptions or other decisions made by the Group’s management are inaccurate or inappropriate it could have a material adverse effect on the financial results of the Group.
17 The Group’s results of operations could be materially adversely affected by the impairment of assets and goodwill under IFRS. The Group carries out impairment testing on goodwill and other assets. Assessments of whether there are indications of impairment are made on an ongoing basis including on a more detailed basis each quarter in conjunction with the preparation of interim financial statements and additional impairment testing is carried out where appropriate. In accordance with IFRS, the Group does not amortise goodwill but rather tests it periodically and at least annually for impairment. Goodwill impairments cannot be reversed. The Group also tests other assets where there is an indication that such assets may be impaired. The Directors believe that the assets which are most at risk of requiring an impairment in future are goodwill and other intangible assets. As at 31 March 2010, the Group’s assets included €180.7 million of goodwill and €102.1 million of other intangible assets. The Group recognised impairments of €19.1 million in 2009 in respect of the goodwill in Mogale, which had been acquired earlier that year due to increases in operating expenses, the strengthening of the Rand and management’s assessment of the outlook for future operating costs and the strength of the Rand. The Group recognised impairments of €41.0 million during the financial year 2008 in respect of its assets in its previous furniture business, sawmill business and its Russian projects in Kostroma comprising impairments of €13.6 million in respect of goodwill, €19.5 million in respect of machinery and equipment, €11.5 million in respect of land and buildings and €1.6 million in respect of intangible assets, which were partly offset by a reversal of impairments on fixed assets of €5.2 million. The write-downs in relation to the investments in equipment purchased in anticipation of expansion into Russia, with which the Group has subsequently decided not to proceed, which are included in the above, totalled €17.7 million in 2008. The Group recognised impairments of €1.0 million in 2007 including €0.2 million of impairments in respect of goodwill. When conducting impairment tests for cash generating units, the Group calculates the value in use by discounting estimated future net cash flows that have been based on the conditions and assumptions prevailing at the time of the testing. In certain cases the Group has applied the net realisable value approach, as an example when testing the associated companies’ values. The Group uses a combination of its own knowledge of its businesses, general third party industry expert or analyst reports where available and to the extent possible (for example Heinz Pariser and CRU International for sales prices and demand trends of relevant commodities in its minerals processing businesses) on its current business and asset base, excluding any non-committed expansion plans to determine the cash flow forecasts for the cash generating business units. Further details of the key background and assumptions used for the impairment testing conducted at 31 December 2009 are set out in the section entitled “Impairment Testing” in the notes to the 2009 financial statements. The Group also analyses the sensitivity of the impairment testing by estimating how the key assumptions should change in order for the recoverable amount to be equal to the carrying amount. Further details of the sensitivity analysis for the impairment testing conducted at 31 December 2009 are set out in the section entitled “Impairment Testing” in the notes to the 2009 financial statements. Among other things, adverse changes in the performance of the underlying business, increases in applicable discount rates and increases in operating costs may trigger an impairment test and adverse movements may lead to an impairment being recorded against goodwill or other assets. Any such impairment or evaluation could have material adverse effect on the operating or financial results of the Group. The Group may be subject to additional tax liabilities. The Group’s main tax risks are related to changes in or possible erroneous interpretations of tax legislation. Changes or erroneous interpretations could lead to tax increases or other financial losses. Realisation of this type of risk might have a material adverse effect on the business, financial condition or operating or financial results of the Group.
18 It is possible that the Group has made interpretations on the tax provisions that differ from those of the tax authorities and that as a result, the tax authorities will impose taxes, tax rate increases or other consequences on the Group’s companies. This could have a material adverse effect on the business, financial condition or operating or financial results of the Group.
2. Risks Relating to the Minerals Processing Businesses Increases in energy and fuel prices and any interruptions in supply will adversely affect the Group. Certain of the Group’s operations and facilities, particularly its minerals processing operations in Germany and South Africa, are intensive users of energy, primarily electricity. The procurement dynamics of these and other energy types are becoming increasingly connected as supply and demand conditions become more inter-dependent on a global basis. Fuel and energy prices globally have been characterised by volatility coupled with general cost inflation in excess of broader measures of inflation. The Group’s exposure to energy and electricity prices and reliance on the supply of electricity and other energy sources have increased following its increased investment in its minerals businesses as this area of the group’s portfolio consume more energy and electricity than other areas, such as wood processing. In particular, in South Africa, the electricity supply, price and availability are essentially controlled by one entity called ESKOM. Increased electricity prices and/or reduced or unreliable electricity supply may prevent the Group from carrying out its current operations or from expanding its business operations as it may wish to do, which might have a material adverse impact on the business, financial condition or operating or financial results of the Group. In addition, increases in fuel prices may lead to third party transport service providers increasing transportation charges which would result in an increase in cost of sales. Any increase in energy costs would increase the cost of sales and decrease competitiveness relative to any competitors who have access to cheaper sources of energy or who have lower energy requirements. In particular, although the direct current furnaces operated by Mogale have certain advantages over traditional arc furnaces, they have higher electricity consumption per unit input, so any increase in electricity prices would reduce their relative competitiveness. If the Group is unable to pass on any price increases to its customers, the business, financial condition or operating or financial results of the Group may be materially adversely affected. The minerals processing businesses’ revenue and earnings depend upon prevailing prices for the commodities. The minerals processing businesses’ revenue and earnings depend upon prevailing prices for the commodities they produce (such as low carbon and ultralow carbon ferrochrome, ferrochrome, silico manganese and stainless steel alloys) and any raw material commodities it purchases (such as UG2, chrome ore, manganese ore, ferrosilicochrome, silicon, stainless steel dust and anthracite) which the Group is unable to directly control. Management believes that future trends in prices are particularly difficult to predict at present. Historically, commodity prices have been volatile and subject to wide fluctuations in response to relatively minor changes in supply and demand, market uncertainty, the overall performance of world or regional economies and the related cyclicality in commodity consuming industries, such as stainless steel production and market speculation by futures traders and other speculators. In the past, commodity prices have exhibited a broadly upward trend, reflecting demand generated by global economic growth and industrialisation. Recently, however, the rapid deterioration of the global macroeconomic environment, has led to reduced demand globally, stock drawdowns or increased use of scrap or recycled materials by potential customers and the unwinding of speculative positions by commodities traders. As a result, commodity prices, including prices of those commodities produced by the Group, have fallen significantly over a relatively short period of time from their previous highs. In response to reduced prices and increasing stock levels many ferrochrome producers significantly
19 reduced output in late 2008, with output then dropping significantly below demand as producers and users consumed stock piled materials. The resulting significant spare capacity of other producers may give rise to continued uncertainty and cause prices to fall. The Group does not currently engage in hedging against movements in commodity prices. As a result, adverse movements in commodity prices may have a material adverse effect on the business, financial condition or operating or financial results of the Group. Furthermore, as the majority of the commodities purchased and sold by the Group are not end commodities for which futures markets exist, the markets for these materials are less sophisticated than other commodities for which a futures market exists and react in different ways to market events than commodities for which there are developed futures markets. The minerals processing businesses operate in competitive markets and the Group’s failure to compete effectively could adversely affect the Group. The Group competes against a large number of mineral processing companies globally, including mineral companies with capabilities, personnel and financial resources which are substantially greater than the Group’s, including large diversified minerals processing companies and companies specialising in ferrochrome production. In competing with the ferrochrome and related mineral processing operations of larger producers, the Group may be at a competitive disadvantage. Some of these companies benefit from greater financial resources or operate furnaces and other processing plants that are lower cost producers than the Group’s operations or may benefit from other economies of scale. Competition in the industry extends to the acquisition of materials and properties as well as the technical expertise and financial ability to run and fund operations. The Group cannot be certain that its minerals processing operations will remain competitive on price or other factors. The Group may be forced to increase expenditure while being unable to increase selling prices of its products sufficiently or in time to offset the effects of any increased costs without losing market share or may be forced to reduce pricing due to competitor’s pricing or other reasons without an equivalent reduction in its costs, either of which could have a material adverse effect on the results of the Group’s operations. As the Group is smaller than many of its competitors it may be less able to take advantage of any consolidation opportunities which may arise. Any failure to exploit opportunities for growth or consolidation may have a material adverse effect on the business, financial condition or operating or financial results of the Group. The Group’s furnaces are vulnerable to interruptions necessitating stoppages. The Group operates a number of mineral and metal processing plants including four furnaces within its South African minerals processing business and plants within its southern European minerals processing business. Its European minerals processing business is also dependent on the processing facility operated by EWW, a company owned by Kermas, a major shareholder in the Company, with whom it has a long-term Ferrochrome toll manufacturing agreement (see further information in paragraph 10.3 of Part XII). Mineral and metal processing plants are especially vulnerable to interruptions, such as power cuts, particularly where events cause a stoppage which necessitates a shutdown in operations. Stoppages in smelting, even if lasting only a few hours, can cause the contents of furnaces to solidify, resulting in a plant closure for a significant period and necessitating expensive repairs, any of which could materially adversely affect the business, financial condition or operating or financial results of the Group. The nature of mining and mineral extraction activities involves a high degree of risk. The Group’s mining and mineral extraction operations carried out by its subsidiary, TMS, in Turkey are subject to a number of risks in addition to those affecting the Group’s other mineral processing activities, including: • adverse mining conditions, including unanticipated variations in grade and other geological problems, difficult surface or subsurface conditions and unusual or unexpected ground conditions, which may delay and hamper production;
20 • fire, flooding, rock bursts, cave-ins, landslides and failure of pit walls or dams; • climate change, unusual weather, seismic events or other natural phenomena; and • other conditions resulting from drilling, blasting and removal and processing of material associated with underground and/or opencast mining. If one or more of these risks materialises it could materially adversely affect the business, financial condition or operating or financial results of the Group. The Group’s reserve and resources estimates for its mining and mineral extraction operations may be materially different from mineral quantities that the Group may ultimately recover. The Group’s estimates of mine life may prove inaccurate and market price fluctuations and changes in operating and capital costs may render certain mineral reserves or mineral resources uneconomical to extract, which could have a material adverse effect on the business, financial condition or operating or financial results of the Group. The minerals processing businesses are subject to numerous laws and regulations, changes to which could adversely affect the Group. The minerals processing businesses are subject to numerous health, safety and environmental laws, regulations and standards as well as community and stakeholder expectations. The Group is subject to extensive governmental regulations in various jurisdictions in which it operates. Operations are subject to general and specific regulations governing mining and processing, land tenure and use, use and storage of chemicals and explosives, environmental requirements (including site specific environmental licences, permits and statutory authorisations), workplace health and safety, social impacts, trade and export, corporations, competition, access to infrastructure, foreign investment and taxation. The costs associated with compliance with these laws and regulations are substantial and possible future laws and regulations, changes to existing laws and regulations could cause additional expense, capital expenditures, restrictions on or suspension of the Group’s operations which could materially adversely affect the business, financial condition or operating or financial results of the Group. Evolving regulatory standards and expectations can result in increased litigation and/or increased costs, all of which can have a material and adverse effect on earnings and cash flows. Renewal of existing permits may incur significant additional expense and any failure to renew permits which are necessary for the Group’s businesses may prevent the operation of the relevant part of the Group’s business which could have a material adverse effect on the business, financial condition or operating or financial results of the Group. The Group is subject to significant and increasing environmental regulation due to the nature of its activities. The minerals processing businesses are engaged in industrial activities that might pollute, inter alia, soil, surface and ground water, air and buildings, especially in the event of a leak or accident, and cause local noise pollution. The minerals businesses also produce large quantities of slag and other waste products. These activities might lead to breaches of environmental laws and liability for damage and possibly also to criminal liability, such as corporate fines. If a real property currently or previously owned or used by the Group is or has been polluted due to the activities of the Group or its previous owner, this could mean that the Group would be responsible for cleaning the polluted area or for possible loss in the property’s value. In addition, the Group could become subject to environmental liabilities resulting from personal injury, property damage or natural resources damage. In addition to environmental obligations and liabilities related to any breach of environmental laws or polluting actions, the Group also has other environmental obligations and liabilities related to its use of sites such as post production restoration or landscaping obligations, some of which are long-term in nature. The acquisition of minerals businesses has exposed the Group to greater environmental risks and regulations than its previous wood processing business and other minor or discontinued business operations have been. Environmental laws and regulations are becoming more complex and stringent, the Group’s environmental management programmes may be the subject of increasingly strict interpretation or enforcement or become more comprehensive, and could result in financial or other penalties and/or the
21 suspension or loss of the Group licences. The Group may also incur significant expenditures and may face operational constraints to maintain compliance with applicable existing and new environmental laws, regulations and permits, to upgrade equipment at its mills, plants and other operations and to meet new regulatory requirements. The Group’s reputation may suffer if it is prosecuted for failing to comply, or if it is perceived as not complying with environmental laws and regulations, which may hinder its relationship with customers, suppliers and employees. If the Group’s environmental compliance obligations were to change as a result of changes to the legislation or in certain assumptions it makes to estimate liabilities, or if unanticipated conditions were to arise in its operations, the Group’s expenses and provisions would increase to reflect these changes. If material, these expenses and provisions could materially adversely affect the business, financial condition or operating or financial results of the Group. At the time of its acquisition by the Group, Mogale was in contravention of numerous environmental regulations. Since then, Mogale has obtained certain additional permits and licences; however, it is still working towards obtaining other necessary permits and licences in accordance with an environmental management plan which it submitted to the South African authorities in 2009 and ensuring that Mogale remedies the environmental issues identified at the time of the Mogale acquisition. Although a portion of the purchase consideration was deferred and its payment is subject to obtaining the remaining permits and licences, it is possible (albeit unlikely in the opinion of the Directors) that the Group’s losses, should such licences and permits not be obtained, or the expenditure necessary to obtain such licences and permits, could exceed the retained deferred consideration or the cap on the indemnities given to the Group in relation to Mogale’s environmental liabilities in connection with the Mogale acquisition, which could have a material adverse effect on the business, financial condition or operating or financial results of the Group. The Group has included provision for certain environmental liabilities and restoration costs, predominantly relating to its minerals processing businesses. However, these provisions are only estimates and the costs the Group may incur in respect of its operations may exceed the provisions. As at 31 December 2009, the Group had recorded total provisions of €14.3 million, of which €12.6 million were long term provisions, which relate mainly to the environment and restoration provisions of the minerals processing businesses. The Group may also incur other expenses for which no provision has been made. Increased regulation of greenhouse gas emissions could adversely impact the Group’s cost of operations. The Group’s mineral processing businesses are energy intensive and indirectly depend heavily on fossil fuels. Increasing regulation of greenhouse gas emissions, including the progressive introduction of carbon emissions trading mechanisms and tighter emission reduction targets, is likely to raise energy costs and costs of production to a material degree over the next decade. Regulation of greenhouse gas emissions in the jurisdictions of the Group’s major customers and in relation to international shipping could also have an adverse effect on the demand for the Group’s products, which if material, could have a material adverse effect on the business, financial condition or operating or financial results of the Group. New technologies and development of existing technologies may affect the Group’s ability to compete successfully. New technologies or novel processes may emerge and existing technologies may be further developed in the fields in which the Group operates. These technologies or processes could have an impact on production methods or on product quality in these fields. Unexpected changes in employed technologies or the development of novel processes that affect the Group’s operations and product ranges could render the technologies the Group utilises or the products it produces less competitive or reduce demand for its products in the future. Difficulties in assessing new technologies may impede the Group from implementing them and competitive pressures may force the Group to implement any new technologies at a substantial cost. The Group’s know-how enables it to use certain technologies including direct current ferrochrome furnaces which provide certain advantages over competitors who use other processes. Development of equivalent or similar technologies by the Group’s competitors will reduce any competitive advantage that the Group may currently enjoy as a result of these technologies and processes. Any such development could materially adversely affect the business, financial condition or operating or financial results of the Group.
22 3. Risks Relating to South Africa The Group may be affected by political, economic and other risks relating to its operations in South Africa. The Group has significant operations in South Africa. Changes in minerals processing, investment policies or shifts in political attitude in South Africa may materially adversely affect the business, financial condition or operating or financial results of the Group. Operations may be affected to varying degrees by government regulations with respect to matters including, but not limited to: restrictions on productions, price controls, export controls, currency remittance, income taxes, expropriation of property, foreign investment, maintenance of claims, environmental legislation, land use, land claims by local people and water use. As a result, important political, economic and other risks relating to South Africa could affect any investment in the Group. Large parts of the population of South Africa do not have access to adequate education, healthcare, housing and other services, including water and electricity. South Africa has also historically experienced high levels of crime and unemployment in comparison with more developed countries. These problems have been among the factors that have impeded inward investment into South Africa, prompted the emigration of skilled workers and negatively affected South Africa’s growth rate. While the South African government has committed itself to creating a stable free market economy, it is difficult to predict the future political, social and economic direction of South Africa or how the government will try to address South Africa’s challenges. It is also difficult to predict the effect on the Group’s business of these problems or of the government’s efforts to solve them. Further, there has been political and economic instability in South Africa’s neighbouring countries. If this instability were to extend into or cause similar instability in South Africa, it could have a negative impact on the Group’s ability to manage and operate its South African operations and therefore on the business, financial condition or operating or financial results of the Group. Electricity supply in South Africa is less reliable and may be subject to greater price rises than in certain other countries. The Group’s minerals processing operations are dependent upon, and are intensive users of, electricity. Electricity supply in South Africa is less reliable and may be subject to greater price increases than in certain other countries, with the supply and price both effectively being controlled by a single entity, known as “ESKOM”. Increased electricity prices and/or reduced or unreliable electricity supply may prevent the Group from carrying out its current operations. Any expansion of the Group’s processing operations, particularly a development at a new site, would be dependent upon the availability of additional electricity supplies, which may not be available at the time or in the manner that the Group may require for such expansion, which may prevent the Group from implementing its expansion plans in the manner it may wish. This might have a material adverse effect on the business, financial condition or operating or financial results of the Group. The Group’s South African minerals processing operations may be affected by local empowerment rights. Under South African empowerment legislation, certain types of business are required to ensure that a minimum percentage of their interests in South Africa are controlled for the benefit of historically disadvantaged South Africans. The Group is required to comply with certain aspects of the empowerment regime in order to maintain and promote appropriate relationships with commercial counterparties and governmental agencies and regulators. Should the Group acquire mining interests in South Africa the empowerment regime will require a prescribed percentage of relevant interests to be controlled for the benefit of historically disadvantaged South Africans. Currently 15.1 per cent. of the Mogale business is so controlled or owned by BEE partners or Mogale’s employees.
23 No assurance can be given that, despite the initiatives taken so far by the Group, the existing empowerment legislation or any future legislative developments in South Africa will not have a material adverse effect on the Group’s mineral operations in South Africa and/or consequently on the business, financial condition or operating or financial results of the Group. Some of the properties on which the Group conducts its South African mineral processing operations may be subject to successful land claims. South African law provides remedies for persons who were dispossessed of rights in land as a result of past racially discriminatory laws or practices. The claimants may be entitled to restitution in various forms, including return of the land to the claimants, provision of alternative land, payment of compensation, or other forms of relief, including services and access to public housing. Although the Group does not foresee the widespread forfeiture of land, the settlement of any such claims could require that the Group cedes freehold title to the claimants in return for compensation payments and may further necessitate entry into a lease arrangement by the Group. Such compensation may, in the aggregate, result in higher costs and materially adversely affect the business, financial condition or operating or financial results of the Group. South African foreign exchange control restrictions could hinder the Group’s ability to extract dividends from, make investments in or procure foreign denominated financings to support its South African subsidiaries. South African exchange control regulations are in force principally to control capital movements. South African companies are generally not permitted (except within certain monetary limits and other parameters) to export capital from South Africa or to hold foreign currency or foreign investments without the approval of the exchange control authorities. These exchange control regulations could hinder the Group’s ability to extract dividends from, make investments in or procure foreign denominated financings to support, its South African subsidiaries. Further modifications to these restrictions may be made by the South African government. The existing regulations and any expansion of existing, or imposition of new, exchange controls could materially adversely affect the business, financial condition or operating or financial results of the Group. The high rate of HIV infection and other chronic health conditions in South Africa may adversely affect the Group’s business. South Africa has one of the highest reported HIV infection rates in the world. The exact effect of increased mortality rates due to AIDS-related deaths or the costs of introducing and maintaining treatment for HIV on the cost of doing business in South Africa and on the South African economy remains unclear. Mogale may lose employees with valuable skills due to AIDS-related deaths or illness. In addition, other effects of the HIV/AIDS epidemic faced by the Group, and other businesses operating in South Africa, include absenteeism, reduced productivity, employees being unable to perform their normal duties, loss of personnel, and increased costs for health care for employees and former employees. The HIV/AIDS epidemic and other chronic health conditions may cumulatively have a material adverse effect on the business, financial condition or operating or financial results of the Group. Inflation or other macro-economic conditions in South Africa may increase costs and consequently could materially adversely affect the Group. South Africa has in the past experienced double-digit rates of inflation, with annual rates of inflation returning to these levels in 2008. If South Africa experiences substantial inflation in the future the Group’s costs in Rand terms will increase significantly and, subject to movements in the foreign exchange rates, its operating margins will contract, resulting in significantly lower cash flows in US Dollar terms. Inflationary pressures may also curtail the Group’s ability to access global financial markets in the longer term and could materially adversely affect the Group’s business, financial condition or results of operations. In addition, the South African government’s response to inflation or other significant macro-economic pressures may include the introduction of policies and/or other measures that could have a material adverse effect on the business, financial condition or operating or financial results of the Group.
24 4. Risks Relating to the House Building and Wood Processing Businesses The house building business is affected by the slowdown in the construction industry and additional liability risks compared to other wood processing industries. The house building business is affected by both the development of the new construction industry in Finland, the demand for prefabricated detached houses and the cost development of the construction industry. Demand and prices in the Finnish detached market house market have suffered significantly in the economic downturn and any recovery is subject to customer sentiment improving and the banking sector’s willingness to lend to potential homeowners among other factors. The Group’s house building business deals directly with its customers, which means that it has a responsibility toward the end customer for a package delivery and the Group is dependent upon, and bears the primary responsibility to the customer for, the external subcontractors it engages. As a result, house building also entails a greater risk of legal actions than many other sectors. House building products involve quality or quantity guarantees to customers, typically consisting of a short-term duty to make repairs (one-year) and a statutory 10-year guarantee in respect of structural safety issues. As the Group produces a limited range of house designs any defect in a design could affect many individual houses. If realised, risks related to guarantees, structural liability or liability for the operations of an external subcontractor might have a material adverse effect on the business, financial condition or operating or financial results of the Group. The Group’s results have to a considerable extent been dependent on the success of the house building business since its acquisition in 2004. Accordingly, failure in the house building business might have a material adverse effect on the business, financial condition or operating or financial results of the Group. The sawmill business is affected by timber pricing, timber demand and supply and its position in the wood processing supply chain. In the sawmill business, the profitability of operations is affected by the development of standing timber prices, the development of timber market prices and the demand for conifer wood in general, both as a raw material and as an end product. Coniferous wood logs represent approximately two-thirds of production costs in the sawmill business. Due to the seasonal nature of coniferous log harvesting and business practices within the markets in which the wood processing business operates, the Group’s sawmills are required to place firm orders for its coniferous wood logs approximately six to twelve months prior to the date they will process the logs. The market price for timber at the time of sale may not reflect the market price for coniferous logs at the time of purchase and the Group is exposed to the risk of changes in demand for its products and price during the intervening period. Unfavourable developments might reduce the results and competitive strength of the business area to a considerable extent. The log market is fragmented, due to large numbers of small owners, which causes regional distortions in log prices and supply. The forest owners may refuse to sell at certain times or may refuse to sell at prevailing market prices, for example during periods where log prices are low and/or the owners perceive prices will rise. Supply of coniferous logs is also dependent on environmental and other natural factors. For example, during the summer of 2009, European pine sawflies damaged forests in the Finnish Ostrobothnia area and, as a consequence, in those areas, it is possible that harvesting of pine forest will be limited, which could negatively affect log procurement for the Group’s sawmills. The Group’s sawmills benefit from selling by-products produced from the mill’s activities including wood chips to Finnish and Swedish pulp and paper producers and local bio-energy generators. The price of coniferous logs also reflects the use of other parts of the tree by such industries. Should the pulp and paper producers and any such bio-energy producers cut capacity further, this could affect the revenue from such by-product sales and also indirectly affect log prices, which may have a material adverse effect on the business, financial condition or operating or financial results of the Group. The sawmill business is involved in the early stages of the processing chain and delivers part of its production output to external processing plants or to the wholesale market, which may affect its ability to react to major structural changes affecting the sector.
25 The house building and wood processing businesses operate in competitive markets and the Group’s failure to compete effectively could adversely affect the Group. The Group competes against a large number of wood processors and house building businesses on a local level and internationally, many of whom have significantly larger businesses than the part of the Group’s house building and wood processing businesses with which they compete. Some of these companies benefit from greater financial resources or operate sawmills and other production facilities or use sub-contractors that have lower costs than the Group’s facilities and sub-contractors. The Group cannot be certain that each of its operations will remain competitive. The house building business competes against both other producers of ready-to-move-in houses and companies building other types of housing. Ruukki expects that competition in the house building and wood processing industry will intensify, which could cause the Group to lose market share, increase expenditures or reduce pricing, any of which could have a material adverse effect on the business, financial condition or operating or financial results of the Group. In addition, competition may result in the Group being unable to increase selling prices of its products sufficiently or in time to offset the effects of any increased costs without losing market share, which may have a material adverse effect on the business, financial condition or operating or financial results of the Group. The wood processing and house building businesses are subject to customer concentration risks and local market risks. The Group’s house building and wood processing businesses’ production facilities and personnel are all based in Finland. This has increased the Group’s risks relating to the unfavourable developments in Finland and in relation to the markets supplied from its operations and the changes in neighbouring countries (for example, with respect to exchange rates). The Group’s house building and wood processing customers are concentrated in certain markets, in particular: house buyers in Finland, the house building industry in Finland and the Japanese, UK and Mediterranean export markets for sawn timber products. Decreased demand in these sectors might have a material adverse effect on the business, financial condition or operating or financial results of the Group. Each of the four factories in the pallet business serves predominantly one local customer for each site operating principally in the paper and steel industries. Due to the economics of the pallet business, particularly transport costs, it might be uneconomical to continue to operate a particular factory should its main or sole current customer cease trading or significantly reduce its demand, which may materially adversely affect the business, financial condition or operating or financial results of the Group. The Group is subject to various laws and regulations, changes to which could have an adverse effect on the Group’s earnings and cash flows. The Group’s house building and wood processing businesses are subject to various national and local laws, regulations and standards as well as community and stakeholder expectations in Finland and to some extent in certain export markets. House building operations are subject to numerous regulations dealing with the technical quality requirements for construction as well as planning and local administrative requirements. These regulations often grant extensive discretion to relevant regulators. Changes in these regulations or the policies of the relevant official regulators might subject the Group to new obligations or obstruct current or planned business activities, which might have a material adverse effect on the business, financial condition or operating or financial results of the Group.
5. Risks Relating to the Ordinary Shares and Depositary Interests Trading volumes and liquidity of the Ordinary Shares on the Helsinki Stock Exchange have historically been low and an active trading market may not develop or be sustained on the London Stock Exchange in the future. Trading volumes and liquidity of the Ordinary Shares on the Helsinki Stock Exchange have been low. In 2009, the total value of equity securities traded on the Helsinki Stock Exchange was €131 billion, compared with £1,479 billion on the London Stock Exchange for the same period. There is no guarantee that an active trading market in the Ordinary Shares on the London Stock Exchange will develop, or if
26 developed that it will be sustained. The share prices of companies with low trading volumes and liquidity may not be the same as for companies with greater trading volumes and liquidity. The bid/offer spread is also likely to be higher for companies with low trading volumes. The share prices of publicly traded companies can be highly volatile. The share price of the Ordinary Shares may fluctuate widely, and such volatility may be caused by factors outside of the Group’s control or may be unrelated or disproportionate to the results of operations of the Group. The market price may be subject to significant fluctuations due to a change in sentiment from investors and analysts regarding the Ordinary Shares in response to various factors including differences between the Group’s actual financial and anticipated operating results and perceived prospects for the Group’s business and operations and those of other companies in the industries it operates in or any adverse publicity relating to the Group or persons connected with it. Furthermore, stock markets have from time to time experienced extreme price and volume fluctuations as a result of general economic and political considerations. A small number of major Shareholders would be able to influence matters requiring Shareholder approval. A small number of the Group’s major Shareholders control approximately 68 per cent. of the Company’s issued share capital: Kermas (approximately 28.5 per cent.), Atkey Limited together with Aida Djakov (approximately 27.1 per cent.) and Hanwa Co., Limited (approximately 12.1 per cent.). These significant Shareholders would be able to influence matters requiring Shareholder approval. The Group currently holds approximately 3.5 per cent. of its shares in treasury and the above figures would increase accordingly if such shares were cancelled. The concentration of ownership may also have the effect of delaying or deterring a change in control of the Group, could deprive Shareholders of an opportunity to receive a premium for their Ordinary Shares as part of a sale of the Group and might affect the market price and liquidity of the Ordinary Shares. Future sales or issues of Ordinary Shares may decrease the price of the Ordinary Shares. The sale of a significant number of Ordinary Shares, or the perception that such sales may occur, could materially and adversely affect the market price of the Ordinary Shares. Under the terms of the RCS and TMS sale and purchase agreement, 15,000,000 Ordinary Shares (representing approximately 6.0 per cent. of the current issued Ordinary Shares) held by Kermas are subject to a five-year lock-up (subject to certain carve outs) from 30 October 2008. Although there are certain restrictions imposed by law, and lockup arrangements in respect of a small number of Ordinary Shares issued or transferred and to be issued or transferred to the Directors and Senior Managers as further described in paragraphs 6 and 8 of Part XII, Ruukki is not aware of any other additional contractual restrictions restricting the sale of its Ordinary Shares by any of its major Shareholders. Any sale of Ordinary Shares by a major Shareholder (including, but not limited to, a sale in breach of an agreed lock up) could decrease the market price of the Ordinary Shares. As explained in paragraph 10.3 of Part XII, Ruukki has issued option rights in respect of certain earn-out payments in respect of prior acquisitions and may be required to issue shares in respect of those options if the relevant earn-out conditions are met. The subsequent issue of further Ordinary Shares would have the effect of reducing proportionate ownership and voting interests of existing Shareholders and could have a material adverse effect on the market price of the Ordinary Shares. As a holding company, Ruukki’s ability to pay dividends will depend upon the level of distributions, if any, received from its operating subsidiaries and the level of cash balances. Ruukki is a holding company which operates its business through its subsidiaries. Therefore, the availability of funds to Ruukki to pay dividends to Shareholders depends in part, upon dividends received from these subsidiaries. The Group’s existing and future contractual arrangements impose or may impose operating and financial restrictions on Group companies. These restrictions and applicable foreign exchange control restrictions limit, or may limit, the ability of subsidiaries to pay their
27 respective holding companies and in turn may limit Ruukki’s ability to pay dividends. Ruukki’s ability to declare dividends will also depend on the Group’s future financial performance which is dependent on the other risk factors described in this Part II. Certain Shareholders may be unable to exercise pre-emptive rights. Certain holders of the Ordinary Shares or Depositary Interests resident in, or with a registered address in, certain jurisdictions other than Finland and the United Kingdom, may not be able to exercise their pre-emptive rights in respect of the Ordinary Shares or Depositary Interests they hold in any future offerings unless a prospectus or registration statement, or the equivalent thereof under the applicable laws of their respective jurisdictions, is effective with respect to such Ordinary Shares, or an exemption from any registration or similar requirements under the applicable laws of their respective jurisdictions is available. Please see further information on Finnish company law and shareholder rights in paragraph 4 of Part XII. The exercise of voting rights and other rights by holders of Depositary Interests is not identical to those of holders of Ordinary Shares. The rights of holders of Depositary Interests will be governed the Deed Poll and arrangements between the Depositary and Ruukki. These rights are different from those of holders of Ordinary Shares, including with respect to receipt of information, the receipt of dividends or other distributions, the exercise of voting rights and attending Shareholders’ meetings. As a result, it may be more difficult for Depositary Interest holders to exercise those rights. In particular, due to Finnish regulations on exercising voting rights attaching to shares held through a nominee, Shareholders who hold their Ordinary Shares in the form of Depositary Interests may find it more difficult to exercise their voting rights than Shareholders who hold their Ordinary Shares in an individual account in the Finnish book-entry system. However, holders of Depositary Interests will have the ability to register their interests in the Company’s shareholder register on a temporary basis in order to attend and/or vote at general meetings. Please see further information on Finnish company law and shareholder rights in paragraph 4 of Part XII. As at the date of this document, it is anticipated that, in order to give voting instructions to the Custodian, holders of Depositary Interests will need to give voting instructions to the Depositary at least ten working days prior to the relevant meeting. Shareholders’ rights are governed by Finnish law. Ruukki is incorporated under the laws of Finland and the rights of shareholders are governed by Finnish company law and by Ruukki’s Articles of Association. These shareholder rights may differ from the typical rights of shareholders in the United Kingdom and other jurisdictions. In addition, certain investor protections afforded to shareholders of companies listed in Finland will not apply if Ruukki ceases to be listed on the Helsinki Stock Exchange. Please see further information on Finnish company law and shareholder rights in paragraph 4 of Part XII. The Finnish FSA will have jurisdiction in the event of any public takeover bid for Ruukki. The Takeover Directive applies to all companies governed by the laws of an EEA member state of which all or some securities are admitted to trading on a regulated market in one or more member states. While Ruukki retains its listing on the Helsinki Stock Exchange, the Finnish FSA will have sole jurisdiction in respect of public takeover bids for Ruukki and the UK Takeover Code will not apply. There are a number of differences between the provisions of the Finnish Securities Markets Act and the UK Takeover Code. Accordingly, in the event of a takeover offer being made for Ruukki, Shareholders may not benefit from certain protections offered by the UK Takeover Code.
28 PART III
DIRECTORS, EXECUTIVE MANAGEMENT, REGISTERED OFFICE AND ADVISERS
Members of the Board Jelena Manojlovic Chairperson Philip Baum Non-executive Director Paul Everard Non-executive Director Markku Kankaala Non-executive Director Terence McConnachie Non-executive Director Chris Pointon Non-executive Director Barry Rourke Non-executive Director
Senior Managers Alwyn Smit Chief Executive Officer, Group Danko Koncar Chief Executive Officer, Minerals Business Alistair Ruiters Chief Executive Officer, Ruukki South Africa Thomas Hoyer Chief Executive Officer, Wood Processing Business Ilona Halla Chief Financial Officer, Group
Registered address Principal business address Telephone number Keilasatama 5 Keilasatama 5 +358 10 440 7000 02150 Espoo 02150 Espoo Finland Finland
Sponsor Ernst & Young LLP 1 More London Place London SE1 2AF United Kingdom
English legal advisers to the Company Finnish legal advisers to the Company Herbert Smith LLP Hannes Snellman Attorneys Ltd Exchange House Eteläranta 8 Primrose Street 00130 Helsinki London EC2A 2HS Finland United Kingdom
English legal advisers to the sponsor Hogan Lovells International LLP Atlantic House Holborn Viaduct London EC1A 2FG United Kingdom
Reporting accountant Auditors of the Group Auditors of EWW Ernst & Young LLP Ernst & Young Oy PricewaterhouseCoopers 1 More London Place Elienlinaukio 5 Aktiengesellschaft London SE1 2AF 00100 Helsinki Wirtschaftsprüfungsgesellschaft United Kingdom Finland Konrad-Adenauer-Ufer 11 50668, Cologne Germany
Registrars for Depositary Interests Depositary Capita IRG Trustees Limited Capita IRG Trustees Limited The Registry The Registry 34 Beckenham Road 34 Beckenham Road Beckenham Beckenham Kent BR3 4TU Kent BR3 4TU
29 PART IV FORWARD LOOKING STATEMENTS AND OTHER IMPORTANT INFORMATION
1. Forward-looking Statements This document contains forward-looking statements regarding the financial conditions, results of operations, cash flows, dividends, financing plans, business strategies, operating efficiencies or synergies, budgets, capital and other expenditures, competitive positions, growth opportunities, plans and objectives of management and other matters relating to the Company. Statements in this document that are not historical facts are hereby identified as “forward-looking statements”. In some instances, these forward-looking statements can be identified by the use of forward-looking terminology, including the terms “believes”, “expects”, “intends”, “may”, “will” or “should” or, in each case, their negative or other variations or comparable terminology. Save for those forward-looking statements required to be included in this document by law (including the Finnish Securities Markets Act), or by the Listing Rules or the Disclosure and Transparency Rules, such forward-looking statements, including, without limitation, those relating to the future business prospects, revenues, liquidity, capital needs, interest costs and income, in each case relating to the Company wherever they occur in this document, are necessarily based on assumptions reflecting the views of the Company, involve a number of risks and uncertainties that could cause actual results to differ materially from those suggested by the forward-looking statements and speak only as at the date of this document. Important factors which may cause actual results to differ include, but are not limited to, those described in Part II “Risk Factors” of this document. Save as required by law (including the Finnish Securities Markets Act), or by the Listing Rules or the Disclosure and Transparency Rules, the Company undertakes no obligation to release publicly the results of any revisions to any forward-looking statements in this document that may occur due to any change in the Directors’ expectations or to reflect events or circumstances after the date of this document.
2. Market and Industry Data All references to market data, industry statistics and forecasts and other information in this document consist of estimates based on data and reports compiled by industry professionals, organisations, analysts, publicly available information or the Company’s own knowledge of its sales and markets. The Company confirms that information sourced from a third party has been accurately reproduced, and as far as the Company is aware and is able to ascertain from information published by that third party, no facts have been omitted which would render the reproduced information inaccurate or misleading. In addition, in many cases the Company has made statements in this document regarding its industry and its position in the industry based on industry forecasts, market research and internal surveys as well as its own experience, which the Directors believe to be reliable. The Company can give no assurance, however, that any of these assumptions are accurate or correctly reflect the Company’s position in the relevant markets, and none of the Company’s internal surveys or information have been verified by independent sources.
3. Sources of Financial Information Unless otherwise indicated, financial information relating to the Company (such as turnover and operating profit) has been extracted without material adjustment from the financial information in Part VIII (which has been prepared in accordance with IFRS). The financial information for the three month interim periods ended 31 March 2009 and 31 March 2010 have been extracted from the unaudited interim report for the three months ended 31 March 2010.
30 4. Presentation of Financial Information All references to “euro”, “EUR”, “Euro” and “€” are to the lawful currency for the time being of the member states that have adopted or may adopt the single currency introduced at the start of the third stage of European Economic Monetary Union pursuant to the Treaty of Rome of March 25, 1957, as amended by, inter alia, the Single European Act of 1986, the Treaty of European Union of February 7, 1992, and the Treaty of Amsterdam of October 2, 1997, establishing the European Community. The Group prepares its financial statements in Euros. All references to “Rand”, “rand” or “ZAR” are to the lawful currency for the time being of South Africa. The financial information given in this Prospectus is generally given to the nearest whole number, the nearest decimal place or the nearest thousand. Therefore, the sum of numbers may not exactly conform to the total figures given and the sum of percentages may not add up to 100 per cent. In addition certain percentages reflect calculations performed on the underlying numbers prior to rounding, and accordingly may not conform exactly to the percentages that would be derived if the relevant calculations were performed on the rounded numbers.
5. Definitions Certain terms used in this document, including capitalised terms and certain technical terms, are defined and explained in Part XIV: “Definitions”.
31 PART V INFORMATION ON THE GROUP
1. Overview of the Group Ruukki is the Finnish-incorporated parent company of a group of businesses primarily engaged in the processing of natural resources. The Group has minerals processing operations based at locations in South Africa and Europe. The facilities and expertise of the Group’s minerals processing businesses enables them to produce a diverse range of products, including specialised low carbon and ultralow carbon ferrochrome, charge chrome ferrochrome, silico manganese and chromium-iron-nickel alloy (stainless steel alloy). Once processed, the end-products are distributed internationally by the Group’s minerals sales team, to customers operating in the stainless steel, automotive, aerospace and power plant industries and located in the USA, Brazil, China, India, Korea, Japan, Taiwan, Singapore, Nigeria, South Africa and a number of European countries. The Group entered the minerals sector in 2008, prior to which its focus had been as a Finnish based group with interests in a variety of sectors, including house building and wood processing. In addition to its minerals processing businesses, the Group continues to be engaged in house building and wood processing operations at sites in northern Finland. The Group is reviewing its interests in the house building and wood processing sectors and alternatives available to develop and maximise the value of its related businesses. The Group is evaluating alternative structures for reorganising its house building and wood processing assets. The outcome of this review may be a decision to retain these businesses and develop them to maximise their value or may include a disposal of, and/or demerger and separate listing of, the Group’s house building and wood processing businesses. The following structure chart sets out the key business areas and geographical locations of the Group’s operations. A list of the Group’s significant subsidiaries is set out in paragraph 11 of Part XII of this document.
Ruukki Group
Minerals Processing Businesses House Building and Wood Processing Businesses
Minerals Minerals Sales processing processing (Malta) (Turkey) (South Africa) House Sawmills Pallets Building (Finland) (Finland) (Finland)
Minerals Mining processing (Turkey) (Germany, toll manufacturing)
Note: Certain subsidiaries are owned less than 100 per cent. by the Group. The German minerals processing business, EWW, is consolidated into the Group’s results although it is not a subsidiary of the Group. For further information see the paragraph entitled “Principles of consolidation” in the section entitled “Critical Accounting Policies” in paragraph 10 of Part VII.
32 Minerals processing businesses The Group’s minerals processing businesses are comprised of Mogale, TMS, RCS and the long-term ferrochrome manufacturing agreement with EWW, with operations based in South Africa, Turkey, Malta and Germany. The Group is primarily involved in the processing of ore concentrate and raw ore into a range of products, including specialised low carbon and ultralow carbon ferrochrome, charge chrome ferrochrome, silico manganese and chromium-iron-nickel alloy (stainless steel alloy). The Group’s strategic intention is for the minerals processing businesses to operate as a standalone business unit with selected vertically integrated mine-to-metals operations and to increase the integration between its minerals processing businesses. In the fourth quarter of 2009, a new Chief Executive Officer was appointed to the minerals processing businesses. In addition, RCS now operates as the central sales and marketing function for the Group’s minerals processing businesses, thereby utilising the sales and marketing team’s experience and customer contacts across the minerals processing businesses. RCS exclusively markets the Group’s products and does not act for any third party. The Group intends that RCS will provide these services for any other minerals businesses which it may acquire. During the period ended 31 December 2009, the total revenue generated by the Group’s minerals processing businesses was €71.0 million with €57.3 million attributed to the Southern European minerals processing business and €28.2 million attributed to Mogale. (There are eliminations of €14.5 million on consolidation due to intragroup sales from Mogale to RCS prior to onward sales to third parties.) As at 31 December 2009, the total number of employees engaged in the Group’s minerals processing businesses was 629. As Mogale was only acquired during 2009, only seven months of Mogale’s revenues have been included in these figures. House building and wood processing businesses The Group’s principal house building and wood processing operations are divided into three business areas: house building, sawmills and pallets. The house building business specialises in the design, manufacture and assembly of ready-to-move-in detached wooden houses. The operations are located in Finland and the majority of end-products are sold to the domestic market. As part of the Group’s strategy to review its business structure and reorganise its house building and wood processing businesses, the Group appointed a new Chief Executive Officer in October 2009 to manage the house building and wood processing business division and strengthened division’s management team. During the period ended 31 December 2009, the total revenue generated by the Group’s house building and wood processing businesses was €122.4 million with €31.8 million from house building, €82.7 million from sawmills and €9.4 million from pallets. As at 31 December 2009, 253 people were employed in the house building and wood processing businesses.
2. Key Strengths 2.1 Minerals processing businesses Application of direct current technology to smelting operations Mogale has the benefit of a non-exclusive licence from Mintek to enable it to use the direct current technology in its furnaces. This technology was initially co-developed by Mogale with Mintek, South Africa’s national mineral research organisation, and subsequently by Mogale, Samancor Chrome and Mintek. The two direct current furnaces utilised by Mogale permit a greater range of reductants and other raw materials compared to traditional arc furnaces, potentially lowering other input costs. These cost advantages more than offset the cost of increased electricity requirements associated with Mogale’s direct current furnaces compared to typical arc furnaces. Very fine particulate size material, such as UG2, can be used within the direct current smelting process. The UG2 raw material used by Mogale is cheaper than the chrome ore used by many larger bulk ferrochrome processers. Furthermore, as there is no need for coke in the direct current process, there is greater flexibility in the choice of reductant. The chromium recovery in the direct
33 current process is higher than in alternating current processes, typically around 90 per cent. Utilising direct current technology also typically offers some savings in capital expenditures compared to alternating current technology. The use of direct current technology and the wealth of experience of the Group’s employees in this field enables the Group to change its product mix (between, for example, charge chrome and stainless steel alloy) very swiftly in order to meet changes in market demand. This to some extent mitigates market risks and enables the Group to optimise its operating margin. Cost and quality competitiveness The Group’s South African smelting operations are cost competitive due to their use of direct current furnace technology and the long-term experience of their employees. Both of these factors contribute to a low level of processing costs compared to key competitors operating within the same product markets. The Group’s direct current furnaces in South Africa utilise low-grade raw materials such as UG2 ore in its production process, together with the waste and other side-products produced by other mining and minerals processing businesses and does not need the same mineral reserves that are considered valuable by many of its competitors. In addition, as the direct current furnaces are able to use a variety of reductants, including anthracite, rather than coke, there is no exposure to the high costs associated with coke, which together with the use of low-grade raw materials considerably reduces the raw material-related component of the Group’s costs compared to key competitors. The Group has access to low-cost high-quality raw materials via its own mining operations in Turkey, which are used by its European minerals processing business. Cost reductions in the production of chromite concentrate by the Turkish minerals processing and mining operations are expected in the second half of 2010 following the opening of the beneficiation plant at its site in Kavak, Turkey, in May 2010, enabling TMS to start using low-cost above-ground tailings dumps from the waste from previous mining operations at this site. Many of the end-products of the European minerals processing business are tailored to particular customer specifications and the high-quality in-house chrome ore raw material source is one of the key contributory factors in the business’ ability to offer this tailoring. Technical expertise in smelting and mining operations including the use of direct current furnaces The application of direct current furnace technology to ferrochrome and related mineral processing is relatively new. The Group has significant technical expertise in developing and using direct current furnace technology. The Group’s two direct current furnaces enable it to process a wider range of minerals and to produce a wider range of alloy compositions than traditional ferrochrome arc furnace technology. The Directors believe that only one of the Group’s competitors, Samancor Chrome, currently has an industrial scale direct current ferrochrome furnace of its own, although they understand that several of the Group’s competitors are looking at building direct current furnaces. Operating a direct current furnace requires significant technical expertise, including stricter controls of certain parameters and additional monitoring of the production process, compared to traditional arc furnaces. The Directors believe that the additional expertise required together with the commissioning and start-up phase (which would typically take approximately 18 months to three years) for any new furnace create, to a degree, a barrier to entry for competitors who may wish to use direct current furnace technology. The European minerals processing business has a long history of operating in the ferrochrome processing, chrome ore and chromite concentrate markets. TMS, the chrome ore and chromite concentrate producer, was established in 1918 and EWW, with which the Group has a long-term ferrochrome toll manufacturing agreement, has been involved in ferrochrome production since 1917. The Group’s ability to produce specialist low and ultralow carbon ferrochrome products is based both upon its access to high grade chrome ores and on the technical expertise it has in developing and operating its processing facilities and in the monitoring of product composition and quality using modern laboratory equipment.
34 Management expertise in smelting and mining operations including the use of direct current furnaces The Group also has an experienced senior management team running its South African minerals processing business each member of which has, on average, more than 15 years of experience in the ferrochrome processing industry and more than 7 years of experience with direct current furnace technology in relation to ferrochrome processing. The Directors believe that the combination of its technical and management expertise makes Mogale uniquely placed to develop and capitalise on the direct current furnace technology utilised in its operations. Similarly, the Group’s ability to produce certain specialist low and ultralow carbon ferrochrome products in its European minerals business to customers’ particular specifications relies on the management’s extensive knowledge of the business’ production process and continual improvements and developments thereof. Diversity of products and flexibility of production The minerals processing businesses produce a range of products and much of their production is of specific alloys and minerals based on customers’ particular requirements. The exact product composition is varied between one batch and the next according to customers’ specific requirements and demand forecast from the Group’s in-house sales and marketing team. The Group’s direct current furnaces are able to produce a wider range of alloy compositions than traditional arc furnaces. The South African minerals processing business produces charge chrome ferrochrome, silico manganese and chromium-iron-nickel alloy (stainless steel alloy), providing a diverse product base and the ability to rapidly change the product mix and respond to changes of demand between these products. The European minerals processing business produces a large number of different products within its particular niche area. Although the overall range of compositions is narrower than the South African minerals processing business, those compositions (particularly impurity levels) are controlled to strict tolerances and small variations in the alloy composition are treated as different products by the Group and its customers. Specialised custom ferrochrome products form an integrated part of customers’supply chains Mogale and TMS manufacture a range of ferrochrome products, primarily chrome ore and concentrate and ferrochrome. The direct current furnace technology utilised by Mogale enables it to also produce charge chrome with different levels of carbon content, silico manganese and chromium-iron-nickel alloy. Mogale frequently changes its product mix and production levels in order to satisfy the demand for each particular product and to maximise profitability. The Group works closely with purchasers of its products, particularly customers purchasing specialist alloys from its European business. The exact composition of the Group’s products, which are used as raw materials by its customers, is critical for such customers’ specialist production and quality assurance processes. By contrast, many users of bulk ferrochrome products have some flexibility to substitute other ferrochrome products. This process of development of particular alloys with individual customers and their production process often means that a specific product is only produced for one customer and the Group is the only supplier of the exact product required. The integration of the Group’s products in the customer’s production process and the customer’s supply chain management provides strong inter-company relationships and a high barrier to entry for potential competitors of the Group. The specialist and individual nature of these materials also mitigates, to some extent, general commodity market price changes. In-house sales and marketing The Group has an in-house sales and marketing centre in Malta for all of its minerals processing businesses’ products. The internal sales and marketing team has extensive knowledge of the Group’s product portfolio and customers’ demands developed through long-term relationships. The sales and marketing team has strong relationships with key users of bulk products including Chinese stainless steel producers and end-users of the specialist low and ultralow carbon ferrochrome products produced by the European business particularly in the United States and
35 Europe. The Directors believe that the in-house sales and marketing team is well placed to build and develop relationships with future new users of the Group’s specialist products as other countries develop the industries where these products are required. In certain selected geographic areas local agents and/or joint ventures are also used together with the main Malta team to increase the customer contact base and to improve customer service. The Directors believe that it is unusual for a minerals processing business of the Group’s size to have its own in-house sales and marketing team. Having such an in-house sales and marketing operation offers key advantages for the Group, particularly given the Group’s business model of manufacturing products to customer’s particular requirements, compared to other companies which rely on third party sales arrangements, including developing customer relationships, matching production against predicted demand and ensuring appropriate pricing across the business units. 2.2 House building and wood processing businesses Strong house building business The Group’s house building business is one of the pioneers and leading ready-to-move-in house producers in Finland. The ready-to-move-in segment share of the Finnish housing market has grown over recent years compared to more traditional building methods. The house building business operates a variable cost model creating a healthy operating margin. The business has relatively low fixed costs, with most costs incurred on a per unit basis, which has enabled the business to maintain an operating profit despite decreasing volumes of houses delivered. As the business’ customers are typically individuals, who pay in instalments over the course of the construction process, the house building operations typically have a negative net working capital requirement and a strong operational cash flow. The Group’s share of the total housing market in Finland is still relatively small, which provides significant opportunities to grow the house building business within Finland. There are also opportunities to expand into neighbouring countries. Roughly one third of the house building business’ wood is sourced from the Group’s sawmill business. This vertical integration provides synergy benefits and reduces the exposure of these businesses to variations in prices and availability of the sawn timber products used by the house building business and produced by the sawmill business.
3. Strategy 3.1 Minerals processing businesses Expand production and increase market share The Group intends to increase its market share, particularly in the bulk processing sector, by utilising and exploiting the advantages which the direct current furnaces, utilised by its South African minerals processing business, offer over traditional arc furnaces. The Group intends to expand its production capacity by investing in additional direct current furnaces. These direct current furnaces will increase the Group’s total production capacity as well as increasing the percentage of such capacity using direct current furnaces, with their inherent advantages in utilising low-cost raw materials and ability to produce a wider range of products than traditional arc furnaces. The Directors believe that the Group’s in-house sales and marketing team’s existing relationships with key customers and markets mean that it is well placed to sell such additional output. Increase vertical integration The Group’s aim is to become a vertically integrated mine-to-metals producer in selected minerals and alloys in selected geographical areas. The Group intends to increase its upstream operations and such increased integration should improve the availability of key raw materials and enable the Group to obtain synergy benefits, including logistical benefits and reduced exposure to price fluctuation of certain raw materials. In addition, the Group is actively investigating further mergers and acquisitions opportunities in businesses which could increase the vertical integration of its minerals processing businesses. Feasibility studies on investing in new capacity and power generation solutions (including co-generation) to mitigate the power related challenges are also
36 being carried out. The Group expects to produce up to a third of its electricity needs at its South African furnaces from co-generation, utilising waste flue gasses at any new furnace it builds and may also add co-generation capacity to existing furnaces in due course. Target the processing of closely-related metals and minerals The Group is reviewing potential opportunities to leverage its existing direct current furnace technology know-how in order to produce different, but closely-related, metals and alloys in geographically contiguous areas to its existing minerals processing operations. The Group believes that its direct current furnace technology processes can be adapted to add value to the smelting and processing of other related minerals and is analysing sources of chrome ore, platinum group metals and iron ore in South Africa. As part of this process, and further to its historic strategy, which has been based on making acquisitions and developing acquired businesses, the Group is investigating potential merger and acquisition opportunities in relevant businesses. 3.2 House building and wood processing businesses Organic growth of the house building business While the house building and wood processing businesses remain part of the Group, Ruukki intends to grow the house building business and broaden its scope by acquiring potential housing development sites. The house building business’ current business model has no major capital expenditures and the Directors expect that such growth would be conducted organically. As part of the Group’s strategy of refocusing its house building and wood processing businesses into house building, the Group divested of a number of its sawmills within its non-core sawmill businesses in the fourth quarter of 2009. The Company’s subsidiary Lappipaneli Oy disposed of its interest in the Kuusamo sawmill in an asset sale in November 2009, for consideration of €14.6 million, payable in instalments in late 2009 and April 2010. The fixed assets (such as machinery and equipment) were leased to the purchasers following the sale and then transferred to them in April 2010. The Group disposed of its 91.42 per cent. interest in Tervola (which owns the Kittilä and Tervola sawmills) with effect from 31 December 2009 for cash consideration of €4.1 million. In addition, the business expanded into the recreational housing sector, delivering its first development of 31 cottages in early 2009. At the end of 2009 the house building businesses acquired land at Kirkkonummi, Finland, which it intends to use for the development of housing projects. Review of the house building and wood processing businesses The Group is reviewing its interests in the house building and wood processing sectors and alternatives available to develop and maximise the value of its related businesses. The Group is evaluating alternative structures for reorganising its house building and wood processing assets. The outcome of this review may be a decision to retain these businesses and develop them to maximise their value or may include a disposal of, and/or demerger and separate listing of, the Group’s house building and wood processing businesses.
4. History and Development The history of the Group can be viewed in two stages: its development and interests prior to 2008 and its post-2008 development into the minerals sector following the development and strengthening of its relationship with Kermas, which was one of the world’s leading ferrochrome and chrome producers. 4.1 Before 2008 History of the Group The Group was first established as a limited partnership in 1984 and listed on the Helsinki Stock Exchange in 1990. During the 1980s, 1990s and early 2000s, the Group underwent a series of strategic changes, investing in a number of different sectors, including technology, care services and metals.
37 In 2003, the Group added wood processing to its then interests through the acquisition of Ruukki Group Oy (now Ruukki Yhtiöt). Ruukki Group Oy was established in 1993, initially operating as a pallet manufacturer, and subsequently entering the sawmill and furniture manufacturing sectors. The Group expanded its wood processing business into house building in 2004 by the acquisition of an initial stake in the house building company Pohjolan Design-Talo Oy. It is these businesses that have formed the basis for the current house building and wood processing operations of the Group. By 2007, the focus of the Group had shifted further towards wood processing. During 2007, the Company carried out an equity raising primarily in order to finance proposed business operations in the Kostroma region of Russia. However, due to a number of adverse developments, mainly related to the administration of the Kostroma region, the Company decided in February 2009 to discontinue all preparations in relation to the Kostroma project. History of Kermas The Kermas group was one of the world’s largest ferrochrome and chrome producing groups prior to the sale of its interest in Samancor. In addition to its minerals sector activities, the Kermas group has interests in other industries, including real estate investments. In 2005, Kermas acquired the majority of the wholly-owned interests of one of the world’s leading integrated ferrochrome producers and one of South Africa’s leading exporters of chemical-grade chromite, Samancor Chrome, from Samancor, which was then owned in a ratio of 60 per cent. to 40 per cent. by BHP Billiton and Anglo American plc respectively. The South African minerals processing business Mogale (previously Palmiet Chrome), which as described previously and below was acquired by the Group in 2009, was at one stage a part of Samancor. At the same time as when Kermas acquired Samancor Chrome from Samancor, the management of Palmiet Chrome led a BEE consortium to acquire Palmiet Chrome and renamed it Mogale Alloys. Together with the BEE consortium, the Batho Barena Consortium, and international partners, Kermas successively transformed the business of Samancor Chrome and eventually disposed of its interest in Samancor Chrome in November 2009. Dr Danko Koncar, who has been a director of Kermas since its incorporation, was perceived as the architect of Samancor Chrome’s transformation during its time under Kermas’ control. As referred to below, in connection with this disposal, Dr Koncar resigned as Chairman of Samancor Chrome on the same day and joined the Group as Chief Executive Officer of the Group’s minerals processing businesses. 4.2 2008 onwards The development of the Group’s relationship with Kermas led the Group in 2008, to diversify into the minerals processing sector with the acquisition from Kermas of the specialised European minerals processing and mining business currently comprised of approximately 98.74 per cent. of the shares of the Turkish company, TMS, 100 per cent. of the shares of the Maltese company, RCS, and a long-term ferrochrome toll manufacturing agreement with the German company, EWW. In connection with the acquisition of TMS and RCS, the Company entered into a non-binding memorandum of understanding with Kermas pursuant to which Kermas set out its intention to give the Company a right of first refusal in relation to any new proposals, opportunities, acquisitions or offers within the mining and minerals sectors which are identified or developed by Kermas. A relationship agreement now exists between the Company and Kermas (see further paragraph 10.5 of Part XII). The Relationship Agreement and the overall relationship with Kermas are expected to provide the Group’s minerals processing businesses with opportunities for growth and diversification and to assist in the execution of its strategy to operate as a vertically integrated mine-to-metals producer. In 2008 the Group increased its stake in the house building company Pohjolan Design-Talo Oy from 90.1 to 100 per cent. and acquired a 51.02 per cent. stake in the sawmill company Junnikkala Oy. The Group also sold its care services business and certain other non-core manufacturing subsidiaries and partially divested its furniture manufacturing business during 2008.
38 In May 2009, following an introduction by Kermas on the basis of an informal memorandum of understanding, the Group further expanded its minerals sector interests through the acquisition of an 84.9 per cent. stake in the South African minerals processing company Mogale. In November 2009, Kermas sold its stake in Samancor Chrome. At the time of the sale, Dr Danko Koncar, the then Chairman of Samancor Chrome, and Dr Alistair Ruiters, a member of Samancor Chrome’s board of directors, resigned from Samancor Chrome and joined the Group’s minerals processing businesses’ management team immediately thereafter. The Directors believe that the minerals processing businesses will benefit from their knowledge and experience in the minerals sector. In the fourth quarter of 2009, the Group sold its interest in three of its sawmills, the Lappipaneli sawmill at Kuusamo and the Tervola sawmills at Tervola and Kittilä. Further details of the material contracts and related party transactions entered into between the Group and Kermas are set out in paragraphs 10 and 13 of Part XII of this document.
5. Operations and Activities 5.1 Minerals processing businesses South African minerals processing business The Group acquired an 84.9 per cent. stake in the South African minerals processing company Mogale in May 2009, with Mogale’s employees and BEE partners controlling or owning the remaining 15.1 per cent. The total purchase price for the Group’s stake in Mogale was originally ZAR 1,850 million, plus ZAR 150 million payable to a trust established for Mogale management incentives and as consideration for a five-year lock-in. Of the purchase price, ZAR 1,125 million and half the management incentive was paid in cash at closing of the acquisition in May 2009 (the aggregate ZAR 1,200 million being approximately €103.7 million at €/ZAR 11.58). The balance of the purchase price (ZAR 725 million plus ZAR 75 million) (approximately €82.2 million at the spot exchange rate on 27 May 2010 of 9.73 for €/ZAR), plus interest thereon, was to be paid in cash over a period of five years from closing of the acquisition, of which the second, unconditional, tranche of ZAR 200 million was due in May 2010. The Group has paid ZAR 12 million (approximately €1.1 million) in 2009 and ZAR 187 million (approximately €19.3 million at €/ZAR 9.73) on 27 May 2010*. The remaining ZAR 600 million conditional payment (including the further ZAR 75 million incentive payment) (approximately €61.7 million at €/ZAR 9.73) is conditional upon Mogale receiving certain operational permits and licences. See also paragraph 10.4 of Part XII and also paragraph 14.3 of Part XII of this document. Mogale’s processing facilities are located in the Krugersdorp, West Rand, Gauteng. Mogale was previously known as Palmiet Chrome and during the 1990s its operations were owned and operated by Samancor Chrome, which at that stage was controlled by BHP Billiton. During 2005, at the same time at which Samancor Chrome was acquired by the Kermas group, Mogale was acquired by its pre-Ruukki owners. Mogale primarily operates in the bulk processing sector by producing charge chrome ferrochrome, silico manganese and chromium-iron-nickel alloy (stainless steel alloy). Locally sourced low cost UG2 ore “dust” and other fine ores are utilised in its ferrochrome production, enhancing its cost competitiveness. The direct current furnaces can use such fine ores without beneficiation processing, unlike traditional ore furnaces which require larger ores, or fine ores to be treated prior to use. Mogale’s facilities are comprised of four furnaces with a combined 96 MVA smelting capacity: • one 44 MVA direct current plasma-arc furnace with a production capacity of 42,000 tonnes of chromium-iron-nickel alloy per annum. It also produces charge chrome ferrochrome and has a production capacity of 50,000 tonnes per annum for charge chrome ferrochrome; • two open 20 MVA submerged arc furnaces with a combined capacity of 48,000 tonnes of silico manganese per annum; and
* Source: management accounts, unaudited, in respect of second tranche payments in 2009 and 2010
39 • one 12 MVA direct current furnace with a capacity of 10,000 tonnes of high grade chromium-iron-nickel alloy per annum. Shortly after the acquisition of Mogale by the Group in May 2009, commissioning of the new 12 MVA direct current furnace, Mogale’s second direct current furnace, was completed. Test runs were held in July 2009 with near full scale production starting in September 2009. In late 2009 and early 2010 the new furnace’s production was switched to high-grade stainless steel alloy, and further testing and modifications were required as this process was developed and tested. Following initial feasibility studies, the Group has also commissioned engineering studies and detailed designs for two new 70 MVA direct current furnaces, but has not yet made a binding commitment to build these furnaces. The direct current arc furnace technology was initially co-developed by Mogale with Mintek, South Africa’s national mineral research organisation, and subsequently by Mogale, Samancor Chrome and Mintek. After BHP Billiton closed Palmiet Chrome’s operations, some of the former employees formed a consortium to buy out the operations from the former owners, creating the black-empowered Mogale. The new owners used the Mintek technology and Palmiet Chrome’s furnace to recover nickel, chrome and iron from stainless steel waste. Mogale has the benefit of a non-exclusive licence from Mintek to enable it to use the direct current furnace technology. The Directors believe that only one of the Group’s competitors, Samancor Chrome, currently has an industrial scale direct current ferrochrome furnace of its own. The cost savings and profitability associated with the direct current furnace technology, compared to alternating current technology, are seen as key benefits. The use of low-grade raw materials delivers significant cost savings. As the direct current process can use anthracite and other reductants, there is no need to use coke which is significantly more expensive than anthracite. The yield of chromium recovery in the direct current process is higher, than in alternating current processes, typically around 90 per cent. (compared to roughly 70 or 80 per cent.). Another key benefit of the direct current furnace technology is its flexibility, which enables Mogale to manufacture a diverse range of products, to change its product mix to meet demand and to explore possible new products. Direct current furnaces do, however, consume more electricity (typically 15 per cent. more) than modern alternating current furnaces. However, even after the approximately 25 per cent. electricity price increase in South Africa last year, and taking into account the announced increase for of a further approximately 25 per cent. for the forthcoming year this is more than offset by the other advantages, at current raw materials prices. Since the third quarter of 2009, the products produced by Mogale have been marketed and sold by RCS. Given its geographical location, in one of the world’s prime minerals processing and mining countries, and the advantages offered by its direct current furnace technology, it is through Mogale that the Group expects to implement its strategy of expanding its production and increasing its market share, particularly in the bulk processing sector. The Directors believe that South Africa will offer opportunities for the Group to acquire mining interests and implement its objective of becoming a vertically integrated mine-to-metals producer. European minerals processing and mining businesses In contrast to Mogale’s position within the bulk processing sector, the Group’s European minerals processing businesses operate in the niche low carbon and ultralow carbon ferrochrome production sectors and comprise a vertically integrated business based in Turkey and Germany. Operating in a niche market means that there are less expansion opportunities for the European minerals processing business than there are likely to be for Mogale, but has certain other advantages including producing products which form an integrated part of the customers’ supply chain.
40 The business (together with RCS which performs sales and procurement operations and which is described further below) was acquired during 2008 through the purchase of approximately 98.74 per cent. of the shares of the Turkish company, TMS, 100 per cent. of the shares of the Maltese company, RCS, and a long-term ferrochrome toll manufacturing agreement with the German company, EWW, from Kermas, a major shareholder in the Company. The EWW toll manufacturing agreement was renegotiated as part of the acquisition and will apply for a period of five years until 27 February 2013 after which time it will continue for a further five years unless terminated by the Group. In addition, the Group has a call option in relation to the shares in EWW, which is exercisable from 1 January 2014. See also paragraph 10.3 of Part XII of this document. Given Kermas’ experience in the minerals sector, as part of the acquisition, Kermas also agreed to provide the Group with management services in relation to the operations of RCS and TMS, including by transferring relevant know-how and expertise such that the Group will be able to independently manage the businesses acquired by 31 December 2013 at the latest. The consideration payable for the acquisition comprised (i) €80 million paid in cash on the closing of the acquisition in October 2008 and (ii) an earn-out consideration pursuant to a profit and loss sharing arrangement, under which Kermas is entitled to receive Ordinary Shares with a value equivalent to a 50 per cent. share of any profit and obliged to pay in cash a 50 per cent. share of any loss based on the combined net profit or loss of RCS and the TMS group for each of the calendar years 2009, 2010, 2011, 2012 and 2013 (subject to certain limitations and exclusions), as further described in paragraph 10.3 of Part XII of this document. Turkish mining and minerals processing business TMS carries out, in two areas in Turkey, open pit and underground mining and operates ore enrichment facilities equipped with primary and secondary crushing, milling and concentration tables. The production facilities are located in Kavak, in the Eskisehir province, and in Tavas, in the Denizli province. It also holds 27 licences, of which 12 are exploitation licences. TMS produces two chrome ore types: special grade chromite concentrates and lumpy chrome ore. The lumpy chrome ore is mainly supplied directly to stainless steel manufacturers in China and India. The chrome ore is also processed into special grade highly concentrated chromite concentrate and delivered for further processing to the Group’s processing operations in Germany for the production of low carbon and ultralow carbon ferrochrome. Although the Turkish chrome ore deposits are significantly smaller in scale than other deposits, including those in South Africa, they are particularly rich in chrome and low in impurities, making them a good choice for the European businesses’ specialist processing operations. The Group has recently invested in a project to construct a new chromite concentrate beneficiation plant in Kavak, Turkey. The plant is equipped with triple deck concentration tables which will enable the tailings from nearby tailings dumps from previous mining operations at the site to be re-worked in order to recover the fine ore particles and efficiently process and concentrate the mine output which the Directors expect will deliver a reduction in costs. Construction of the plant was completed in May 2010 and full scale production operations at the plant commenced in June. In February 2010, TMS acquired 99 per cent. of the share capital of Intermetal for a cash consideration of €0.3 million from TMS’s managing director to acquire Intermetal’s mineral exploration rights. Intermetal has six chrome ore exploration and exploitation licences in Turkey with a total land area of approximately 5,000 hectares. German minerals processing business Processing of the chromite concentrate produced by the Group’s Turkish mining and minerals processing operations is carried out by EWW in Eschweiler-Weisweiler, Germany, under the long term toll manufacturing agreement between RCS and EWW. The plant also processes chromite concentrate supplied by other mining businesses. The plant manufactures specialised low carbon and ultralow carbon ferrochrome products which are then sold to end customers, for example, in the automotive, aerospace and power plant industries, by RCS. EWW uses a submerged arc
41 furnace, rather than a direct current furnace; however given the scale of EWW’s operations and the cost of electricity in Germany and the fact that EWW is not a subsidiary of the Group, but processes minerals for it under a long term toll manufacturing agreement, the Directors believe that it would not be appropriate for EWW to invest in a new direct current furnace for its processing operations. Due to the control arrangements the Company has over EWW, its results are consolidated into the Group’s consolidated financial statements. Maltese procurement and sales business RCS performs sales and marketing operations from its base in Valletta, Malta exclusively for the Group’s South African and European businesses and procurement operations for the European businesses. RCS sells the specialised ferrochrome products manufactured by the German minerals processing business and the Turkish minerals processing and mining operations to customers in the USA, Europe and Japan, principally producers of special grades of stainless steel operating in the automotive and aerospace industries. Sales of the lumpy chrome ore produced by TMS, not used by EWW, to Chinese and Indian stainless steel producers are also handled by RCS. Following centralisation of the sales and marketing function in late 2009, RCS now also sells the charge chrome ferrochrome, silico manganese and chromium-iron-nickel alloy (stainless steel alloy) produced by Mogale into the USA, Brazil, China, India, Korea, Japan, Taiwan, Singapore, Nigeria, South Africa and a number of European countries. Product markets The Group’s minerals processing businesses are active in the following global product markets. Chrome ore and concentrate There are three forms of chrome ore. These can be distinguished by their different physical characteristics, which affect black furnace productivity: fines (fine ore), lump (lumpy ore) and chromite concentrate. Fine ore is ore with the majority of individual particles measuring less than 3 millimetres in diameter. Lumpy ore is ore with the majority of particles measuring 3 to 10 millimetres in diameter. Fine ore and lumpy ore are produced from the same ore and are separated by screening and sorting. Although fine ores and lumpy ores cost about the same to produce, fine ores fetch lower prices than lumpy ore because they must be sintered by the steel mill before they can be charged to the blast furnace. Chromite concentrate is a further processed product which is finer in composition than lumpy ore, and is black in colour. It contains a higher percentage of chrome compared to lumpy ore or fine ore. In 2009, TMS produced 8,742 tonnes of lumpy ore for external customers and 17,224 tonnes of chromite concentrate. Total worldwide production of chrome ore and chromite concentrate in 2009 was approximately 20.0 million tonnes. Ferrochrome Ferrochrome is categorised according to its carbon content, which determines the most appropriate end use. High carbon ferrochrome and charge chrome account for over 90 per cent. of global ferrochrome output. High carbon ferrochrome contains 58-72 per cent. chrome, 7.5-8.5 per cent. carbon and 0.5-3.0 per cent. silica. Charge chrome contains 48-58 per cent. chrome, 4.0-9.0 per cent. carbon and 2.0-6.0 per cent. silica. High carbon ferrochrome and charge chrome are used in the production of stainless steel. Charge chrome is also used as an additive in the steel industry. Medium carbon ferrochrome contains around 56-68 per cent. chrome and less than 2 per cent. carbon, whilst low carbon and ultralow carbon ferrochrome contain less than 0.5 per cent. carbon and less than 0.03 per cent. carbon respectively and more than 60 per cent. chrome. Low carbon and ultralow carbon ferrochrome are used by specialist stainless steel manufacturers, for example, in the aviation and nuclear power industries.
42 The total worldwide market for the production of high carbon and charge ferrochrome in 2009 is estimated to have been approximately 5.8 million tonnes. Mogale produced approximately 14,000 tonnes of ferrochrome in 2009 (including during the period prior to its acquisition by the Group). EWW produced 14,074 tonnes of low carbon/ultralow carbon ferrochrome in 2009. Many of the products produced by EWW are tailored to purchasers’ specific requests and so direct comparisons between all low carbon/ultralow carbon ferrochrome products may not be appropriate, particularly where particular quality assurance parameters are specified. Silico manganese Silico manganese is used in the production of carbon steel. Total worldwide production of silico manganese in 2009 is estimated to have been 6.1 million tonnes. Chromium-iron-nickel alloy Chromium-iron-nickel alloy is used in the production of stainless steel in 300 stainless steel and 200 stainless steel series products. Given the specialised nature of this product, there is virtually no direct competition with other alloys. The Directors believe that Mogale is the only company producing the particular chromium-iron-nickel alloy it produces on a commercial scale. In aggregate, Mogale produced 48,071 tonnes of ferro alloy for the seven months of ownership (June – December) in 2009. The total annual production capacity at 31 December 2009 was approximately 135,000 tonnes. 5.2 House building and wood processing businesses House building The Group’s principal interest in the house building and wood processing sectors is its pioneering ready-to-move-in house building business. The house building business specialises in the design, manufacture and assembly of ready-to-move-in detached wooden houses. The business’ main customers are individuals based in Finland. During the period ended 31 December 2009, the house building revenue amounted to €31.8 million and a total of 238 houses were delivered. The house building business employed a total of 91 employees as at 31 December 2009. The operations of the house building business are subject to the regulations of the Finnish government with regard to the technical quality requirements for construction and the business regularly considers the impact of such regulations on its designs and end-products. The houses delivered by the business comply with the changes concerning energy efficiency requirements which were introduced to these regulations with effect from 1 January 2010. The house building business only delivers houses to the domestic market. Its competitors are mainly Finnish privately owned house building businesses. The business area’s market share in terms of delivered units is relatively small. However, as a consequence of it being one of the few market players which produces full ready-to-move-in houses, with a higher price per unit than the market average, in terms of revenue, its market share is more significant. Sawmills Following the recent sale of three of its sawmills in late 2009, the Group’s sawmill business now comprises two sawmills operating in northern Finland, located at sites in Kalajoki and Oulainen, both of which are owned by the principal subsidiary in this business area, Junnikkala Oy (51.02 per cent.). The raw materials, principally pine and spruce, are procured from regional Finnish forests. The sawmills have long-standing commercial relationships with various forest owners. However, in accordance with standard industry practice, contracts are typically concluded for individual orders, rather than on a long-term basis, with reference to the spot market log price. The sawmills’ main products are sawn, planed, stress-graded and ground-coated timber goods. The level of processing (for example, in terms of planning or painting) has increased slightly over recent years. The sawmills also produce by-products, such as woodchips, sawdust and bark which are sold to pulp and paper mills and have historically also been sold to local bio-energy
43 producers. Some of the by-products are also used internally to generate the heat needed in running the sawmills and one of the sawmills also sells some of the energy to the local community for heating. The annual production capacity of sawn timber across the sawmills business is currently approximately 300,000 m3. In 2009, the business’ revenue was €82.7 million with 331,000m3 of sawn timber produced. As at 31 December 2009, the sawmills business employed a total of 116 employees. The end-products are sold to the export markets and to the domestic market in Finland. Accordingly, the principal markets of the sawmills business are Finland, Mediterranean countries, Japan, the UK and Central European countries. The majority of the sawn timber, both in the Finnish domestic market and the export market, is used in the construction industry. The sawmills business’ main competitors are other Finnish saw-millers and saw-millers based in Sweden, and to some extent it also faces competition from the Russian market. The Group’s sawmills business is a relatively small player in both the global and Finnish domestic market. Pallets The Group has four factories in its pallet manufacturing business area, which had previously been reported as part of its sawmills business area, but which are now reported as a separate part of the house building and wood processing business. These factories are based at Oulu, Kemi, Tornio and Rovaniemi in northern Finland, producing wooden loading pallets for locally based customers operating principally in the paper and steel industries, and typically on the basis of long term arrangements. There are only a small number of key customers in this business area. Annually, approximately 1.5 million pallets are produced. The pallets manufacturing business is a fairly small part of the house building and wood processing businesses; in 2009, pallet manufacturing generated sales of €9.4 million. As at 31 December 2009, the pallets business employed a total of 46 employees.
6. Research and Development, Patents and Licences Generally, the Group invests in companies that have an established position in the markets in which they operate. As such, it does not apply any particular research and development policy with regard to intellectual property. Product development and financing of research and development does not have a significant role within the Group, other than ordinary product improvement measures and the development of business-supporting computer applications. Mogale has the benefit of a non-exclusive licence from Mintek to use the intellectual property attached to the direct current furnace technology utilised by its furnaces. However, the real value to the business in this technology is in its related know-how and technical expertise. This know-how and expertise is gained through Mogale’s operations rather than through specific research and development activity. Other than the Mintek licence, business names and auxiliary business names, the Group does not have any patents, intellectual property licences or other intellectual property of material value to the Group.
7. Property, Plant and Equipment The Group has its head office in Espoo, Finland and other offices in London and Pretoria. The South African minerals processing business has production facilities in West Rand Gauteng, including one 44 MVA direct current plasma arc furnace, two open 20 MVA submerged arc furnaces and one 12 MVA submerged arc furnace. TMS has production facilities, offices, mineral exploration areas and other property interests in Turkey including mines and primary crushing and sorting and secondary concentration and beneficiation facilities including the new chromite concentrate beneficiation plant at Kavak. RCS has offices in Valletta, Malta. EWW has production facilities in Eschweiler-Weisweiler, Germany including a submerged arc furnace.
44 The house building and wood processing business has various production facilities and offices in Finland. The house building business has production facilities in Nivala for assembling house frames and offices in Oulunslalo. Junnikkala has two sawmills and associated offices at Kalajoki and Oulainen with a combined capacity of approximately 300,000m3 per annum. The pallets business has four factories in Tornio, Oulu, Kemi and Rovaniemi. Further details of the Group’s material property interests are set out in paragraph 12 of Part XII of this document.
8. Health & Safety and Environmental The Group is committed to following high standards in its operations in relation to health and safety and environmental issues. Health and Safety The Company has committed to the implementation of appropriate policies across each of the businesses within the Group and pursuant to which safety issues will be reinforced and educated and measures to ensure that there is constant improvement in hazard awareness and prevention procedures will be implemented. The Group decided to review its policies following the acquisition of Mogale, which was operating under a health and safety and environmental policy which was inherited from Samancor, and which had been implemented when Samancor was previously owned by BHP Billiton and Anglo American plc. The objective of this policy is to eliminate all harm to individuals, the environment and the production process. The Group is currently reviewing all its health and safety policies and intends to implement or update its policies to ensure that its policies reflect an appropriate standard for each of its businesses. The house building and wood processing businesses follow applicable safety regulations under Finnish law and regulations and relevant guidance from manufacturers in relation to the operation of machinery. As the Group considers that following those regulations and guidance is sufficient for those businesses at the present time, it has not created a further segment-wide policy or adapted the policy adopted by the minerals processing businesses. The Group’s minerals processing and mining operations have in place baseline risk assessment systems, occupational hygiene monitoring and medical surveillance programmes which conform to relevant legislation as well as best practice. The house building and wood processing businesses also have similar systems in place appropriate for their operations. The risk of occupational illnesses is particularly pertinent with regard to the Group’s mining operations. Each new employee is assessed for the purposes of establishing his/her fitness for underground mine work and minerals processing activities. Employees also receive comprehensive operational and health and safety training. The Group’s minerals processing businesses continue to assess and monitor exposure to occupational diseases. The key safety risks in relation to the Group’s mining operations are fatalities and serious injuries resulting from fall of ground, scraping and rigging and tramming incidents. Other significant safety risks include falls from height and materials handling. Environmental In common with other minerals processing and wood processing businesses, the Group’s activities have an impact on the environment where they operate. A description of the environmental risks associated with the Group’s activities is set out in paragraph 2 of Part II of this document. The Group has programmes in place to address its impact on the environment, including those relating to water, air quality, waste biodiversity and land management. These include the initiatives in place to improve the environmental issues identified at the time of the Mogale acquisition, principally, contaminated soils issues and the lack of certain permits and licences, an effective storm water, waste management and associated pollution control system and a proper groundwater monitoring system. The house building and wood processing businesses have invested in modern and efficient equipment that helps to reduce the impact of their operations on the environment.
45 Mogale submitted an environmental management plan, which it prepared in co-operation with Golder Associates, to the South African authorities in 2009, and has committed to follow all prevailing environmental rules and regulations. During 2009, Mogale also received certain of the licences and permits required by relevant environmental regulations, including, for example, air permits, and has since received further licences and permits, such as water use and waste management licences in 2010. The Group is still in the process of applying for some further permits and licences; however, the Directors believe that this is unlikely to affect the operation of its furnaces as the South African authorities are aware of the situation and Mogale is implementing its environmental management plan. As at the date of this document, the Group is not aware of any threatened closures or suspensions of any of its operations by reason of any non-compliance with environmental laws or regulations.
9. Other non-core interests/investments of the group The non-core interests/investments of the Group include the functions of its headquarters, entities established to operate the stalled Russian operations and certain other businesses, none of which are significant to the overall Group. During 2007, the Company carried out an equity raising primarily in order to finance proposed business operations in the Kostroma region of Russia. Following this equity raising, the Group continued with its plans to expand its wood processing business into Russia by establishing an integrated pulp mill, sawmill and harvesting business in the Kostroma region via greenfield investments. However, due to a number of adverse developments, mainly related to the administration of the Kostroma region, the Company decided to discontinue all preparations in February 2009, having previously decided to scale down preparations and examine alternatives to the initial plan in 2008. As most of the sawmill machinery and equipment had already been ordered and paid for, the machinery and equipment is currently temporarily stored in warehouses in Finland. The Group is seeking a purchaser for the machinery from the Group or another solution in respect of the equipment. In aggregate, the total costs and expenses related to the Kostroma investment project since its inception in 2006 through to the end of 2009 amounted to €32.6 million*. The Group holds interests in Alumni Oy (100 per cent.) (previously the parent company of its metal businesses), Balansor Oy (99.99 per cent.), Hirviset Group Oy (100 per cent.) (previously the parent company of its furniture business) and Rekylator Oy (100 per cent.). The Group’s associated companies include: Arc Technology Oy (37.40 per cent.), ILP-Group Ltd Oy (33.44 per cent.), Incap Furniture Oy (12.45 per cent.), Loopm Oy (28.43 per cent.), Rivest Oy (40.00 per cent.), Sportslink Group Oy (25.00 per cent.), Stellatum Oy (34.00 per cent.), Valtimo Components Oy (24.90 per cent.) and Widian Oy (39.64 per cent.). Many of these interests are historic, inactive and relate to businesses which the Group has partially divested or discontinued in its transition from a varied portfolio business towards its current focus on the minerals processing sector. Incap Furniture Oy is currently subject to the Finnish corporate restructuring process.
10. Recent Developments In February 2010, TMS acquired 99 per cent. of the share capital of Intermetal for a cash consideration of €0.3 million from TMS’s managing director to acquire Intermetal’s mineral exploration rights. Intermetal has six chrome ore exploration and exploitation licences in Turkey with a total land area of approximately 5,000 hectares. The Turkish beneficiation plant was completed in May 2010 and full scale production operations at the plant commenced in June. The plant enables TMS to use nearby waste tailings from previous mining operations rather than mined chrome ore for production of chromite concentrate, which management expects to reduce production costs for the chromite concentrate. In the fourth quarter of 2009, the Group’s house building and wood processing business purchased its first land for development purposes in Kirkkonummi. Further land purchases may be made in due course. Prior to this, all houses had been constructed on land purchased by the future home owner.
* Source: management accounts, unaudited.
46 The Group has also established an office in Pretoria for Ruukki South Africa (Pty) Ltd, headed by Dr Alistair Ruiters, who was appointed as Chief Executive Officer of Ruukki South Africa (Pty) Ltd in March 2010 taking over certain management functions from the Mogale board, and to consider potential expansion opportunities for the South African minerals processing business. In addition, Mr Callie Pienaar was appointed as Chief Operating Officer of Mogale. The Group has also opened an office in London, to handle investor relations and for some head office staff.
47 PART VI DIRECTORS, SENIOR MANAGEMENT AND CORPORATE GOVERNANCE
1. The Group’s Management 1.1 The Board of Directors The Company’s Board is comprised of Jelena Manojlovic, Philip Baum, Paul Everard, Markku Kankaala, Terence McConnachie, Chris Pointon and Barry Rourke. For further discussion of the Board’s corporate governance practices refer to paragraph 2 of this Part VI. The names, business experience and principal business activities outside the Group of the Directors, as well as the dates of their initial appointments as Directors, are set out below. The term of office for all directors ends at the end of the next annual general meeting in 2011. The Company has recently called an extraordinary general meeting to be held on 11 August 2010 at which it is proposed that Alwyn Smit and Danko Koncar are appointed as executive directors of the Company. Further details are set out in paragraph 1.2 below. Jelena Manojlovic (Chairperson), Ph.D. (Medicine), Clin. D. (Psychology), MA (Psychotherapy), born 1950 Jelena Manojlovic has been a member of the Board since 11 July 2008. She has acted as Chairperson of the Board since 17 June 2009. She is also a member of the remuneration committee and the nomination committee. She is an established university lecturer. She has 35 years’ experience in the human resources field and 20 years’ in management positions including within UK hospitals and universities and other companies. She was previously Human Resources Director of Kermas (a major shareholder in the Company). Philip Baum, B.Com (Accountancy), LLB (Law), Higher Diploma (Tax Law), born 1954 Philip Baum was appointed as a member of the Board at the annual general meeting on 21 April 2010. He is also the chairman of the remuneration committee and a member of the safety and sustainable development committee. He has had a 31 year career with Anglo American plc, with extensive international experience in Africa, Europe, North and South America and Australasia in mining, minerals and heavy industry. He retired from Anglo American plc in 2009 as Chief Executive Officer of its Ferrous Metals Division and a member of its Executive Committee. Paul Everard, B.A. (Mechanical Sciences) M.A. (Mechanical Sciences), born 1940 Paul Everard was appointed as a member of the Board at the annual general meeting on 21 April 2010. He is also the chairman of the safety and sustainable development committee and a member of the audit committee. He has had a career of over 40 years in natural resource companies involved in extraction and processing of oil, metals and minerals including at Shell, Billiton and BHP Billiton, including some 25 years as an executive director mainly within the Aluminium Division of BHP Billiton and its predecessors before retiring in 2005. Markku Kankaala, B.Sc. (Eng.), born 1963 Markku Kankaala has been a member of the Board since 30 June 2003. He is also a member of the remuneration committee. In addition to his position as a Board member, he had until recently acted on the boards of certain of the Group’s sawmill companies as well as various operations which are now discontinued or non-core. From 2003 to 2004, he was the Chief Executive Officer of the Company. Prior to this he was employed as a branch director of the Company and worked as an entrepreneur in the wood products industry. Terence McConnachie, born 1955 Terence McConncahie has been a member of the Board since 7 October 2008. He is also a member of the nomination committee and the safety and sustainable development committee. He is Chief Executive Officer at Sylvania Resources Limited as well as a major shareholder and Chief Executive Officer of Alumicor SA Holdings (Pty) Ltd. He has 25 years of experience in the
48 mining and minerals processing industry and is the founder and former Chief Executive Officer of South African Chrome & Alloys Ltd (now Merafe Resources), which is listed on the Johannesburg Stock Exchange, and Welprop Mining Services. He is also currently a non-executive director of a number of other mining and minerals processing businesses. Chris Pointon, BSc (Chemistry & Earth Science), PhD (Geology), born 1948 Chris Pointon was appointed as a member of the Board at the annual general meeting on 21 April 2010. He is also the chairman of the nomination committee and a member of the audit committee. Chris Pointon has 40 years of experience in the mining and minerals industry including exploration, development, operations and general management in Asia, Australia, South America, South Africa and Europe. He joined the Royal Dutch / Shell Group in 1970 in its Metals division, subsequently Gencor, Billiton and BHP Billiton. From 1997 until his retirement in 2006 he was President of BHP Billiton’s Stainless Steel Materials division. Barry Rourke, FCA, born 1950 Barry Rourke was appointed as a member of the Board at the annual general meeting on 21 April 2010. He is also the chairman of the audit committee and a member of the remuneration committee. Barry Rourke was an audit partner at PricewaterhouseCoopers for 17 years from 1984 to 2001. He has extensive international experience, particularly in the US and Eastern Europe. Mr. Rourke has significant boardroom experience, with leadership and team working skills as well as broad business and industry knowledge, particularly in the natural resources, engineering and construction sectors. He currently holds a number of non-executive directorships and positions as chairman of audit committees in other companies. 1.2 Senior Managers The Board and the Chief Executive Officer are assisted in the Company’s operational management of the Company by the Management Executive Committee. The Management Executive Committee is an advisory body which was set up by the Board of Directors in November 2009. The Management Executive Committee has neither authority, based on laws or the Articles of Association, nor any independent decision-making rights. Decisions on matters discussed by the Management Executive Committee are taken by the CEO, a Management Executive Committee member responsible for the matter in question, the Board of Directors of the Company or the board of directors of one of the subsidiaries, as appropriate. The current members of the Management Executive Committee are as follows: Mr. Alwyn Smit Chief Executive Officer, Group Dr. Danko Koncar Chief Executive Officer, Minerals Processing Businesses Dr. Alistair Ruiters Chief Executive Officer, Ruukki South Africa Mr. Thomas Hoyer Chief Executive Officer, House Building and Wood Processing Businesses Ilona Halla Chief Financial Officer, Group Historically, the Group has been founded on the principle of decentralised management, with operative decisions localised at the individual subsidiary or business level. However, the Group has recently moved towards a more centralised management structure. In line with the Group’s overall strategy and the move towards focusing and building on its minerals processing businesses and investigating options for divesting its house building and wood processing businesses, the Group has created two separate senior management operations for its minerals processing business and its house building and wood processing businesses. With effect from 4 November 2009, Dr Danko Koncar was appointed as Chief Executive Officer, Minerals Processing Businesses and Dr Alistair Ruiters was appointed as Chief Executive Officer, Ruukki South Africa. On 5 March 2010, Dr Ruiters was appointed as Executive Chairman of Mogale. With effect from 1 October 2009, Thomas Hoyer was appointed to the new role of Chief Executive Officer of Ruukki Yhtiöt Oy, the subsidiary which the Group intends will become the parent company for the house building and wood processing businesses. In conjunction with this appointment, an operative management team has also been appointed to the house building and wood processing businesses.
49 The details for the senior managers are set out below: Alwyn Smit (Chief Executive Officer, Group), B.Comm.Hon. (Economics), LLB, born 1961 Alwyn Smit has been Chief Executive Officer since 12 September 2008 and was a member of the Board from 31 March 2008 until the end of the annual general meeting on 21 April 2010. He also served as Chairman of the Company from 11 July 2008 to 17 June 2009. He was formerly employed in the banking and finance industries and has 20 years’ international experience in banking and finance. He was the founder and from 1996 until 2006 was the Chief Executive Officer of Decillion Limited, an investment banking boutique listed on the Johannesburg Stock Exchange from 1999 until 2009. He was also the former Chief Executive Officer of First Derivatives, a joint venture between FirstCorp Merchant Bank and First National Bank. Mr Smit is a South African citizen and is resident in Switzerland. The Company has recently called an extraordinary general meeting to be held on 11 August 2010 at which it is proposed that Alwyn Smit is reappointed as an executive director of the Company. Dr Danko Koncar (Chief Executive Officer, Minerals Processing Businesses), Diploma (Engineering), M.Sc. (Science) Ph.D. (Science), born 1942 Dr Koncar was a member of the Board from March 2008 until July 2008. He has also served as chairman of Samancor Chrome, the General Director of Kermas and General Director RCS Trading (a ferrochrome trader). He has significant experience in minerals processing operations including approximately 20 years experience in ferrochrome processing and 6 years experience in direct current technology in relation to ferrochrome processing. The Directors believe that Danko Koncar’s experience and depth of knowledge will be significant contributors to the Group’s minerals processing businesses’strategy and operations, including any future growth and development in its minerals processing businesses and that his reputation and presence in the minerals processing industry will also be a key driving force when it comes to new ventures and investment opportunities. Danko Koncar is a director of Kermas, a major shareholder of the Company. Danko Koncar’s cousin holds 99.0 per cent. of the shares in Kermas. The relationship between the Company, Danko Koncar and Kermas is set out in the Relationship Agreement (see paragraph 10.5 of Part XII of this document). The Company has recently called an extraordinary general meeting to be held on 11 August 2010 at which it is proposed that Danko Koncar is appointed as an executive director of the Company, in the role of “Director Responsible for New Business”. If appointed to that role, Danko Koncar will be responsible for pursuing business opportunities and presenting them to the Company for review. The Company will then decide whether any such opportunities will be pursued by the Company. Further details of Danko Koncar’s proposed role are contained in the Relationship Agreement. Dr Alistair Ruiters (Chief Executive Officer, Ruukki South Africa (Pty) Limited), BA (Economic History), PhD (Sociology), born 1964 After completing his academic studies in 1993, Dr Ruiters served as a public servant in the new South African democratic government from 1994 to 2005. He held numerous senior positions including the Commissioner of the Competition Commission and the Director General of the Department of Trade and Industry. In 2005, Dr Ruiters joined the private sector and until recently was the Chief Executive Officer of The Sediko Group, a diversified investment holdings company. Dr Ruiters currently serves as the chairperson of the Pebble Bed Module Reactor. In addition to these positions, he serves on the boards of Sylvania Resources, Umcebo Mining, Accor Services South Africa and Sediko Holdings. Thomas Hoyer (Chief Executive Officer, House Building and Wood Processing Businesses), M.Sc. (Economics), born 1974 Thomas Hoyer has been Chief Executive Officer of Ruukki Yhtiöt Oy since 1 October 2009. He was previously a member of the Board from 7 October 2008 until the end of the annual general meeting on 21 April 2010. Thomas Hoyer has 12 years experience in portfolio management,
50 private equity, finance and management. He is a partner at Helsinki Capital Partners Oy and was formerly Chief Financial Officer of Aldata Solution Oyj, a Helsinki Stock Exchange listed software company. Ilona Halla (Chief Financial Offer), M. Sc.(Finance & Accounting.), Certified Internal Auditor, born 1961 Ilona Halla was appointed as the Group’s Chief Financial Officer on 5 February 2010. Ilona Halla joined the Group on 24 November 2009 and, prior to taking up this position, worked as the Group’s Chief Audit Executive. Prior to joining the Group, she served as a director of internal audit services at Ernst & Young Oy and the director of Management Assurance Services at KPMG Oy Ab and has previously been employed by both international industrial companies and banking organisations. She has also had longstanding career in the Institute of Internal Auditor’s Inc. serving at Finnish and European levels and on the global Board.
2. Corporate Governance The Board is committed to the highest standards of corporate governance. As a Finnish company listed on the Helsinki Stock Exchange, the Board currently applies the Finnish Corporate Governance Code, which is followed on the “comply or explain” principle. As a foreign issuer, with a “premium listing” for the purposes of the Listing Rules, following Admission, the Company will be also required to “comply or explain” against the UK Combined Code. The Company currently complies with the insider guidelines of the Helsinki Stock Exchange. Following Admission becoming effective, the Company intends to comply with a code of securities dealings in relation to the Ordinary Shares which is also consistent with the Model Code, as the Model Code will then also apply to the directors of the Company and relevant employees of the Group. The Board will also continue to take account of institutional shareholder and governance rules and guidance on disclosure and shareholder authorisation. The Board meets frequently for regularly scheduled meetings and at other times at the request of one or more of the Directors. In 2008 and 2009, the Board as then comprised met 32 times and 21 times respectively. Following the 2010 annual general meeting when Alwyn Smit and Thomas Hoyer stepped down from the Board, there have been no executive directors on the Board. However, if Alwyn Smit and Danko Koncar are appointed as executive directors, at the extraordinary general meeting to be held on 11 August 2010, there will be both executive and non-executive directors on the Board again. For the purposes of assessing compliance with the UK Combined Code, the Board considers that six of the seven directors, namely Philip Baum, Paul Everard, Markku Kankaala, Terence McConnachie, Chris Pointon and Barry Rourke, are independent of management and free from any business or other relationship that could materially interfere with the exercise of his/her independent judgment. The Board considers that the chairperson of the Company, Jelena Manojlovic, was not independent on appointment (for the purposes of the UK Combined Code or the Finnish Corporate Governance Code), as at the time of her appointment both she and her husband, Dr Danko Koncar were directors of Kermas. Jelena Manojlovic is no longer a director of Kermas, although Danko Koncar is still a director of Kermas. (The Finnish Corporate Governance Code distinguishes between independence from the company and independence from significant shareholders. The Board considers that the chairperson of the Company is independent of the Company but is not independent of significant Shareholders for the purposes of the Finnish Corporate Governance Code.) The Board had previously considered that Markku Kankaala was not independent of the Company due to his previous employment with the Company, which ended in 2004. However, in light of the passage of time and following the termination of his other non-executive directorships of certain subsidiary companies within the Group, the Company now considers him to be independent.
51 Barry Rourke has been appointed as the senior independent director and he will serve as an additional contact point for Shareholders should they feel that their concerns are not being addressed through the normal channels. He is also available to fellow non-executive directors, either individually or collectively, should they wish to discuss matters of concern in a forum that does not include the Chairperson. Committees The Board established an audit committee in May 2007, established a remuneration committee and a nominations committee in May 2010 and established a safety and sustainable development committee in June 2010. Audit committee and internal audit function The audit committee was established in May 2007 and currently consists of three members, namely Barry Rourke (committee chairman), Paul Everard and Chris Pointon. The audit committee shall consist of not less than three members and the quorum for meetings of the audit committee will be two members of which one must be the chairman of the committee. Each of the members of the audit committee shall be independent non-executive directors. The chairperson of the board must not be a member of the audit committee. The audit committee meets at such times as may be necessary; meetings typically coincide with the Group’s financial reporting cycle and typically would be timed to take place (i) before the end of the financial year, (ii) before the issue of interim financial statements and (iii) after the year end but before the annual accounts are finalised, together with further meetings at other times, as appropriate. The audit committee’s responsibilities include monitoring the integrity and clarity of the Company’s results and financial statements; reviewing the effectiveness of the Company’s internal controls and risk management systems; reviewing the effectiveness of the Company’s internal audit function; and assessing the independence and objectivity of the external auditors. The Group’s internal audit work is currently conducted in-house by the Chief Financial Officer, Ilona Halla, together with assistance from external professional services firms. Remuneration committee The remuneration committee currently consists of four members, namely Philip Baum (committee chairman), Markku Kankaala, Jelena Manojlovic and Barry Rourke. The remuneration committee has not met yet and its first meeting is expected to be after Admission. The remuneration committee shall consist of not less than three members each of whom shall be independent non-executive directors. In addition the Chairperson of the Company may also serve on the remuneration committee whether or not he/she was considered independent upon his/her appointment. The chairman of the remuneration committee shall be an independent non-executive director and shall not be the Chairperson of the Company. The quorum for meetings of the remuneration committee will be two members of which one must be the chairman of the committee. The remuneration committee will meet at such times as may be necessary and not less than twice a year. The remuneration committee will be responsible for determining the framework and broad policy for and all elements of the remuneration (including benefits, pension arrangements and termination payments) of the Chairperson, executive directors (if any) and senior managers of the Company (being the Chief Executive Officer and all members of the Group who report directly to the Chief Executive Officer, which includes each of the Senior Managers other than Alistair Ruiters who reports to Danko Koncar). The committee will be responsible for reviewing the existing arrangement of the Chairperson and the senior managers which were in place when such arrangements are next due for renewal. Nomination committee The nomination committee currently consists of three members, Chris Pointon (committee chairman), Jelena Manojlovic and Terence McConnachie. The nomination committee met in June 2010 for the first time to consider the proposed appointment of Alwyn Smit and Danko Koncar as directors of the Company.
52 The nomination committee shall consist of not less than three members appointed by the Board. A majority of members of the nomination committee will be independent non-executive directors. The quorum for meetings of the nomination committee will be two members including at least one independent non-executive director. The chairman of the nomination committee will be the Chairperson of the Company or an independent non-executive director, as appointed by the board of directors of the Company, but the Chairperson of the Company will not chair the nomination when it is dealing with the appointment of a successor to the Chairpersonship. The committee will meet at such times as may be necessary and not less than once a year. The nomination committee’s responsibilities will include regular reviews of the structure, size and composition of the Board; giving full consideration to succession planning for both executive and non-executive directors and in particular for the roles of Chairperson and Chief Executive Officer; and evaluating the balance of skills, knowledge and experience of the Board. Safety and sustainable development committee In June 2010, the Board established a safety and sustainable development committee, which currently consists of three members, namely Paul Everard (committee chairman), Philip Baum and Terence McConnachie. The safety and sustainable development committee has not met yet and its first meeting is expected to be after Admission. The principal function of the Committee will be to review matters relating to safety and sustainability to ensure that the operations of the Group are carried on in a safe and sustainable way and to make recommendations in this regard to the Board. Remuneration The monthly fees for the Chairperson and other board members are determined by the shareholders in general meetings. All matters related to the remuneration payable to the Chief Executive Officer and other senior management, which were previously the responsibility of the Board, have now been delegated by the Board to the remuneration committee. The time needed to carry out the duties, the general situation of the Company, and current standard practices are taken into account when determining the remuneration of the Chief Executive Officer and other senior management. Company secretary As Finnish companies do not have company secretaries, the Company has appointed Mika Taberman, of Attorneys-at-law Juridia Ltd., to assist the Chairperson in advising the Board on corporate governance issues. Mr Taberman has acted as secretary to the Board of Directors since 2007 but is not appointed as an officer of the Company. Mr Taberman’s removal from this role would be a matter for the Board as a whole.
53 PART VII OPERATING AND FINANCIAL REVIEW
The following is a discussion of the results of operations and financial condition of Ruukki as at and for the financial years ended 31 December 2007, 31 December 2008 and 31 December 2009. The following discussion of the Company’s financial condition and results of operations should be read together with the rest of this document, including the financial information set out in Part VIII of this document. The discussion of the Company’s results of operations and financial condition is based on International Financial Reporting Standards (IFRS) as adopted by the European Union for the financial years ended 31 December 2007, 31 December 2008 and 31 December 2009. Some of the information contained in the following discussion, including information with respect to the Company’s plans and strategies for its business and expected sources of financing, contains forward-looking statements that involve risk and uncertainties. Potential investors should read “Forward Looking Statements” and “Presentation of Financial Information” at pages 31 and 32 for a discussion of the risks and uncertainties related to those statements and should also read “Risk Factors’’, at pages 12 to 28, for a discussion of certain factors that may affect the Company’s business, financial condition, operating or financial results and prospects.
1. Overview The Group is primarily engaged in the processing of natural resources, and currently has minerals processing operations in South Africa and Europe and wood processing and wooden house building operations in Finland. The Group has previously undergone a series of strategic changes, investing in a number of different sectors, and the focus of the Group has shifted during the three year period covered by this operating and financial review. The Group’s mineral processing businesses produce a diverse range of products including specialised low carbon and ultralow carbon ferrochrome, charge chrome ferrochrome, silico manganese, chromium-iron-nickel alloy (stainless steel alloy) and lumpy chrome ore. The Group also has house building and wood processing operations in northern Finland, which process softwood timber, primarily pine and spruce, produce pre-fabricated ready-to-move-in wooden houses and produce wooden pallets. By 2007, the focus of the Group had shifted towards its house building and wood processing businesses. During 2007, the Group carried out an equity capital raising primarily in order to finance proposed business operations in the Kostroma region in Russia. However, due to a number of adverse developments, mainly related to the administration of the Kostroma region, preparations for the Kostroma investment project were scaled back in 2008 and discontinued in early 2009. In 2008, the Group sold its care services business and certain other non-core manufacturing subsidiaries and partially divested its furniture manufacturing business. Later in 2008, the Group diversified into the minerals processing sector, with the acquisition of the specialised European minerals processing and mining business from Kermas. The European minerals processing business currently comprises approximately 98.74 per cent. of the shares of the Turkish company, TMS, 100 per cent. of the shares of the Maltese company, RCS, and a long-term ferrochrome toll manufacturing agreement with the German company, EWW. For the reasons set out in the paragraph entitled “Principles of consolidation” in the section entitled “Critical Accounting Policies” later in this Part VII, EWW’s accounts are consolidated into the Group’s consolidated accounts. In May 2009, the Group further expanded its minerals sector interests through the acquisition of an 84.9 per cent. stake in the South African minerals processing company Mogale. In the fourth quarter of 2009, the Group also sold three of its sawmills. Since 2008, the Group’s business has been organised into two principal business segments: minerals processing businesses and house building and wood processing businesses.
54 Minerals processing businesses The Group’s minerals processing businesses comprise Mogale, TMS, RCS and the long-term ferrochrome manufacturing agreement with EWW. The operations are based in South Africa, Turkey, Malta and Germany. The Group is primarily involved in the processing of ore concentrate into a range of products, including specialised low carbon and ultralow carbon ferrochrome, charge chrome ferrochrome, silico manganese and chromium-iron-nickel alloy (stainless steel alloy). The minerals processing businesses contributed €71.0 million revenue (36.7 per cent. of the Group’s total revenue) in the year ended 31 December 2009. The Group’s mineral processing businesses have been acquired during the period of the historical financial information covered by this operating and financial review. The European minerals processing business was acquired in October 2008 and Mogale was acquired in May 2009. House building and wood processing businesses The Group’s house building and wood processing businesses are divided into three business areas within the business segment: house building, sawmills and pallets. The operations are located in Finland and the majority of end-products are sold within the Finnish domestic market. Prior to the acquisition of the minerals processing businesses and the Group’s redirection, the house building and wood processing businesses had been the main businesses of the Group. The house building and wood processing businesses contributed €122.4 million revenue (63.3 per cent. of the Group’s total revenue) in the year ended 31 December 2009. In addition to these principal business segments the Group reports other operations including Group management and interests in other non-core business areas as “other” operations.
2. Developments in the Company’s Operating Environment A brief description of the high-level developments in the operating environment of each of the Group’s businesses for the years 2007 to 2009 is set out below. As noted above, and described in further detail later in this operating and financial review, the Group’s business has undergone a series of changes during the three year period covered by this operating and financial review. 2.1 2007 Economic growth continued in Finland and globally, sustaining demand for the Group’s products, although input costs continued to rise. The Group decided to increase its focus on wood processing in Finland and on the planned Kostroma investment project. House building and wood processing External supplies, raw material costs and subcontractor labour costs continued to rise significantly above inflation in the first half of 2007; although costs increases started to level off in the autumn. These increases were mitigated to some extent by an increase in the average selling price and an increase in the number of houses delivered, due to a strong housing market in Finland. The price of sawn timber products, coniferous wood logs and transportation costs all increased in 2007. Market demand for sawn timber products was generally strong both in Finland and the export market, although demand weakened towards the end of the year, particularly for exported timber products. The business was also affected by structural changes in the Finnish forestry industry and the implications of potential future increases in Russian round wood duties. Revenues and profits both increased compared to 2006. Discontinued operations The business environment of the furniture business continued to be very challenging. The business relied upon sales to a single major customer and was forced to accept reductions in sales prices while order volumes also decreased and much of the business’ capacity was unused. The underlying business was loss making for the first three quarters, although an increase in demand in the final quarter produced a small operating profit for the full year.
55 The care services business grew organically in 2007, opening new care homes and developing homes acquired in 2006. The business benefited from the service outsourcing trend of the public sector to private operators, particularly in elderly care and mental health services. However, operating expenses increased in the final quarter due to above inflation salary increases, expansion costs and one-off purchases at existing homes. Preparations for the Kostroma investment project, which started in 2006, continued, with the Group recording costs of €3.5 million for the preparations and other prepayments on investments. 2.2 2008 The Finnish and global economies were affected as the problems in the financial sector spread to the rest of the economy, leading into a rapid economic downturn. The Group strengthened its wood processing business, scaled back the planned Kostroma investment project (which was subsequently discontinued entirely in early 2009), acquired its first minerals processing business, disposed of its care services business and partially disposed of its furniture business. Minerals processing businesses Reduced demand from stainless steel producers decreased demand for the newly acquired European minerals processing business’ low and ultralow carbon ferrochrome products and the Group suspended processing at the EWW smelter in December to match production to the lower demand and reduce inventory build up. House building and wood processing businesses The general deterioration of the economic situation, prevailing uncertainty and tightening of the availability of consumer finance adversely affected sales and future orders in the house building business in 2008. The number of delivered houses during 2008 was 28 per cent. lower than in 2007. Private sector residential construction in Finland as a whole and the number of building permits for private house construction granted were also significantly reduced. The demand for and price of sawn timber declined significantly in 2008 both for the Finnish domestic and export markets, particularly during the second half of the year, primarily due to reduced activity in the construction industry, adversely affecting the profitability of the Group’s sawmills. Prices for pine and spruce logs adjusted later in 2008 and plant closures and capacity reductions by certain competitors started to reduce the extent of operating losses at the end of the final quarter. The pallet business remained profitable, with modest organic growth in revenues. The business also acquired another small subsidiary at the end of the year. Discontinued operations The furniture business’ sole major customer decided to significantly reduce future order volumes in response to lower end-user demand, forcing the business into a major restructuring exercise including co-determination negotiations for all its employees. The Group reduced its majority stake to a minority interest for a nominal sum at the end of 2008 and deconsolidated the business. Following adverse developments, mainly related to the administration in the Kostroma region, the Group decided to scale down preparations for the Kostroma investment project. Significant expenses and impairments were recorded in 2008. Preparations were discontinued entirely in early 2009. 2.3 2009 The general economic situation remained weak and challenging, although there was some short term improvement as global recovery policy measures were commenced in order to activate demand for the markets and to secure the availability of financing for commercial and industrial players. Minerals processing businesses The Group expanded its minerals processing operations with the acquisition of Mogale in May 2009. Demand from stainless steel producers remained low in 2009, due to continued low demand for stainless steel in most end-user industries. However, commodity prices, including
56 ferrochrome, started to recover in the second quarter of 2009 and demand increased due to modest increases in stainless steel production and a restocking of depleted inventories by later processers. Costs increased significantly too though, with electricity prices in South Africa increasing by approximately 25 per cent. in July and labour costs increasing at above inflation rates. Profitability was adversely affected by currency exchange rates (USD/Rand and USD/Euro). The Group suspended production at the EWW smelter for roughly five and a half months in total during the first, third and fourth quarters to match production to the reduced demand. Underground mining operations in Turkey were also significantly reduced in the second half of the year due to low demand and inventory build up. House building and wood processing businesses The number of houses delivered by the house building business continued to decline in 2009, with deliveries in the third quarter particularly low due to very low sales at the end of 2008. However the business remained profitable and although operating profits fell, operating margins actually increased slightly due to the reduction of fixed costs. Consumer confidence improved towards the end of the year with new sales increasing compared to the previous year. The uncertain market conditions from 2008 continued into early 2009 and prices for sawn timber products continued to decline in the first half of the year. However, these price reductions were, to some extent, offset by reduced log prices. Sales of wood chip by-products were adversely affected due to reductions in paper and pulp mill output in the vicinity of the Group’s sawmills. Demand from the construction industry picked up towards the end of the year. The Group also divested three of its sawmills in the fourth quarter. The pallet business remained generally steady during 2009, even though one of its key customers, the paper industry, has been suffering due to reduced demand for paper products. 3. Key Factors affecting Results of Operations The results of the Company’s operations have been, and will continue to be, affected by many factors. This section sets out certain key factors that the Directors believe have affected the Company’s results of operations or could affect its results of operations in the future. For a discussion of certain factors that may adversely affect the Company’s results of operations and financial condition, please also see Part II – “Risk Factors”. 3.1 Acquisitions and disposals Acquisitions and disposals have formed an integral part of the Group’s operational development in 2007 to 2009. The revenues and expenses of newly acquired entities are consolidated from the date on which the Group acquires a controlling interest and the revenues and expenses of disposed entities cease to be consolidated from the date on which the Group disposes of the previous controlling interest. The Group also holds minority interests in certain companies. In addition to the acquisitions and disposals noted below, the Group has carried out various other smaller transactions. Further information regarding the accounting treatment and financial effect of the key acquisitions and disposals is set out in the “business combinations” notes and notes G.8 “Property Plant and Equipment” and G.9 “Intangible Assets” to the 2007 financial statements which are incorporated by reference into this document, the “business arrangments” notes to the 2008 financial statements which are incorporated by reference into this document and the “business combinations” notes and notes G.9 “Property Plant and Equipment” and G.10 “Intangible Assets” to the 2009 financial statements which are included in Section A of Part VIII of this document and incorporated by reference into this document. Minerals processing business acquisitions The Group’s most significant acquisitions during the past three years were the acquisitions of its minerals processing businesses in October 2008 (the European minerals processing business) and May 2009 (Mogale).
57 The total purchase price for the Group’s 84.9 per cent. stake in Mogale was originally ZAR 1,850 million, plus ZAR 150 million payable to a trust established for Mogale management incentives. Of the purchase price, ZAR 1,125 million and half of the ZAR 150 million management incentive was paid in cash at closing of the acquisition in May 2009 (the aggregate ZAR 1,200 million payment being approximately €103.7 million at €/ZAR 11.58). The balance of the purchase price (ZAR 725 million plus ZAR 75 million), plus interest thereon, was to be paid in cash over a period of five years from closing of the acquisition, of which the second, unconditional, tranche of ZAR 200 million was due in May 2010. The Group has paid ZAR 12 million (approximately €1.1 million) in 2009 and ZAR 187 million (approximately €19.2 million at €/ZAR 9.73) on 27 May 2010*. The remaining ZAR 600 million conditional payment (including the further ZAR 75 million incentive payment) (approximately €61.7 million at €/ZAR 9.73) is conditional upon Mogale receiving certain operational permits and licences. See also paragraph 10.4 of Part XII and also paragraph 14.3 of Part XII of this document. The consideration payable for the acquisition of the European minerals processing business (RCS, the 98.74 per cent. interest in TMS and the long-term ferrochrome toll manufacturing agreement with EWW) comprised (i) €80 million paid in cash on the closing of the acquisition in October 2008 and (ii) earn-out consideration pursuant to a profit and loss sharing arrangement, under which Kermas is entitled to receive Ordinary Shares with a value equivalent to a 50 per cent. share of any profit and obliged to pay in cash a 50 per cent. share of any loss based on the combined net profit or loss of RCS and the TMS group for each of the calendar years 2009, 2010, 2011, 2012 and 2013 (after tax but taking into account any tax refunds and excluding the effects of any mergers and acquisitions and corporate restructurings affecting RCS or TMS and subject to certain limitations), as further described in paragraph 10.3 of Part XII of this document. The Group’s preliminary calculation of the earn out liability payable in 2010, in respect of 2009, which was recorded as a short term liability in its 2009 financial statements, was €2.9 million. House building and wood processing business acquisitions The Group also completed a number of acquisitions in its house building and wood processing business during the three year review period. In March 2007, the Group acquired the remaining 68 per cent. of the pallets and packaging business Oplax Oy for €5.5 million. In January 2008 the Group acquired a 51.02 per cent. interest in the sawmill company Junnikkala Oy together with put and call options over the remaining share capital. The Group originally estimated that the total purchase price would be approximately €23 million (without discounting the estimated option strike price) with €5.3 million paid in cash at completion (net of cash acquired). However, following worse than expected performance, the Group terminated the put option in December 2009, although the call option remains exercisable. In September 2008, the Group also increased its stake in the house building company Pohjolan Design-Talo Oy (from 90.1 per cent. to 100 per cent.), for €6.1 million (including deferred payments and estimated earn outs recognised in the 2008 accounts). See also paragraph 10.7 of Part XII of this document. Other acquisitions In February 2007, the Group increased its stake in the furniture business in which it had previously been a significant, but minority, shareholder, by taking part in a directed share issue. The Group increased its stake from 47.3 per cent. to 71.0 per cent, for a cash payment of €0.9m as part of a €3.0m finance package by shareholders and other finance providers. As a result of this investment, the furniture business was consolidated into the Group’s accounts for most of 2007 and 2008 (see further below). Disposals The Group also disposes of business and investments which are no longer part of its core business or which are unprofitable or which otherwise do not conform to its overall business strategy.
* Source: management accounts, unaudited, in respect of second tranche payments in 2009 and 2010
58 In 2008 these disposals included the sale of a 23 per cent. stake in its furniture business and the disposal of its care services business. The Group disposed of a 23 per cent. stake in its furniture business for nominal consideration at the end of 2008, retaining a 48 per cent. minority stake and no contractual commitments to contribute to future capital, partially reversing impairment losses relating to the furniture business recognised earlier in 2008. In June 2008, the Group disposed of its care services business, resulting in a gain on disposal of €12.0 million in the 2008 accounts. The Group also retained call options in respect of 5 per cent. of the shares. Part of the consideration was provided by way of a vendor loan, the final payment under which is due in 2011. In 2009, the Group’s disposals included the sale of three of its sawmills. The Lappipaneli sawmill was sold in an asset sale in November 2009 for €14.6 million, payable in instalments in the fourth quarter of 2009 and in April 2010. The fixed assets were leased to the purchasers following the sale and were transferred to them in April 2010. The Group sold its 91.42 per cent. interest in its former subsidiary which owns the Tervola and Kittilä sawmills for €4.1 million in cash in December 2009. Other effects of transactions Acquisitions will, generally, increase production volumes, revenues and operating costs, with the opposite being true of disposals. Amortisation and depreciation are, generally, likely to be higher as a result of the expanded business and significant impairments have been required on occasions where acquired businesses did not perform as well as expected when they were acquired. The Group has recognised impairments in relation to goodwill, including €11.8 million in the sawmill business in 2008, and €19.1 million in Mogale in 2009. The Group has also incurred costs and expenses related to transactions which have been investigated but have not completed. For example, although the Group entered into a merger implementation agreement for the acquisition of Sylvania Resources Limited in June 2009 and incurred transaction costs of €2.1 million, including advisory fees, a number of obstacles hampering the potential acquisition were encountered and the transaction was called off. 3.2 Expansion of operations and upgrade of existing operations The Group has invested in its existing businesses with a view to expanding production and increasing market share in the relevant products. The Group has also invested in new business areas to expand its operations. Expansions will generally result in increased revenues (and operating costs), but also result in initial start up costs from capital expenditure and other costs. The Group has also invested in improving its existing operations to reduce operating costs per unit product, for example by improving efficiencies or yields or to enable use of alternative, cheaper raw materials. Such projects result in up front capital expenditure costs and may also result in reduced revenues for a period, where existing infrastructure needs to be decommissioned and replaced. In 2007, the Group raised net proceeds of €337.6 million from an issue of Ordinary Shares in conjunction with its plans to expand its wood processing business into Russia by establishing an integrated pulp mill, sawmill and harvesting business in the Kostroma region via greenfield investments. However, due to a number of adverse developments, mainly related to the administration of the Kostroma region, the Company announced in March 2008 that the preparations for the Kostroma investment project had been cancelled. As most of the sawmill machinery and equipment had already been ordered and paid for, the machinery and equipment is currently temporarily stored in warehouses in Finland. The Group continues to seek a purchaser for the machinery or another solution in respect of the equipment. The Group incurred significant costs in relation to the project including the write down of machinery. In aggregate, the total costs and expenses related to the Kostroma investment project since its inception in 2006 through to the end of 2009 amounted to €32.6 million*. Shortly after Mogale’s acquisition by the Group in May 2009, commissioning of Mogale’s new 12 MVA direct current furnace, its second direct current furnace, was completed. Test runs were held in August 2009 with near full scale production starting in September. In late 2009 and early
* Source: management accounts, unaudited.
59 2010 the new furnace’s production was switched to high-grade stainless steel alloy, and further testing and modifications were required as this process was developed and tested. Although most of the capital expenditure was incurred by Mogale prior to its consolidation into the Group’s accounts, part of the expenditure and the higher initial operating costs, for initial test and production runs, are reflected in the Group’s 2009 accounts. Following initial feasibility studies, the Group has also commissioned engineering studies and detailed designs for two new 70 MVA direct current furnaces but has not yet made a binding commitment to build those furnaces. In 2009, the Group started building a new chromite concentrate plant in Turkey, equipped with triple deck concentration tables which should enable the tailings to be re-worked in order to recover the fine ore particles and efficiently process and concentrate the mine output. The Directors expect that this will deliver a significant reduction in costs, as it will enable the use of tailings situated a few hundred metres from the plant, rather than mined chrome ore. Construction of the plant was completed in May 2010 and full scale production operations at the plant commenced in June. The Group originally announced that the total costs were estimated at €7.0 million, converted from its US Dollar estimate at the applicable exchange rate, and the Directors believe that the total costs will be in line with this estimate. The Group also invested €9.5 million at the Kalajoki and Oulainen sawmills in 2008 and early 2009, following the acquisition of its interest in Junnikkala, to enhance efficiency and significantly increase their combined annual capacity. 3.3 Prices received for the Group’s products The Group’s revenues are directly affected by the prevailing prices of minerals and alloys sold by its minerals processing business as well as the houses and other sawn timber products and by-products sold by its house building and wood processing business. Minerals processing businesses The minerals processing businesses’ revenue and earnings depend upon prevailing prices for the commodities they produce (such as low carbon and ultralow carbon ferrochrome, ferrochrome, silico manganese and stainless steel alloys) which the Group is unable to directly control. The Group does not currently engage in hedging against movements in commodity prices. As a result, movements in commodity prices have a direct effect on the Group’s revenues. Furthermore, as the majority of the commodities purchased and sold by the Group are not end commodities for which futures markets exist, the markets for these materials are less sophisticated than other commodities for which a futures market exists and react in different ways to market events than commodities for which there are developed futures markets. The following table sets out the average market price per lb for selected commodities produced by the Group’s minerals processing businesses for the periods indicated: For the year ended 31 December Average price $/lb 2007 2008 2009 Charge chrome (FeCr) 0.93 1.76 0.85 Low carbon FeCr (max 0.5% C) 1.50 3.78 2.06 Premium ultra-low carbon FeCr (<0.03% C) 1.68 4.16 2.40
Source Heinz H. Pariser, Alloy Metals & Steel Market Research Notes: (1) The table covers the last three years, although Group only acquired its minerals processing businesses in 2008 and 2009. The economic environment in 2008 caused a significant reduction in stainless steel production, with major steel users, such as the construction and automotive industries, all reducing their demand for steel which in turn caused a reduction in demand for and price of commodities used in stainless steel manufacture, including ferrochrome and other products produced by the Group’s mineral processing business. Many users also ran down inventories for working capital purposes, reducing their demand for the mineral processing businesses’ products more significantly than the change in the production of the end products. This was particularly noticeable in the aerospace industry, which is a significant end-user of the specialist ultralow carbon ferrochrome produced
60 by the Group’s European minerals processing business. In consequence, prices for charge chrome, ferrochrome and ultralow carbon ferrochrome all peaked in mid-2008, before dropping significantly in the second half of 2008 and early 2009. In response to reduced prices and increasing stock levels many ferrochrome producers significantly reduced output in late 2008, with output then dropping significantly below demand as producers and users consumed stockpiled materials. Prices bottomed out in the third quarter of 2009 and then rose gradually for the remainder of 2009. Although historically there has been a close link between prices of many of the commodities produced by the Group, this link has been weaker recently, as producers have adopted different approaches to movements in demand and price. The scale of the Group’s mineral processing operations has enabled it to change the product mix at its smelters. Further, the use of direct current technology for part of its South African smelting operations enables the Group to change its product mix very swiftly to meet changes in market pricing and demand, which to some extent mitigates market commodity pricing risks and enables the Group to optimise its operating margin (or limit operating losses) for production from its direct current furnaces. House building and wood processing businesses The house building and wood processing businesses’ revenues are similarly dependent on the prices received for their products. There has also been a significant drop in demand for and prices of the houses built by and sawn timber products and by-products produced by the house building and wood processing businesses, due to the economic downturn, in particular the reduction in demand for houses and the reduction in the use of wood in the construction industry. The Group agrees prices up front with customers, prior to constructing their houses. The average sales price for houses produced by the Group has remained broadly flat over the past three years, with modest increases in the average price of houses delivered in 2008 compared to 2007 and in 2009 compared to 2008; however the average house price is also dependant on variations in size and style of house sold, and no adjustment is made for this variation. The economic climate in Finland has had a much greater impact on demand and the number of houses produced than price. Sawn timber prices continued to rise in early 2007, peaking in October, before falling in the latter part of the year. Demand reduced sharply in autumn 2008 due to the global economic crisis, with average export prices for 2008 falling to roughly 2006 levels, with further decreases in early 2009. A modest increase in demand and prices occurred in later 2009 due to the weak economic recovery in Finland and other export markets within the EU, although as a whole prices and production in 2009 were lower than 2008. Increases in the cost of capital meant that many users of sawn timber also reduced inventories, further reducing demand during later 2008 and early 2009. Reductions in production capacity halted the slide in prices in May 2009, with modest price rises occurring in 2009 as buyers increased orders to replenish depleted stocks. The Group sells its sawn timber products to export customers and also the Finnish domestic market. Production in the industry can be switched quickly between timber for the two markets, although producers, including the Group, are unlikely to have the flexibility to switch all production due to the need to have regard to maintaining relationships with customers. The sawmills’ revenue from sawn timber products is supplemented by sales of wood chips and other by-products to pulp and paper producers and historically also to local bio-energy producers. The price for these by-products is linked to the demand of the pulp producers and has relatively little correlation to prices for logs or sawn timber products. Consequently changes in the price of these by-products directly affects the revenues received by the Group’s sawmills and may also indirectly affect log prices, as the log prices also reflect use of other parts of the tree by such industries. Although there has been a modest growth in the use of wood and wood by-products by energy users in Finland as a whole, the effect for the Group has been more than offset by a significant reduction in the demand for wood chips and by-products in late 2008 and in 2009 by Finnish pulp and paper producers (including those near to the Group’s sawmills) due to a decline in magazines, newsprint and other paper uses as advertising has switched to electronic media and use of paperboard in packaging has been reduced. One of the subsidiaries burns some of the chips, selling the energy to the local community for heating as well as using it within the sawmill facility. 61 The changes in average unit prices between 2007 and 2009 for the pallets and boxes produced by the pallets businesses were not significant. 3.4 Production volumes (including curtailed production and stoppages and drop in demand) The Group’s revenues are directly affected by the volume of minerals products sold by its minerals processing business as well as the houses and other sawn timber products and by-products sold by its house building and wood processing business. Minerals processing businesses There has been a significant drop in demand for the Group’s minerals processing businesses’ products due to the current economic environment and in particular the reduction in demand for specialist steels in end products in the automotive, aerospace and other industries in which the majority of the Group’s chrome and ferrochrome products are used. The following table sets forth the key production volumes of the Group’s minerals businesses for the periods they were owned by the Group: For the year (TMS/EWW) For the or 7 months 2 months ended (Mogale) ended 31 December 2008 31 December 2009 Special grade ferrochrome produced by EWW (mt) 2,408 14,074 Chrome ore concentrate produced by TMS (mt) 3,563 17,224 Lumpy ore extracted for external customers (mt) — 8,742 Total ferroalloys produced by Mogale (mt) — 48,071
Notes: (1) Production for the Mogale business represents the period from its acquisition in May 2009 to 31 December 2009. (2) 2008 production for the European minerals business represents the period from its acquisition in October 2008 to 31 December 2008. 2009 production represents the full calendar year. The annual production capacity for the three existing Mogale furnaces acquired by the Group was approximately 110,000 metric tonnes per annum, which was further increased to approximately 135,000 metric tons per annum when the 12 MVA DC furnace was completed later in 2009. The acquisition of Mogale by the Group significantly increased the Group’s minerals processing capacity. As noted in paragraph 3.3 above, there was a significant reduction in demand for ferrochrome and other products produced by the Group’s mineral processing businesses in 2008, due to a reduction in demand for stainless steel products and inventory reduction for working capital purposes by stainless steel producers, which adversely affected production volumes in late 2008 and into 2009. Demand picked up in the third quarter of 2009 as stainless steel production increased and stainless steel producers restocked depleted inventories. Processing at the EWW smelter was suspended from the beginning of December 2008 through to the end of March 2009, in July and August 2009, and in late December 2009 through to February 2010, due to reduced demand. The shutdowns reduced costs slightly during these periods, although most general operating costs were still incurred or were replaced by one-off costs for shutdown and restart. Shortly after the acquisition of Mogale, the Group completed the commissioning of its second 12 MVA direct current furnace, increasing Mogale’s total production capacity. Much of the senior management and more experienced workforce were involved in the commissioning process and the diversion of resource from the other furnaces reduced production efficiency at those furnaces. Production volumes from the new furnace during commissioning and in the post-commissioning phase for most of the rest of 2009 were limited, although the utilisation increased at the end of the year and the Group was able to make some use of the beneficial effects of the direct current furnace including the ability to switch production quickly between mineral products. Due to reduced demand for ferrochrome, the Group also chose to sell some of the lumpy chrome ore mined at its Turkish mines and also reduced underground mining operations in the latter half of 2009, to reduce stockpiling of chrome ore and improve cash flows. Mining for concentrate was
62 halted at the larger mine in July and reduced significantly at the smaller mine for the rest of the year. Some of the output from the second quarter was sold as lumpy chrome ore with a small amount of mining for lumpy chrome ore occurring in the second half of the year as well. House building and wood processing businesses There has been a significant drop in demand for the house building and wood processing businesses’ products in 2008 compared to 2007, due to the economic downturn, with further reductions in 2009, in particular a reduction in demand for houses and a reduction in the use of wood in the construction industry. The Finnish detached house market has suffered significantly in the economic downturn due to customer sentiment and the reduction in credit available to potential homeowners. House building The Group generally enters into contracts with a delivery time of nine months in the future. Customers are required to pay cash in instalments during the design and building process; however revenues and costs are only recognised on delivery of the completed ready-to-move-in house. Consequently, there is a delay between customer sentiment affecting orders and its impact on revenues and costs recorded by the business. The following table sets out the number of delivered wooden ready-to-move-in houses for the periods indicated: For the years ended 31 December 2007 2008 2009 Number of houses 473 342 238 The number of houses delivered fell year on year for 2007-2009. The Group’s market share also fell during 2007 and 2008. The US sub-prime crisis and consequential global economic deterioration resulted in a significant reduction in orders towards the end of 2007, which continued into 2008 and worsened in the second half of 2008, which affected production in 2008 and 2009. A one off project in the fourth quarter of 2008/the first quarter of 2009 for the delivery of 31 holiday houses boosted the number of houses delivered in the winter of 2008/2009, against a general trend of falling numbers of houses delivered. As the economic climate improved in 2009, the order book has increased, with some of these houses being delivered in late 2009. The market for low-end houses produced by Pohjolan Design-Talo has improved more quickly than the market for the Group’s mid-end houses and the market for more expensive house types. The change in management in December 2008 and buying out the remaining 9.9 per cent. minority stake from the outgoing management also adversely affected the business, with the outgoing management focussing on production of orders already secured rather than securing new orders, which affected production volumes in 2009. The renewed focus on marketing by the new management team has helped contribute to the increase in the order book in 2009. Sawmills and pallets The following table sets out production volumes of sawn timber and production capacity for the Group’s sawmills for the periods and dates indicated: For the years ended 31 December 2007 2008 2009 Total volume sawn (m3) (full year) 180,000 312,000 331,000 Approximate nominal total production capacity (at 31 December)(1)(2) 200,000 500,000 300,000
Source: from management (1) Capacity changed during 2008 and 2009 as a result of acquisitions, disposals and capital expenditure (see below). (2) Capacity at 31 December 2009 excludes the capacity of Tervola and Kittilä sawmills disposed on 31 December 2009 and the Lappipaneli sawmill which was held for sale following an agreement for sale entered into in November 2009 prior to its transfer in April 2010. Sawn timber production decreased sharply in Finland in 2008 compared to 2007, with the decrease continuing into early 2009, due to a fall in demand from export markets and a contraction in domestic demand, due primarily, in both cases, to a decline in the construction 63 market. The Group’s total production figures appear to buck this trend; however, the increases are due to increased capacity from acquisitions and capital investments, and utilisation in 2008 and 2009 was lower than in 2007. The Group acquired a majority interest and call option in Junnikkala in January 2008, consolidating the sawmill capacity of the Kalajoki and Oulainen sawmills. This capacity was further expanded later in 2008, by expansion works at the Kalajoki and Oulainen sawmills, which is reflected in the capacity at the end of 2008 although commissioning works continued into 2009. The Group disposed of or agreed the disposal of the Lappipaneli, Tervola and Kittilä sawmills in the fourth quarter of 2009. (The fixed assets of the Lappipaneli sawmill were retained until April 2010 and leased to the purchasers following the sale.) These disposals reduced the Group’s overall sawn timber capacity to its current value of 300,000m3 per annum (200,000m3 at Kalajoki and 100,000m3 at Oulainen) although the disposals had only a modest effect on total production volumes in 2009 given that they occurred late in the year. Production at the Kalajoki sawmill was stopped temporarily for short periods in the second half of 2008 during the refurbishment and expansion works. The Oulainen sawmill was closed for several months in the summer and autumn as the main production line was replaced. The works had a modest effect on production volumes. Unlike certain competitors, the Group chose not to close any sawmill for an extended period due to the reduced sawn timber demand and prices; however, the sawmills operated at somewhat reduced throughput as there was insufficient demand to operate at full capacity. During periods of particularly cold winter weather, the Group also operated the sawmills at reduced throughputs, as log feed-in speeds to the saw must be reduced for deep frozen wood logs. Commercial log fellings declined as log prices fell, meaning that log supply remained relatively tight. The Group’s ability to increase sawn timber production volumes at the end of 2009 was, to some extent, constrained by log availability. Aggregate annual production volumes in the pallets business have remained relatively stable for the period the business has been consolidated into the Group accounts, with a modest increase over the review period, in part due to the acquisition of the PSL Räinä pallets business in November 2008. Each of the pallet production facilities sells exclusively or mainly to a single customer, with the business’ main customers being in the paper and steel industries. Production volumes are highly dependent on the demand of those major customers. 3.5 Production costs and costs of sale The Group’s competitiveness and profitability are impacted by its ability to maintain efficient operations and maintain a low level of processing costs and costs of sale compared to key competitors operating within the same product markets. The Group’s key operating costs include energy costs, raw materials costs and employment costs (including subcontractor costs). Minerals processing businesses Although the Group’s goal is to become a fully integrated mine-to-metals minerals producer and processor, the Group is currently not fully vertically integrated and the majority of raw materials used in its businesses are purchased from third parties. The Group’s minerals processing operations in Germany and South Africa are intensive users of energy, primarily electricity. As a result, the price of energy (particularly electricity) and raw materials plays an important role in the profitability of its minerals processing businesses. Electricity prices in South Africa had historically been relatively low and had increased at below inflation rates. However, in July 2009, ESKOM, the South African monopoly electricity supplier, increased wholesale electricity prices by approximately 25 per cent. and announced further similar price rises for the forthcoming year and the year after that. Electricity prices in Germany are relatively expensive compared to other countries. Although there is some correlation between raw materials prices and prices of intermediate commodities due to demand from and cost pressures applied by producers of intermediate commodities, there are generally discrepancies in the timing and/or amount of such changes.
64 The Group’s direct current technology furnaces enable certain of its furnaces to use very fine raw materials, such as UG2, which is currently and has been cheaper than the larger chrome ore used by many larger bulk ferrochrome processors. As the direct current smelting does not require coke, there is also a greater flexibility in the choice of reductant. Labour costs in the minerals processing business have also increased faster than inflation. A general wage increase of 8 per cent. was agreed with the South African works council in the summer of 2009. A general wage increase of 15 per cent. was agreed by TMS as part of a new union agreement in 2010. Processing at the EWW smelter was suspended from the beginning of December 2008 through to the end of March 2009, in July and August 2009, and in late December 2009 through to February 2010, due to reduced demand. Reductions in processing at EWW meant that less of the ores produced by the Turkish mining operations were being utilised and the underground mining operations for concentrate production were halted at the larger mine in July and reduced significantly at the smaller mine for the rest of the year, to reduce inventory build up. Some of the output from the second quarter was sold as lumpy chrome ore with a small amount of mining for lumpy chrome ore occurring in the second half of the year. The shutdowns reduced costs slightly during these periods, with a small reduction in employment costs from workers taking annual and unpaid leave during these periods and a reduction in overtime, and reductions in raw material and energy costs. However, fixed costs were still incurred and other one-off costs for shutdown and restart meant that the net reductions in operating costs were small. Shortly after the acquisition of Mogale, the Group completed the commissioning of its second 12 MVA direct current furnace, increasing Mogale’s total production capacity. Operational costs were incurred in the commissioning stage and were incurred on production (although only for low volumes of product produced) in the post-commissioning phase. Much of the senior management and more experienced workforce were involved in the commissioning process, and the diversion of resource from the other furnaces reduced the operational efficiency at those furnaces, increasing the cost per unit volume, particularly in the third quarter. House building and wood processing businesses House building House prices are fixed up front with customers, typically nine months prior to delivery of the finished house. Any changes in costs will affect the profitability of that contract. The majority of costs incurred are volume dependent, comprising external and internal purchases and subcontractor services. Of these, the external purchases used in the house construction (such as kitchen and bathroom equipment, plumbing, electrical equipment and interior furnishings) are the most significant. The wooden frame components have generally been sourced as intragroup purchases from the Junnikkala and Tervola sawmills. As sawn timber prices are an input cost for the house building business (and an output price for the Group’s sawmills) some of the effect of changes is offset for the Group as a whole. Certain products which are not produced by the Junnikkala sawmill have continued to be purchased from the Tervola sawmill following its disposal. The majority of labour is subcontracted, with only the frame assembly and design and management employees being employed by the Group. Subcontractor costs peaked in mid 2007 due to the volume of house production and general economic climate; the overall decline in the construction industry in Finland since then has slightly reduced subcontractor costs. However, although the majority of costs are volume dependent the number of houses constructed has a significant impact on the quantities of materials purchased from external suppliers, which typically provide volume discounts which causes costs per house to rise as the number of houses produced decreases. The Group undertook a costs review at the end of 2008, reducing marketing expenses and reducing the number of employees, the impact of which has been to reduce costs in 2009. Sawmills and pallets The cost of coniferous wood logs represents approximately two thirds of production costs in the sawmill business. Due to the seasonal nature of coniferous log harvesting, the Group is required to place firm orders for its coniferous wood logs approximately six to twelve months prior to the date it will process the logs. 65 Log prices continued to rise in early 2007, reaching a peak in June, before starting to fall in response to reduced demand from wood processors until March 2008, with these prices affecting the sawmills roughly 6 to 12 months later as prices due to the extended lead time for log purchases. The log market is fragmented, due to large numbers of small owners causing regional distortions at certain times, for example when certain owners refuse to sell during periods of low pricing. The Finnish government influence offsets some of these variations as government owned plantations generally continue to sell when prices are low. The reduction in utilisation in 2008 and 2009, compared to 2007, adversely affected the costs per unit production, as the increase in fixed costs was significantly greater than the increase in throughput resulting in an increase in fixed costs per unit volume of processed timber. Overall costs were also significantly affected by the acquisitions and expansions in 2008 (compared to 2007) and to a lesser extent by the disposals at the end of 2009. Production costs and costs of sale in the pallets business increased slightly in the period following the acquisition of the remaining interest Oplax Oy and its consolidation into the Group’s accounts in 2007, in part due to the acquisition of the PSL Räinä pallets business in November 2008. 3.6 Currency exchange rates The Group is exposed to risk from currency fluctuations because of mismatches between the currencies in which operating costs and purchase liabilities are incurred and those in which revenues are received or deposits and finance facilities are denominated. The exchange rate risks are not hedged at a Group level and, in general, are not hedged by the individual companies within the Group. The Group’s functional currency is the Euro. However, the commodities bought and sold by the minerals businesses are predominantly denominated in US Dollars, and expenses and investment are partly in Euros and other foreign currencies including the South African Rand and Turkish Lira in addition to US Dollars. The Group’s foreign exchange risks have increased since the acquisition of its minerals processing businesses, particularly the Mogale acquisition. The most significant exchange rate has varied as the Group’s business operations have developed. Currently, the most significant operational exchange rate is the US Dollar/Rand due to Mogale’s operations, followed by the US Dollar/Euro due to both parts of the minerals processing business. The Euro/Rand exchange rate is very significant on a non-operational level due to the outstanding Rand-denominated purchase consideration from the Mogale acquisition. The deferred purchase consideration (excluding interest expenses) for the Mogale acquisition comprised an unconditional payment of ZAR 200 million, which was due in May 2010 and further conditional payments of ZAR 525 million to the vendors and ZAR 75 million to the management incentive trust, which are conditional on obtaining relevant purchases and licences (the aggregate conditional payment ZAR 600 million is approximately €61.7 million at €/ZAR 9.73). The Group has paid ZAR 12 million (approximately €1.1 million) in 2009 and ZAR 187 million (approximately €19.2 million at €/ZAR 9.73) on 27 May 2010*. (See further paragraph 10.4 of Part XII and paragraph 14.3 of Part XII of this document.) Historically, the Euro/Japanese Yen and Euro/Swedish Krona exchange rates have also been significant due to their effects on the house building and wood processing business and the Euro/Russian Rouble due to the, now discontinued, Kostroma investment project. Certain subsidiaries within the Group’s house building and wood processing segment entered into forward foreign exchange derivative contracts in 2007 and 2008. In 2008, one of the sawmill subsidiaries significantly over hedged its exposure to the Japanese Yen. Losses of €5.2 million, comprising €2.7 million realised losses and €2.5 million changes in fair value were recognised in the accounts in 2008. Following the discovery of this overhedging, the Group decided that operational currency exposure should only be hedged in certain very limited circumstances and settled the remaining forward agreements in 2009 resulting in a further €1.0 million loss being recognised on closing out the positions. The Group has brought a claim against the bank in relation to these losses (see further paragraph 14.1 of Part XII of this document).
* Source: management accounts, unaudited, in respect of second tranche payments in 2009 and 2010
66 4. Financial Targets 4.1 2007 On 28 February 2007, Ruukki advised the market that its revenues in 2007 were expected to be close to €200 million and that the operating profit (EBIT) was expected to be above the 2006 EBIT (which was €13.0 million), when taking into account the fiscal year 2007 costs related to the Kostroma investment project. On 14 August 2007, the Group confirmed its revenues forecast, but stated that the EBIT forecast was expected to exceed the 2006 EBIT excluding the expenses arising from the Kostroma investment project. This forecast was repeated on 13 November 2007. The actual revenues for 2007 were €213.9 million and the actual EBIT was €15.7 million including the Kostroma investment project expenses (which amounted to an EBIT expense of €1.1 million). 4.2 2008 On 27 February 2008, Ruukki advised the market that the Group’s consolidated revenue in 2008 was expected to be about 20 per cent. higher than the 2007 group revenue, that the Group’s 2008 operating profit (EBIT) was expected to be at about the same level as during 2007 despite the cyclical changes in the house building and sawmill businesses and that earnings before taxes for 2008 were expected to increase by approximately a quarter. On 17 June 2008, the Group restated its financial forecast for 2008, noting that the financial outlook of the wood processing businesses for 2008 was weaker than previously assumed, but that the then pending chrome business transaction (ie the acquisition of RCS, TMS and long term supply agreement with EWW) could, if finalised, very significantly enhance the profitability in the latter half of 2008. The weaker outlook was based on lower than expected output delivery volumes in the furniture business segment, decline in demand and prices in the sawmill business segment and an increase in expenses related to the Kostroma investment project. On 4 November 2008, a further update was provided stating that the Group’s wood processing businesses, including the Group headquarters and the Kostroma investment projects, were expected to generate approximately €60 million revenue for the fourth quarter of 2008 (revenues for continuing operations for the first three quarters of 2008 were €171.1 million) and correspondingly IFRS-based operating profit (EBIT) was expected to be €0.5 million to €2.0 million for the same period (EBIT for the first three quarters of 2008 was a loss of €35.9 million). The chrome businesses acquired in the fourth quarter of 2008 were expected to generate revenues of around €20 million for November and December, and to have earnings before interest, taxes, depreciation and amortisation (EBITDA) of around €7 million for the two-month period, each on a local GAAP basis (Malta and Turkey). On 10 December 2008, Ruukki issued revised guidance, as due to deterioration of the market demand, the outlook for the minerals processing business had become weaker than estimated in the November guidance. The Group also revised its guidance for the wood processing businesses (to include the sawmill business, furniture business, house building business, excluding Group headquarters and the Kostroma investment project) respecifying the guidance for 2008 (calculated in accordance with IFRS): Wood processing Minerals processing December 2008 guidance for 2008 (including areas (November & € million noted above) December only) Group total Revenue 220 15 245 EBITDA 13 5 20 The 2008 results for the wood processing segment were slightly above this revised guidance, which was offset by slightly worse than expected results in the minerals processing segment. Total revenues for the Group in 2008 were slightly above the December guidance and Group EBITDA was slightly below the December guidance.
67 4.3 2009 In 2009, Ruukki chose to publish EBITDA guidance. The Group also stated it would emphasise positive cash flow. Guidance was published and updated through the year as follows: EBITDA Minerals House building and Non-segment and € million processing wood processing eliminations Group total Published 26 February 2009 10.0 5.0 (5.0) 10.0 Revised 25 May 2009 15.0 5.0 (5.0) 15.0 Revised 6 August 2009 15.0 7.0 (7.0) 15.0 Revised 7 October 2009 10.0 7.0 (7.0) 10.0 Revised 21 December 2009 close to 9.0 close to 7.0 not stated 6.5 The minerals processing EBITDA was revised upwards on 25 May in conjunction with the Mogale acquisition, which was expected to increase the minerals processing output and have a positive effect on profitability. On 6 August the wood processing EBITDA guidance was revised upwards based on better than expected development in sawn timber prices. However, this was offset by increased expenses and accruals in the non-segment operations, particularly one off closure costs relating to the Kostroma investment project of €2.1 million and accruals for the Group CEO remuneration including the 2009 CEO bonus package. On 7 October, the minerals processing guidance was revised downwards since Mogale had not generated the expected results mainly due to strengthening of the ZAR against the Euro. In addition, in August, Mogale started its new 12 MVA direct current furnace, and the ramp-up of additional production capacity initially negatively affected normal production. Non-recurring expenses in relation to corporate activity also had a negative effect on the segment’s profitability. On 21 December 2010, Ruukki advised that during the fourth quarter, the Group had started preparations for listing on the main market of the London Stock Exchange. It was estimated that the Group would recognise a total of €2.0 million of listing expenses during 2009, mainly arising from the financial information related workstreams of the listing process. Moreover, based on the current market circumstances both the minerals processing and the house building and wood processing segments’ EBITDAs were expected to be slightly below their earlier guidance, although the decrease in the minerals processing businesses’ EBITDA was lessened, to some extent, due to the European specialty grade ferrochrome business performing better than previously estimated even though the weakness of the US Dollar had had an adverse effect on earnings. The actual EBITDAs for 2009 were: EBITDA Minerals House building and Non-segment and € million processing wood processing eliminations Group total 2009 actual (audited) 10.4 17.1(1) (8.1) 19.4(1)
Note (1): includes €5.3 million non-recurring positive impact of termination of Junnikkala put option. Reasons for deviation from 21 December 2009 guidance The main reasons that led to the deviation of the financial statement from the profit guidance, which was published on 21 December 2009, in respect of the EBITDA guidance were as follows: Minerals processing business The deviation of the minerals business (in total approximately one million euro) was mainly caused by the fact that the Group’s South-African operations achieved a better result at the end of the year compared to the guidance, primarily due to increased sales volumes and prices. House building and wood processing businesses The (positive) effect of the non-recurrent sums relating to the actions carried out at the end of the year included: (i) the termination of the Junnikkala put option, and (ii) the effect of the sale of the sawmill operations of Lappipaneli and the sale of share capital of Tervola.
68 The segment management’s guidance in respect of Junnikkala was more conservative than the guidance received from the management of Junnikkala, as previous guidance from the management of Junnikkala had repeatedly turned out to be too optimistic earlier in the year. The segment’s management had reservations about the guidance, especially as the beginning of the year had been generally difficult in the sawmill business and although there appeared to be a recovery in market demand there was no certainty in respect of the duration of the recovery. However, Junnikkala’s performance was close to Junnikkala’s own guidance, which was better than the segment management’s guidance, due to increased sales volumes and sawn timber sales prices increasing more rapidly than round log prices. Due to continued uncertainties in the profitability of the house building business the profitability was estimated conservatively and profitability in the fourth quarter was better than originally expected. The guidance produced by the house building and wood processing businesses were overly conservative when reviewed with the benefit of hindsight. Other The realised level of the EBITDA was also affected at the Group level by the re-classification of the losses caused by the termination of the Russian business operations. Based on the re-classification, the losses were presented under EBITDA in accordance with the accounting policies adopted for the 2009 consolidated auditing financial statements. 4.4 2010 On 27 February 2010, Ruukki advised that in order to follow the international market practices of listed minerals companies, the Board of Directors had decided to change the way of presenting the future outlook compared to the past practice of the Company and that EBITDA guidance would no longer be presented. The Company also noted that the new policy on future guidance better reflected the way in which the Board of Directors followed the forecast development of the Company’s business following the Company’s move into new market areas. The emphasis on cash flow generation from all of its operations is still a particularly important operational principle for 2010.
5. Results of Operations 2007 – 2009 5.1 Consolidated results overview The Group’s consolidated income statement data for the year ended 31 December 2008 and 31 December 2009 have been extracted from the 2009 annual financial statements and the Group’s consolidated income statement data for the year ended 31 December 2007 has been extracted from the 2008 annual financial statements to reflect reclassification adjustments. The numbers set out below for the year ended 31 December 2009 are audited. The numbers set out below for the year ended 31 December 2007 and 31 December 2008 have been adjusted as described further below. The 2007 and 2008 numbers had originally been audited. However, as the 2007 and 2008 numbers have been extracted from the comparative financial information, and in the case of the 2007 numbers have been subject to certain further adjustments (which have been made for consistency with the presentation and policies used in the 2009 financial statements and which are described further below) the 2007 and 2008 numbers are considered to be unaudited.
69 The following table sets out the Group’s consolidated income statement data for the years ended 31 December 2007, 31 December 2008 and 31 December 2009: Consolidated profit and loss (IFRS) For the years ended 31 December 2007 2008 2009 €’000 €’000 €’000 Revenue 213,910 247,361 193,359 Other operating income(1) 6,874 3,648 7,587 Changes in inventories of finished goods and work in progress 1,650 (9,050) (17,495) Raw materials and consumables used (140,802) (171,595) (115,255) Employee benefits expense (32,037) (37,358) (28,230) Depreciation and amortisation (8,022) (14,168) (26,960) Other operating expenses(2) (24,242) (27,691) (20,611) Impairment, net (1,034) (41,034) (17,020) Items related to associates (core)(3) 74 — 6 Operating profit/loss 16,371 (49,886) (24,617) Finance income(1) 7,467 16,783 5,871 Finance cost(2) (3,983) (12,958) (9,306) Items related to associates (non-core)(3) (697) 171 (284) Profit/loss before taxes 19,158 (45,891) (28,336) Income taxes (5,478) 1,171 5,609 Gain on disposal from discontinued operations — 12,033 — Profit/loss for the period 13,680 (32,687) (22,727) Profit attributable to equity shareholders 12,651 (31,386) (19,744) to minority shareholders 1,030 (1,301) (2,983) 13,680 (32,687) (22,727)
Notes: (1) The Company reclassified in the 2009 financial statements €29,000 of other emissions rights-related finance income for the year ended 31 December 2008 from finance income to other operating income. This resulted in the reduction in finance income from €16,812,000 to €16,783,000 and the corresponding increase in other operating income from €3,620,000 to €3,648,000 for the year ended 31 December 2008. These numbers are included in the 2009 audited financial statements. There were no emission rights in 2007 as Junnikkala was not part of the Group at that time. (2) The Company reclassified in the 2009 financial statements €112,000 of emission rights-related costs for the year ended 31 December 2008 from finance cost to other operating expenses. This resulted in the reduction in finance costs from a negative €13,071,000 to a negative €12,958,000 and the corresponding increase in other operating expenses from a negative €27,579,000 to a negative €27,691,000 for the year ended 31 December 2008. (3) The Company decided in conjunction with the 2009 financial statements to change the way it presents share of associated profits, sales gains and losses related to associates, and impairment on associates’ shares and receivables, to the extent they relate to associated companies owned by the Group parent company and not belonging to business segments. Hence, from 2009 onwards these items are presented in finance items below EBIT, when previously they have been presented above EBIT in various lines. The results for 2007 and 2008 have been restated above accordingly. The rationale behind the change in the way of presenting these items is that these associated companies are not material and that they are classified as non-core assets.
Ruukki’s consolidated financial statements for 2009 also include a “consolidated statement of comprehensive income” (see further Section A of Part VIII of this document).
70 5.2 Year ended 31 December 2008 compared to year ended 31 December 2007 Revenue The Group’s consolidated revenues increased by €33.5 million (15.6 per cent.), from €213.9 million to €247.4 million. The following table presents the Group’s consolidated revenues by segment: Revenue by segment (IFRS) For the years ended 31 December 2007 2008 €’000 €’000 Minerals processing — 12,308 House building and wood processing(1) 119,980 144,066 Other & discontinued operations(2) 93,930 90,988 Total 213,910 247,361
Notes: (1) House building and wood processing revenues comprise revenues for house building, sawmills and pallets businesses (pallets were included within “sawmills” in 2007 and 2008 financial statements) net of intra-group sales. (2) “Other and discontinued operations” comprises other operations and discontinued operations (including the headquarters function, Kostroma investment project, furniture business and the care services business) and includes all eliminations and unallocated items except for the intra-group sales relating to house building and wood processing segment.
Minerals processing businesses Prior to the acquisition of the European minerals processing business, the Group did not operate a minerals processing business, so no revenues were recorded for this segment in 2007. Essentially all of the €12.3 million revenues for the two months of 2008 in which the minerals processing business was consolidated into the Group’s accounts were generated by the low and ultralow ferrochrome after processing by EWW. Due to the reduced demand for end-products utilising stainless steel, demand for ferrochrome reduced during 2008 and in response to this reduced demand, the Group chose to suspend processing at EWW’s smelter from the beginning of December 2008 until the end of March 2009, reducing the revenues which could have been received in 2008 in order to match production to demand and prevent stockpiling. House building and wood processing businesses Total revenue in the house building segment decreased from €62.4 million to €50.4 million, primarily due to the lower number of houses delivered in 2008. The Group delivered 342 houses in 2008, which was 28 per cent. lower than the 473 it delivered in 2007, a decrease of 131 houses, due to the reduced demand for housing caused by the economic deterioration and uncertainties. The house building business also lost market share, with the number of houses it delivered declining more rapidly than the Finnish housing market as a whole. The price per house remained relatively stable between 2007 and 2008. The Group produced 31 houses as part of a one off development for the recreational housing market, with nine houses delivered in 2008 and the balance in early 2009. Revenues from this project were recognised according to the percentage of completion method, so although the majority of houses were delivered in early 2009, €2.8 million was reflected in the 2008 accounts as revenues from this project, partly offsetting the decline in other house deliveries. Total revenue for the sawmills and pallets business increased from €59.4 million in 2007 to €96.3 million in 2008, including inter-segment sales, an increase of €36.9 million, (€57.6 million to €93.7 million excluding inter-segment sales, an increase of €36.1 million). Revenues from the sawmills business (excluding pallets) comprised the substantial majority of revenues in both years, and revenues in 2008 were €87.1 million (including inter-segment sales). The demand for and price of sawn timber declined significantly during the second half of 2008, due to reduced activity in the construction industry, where the majority of the sawn timber produced by the Group’s sawmills is used. However, unlike certain competitors, the Group chose not to significantly scale down production or
71 close sawmills in 2008, although utilisation of facilities was reduced compared to 2007. The plant closures and reduced utilisation by major competitors meant that the Group was not exposed to the full effect of the reduced demand for timber. The Group’s acquisition of Junnikkala in January 2008 almost doubled the total production capacity with this increase being available for the majority of 2008, which increased revenues despite falling throughput at the sawmills owned in 2007. The volume of sawn timber increased from 180,000 m3 in 2007, to 312,000 m3 in 2008, an increase of 132,000 m3. The Group also carried out a major investment programme at the newly acquired Junnikkala sawmills (at Kalajoki and Oulainen) during the latter half of 2008 to further increase annual production capacity of sawn timber and enhance efficiency, and the capacity increase is reflected in the nominal capacity at the end of 2008. However as the investment programme was completed in early 2009 and there were periods in which the existing machinery was out of operation to enable the works to take place, the effects of the additional increased capacity are not reflected in the 2008 results. Revenues from the pallets business were €9.2 million in 2008, an increase from 2007, due primarily to the longer period for which the business was consolidated, following the acquisition of the remaining 68 per cent. interest in Oplax Oy in March 2007. Growth in the underlying business was modest. A small increase in revenues was also recorded due to the acquisition of the PSL Räinä pallets businesses in November 2008. Other The furniture business contributed revenues of €78.5 million in 2008, compared to €68.7 million in 2007 (for the period of consolidation from February 2007 to December 2007), an increase of €9.8 million. However, the business was loss making and following the decision by the business’ sole major customer to significantly reduce future order volumes and the resulting restructuring, the Group sold part of its stake for a nominal sum, reducing its ownership from 72 per cent. to approximately 48 per cent. at the end of 2008. The care services business contributed €10.2 million revenue in 2008, prior to its disposal in June 2008 (an increase of €2.2 million from €8.0 million for the equivalent period in 2007), primarily due to small acquisitions during the course of 2007. Other operating income In 2008, a total of €3.6 million was recognised as other operating income (primarily insurance compensation, gains on disposals of investments and other assets and rental income), a decrease from the €6.9 million recognised in 2007, with the main change being a reduction in insurance compensation received from €5.8 million to €1.8 million. Operating profit and EBITDA (IFRS) For the years ended 31 December 2007 2008 House House building Other & building Other & Minerals and wood discontinued Minerals and wood discontinued processing processing operations(1) processing processing operations(1) €’000 €‘000 €‘000 €‘000 €‘000 €‘000 Operating profit/ (loss), EBIT(2)(3)(4)(5) — 19,576 (3,279) (999) (13,718) (23,136) Add back Impairment(6) — — 1,034 — 20,376 20,657 Amortisation & depreciation — 4,030 3,992 2,880 7,824 3,463 EBITDA — 23,605 1,747 1,880 14,483 986
Notes: (1) “Other and discontinued operations” comprises other operations and discontinued operations (including the headquarters function, Kostroma investment project, furniture business and the care services business) and includes all eliminations and unallocated items except for the intra-group sales relating to house building and wood processing segment.
72 (2) Items related to associates (core) are included in operating profit/(loss) whereas items related to associates (non-core) are categorised below operating profit/(loss). (3) The Company reallocated in the 2008 financial statements €1,068,000 of Russian related operating loss for the year ended 31 December 2007 from house building and wood processing to other discontinued operations. This resulted in the operating profit for the house building and wood processing increasing in the 2008 financial statements from €18,508,000 to €19,576,000 (each net of inter-segment eliminations of €191,000) and correspondingly the operating loss for other and discontinued operations decreasing in the 2008 financial statements from a loss of €2,211,000 to €3,279,000 for the year ended 31 December 2007 (net of the adjustments of €623,000 due to reclassification and inter-segment eliminations of €191,000). The €623,000 reclassification adjustment has been presented below the operating profit on the face of the profit and loss statement presented in paragraph 5.1 of this Part VII to comply with the presentation of the 2009 financial statements. (4) The 2008 house building and wood processing operating loss was increased in the 2009 financial statements by €84,000 from a loss of €13,634,000 (net of €12,000 elimination of sawmills and house building intra-group items as sawmill and house building were reported in 2008 as separate segments) to a loss of €13,718,000 due to reclassifying emission rights costs of Junnikkala. The 2008 other and discontinued operations operating loss was increased in the 2009 financial statements by €171,000 from a loss of €22,966,000 (post €12,000 elimination of house building and sawmills intra-group item referred to previously) to a loss of €23,136,000 due to reclassification of associated company items and inter segment eliminations. In total the adjustments result in total operating loss increasing by €254,000, from €37,599,000 to €37,853,000. (5) In addition, included in the above analysis is the €12.0 million gain on disposal of the care business in 2008, which has been reported in the operating profit on the face of the profit and loss statement presented in paragraph 5.1 of this Part VII. (6) The 2007 charge for impairment for other and discontinued operations is correctly shown as €1,034,000 in note G3 (depreciation amortisation and impairment) and as amounts which in aggregate total €1,034,000 in notes G8 and G9 (property plant and equipment and intangible assets); however, it was incorrectly recorded as €1,625,000 in the segment information on page 58 in the 2007 financial statements. The correct value of €1,034,000 was used in the comparative information in the 2008 financial statements.
Minerals processing businesses Prior to the acquisition of the European minerals processing business, the Group did not operate a minerals processing business, so no revenues, costs, depreciation, amortisation or impairments were recorded for this segment in 2007. The minerals processing business recorded an EBITDA of €1.9 million and an operating loss of €1.0 million in 2008. The main operating costs for the two months of 2008 in which the minerals processing business was consolidated into the Group’s accounts comprised electricity, raw materials and labour costs. The Turkish mining operations were run at full capacity following the acquisition in October 2008, while the subsequent processing of chrome ore produced was reduced, leading to an increase in chrome ore inventories. Processing at EWW’s ferrochrome smelter was suspended from the beginning of December 2008, due to reduced demand and a build up of inventory prior to the acquisition by the Group in the first month of the Group’s ownership. The shutdown reduced costs slightly for this period; however, most of the general operating costs continued to be incurred during the shutdown or were replaced by one-off costs for shutdown and restart. Depreciation of €2.9 million was recorded on the intangible and tangible assets acquired. House building and wood processing businesses Operating profit in the house building segment reduced from €13.3 million in 2007 to €10.1 million in 2008, a decrease of €3.2 million, with a similar change in EBITDA, which decreased by €3.2 million, from €13.6 million to €10.4 million, primarily due to the decrease in the number of houses delivered. The majority of the house building business’ costs are variable and incurred on a per-house basis, so the costs were also reduced as the number of houses delivered decreased. However, certain fixed costs were still incurred and volume related discounts for external purchases (such as kitchen and bathroom equipment, plumbing, electrical equipment and interior furnishings) decreased due to the decreased number of houses delivered, and there were modest increases in subcontractor, labour and external purchases costs due to inflation, increasing the overall cost per unit and reducing profit per house delivered. The sawmill and pallets businesses’ overall EBITDA reduced from €10.2 million in 2007 to €4.2 million in 2008, a decrease of €6.0 million. The segment, which had made an underlying operating profit (EBIT excluding one off items) each quarter in 2007 made a smaller underlying profit in the first quarter 2008, due to falling demand and prices, but then recorded underlying operating losses for the rest of 2008 as demand and prices for sawn timber continued to fall. The Group was forced to absorb the effect of reduced prices for sawn timber products as many input
73 costs, such as log prices, had been agreed in advance, and only modest savings in operating costs were made in running the sawmills at reduced utilisation, with the largest quarterly loss occurring in the fourth quarter of 2008. Reductions in log prices and reductions in output from competitors (in response to reduced demand and price for sawn timber products) alleviated, slightly, the extent of the losses at the very end of 2008, although the situation remained unfavourable into early 2009. The segment’s losses were also increased by the acquisition of Junnikkala, which was loss-making in the period following its acquisition in January 2008. However, a number of “one-off ” items were recorded in 2007 and 2008 which had compounded the impact on the overall operating profit. Excluding one-off items, the sawmill and pallets business made an underlying operating loss of €3.3 million in 2008, compared to an underlying operating profit of €6.0 million in 2007 (as restated in 2008 to exclude €1.1 million of costs related to the Kostroma investment project, which was moved into the investment segmental disclosure in 2008, and insurance one-off compensation of €0.4 million), an overall negative change of €9.3 million. The overall sawmills and pallets business’ underlying operating profit in 2007 was increased by €0.4 million insurance compensation realised in the first quarter of 2007. However, significant impairments were recorded in 2008, with €17.9 million related to the sawmills and €2.4 million to the pallets parts of the business. There were no impairments in 2007. Underlying EBITDA in the pallets part of the business remained good for both 2007 and 2008; however, impairments of €2.4 million and depreciation and amortisation charges of €1.4 million in 2008 resulted in the EBITDA of €1.7 million turning into an EBIT operating loss of €2.1 million in 2008. Impairments across the house building and wood processing segment as a whole were €20.4 million in 2008, whereas no impairments were recorded in 2007. An impairment loss was of €11.9 million was recorded in the third quarter of 2008 for impairments of goodwill and intangible assets recorded in the third quarter of 2008 and further impairments of €7.3 million were recorded in relation to machinery and equipment and €1.2 million in relation to intangible assets were recorded in the fourth quarter. Of the total €20.4 million impairments in 2008, €17.9 million related to the sawmills and €2.4 million to the pallets parts of the business. Depreciation and amortisation costs across the house building and wood processing segment as a whole also increased by €3.8 million, from €4.0 million in 2007 to €7.8 million in 2008. The principal reason for the increase was the purchase of, and subsequent investment in, Junnikkala. Part of the Junnikkala purchase price was allocated to intangible assets, which are amortised over a period of 3-10 years (depending on the type of asset). Following the acquisition, the Group also invested €9.5 million at the Junnikkala sawmills to increase capacity and enhance efficiency in 2008 and 2009, which further increased the value of assets to be depreciated at the year end. There were also fair value adjustments in relation to the previous depreciation and amortisation which had been applied to Junnikkala’s assets and one off adjustments were incurred in 2008 in accordance with IFRS3, increasing the total depreciation and amortisation. Due to the low fixed asset base in the house building business, depreciation and amortisation costs in both years remained low, at €0.3 million in both 2007 and 2008. Other During 2008, the Group decided to scale down preparations for the Kostroma investment project, although the decision to discontinue operations entirely was not made until early 2009. The technical design work for the Kostroma sawmill was completed in September 2008 and various machinery and equipment were ordered in anticipation of implementing the project. Due to the decision not to proceed with the Kostroma investment project, one off losses of €18.5 million were incurred in 2008, including €17.7 million in impairments, predominantly relating to the sawmill assets under construction and ordered in anticipation of construction. (These assets are still temporarily stored in warehouses in Finland. The assets are valued, after the write downs in 2008, at €7.2 million, which is reflected within the total property plant and equipment value in the balance sheet at 31 December 2008 and 31 December 2009.) Other non-one off investment
74 project losses (such as payroll, engineering studies and legal costs) also increased, from €3.5 million in 2007 to €7.1 million in 2008, an increase of €3.6 million, due to increased work on the project prior to the decision to scale down preparations. The Group’s former furniture business, which had made an operating profit of €2.7 million in 2007 (for the period of consolidation and including net insurance compensation of €5.4 million), was not consolidated in the Group’s 2008 balance sheet, following the disposal of a 23 per cent. stake in December 2008. The furniture business went through a major restructuring in 2008 as the sole main customer of that business indicated significantly lower delivery volumes. The business had made an operating loss of €9.0 million in the first three quarters of 2008. The total operating loss for 2008, following a partial reversal of impairment losses recognised earlier in 2008 was €3.7 million (of which €2.8 million comprised the net impairment on disposal), total negative change of €6.4 million compared to 2007. The former care services business, Mikeva Oy, which had made a modest operating profit of €0.3 million in 2007, was sold in June 2008, resulting in a gain on disposal of €12.0 million (as shown in the 2008 accounts, although this was revised downwards in 2009), which together with the €0.8 million operating profit for the period prior to its disposal gave an overall operating profit of €12.8 million, an increase of €12.5 million compared to 2007. The small acquisitions in 2007 helped increase operating profits in early 2008, compared to 2007, as revenues increased noticeably more than costs (primarily personnel costs). Head office costs increased in 2008 compared to 2007 due to changes in the board structure and increases in remuneration payable to incoming and outgoing directors and senior management. Impairments increased significantly in 2008 from 2007, with a total of €20.7 million recorded for “other and discontinued operations” in 2008 (€17.7 million relating the Kostroma investment project and €2.8 million relating to the furniture business). In 2007, impairments of €1.0 million were incurred in other and discontinued operations relating to discontinued metal and furniture businesses. The decrease for “other and discontinued operations” as a whole was €19.6 million. Depreciation and amortisation costs in the other and discontinued operations decreased slightly, by €0.5 million, from €4.0 million in 2007 to €3.5 million in 2008, due to general year to year variations in the asset base and the effect of acquisitions and disposals. Other operating expenses Other operating expenses increased by €3.4 million from €24.2 million in 2007 to €27.7 million in 2008. The largest single item within other operating expenses is “other” other operating expenses, which increased by €4.1 million from €15.9 million in 2007 to €20.0 million in 2008. These costs include various ongoing expenses as well as one off expenses both within the two business segments (minerals processing and house building and wood processing) and also the non-segment “other and discontinued operations”. These costs include part of the costs relating to the Kostroma investment project referred to above, with €5.0 million included within “other” other operating expenses in 2008, an increase of €3.7 million from €1.3 million in 2007.
75 Finance income/expenses The table below summarises the components of finance income/(expenses) for 2007 and 2008: (IFRS) For the years ended 31 December 2007 2008 €’000 €’000 Income on assets available for sale(1) 2,715 98 Interest from held-to-maturity investments 2,438 13,500 Interest from loans and trade receivables 1,717 1,363 Net foreign exchange gains 3 1,983 Other finance income 19 — Gain on disposal of financial assets at fair value through profit and loss(2)(3) 162 (161) Interest expense on financial liabilities measured at amortised cost(4) (2,566) (2,903) Impairment losses on available-for-sale financial assets(5) (19) (300) Impairment losses on trade receivables(5) (116) (42) Net foreign exchange losses (202) (5,594) Other finance expense(4) (244) (1,592) Changes in fair value of financial assets at fair value through profit and loss(2)(6)(7) (421) (2,527) Net finance income/(expenses)(7) 3,484 3,824
Notes: (1) Income on assets available for sale includes interest income, dividend income and gain on disposal on available-for-sale financial assets separately disclosed in the 2009 financial statements. (2) The €161,000 gain on disposal of financial assets at fair value through profit and loss was separately disclosed in the 2009 financial statements for the year ended 31 December 2008, whereas, it was reported in the changes in fair value of €2,800,000 disclosed in the 2008 financial statements. (3) The net change in fair value of negative €259,000 in 2007 is presented as a net figure in the 2007 and 2008 financial statements but is presented above as a loss of €835,000 for changes in fair value of financial assets at fair value through profit and loss partly offset by a gain of €414,000 as a positive unrealised change in fair value through profit and loss and a gain of €162,000 on disposal of financial assets at fair value through profit and loss. (4) The Company reclassified €168,000 of the 2008 interest expense on financial liabilities measured at amortised cost to other finance expense in the 2009 financial statements. There was no such adjustment required in 2007. (5) Combined impairment losses of €342,000 as per the 2008 financial statements have been presented separately between impairment losses of available-for-sale financial assets and trade receivables to be consistent with the 2009 financial statements disclosure. Impairment losses of €135,000 in 2007 presented in aggregate in the 2007 and 2008 financial statements have been presented separately above between impairment losses of available-for-sale financial assets and trade receivables to be consistent with form of disclosure in the 2009 financial statements. (6) The Company reclassified €273,000 of the changes in fair value for the year ended 31 December 2008 in the 2009 financial statements by disclosing separately €161,000 under the gain on disposal of financial assets at fair value through profit and loss and reducing the change in fair value by €112,000 due to the reclassification of emission rights costs to operating expenses. No such emission rights reclassification was necessary in 2007 as there were no such rights. (7) The net finance income and expense for the year ended 31 December 2008 increased by €83,000, from €3,741,000 reported in the 2008 financial statements to a restated €3,824,000 in the 2009 financial statements due to €112,000 reclassification due to transferring emission rights related expenses from financial items to operating items offset by the €29,000 emission rights income reclassification from finance income to other operating income.
Finance income increased slightly, by €0.3 million, from €3.5 million in 2007 to €3.8 million in 2008. Income from investments increased significantly due to interest and other income received on the €337.6 million raised in mid 2007. Although money was spent on the Kostroma investment project and other acquisitions during 2007 and 2008, the net amount held in bank accounts and other money market investments was, on average, significantly higher in 2008 than 2007. The
76 Group also changed how this money was invested, with much of the money invested in assets classified as available for sale in 2007 being switched to assets classified as held to maturity in 2008, with the income and interest received thereon moving accordingly. In 2008, one of the sawmill subsidiaries significantly overhedged its exposure to the Japanese Yen. Unrealised losses of €2.5 million are recorded as changes in fair value of financial assets through profit and loss, with further losses recognised in 2009 when the positions were closed. Part of the €2.7 million realised losses incurred in 2008 are recognised in the €5.6 million foreign exchange losses. No similar overhedging occurred in 2007. Foreign exchange losses in 2008 were significantly higher than in 2007. The largest part of the losses in 2008 related to losses incurred in relation to unfavourable movements in the Euro/Rouble exchange rate incurred in relation to the Kostroma investment project. Losses related to the wood processing business also increased significantly, including part of the Japanese Yen overhedging losses. The newly acquired European minerals business also incurred losses, although most were unrealised. The losses were partly offset by foreign exchange gains, predominantly in the minerals processing business (which slightly exceeded the losses in that segment) and the Kostroma investment project. The Group incurred finance losses in relation to the forward position the Group held in a listed Swedish company in the wood processing sector representing a minority interest in that company and these increased from 2007 to 2008. These losses were recorded as changes in fair value of financial assets through profit and loss in 2007 and as other finance expenses in 2008; they comprise the principal component of these items in the respective years. Income tax The income tax charge of €5.5 million in 2007 changed to a tax credit of €1.2 million in 2008 due primarily to (i) recognised losses in 2008 compared to gains in 2007 and (ii) large non-deductable impairment losses in 2008, a total positive change of €6.6 million. 5.3 Year ended 31 December 2009 compared to year ended 31 December 2008 Revenue The Group’s consolidated revenues decreased by 21.8 per cent. from €247.4 million in 2008 to €193.4 million in 2009. The following table presents the Group’s consolidated revenues by segment: Revenue by segment (IFRS) For the years ended 31 December 2008 2009 €’000 Minerals processing 12,308 71,035 House building and wood processing(1) 144,066 122,324 Other & discontinued operations(2) 90,988 1 Total 247,361 193,359
Notes: (1) House building and wood processing revenues comprise revenues for house building and sawmill businesses net of intra-group sales. (2) “Other and discontinued operations” comprises other operations and discontinued operations (including the headquarters function, Kostroma investment project, furniture business and the care services business) and includes all eliminations and unallocated items except for the intra-group sales within the minerals processing segment and the intra-group sales within the house building and wood processing segment.
Minerals processing businesses Overall revenues increased significantly due to the consolidation of a full year’s revenue for the European minerals processing business in 2009 (2 months for 2008) and the acquisition of Mogale, which was consolidated from June to December 2009. Revenues from Mogale in 2009
77 (7 months) were €28.2 million compared to €nil in 2008 (0 months), an increase of €28.2 million. Revenues from the Southern European minerals processing business in 2009 (12 months) were €57.3 million compared to revenues in 2008 (2 months) of €12.3 million, an increase of €45.0 million. Following the decision to sell Mogale’s products through RCS in the third quarter of 2009, sales of Mogale’s output have been recorded as revenues for both Mogale (as an intragroup sale to RCS) and also RCS (for the subsequent sale to the third party customer). The overall minerals processing business’ revenue in 2009 is net of €14.5 million eliminations between the two parts of the minerals processing business. Revenues were also affected by movements in exchange rates, with most sales being priced in US Dollars, but recorded in the consolidated accounts in Euros. The general trend for 2009 was a strengthening of the Euro against the US Dollar, reducing revenues translated into Euro. However, sales and production volumes in both businesses declined in 2009 compared to the full year in 2008 (including periods prior to their acquisition by the Group). Although some of the decline in revenues occurred prior to the Group’s acquisitions of these businesses, revenues continued to decline at both businesses following their acquisition. Sales of speciality low and ultralow carbon ferrochrome declined substantially in the first half of 2009 and production at the EWW smelter was halted for approximately five and a half months in 2009 (in January to March, July, August and late December) to adjust production volumes to the reduced demand. Prices were also significantly reduced, further reducing revenues against the comparable period (which was prior to the acquisition by the Group). However, revenues from the speciality grade ferrochromes increased towards the end of the year as demand returned from stainless steel producers as a result of increased stainless steel production and a reversal of steel producers’ raw material inventory reductions earlier in the year. The Group also sold 8,742 tons of lumpy chrome ore directly to third parties in 2009, to maintain revenues and help cash flow, given the reduced demand for the other highly processed products by the Group. Revenues for the bulk products produced by Mogale declined for the first few months following the acquisition in May 2009 compared to the equivalent period in 2008 (ie prior to ownership by the Group). However price and demand started rising in the third quarter, increasing revenues for the latter part of the year. The diversion of resources for the commissioning of the new 12 MVA direct current furnace in July and August negatively impacted the operation of the other furnaces and limited the Group’s ability to capitalise on this strengthening market in the third quarter; however, revenues improved significantly in the fourth quarter as stainless steel production picked up and some of the destocking by customers from earlier in the year was reversed. During the third quarter of 2009, the Group commenced sales of Mogale’s products through its minerals sales operations in Malta. A small commission was charged as a percentage of the sales which is reflected in the European business’ revenues, with the intragroup sales price reflected in revenues for both Mogale and the European business (as the third party sales price comprises the intragroup sales price plus the commission). The intragroup sales are eliminated on consolidation in the accounts for the Group and the minerals processing division as a whole. House building and wood processing businesses The number of houses delivered decreased by 30 percent with 238 houses delivered in 2009 compared to 342 in 2008, a decrease of 104 houses. Although the average price per house remained broadly flat, revenues were significantly reduced from €50.4 million in 2008 to €31.8 million in 2009, a decrease of €18.5 million, due to the reduced deliveries. Revenues of €2.8 million had already been recognised in 2008 for the 31 unit holiday cottage development, which was completed in early 2009, under the percentage of completion method; these revenues would have been recorded in 2009 under the accounting principles for other house deliveries. Very low sales at the end of 2008 were reflected in low delivery volumes in mid 2009, particularly the third quarter. Volumes and revenues increased in the final quarter, although remained below 2008 levels for the same period. Orders in 2009 increased as consumer sentiment improved during the year, although due to the long lead time for production most of these houses were in the order
78 book, due for delivery in 2010, so are not directly reflected in the 2009 results. The Group’s order book in the latter half of 2009 had increased to 285 houses, with a delivery value of €40.1 million excluding VAT, compared to 185 houses with a delivery value of €25.0 million in 2008, an increase of 100 houses and €15.1 million. Total revenue for the sawmills business (excluding pallets) decreased from €87.1 million in 2008 to €82.7 million in 2009; a decrease of €4.4 million. The volume of sawn timber produced in 2009 was slightly higher than in 2008, this increase was primarily due to the increased average production capacity for the year. The volume increase was significantly less than the increase in average production capacity and the average utilisation of the sawmills was lower in 2009 than in 2008. Capacity was increased following the acquisition of Junnikkala in January 2008 and the expansion works of the Junnikkala sawmills, which commenced in the summer of 2008 and was completed in spring 2009, with a further six months spent running the mills at a reduced capacity while further post-commissioning work was carried out, meaning that the full increase in capacity was only fully utilised in the last few months of 2009. Capacity was then reduced at the end of 2009 following the disposal of the Lappipaneli sawmill in November and the Tervola and Kittilä sawmills at the end of December. The fixed assets of the Lappipaneli sawmill were leased to the purchaser from the date of the transfer of the working capital assets (the fixed assets were then transferred in April 2010), and the rental income for November and December 2009 is included within the sawmills’ revenue. Prices for sawn timber products in the first half of 2009 were significantly lower than 2008. Prices continued to decline until May 2009. In the second half of the year prices rose gradually, driven first by the effect of production capacity cuts across the industry and then increased demand from sawn timber consumers. The construction and house building industry, which is the key customer segment for the Group’s sawmills, and the sawmill industry as a whole, started to recover in the latter half of 2009. Demand for sawn timber products also increased in the second half of the year as buyers increased orders to replenish depleted stocks and increased consumption. However, the availability of coniferous wood logs remained tight due to reductions in commercial fellings, which limited, to some extent, the ability to increase production and consequently revenues to the extent the Group may have wished to meet increased demand. Revenue from sales of by-product wood chips also decreased due to reduced production at the pulp mills near to the Group’s sawmills, which comprise the main customer for these by-products. The pallets business was generally steady through 2008, with revenues increasing by €0.2 million in 2009 compared to 2008 from €9.2 million to €9.4 million, due to the additional sales from the PSL Räinä business acquired towards the end of 2008. Revenues from the rest of the pallets business declined slightly despite a more significant decline in production in the paper industry, which is one of its key customer segments. Other Revenues from “other and discontinued operations” in 2009 amounted to €nil. Revenues of €91.0 million were recorded in 2008 including €78.5 million from the furniture business and €10.2 million from the care services business. The latter was sold in June 2008 and part of the Group’s stake in the former was sold at the end of 2008, so revenues from these businesses were not consolidated in 2009. Other operating income Other operating income in 2009 was €7.6 million, including a gain of €5.3 million from the termination of the Junnikkala put option, a gain of €0.8 million on the disposal of Lappipaneli and €0.5 million relating the sale of its stake in Cybersoft Oy in November 2009. In 2008, €3.6 million was recognised as other operating income of which €1.8 million was insurance compensation with the balance primarily gains on disposals of investments and other assets and rental income. Insurance compensation received in 2009 was not significant. The overall decrease in other operating income was €4.0 million.
79 Operating profit and EBITDA (IFRS) For the years ended 31 December 2008 2009 House House building Other & building Other & Minerals and wood discontinued Minerals and wood discontinued processing processing operations(1) processing processing(2) operations(1) €‘000 €‘000 €‘000 €‘000 €‘000 €‘000 Operating profit/ (loss), EBIT(3)(4) (999) (13,718) (23,136) (30,066) 13,610 (8,161) Add back Impairment (& reversals) — 20,376 20,657 19,079 (2,059) — Amortisation & depreciation 2,880 7,824 3,463 21,367 5,535 57 EBITDA 1,880 14,483 986 10,380 17,086 (8,104)
Notes: (1) “Other and discontinued operations” comprises other operations and discontinued operations (including the headquarters function, Kostroma investment project, furniture business and the care services business) and includes all eliminations and unallocated items except for the intra-group sales within the minerals processing segment and the intra-group sales within the house building and wood processing segment. (2) House building and wood processing 2009 operating profit and EBITDA includes the effect of termination of the Junnikkala put option at €5.3 million. (3) Items related to associates (core) are included in operating profit/(loss) whereas items related to associates (non-core) are categorised below operating profit/(loss). In addition, included in the above analysis is the €12.0 million gain on disposal of the care business in 2008, which has been reported in the operating profit on the face of the profit and loss statement presented in paragraph 5.1 of this Part VII. (4) The 2008 house building and wood processing operating loss was increased in the 2009 financial statements by €84,000 from a loss of €13,634,000 (net of €12,000 elimination of sawmills and house building intra-group items as sawmill and house building were reported in 2008 as separate segments) to a loss of €13,718,000 due to reclassifying emission rights costs of Junnikkala. The 2008 other and discontinued operations operating loss was increased in the 2009 financial statements by €171,000 from a loss of €22,966,000 (post €12,000 elimination of house building and sawmills intra- group item referred to previously) to a loss of €23,136,000 due to reclassification of associated company items and inter segment eliminations. In total the adjustments result in total operating loss increasing by €254,000, from €37,599,000 to €37,853,000.
Minerals processing businesses Underlying profitability, at the EBITDA level, remained quite good for 2009 as a whole, increasing by €8.5 million from €1.9 million in 2008 to €10.4 million in 2009, helped by improvements in the fourth quarter, which was noticeably better than the previous three quarters. However, the minerals processing businesses’ operating loss (EBIT) increased from €1.0 million in 2008 to €30.1 million in 2009, an increase of €29.1 million. The main reason for the change was the acquisition of Mogale, which was loss making in 2009, and the increased period of consolidation for the Southern European minerals business which has also been loss making since its acquisition. Operating conditions were difficult for the minerals processing industry as a whole in 2009 as revenues declined significantly while many operating costs were only slightly reduced or even increased. Production at the EWW smelter was halted for approximately five and a half months in total during 2009 due to reduced demand. Underground mining for concentrate was halted at the larger Turkish mine in July and reduced significantly at the smaller mine for the rest of the year, although a small amount of mining for lumpy chrome ore was carried out instead in the second half of the year as well. The reduced or halted operations enable some modest cost savings, although, the decrease in revenues was much larger than the decrease in operating costs as fixed costs were still incurred.
80 Electricity costs, which represent a major operating cost for the minerals processing business, rose significantly in 2009. Wholesale electricity prices in South Africa increased by approximately 25 per cent. in July 2009. Average labour costs rose, with a general wage increase of 8 per cent. agreed with the South African works council in the summer of 2009. There was also a small increase in the number of employees employed by the European minerals business. However, some small savings in the minerals processing business were made (on a like for like basis) through workers taking unpaid leave and reduced overtime payments. The combined sales operations of the Group have benefitted from economies of scale following the acquisition of the Mogale business and the channelling of its sales through RCS in Malta, with total sales costs across both businesses being reduced as a result (on a full year comparison). A substantial portion of the Mogale purchase price was reflected in goodwill, following its acquisition in May 2009. An impairment of €19.1 million was recorded in December 2009 against the goodwill of Mogale, due to increases in operating expenses, the strengthening of the Rand and management’s assessment of the outlook for future operating costs and future strength of the Rand. There were no impairments in the minerals processing businesses in 2008. Depreciation and amortisation costs also increased, from €2.9 million in 2008 to €21.4 million in 2009, an increase of €18.5 million. The principal reason for the increase was the acquisition of the European minerals processing business in October 2008 and the acquisition of Mogale in May 2009, particularly on intangible assets, including customer lists and technology, acquired as part of the acquisitions. The European minerals processing business was consolidated for a full 12 months in 2009, rather than two months in 2008, with a commensurate increase in amortisation and depreciation. Amortisation and depreciation was also recorded for Mogale’s assets for seven months in 2009. House building and wood processing businesses The house building business remained profitable in 2009, despite the decline in delivery volumes as the majority of operating costs are incurred on a per house basis. However, overall profit was significantly lower, with EBITDA reduced from €10.4 million in 2008 to €7.2 million in 2009, a decrease of €3.2 million, and EBIT reduced from €10.1 million in 2008 to €6.8 million in 2009, a decrease of €3.3 million. The decrease was due to reduced turnover as well as reduced operating margins as a result of reduced volume discounts for purchases from external suppliers and a limited ability to reduce certain fixed costs. Subcontractor costs declined slightly through 2008 and 2009 due to the overall decline in the Finnish construction industry. No impairments were recorded in either year and the change in depreciation and amortisation was not significant. The sawmills business (excluding pallets) recorded an EBITDA of €8.4 million in 2009, compared to €2.3 million in 2008, an increase of €6.0 million. However, this includes the positive impact of a gain of €5.3 million realised on the termination of the Junnikkala put option at the end of 2009. The EBIT numbers are further affected by other one-off items. A reversal of prior impairments of €2.1 million was realised on the disposal of Lappipaneli in 2009 whereas impairments of €17.9 million had been realised in 2008. Including these one-off items, the sawmills business (excluding pallets) made an EBIT operating profit of €6.2 million in 2009, compared to an operating loss of €21.8 million in 2008, an overall positive change of €28.0 million. Excluding the Junnikkala put option termination and Lappipaneli related reversal of impairment, the sawmill EBIT would have been a loss of €1.1 million. No impairments were recorded in 2009, making an overall positive change (including the reversal on disposal) of €20.1 million compared to 2008. Operating costs per unit volume for the sawmills (excluding pallets) fell during 2009, compared to 2008. The fall in round log prices levelled off in the first half of 2008, with prices starting to rise again slowly after that. Due to the lead time for delivery of logs, this meant that prices for logs used in production generally were low but had started to rise in 2009 and were, on average, lower than those used in 2008. The extent of the reduction meant that even though the volume of
81 sawn timber increased from 312,000m3 in 2008, to 331,000m3 in 2009, an increase of 19,000m3, aggregate input costs were still lower. The segment’s fixed costs also increased due to the increased period the Junnikkala sawmills were consolidated into the Group and due to additional operating costs relating to the expanded Junnikkala facilities which were completed in early 2009, with further works and testing occurring for a further six months. The first half of the year was challenging and the EBITDA for the first half remained negative. However, profitability improved in the second half of 2009, with positive EBITDA for the second half of the year and the year as a whole, as revenues rose more quickly than operating costs due to increased demand for timber and completion of the further testing of the Junnikkala sawmill, resulting in increased utilisation of the sawmill facilities and prices for sawn timber products rising more rapidly than prices for round wood logs. Depreciation and amortisation for the sawmills (excluding pallets) reduced from €6.2 million in 2008 to €4.2 million in 2009, a decrease of €2.0 million. The principal reason for the decrease is that there was a one off fair value adjustment applied in 2008 following the acquisition of Junnikkala, and no such adjustments were required in 2009. Excluding this adjustment, depreciation and amortisation actually increased slightly, primarily due to the increased asset base following the capital expenditure at the Junnikkala sawmills although partly offset due to reductions in the asset base due to impairments recorded in 2008. In the fourth quarter of 2009, the Group sold three of its sawmills, disposing of the Tervola and Kittilä sawmills at the end of December and the working capital related assets of Lappipaneli in November (with the fixed assets being transferred in April 2010). However, as these sales occurred relatively late in the year, they had only a modest effect on the underlying consolidated operating costs and profits, other than the Lappipaneli related reversal of impairment. The operating profitability (EBITDA) of the pallets business remained broadly stable, decreasing by €0.2 million from €1.7 million in 2008 to €1.5 million in 2009. A modest EBIT of €0.5 million was recorded in 2009 compared to a loss of €2.1 million in 2008, a positive change of €2.6 million. Operating costs increased slightly more than revenues, with most of the increase in operating costs from PSL Räinä, acquired in November 2008, being offset by reductions in the rest of the business. No impairments were recorded in 2009 compared to €2.4 million in 2008. Depreciation and amortisation decreased from €1.4 million in 2008 to €1.0 million in 2009, an increase of €0.4 million. Other Despite the decision in early 2009 to entirely discontinue the Kostroma investment project a further €1.6 million operating losses were recorded as certain run down expenses in 2009 and payments for the storage of components for the unassembled sawmill were also incurred. In 2008 one-off losses of €18.5 million and other losses of €7.1 million were recorded in relation to the Kostroma investment project. Expenses of €1.0 million were recognised in 2009 for senior management share based payments related to share options compared to €0.4 million in 2008, an increase of €0.6 million. Preparations for the London listing began in 2009, with expenses of €1.9 million recognised in 2009, with no related expenses incurred in 2008. The furniture business and care services business were not consolidated in 2009 as they were no longer part of the Group. The furniture business recorded an operating loss of €3.7 million in 2008 (including the partial reversal of earlier impairment losses.) The care services business made an operating profit of €0.8 million plus a gain on disposal of €12.0 million in 2008. Other operating expenses Other operating expenses decreased by €7.1 million from €27.7 million in 2008 to €20.6 million in 2009. The largest single item within other operating expenses is “other” other operating expenses, which decreased by €2.6 million from €20.0 million in 2008 to €17.4 million in 2009. These costs include various ongoing expenses as well as one off expenses both within the two business segments (minerals processing and house building and wood processing) and also the
82 non-segment “other and discontinued operations”. During 2009, €1.9 million of expenses relating to the London listing, €2.1 million expenses related to the intended acquisition of Sylvania Resources and €0.3 million of other minerals processing related project costs were recorded. The “other” other operating expenses also include part of the costs relating to the Kostroma investment project referred to above, with €1.0 million included in 2009, an decrease of €4.0 million from €5.0 million in 2008. Rental costs and external service costs also decreased. Finance income/expenses The table below summarises the components of finance income/(expenses) for 2008 and 2009: (IFRS) For the years ended 31 December 2008 2009 €’000 €’000 Interest income on available for sale financial assets(1) 2— Dividend income on available for sale financial assets(1) 34 Interest from held-to-maturity investments 13,500 1,123 Interest from loans and trade receivables 1,363 1,419 Net foreign exchange gains 1,983 1,959 Gain on disposal of available for sale financial assets(1) 93 — Gain on disposal of available for sale financial assets at fair value through profit or loss(2) (161) — Other finance income — 1,366 Interest expense on financial liabilities at amortised cost(3) (2,903) (1,930) Impairment losses on receivables relating to discontinued Russian operations — (1,483) Impairment losses on available for sale financial assets(4) (300) — Impairment losses on trade receivables(4) (42) — Net foreign exchange losses (5,594) (4,707) Changes in fair value of financial assets at fair value through profit or loss(3) (2,527) — Other finance expense(3) (1,592) (1,186) Net finance income/(expenses)(6) 3,824 (3,435)
Notes: (1) Interest income, dividend income and gain on disposal on available-for-sale financial assets have been reported separately in the 2009 financial statements but were included in income of assets available for sale in the 2008 financial statements. (2) The €161,000 of gain on disposal of financial assets at fair value through profit and loss was separately disclosed in the 2009 financial statements for the year ended 31 December 2008, whereas, it was reported in the changes in fair value of €2,800,000 disclosed in the 2008 financial statements. (3) The Company reclassified €168,000 of the interest expense on financial liabilities measured at amortised cost for the year ended 31 December 2008 to other finance expense. (4) Combined impairment losses of €342,000 as per the 2008 financial statements have been presented separately between impairment losses of available-for-sale financial assets and trade receivables to be consistent with the 2009 financial statements disclosure. (5) The management reclassified €273,000 of the changes in fair value for the year ended 31 December 2008 in the 2009 financial statements by disclosing separately €161,000 under the gain on disposal of financial assets at fair value through profit and loss and reducing the change in fair value by €112,000 due to emission rights reclassification to operating expenses. (6) The net finance income and expense for the year ended 31 December 2008 increased by €83,000, from €3,741,000 reported in the 2008 financial statements to a restated €3,824,000 in the 2009 financial statements due to €112,000 reclassification due to transferring emission rights related expense from financial items to operating items offset by the €29,000 reclassification from finance income to other operating income.
83 Income from investments reduced significantly as funds which had been held in bank accounts were used and cash was realised from other investments to fund the Group’s acquisitions in 2008 and 2009, reducing the net amount held in bank accounts and other money market investments. The most significant payments in this regard were the €80.0 million cash payment in October 2008 for the European minerals business and the ZAR 1.2 billion (approximately €103.7 million at €/ZAR 11.58) cash payment for the acquisition of Mogale in May 2009. Lower interest rates also reduced income. Interest expenses on loans decreased due to reduced interest rates, although the total loans actually increased. The losses incurred by one of the sawmill subsidiaries in relation to overhedging exposure to Japanese Yen were split between 2008 and 2009, with unrealised finance losses of €2.5 million recorded as change in net fair value of financial assets and part of the €2.7 million realised losses recorded in foreign exchange losses. A further €1.0 million close out costs were recorded in 2009, primarily as foreign exchange losses within finance expenses. Foreign exchange losses decreased from 2008 to 2009. The largest part of the losses in 2009 related to losses incurred by RCS, predominantly in relation to the Euro/US Dollar exchange rates, with other losses being incurred by the wood processing business, including further losses relating to the Japanese Yen overhedging, and incurred by Mogale. The largest part of the losses in 2008 related to losses incurred in relation to unfavourable movements in the Euro/Rouble exchange rate incurred in relation to the Kostroma investment project, with other losses being incurred by the wood processing business and RCS. Although foreign currency exposures increased significantly from 2008 to 2009, total foreign exchange gains were broadly similar for the two years. Other finance income of €1.4 million was recorded in 2009, predominantly relating to the forward position the Group held in a listed Swedish company in the wood processing sector representing a minority interest in that company. This forward position was closed in late 2009. A slightly greater loss had been recorded in 2008 in respect of this interest, which comprised the majority of the €1.6 million other finance expenses in 2008. Other finance losses of €1.2 million were incurred in 2009. Finance impairment losses increased, with the €1.5 million in write-downs related to the remaining financial assets of the discontinued Russian operations compared to other finance impairments of €0.3 million in 2008, a decrease of €1.1 million. No changes in fair value for financial assets were recorded in 2009 whereas in 2008 a €2.5 million loss was recorded related to the Japanese Yen exposure. Income tax The income tax credit of €1.2 million in 2008 increased by €4.4 million to €5.6 million in 2009, due primarily to a combination of (i) reduced losses in 2009 compared to 2008, (ii) significantly smaller non-deductable impairment losses, and (iii) the impact of a larger tax refund in 2009 compared to the previous year’s tax exempt income.
6. Liquidity and Capital Resources 2007-2009 6.1 Overview The Group’s primary source of liquidity is cash flows from operations. The proceeds of the 2007 equity capital raising have also been used as a source of liquidity and have provided the funds for various acquisitions, capital expansion works and share buy-backs undertaken by the Group over the last three years. The Group has historically been managed on a decentralised basis, with cash flow and liquidity (among other things) monitored by individual subsidiaries. However, the Board of Directors decided to start to centralise the Group’s treasury and risk management functions during 2009 at
84 the segment level in order to centrally manage risks and utilise economies of scale. These processes are now managed centrally by the Group. Since early 2009, the Board of Directors has emphasised cash flow generation from all of the Group’s operations. 6.2 Cash flow analysis The Group’s consolidated cash flow statement data for the year ended 31 December 2008 and 31 December 2009 has been extracted from the 2009 annual financial statements and the Group’s consolidated cash flow statement data for the year ended 31 December 2007 has been extracted from the 2008 annual financial statements to reflect reclassifications adjustments. The numbers set out below for the year ended 31 December 2007 and 31 December 2008 have been adjusted as described further below. The 2007 and 2008 numbers had originally been audited. However, the 2007 and 2008 numbers have been extracted from the comparative financial information, and in the case of the 2007 numbers have been subject to certain further adjustments (which have been made for consistency with the presentation and policies used in the 2009 financial statements and which are described further below) the 2007 and 2008 numbers are considered to be unaudited. The most significant changes to consolidated cash flows in 2007 to 2009 were due to the acquisitions and disposals of various businesses, and the equity capital raising in mid 2007.
85 The table below sets out summarised consolidated cash flows for the periods indicated: (IFRS) For the years ended 31 December 2007 2008 2009 €’000 €’000 €’000 Cash flows from operating activities Net profit/loss(1) 13,681 (32,687) (22,727) Adjustments to net profit/loss: Depreciation and impairment 9,055 55,202 43,980 Finance income and expense(2) (3,484) (3,341) 4,330 Income from associates 623 (571) (111) Income taxes 5,478 (1,171) (5,609) Option expenses 576 358 991 Proceeds from non-current assets — (13,063) (1,564) Working capital changes: Change in trade and other receivables(3) (9,618) 18,836 (11,164) Change in inventories (4,049) 17,345 (3,832) Change in trade payables and other debt (1,404) (31,182) 4,757 Change in provisions(4) 11 (1,708) 1,274 Payment to trust fund to provide for future remuneration in relation to Mogale acquisition — — (6,479) Interest paid (2,028) (6,549) (2,145) Interest received 1,370 1,340 1,623 Income taxes paid (4,429) (3,763) (3,138) Net cash from operating activities 5,783 (952) 185 Cash flows from investing activities Acquisitions of subsidiaries, net of cash acquired (6,445) (89,157) (102,452) Payments for earn-out liabilities (8,358) (403) (438) Acquisitions of associates (42) (5) (63) Capital expenditure on non-current assets (6,337) (38,704) (10,772) Other investments, net — (1,175) (40) Disposal of subsidiaries(5) 355 11,101 5,602 Disposal of associates 6,713 10 718 Net cash used in investing activities (14,114) (118,334) (107,443) Cash flows from financing activities Proceeds from share issue 337,609 — — Share buy-back — (12,273) (57,714) Capital redemption — — (10,055) Dividends paid (5,493) (12,433) (479) Proceeds from borrowings 10,630 16,731 9,417 Repayment of borrowings (5,655) (14,498) (14,237) Deposits(6) (133,851) (52,770) 184,230 Other investments(6) (173,360) 173,056 — Interest received on investments 3,940 14,741 1,233 Repayments of loan receivables and loans given, net (1,380) 3,872 5,590 Repayment of finance leases (351) (212) (279) Net cash used in financing activities 32,089 116,214 117,706 Increase in cash and cash equivalents 23,758 (3,071) 10,449 Cash at beginning of period 24,768 48,527 45,413 Exchange rate differences(7) — (42) (10) Cash at end of period 48,527 45,413 55,852 Change in balance sheet 23,758 (3,071) 10,449
86 Notes: (1) The amount disclosed in the 2007 financial statements for net profit was the profit attributable to equity shareholders amounting to €12,651,000 i.e. before profit attributable to minority interests. The net profit has been adjusted to €13,681,000 to reflect the 2009 financial statement presentation which uses net profit. (2) There is a €483,000 difference in 2008 between the finance income and expense in the income statement and the finance income and expense in the cash flow statement due to €400,000 impairment in associates being booked in line item `income from associates´ in the income statement whereas it is booked under finance items in the cash flow statement as well as the net €84,000 impact of the reclassified emission rights of Junnikkala. The 2009 finance income difference of €895,000 between the cash flow statement and the income statement is due to the impact of reclassifying impairment items related to associates. (3) Change in provision reported in the 2007 financial statements was restated by €1,000 in the 2008 financial statements. (4) The adjustment in the 2007 net profit referred to in (2) has a corresponding adjustment in change in trade and other receivables to reflect the minority interest balance. (5) The line with the caption “disposal of subsidiaries” in the “cash flows from investing activities” in the 2009 cash flow includes an inflow of €0.8 million for deferred sale price and an outflow of €0.2 million due to adjustments of the original sales price, in both cases related to the care services business sold in 2008. (6) The lines entitled “deposits” and “other investments” which are presented separately in the 2008 and 2009 financial statements were combined under the caption “current investments in financial assets” in the 2007 financial statements. (7) The line with the caption “Exchange rate differences” had been entitled as “fair value adjustments” in the 2007 and 2008 financial statements. Net cash flows from operating activities Year ended 31 December 2008 compared to year ended 31 December 2007 Net cash outflow from operating activities was a negative €1.0 million in 2008, compared to a net cash inflow of €5.8 million in 2007, a net difference of €6.7 million. The change was primarily driven by a reduction in cash generated by operations in 2008 (which was largely a result of a swing from generating operating profits in 2007 to generating operating losses in 2008). This was partly offset by a positive change in the working capital position, with a net favourable change of €5.0 million in 2008 as compared to a net negative change of €15.1 million in 2007, due primarily to a rapid decrease in business production volumes driven by a reduction in activity in both the existing and acquired businesses. An additional €4.5 million was also paid in interest payments in 2008 compared to 2007, primarily as a result of the acquisition of Junnikkala, including its existing debt facilities, and the greater period in 2008 in which the furniture business (and thus its debt) was consolidated in the Group cash flow. Operating cash flow in 2008 is also reduced by an adjustment of €13.0 million to net profit/loss reclassifying certain proceeds (the largest component of which relates to the disposal of the care services business) as relating to investing activities. Year ended 31 December 2009 compared to year ended 31 December 2008 Net cash inflow from operating activities was €0.2 million in 2009, compared to a net cash outflow of €1.0 million in 2008, a net difference of €1.1 million. Cash generated by operations increased due to improved trading conditions later in the year, particularly the final quarter. Interest payments were €4.4 million lower in 2009 compared to 2008, primarily as a result of lower interest rates, and the total amount of loans on which interest was payable was, generally, higher in 2009. There was a net decrease in cash of €10.2 million due to investing in working capital, compared to net inflows of €5.0 million in 2008, as business improved and some inventory reductions in 2008 were reversed. A payment of €6.5 million was made into the trust fund to provide future remuneration in relation to the Mogale acquisition; there were no comparable arrangements in 2008. Net cash flows from investing activities Year ended 31 December 2008 compared to year ended 31 December 2007 Net cash outflow from investing activities was €118.3 million in 2008, an increase of €104.2 million, from €14.1 million, in 2007. The net outflow in 2008 was largely as a result of acquisitions, with a total spend (net of cash acquired) of €89.2 million (principally the cash payments for (i) the acquisition of the European minerals processing business, TMS and RCS and the long term manufacturing agreement with EWW, which comprised €80.0 million, (ii) €5.3 million (net of cash acquired) for the interest and options in the Junnikkala sawmill, and
87 (iii) payment for the increase in the Group’s stake in its house building business and the acquisition of a minor subsidiary by the house building business), compared to €6.4 million in 2007. Capital expenditure on non-current assets increased from €6.3 million in 2007 to €38.7 million in 2008, an increase of €32.4 million, with 2008 expenditure relating mainly to the first part of the €9.5 million capacity and efficiency improvements at Junnikkala and the Kostroma investment project. This was partly offset by a decrease of €8.0 million in payments of earn out liabilities from €8.4 million in 2007 to €0.4 million in 2008, and an increase of €4.0 million in cash received for disposals of subsidiaries and associates from €7.1 million in 2007 to €11.1 million in 2008 (the latter related mainly to the disposals of the care services business). The main reason for the reduction in earn outs was that the final earn out payment for the acquisition of the house building business Pohjolan Design-Talo was paid in 2007, with further reductions due to a decrease in profitability of the Tervola and Kittilä sawmills and the disposal of the care services business in 2008. Year ended 31 December 2009 compared to year ended 31 December 2008 Net cash outflow from investing activities was €107.4 million in 2009, a decrease of €10.9 million, from €118.3 million in 2008. The net outflow in both years was largely as a result of acquisitions, with a total spend (net of cash acquired) of €102.5 million in 2009 for the cash payments for the Group’s 84.9 per cent. interest in Mogale, with ZAR 1,125 million plus transaction costs and interest payments paid on completion in May 2009 (the ZAR 75 million (€6.5 million) payment into the management trust is recorded in operating cash flows), compared to €89.2 million for acquisitions in 2008, an increase of €13.3 million. Capital expenditure on non-current assets decreased by €27.9 million from €38.7 million in 2008 to €10.8 million in 2009. Approximately equal amounts of the €9.5 million capital expansion and upgrade at Junnikkala were recorded in each of 2008 and 2009. The other main works in 2009 related to the Turkish beneficiation plant (which was completed in May 2010), purchase of tangible and intangible assets for improvements at the pallets business and the latter stages of commissioning the second direct current furnace at Mogale. Much of the 2008 expenditure related to the Kostroma investment project, the preparations for which were scaled back in 2008 and discontinued in early 2009. There was also a decrease of €4.8 million in cash received for disposals of subsidiaries and associates from €11.1 million in 2008 (most of which had been received from the disposal of the care services business) to €6.3 million in 2009 for the disposal of subsidiaries and associates primarily from the instalments received in 2009 from the disposal of the Lappipaneli, Tervola and Kittilä sawmills and €0.5 million from the disposal of Group’s stake in its former associate, Cybersoft Oy, in November 2009. Net cash flows from financing activities Year ended 31 December 2008 compared to year ended 31 December 2007 Net cash inflow from financing activities was €116.2 million in 2008, an increase of €84.1 million from €32.1 million in 2007. The investments in money market mutual funds made in 2007 (following the 2007 equity capital raising) were redeemed in 2008 and deposited in bank accounts, giving an inflow of €173.1 million, with a further €14.7 million received in interest from all investments, mainly the mutual funds. The net inflow for the 2007 year had been driven by the proceeds from the 2007 share issue of €337.6 million, the majority of which had been placed into money market funds or on deposit. The 2008 inflow was in part offset by further deposits of €52.8 million and increased distributions to shareholders, in the form of a share buy back of €12.3 million and dividends of €12.4 million (including a dividend to shareholders of the Company of €11.6 million). Proceeds from borrowings were broadly offset by repayment of borrowings in 2008 with a net difference of €2.2 million received, down from the net inflow of €5.0 million in 2007. There was a net outflow for repayment of loan receivables and loans given in 2007 of €1.4 million, with this reversing to an inflow of €3.9 million in 2008, a difference of €5.3 million due to drawing down various facilities to finance investments and working capital requirements.
88 Year ended 31 December 2009 compared to year ended 31 December 2008 Net cash inflow from financing activities was €117.7 million in 2009, a slight increase of €1.5 million from €116.2 million in 2008. A total of €184.2 million was taken from previously deposited funds, to fund the investing activities and other activities in 2009, whereas €173.1 million had been received from the redemption of money market instruments in 2008 with €52.8 million being placed on deposit, a net change of €63.9 million. A total of €68.2 million was returned to shareholders in 2009 through buybacks of €57.7 million, a capital redemption of €10.1 million and a dividend of €0.5 million, compared to €24.7 million in 2008 through a share buy back of €12.3 million and dividends of €12.4 million (including a dividend to shareholders of the Company of €11.6 million) an overall increase of €43.5 million. Proceeds from borrowings decreased by €7.3 million from €16.7 million in 2008 to €9.4 million in 2009, while repayment of borrowing remained almost flat at €14.2 million in 2009 compared to €14.5 million in 2008. Interest received from investments decreased by €13.5 million from €14.7 million in 2008 to €1.2 million in 2009, due to use of funds in 2008 and 2009 reducing the value of investments and/or the time for which interest was payable. The net inflow for repayment of loan receivables and loans given in 2008 of €3.9 million, increased by €1.7 million to €5.6 million in 2009 due to drawing down various facilities to finance investments and working capital requirements. 6.3 Capital expenditure The following table sets forth the Group’s cash outflow for capital expenditure for the periods indicated: Gross capital expenditures (IFRS) For the years ended 31 December 2007 2008 2009 €’000 €’000 €’000 Total (6,337) (38,704) (10,772)
6.4 South African exchange control regulations South African exchange control regulations are in force principally to control capital movements. South African companies are generally not permitted (except within certain monetary limits and other parameters) to export capital from South Africa or to hold foreign currency or foreign investments without the approval of the exchange control authorities. These exchange control regulations could hinder the Group’s ability to extract dividends from, make investments in or procure foreign denominated financings to support, its South African subsidiaries. Further modifications to these restrictions may be made by the South African government.
7. Balance Sheet Data 2007-2009 7.1 Balance sheet overview The Group’s consolidated balance sheet statement data for the year ended 31 December 2008 and 31 December 2009 have been extracted from the 2009 annual financial statements and the Group’s consolidated balance sheet statement data for the year ended 31 December 2007 has been extracted from the 2008 annual financial statements to reflect reclassifications adjustments. The numbers set out below for the year ended 31 December 2007 and 31 December 2008 have been adjusted as described further below. The 2007 and 2008 numbers had originally been audited. However, as the 2007 and 2008 numbers have been extracted from the comparative financial information, and in the case of the 2007 numbers have been subject to certain further adjustments (which have been made for consistency with the presentation and policies used in the 2009 financial statements and which are described further below) the 2007 and 2008 numbers are considered to be unaudited.
89 The following table sets forth balance sheet data for the periods indicated: (IFRS) For the years ended 31 December 2007 2008 2009 €’000 €’000 €’000 Assets Non-current assets Property, plant and equipment(1) 37,516 69,633 80,655 Goodwill 33,422 87,248 172,850 Other intangible assets 5,807 72,137 103,063 Investments in associates 1,702 1,770 507 Other financial assets(2) 477 1,082 1,113 Receivables 1,596 19,469 26,130 Deferred tax assets 1,136 2,815 2,264 81,656 254,154 386,583 Current assets Inventories 29,635 40,419 55,951 Receivables 29,955 36,672 49,283 Assets held to maturity 131,212 186,485 2,500 Other financial assets 176,112 133 314 Cash and cash equivalents 48,527 45,413 55,852 415,440 309,121 163,900 Assets held for sale 2,893 — 12,714 Total assets 499,990 563,275 563,198 Equity and Liabilities Equity attributable to equity holders of the parent Share capital 23,642 23,642 23,642 Share premium reserve 25,740 25,740 25,740 Revaluation reserve 969 2,193 2,193 Paid-up unrestricted equity reserve 340,690 328,025 260,357 Translation reserve(3) (1,080) (434) 6,165 Retained earnings(3) 19,694 (30,224) (49,953) Minority interest 1,995 7,768 17,878 Total equity 411,650 356,710 286,022 Non-current liabilities Deferred tax liabilities 3,894 30,979 43,949 Interest-bearing debt(4) 23,958 41,779 75,506 Other non-current debt(4) 1,267 63,352 37,261 Provisions 70 4,815 12,602 29,188 140,925 169,318 Current liabilities Trade payables(5) 25,099 31,742 32,295 Deferred income 16,481 13,215 13,480 Provisions 119 479 1,690 Tax liabilities 877 6,917 15,104 Interest-bearing debt(5) 15,991 13,286 39,008 58,566 65,640 101,577 Liabilities classified as held for sale 585 — 6,280 Total liabilities 88,340 206,565 277,175 Total equity and liabilities 499,990 563,275 563,198
90 Notes: (1) The net book value of property, plant and equipment amounts to €37,516,000 in the 2007 financial statements, although, the note G8 (property plant and equipment) disclosed a carrying value at 31 December 2007 of €35,221,000 for property, plant and equipment with equipment under finance leases of €2,605,000. (2) A typographical error of €30,000 in the 2007 financial statements (where the figure was given as €447,000) was corrected in the 2008 comparative financial statements. (3) Translation reserve was reported in 2009 as a caption in the balance sheet, whereas in 2008 and 2007 it was included in retained earnings. (4) Acquisition-related liabilities, both conditional and unconditional items, have from 31 December 2009 been presented in interest-bearing liabilities to the extent those liabilities are to be settled with cash regardless whether the payments are fixed in nominal terms or whether there is interest determined in the transaction documentation. No reclassification has been carried out where the payment is in the form of the Company’s Ordinary Shares, and hence those items are shown in the non-interest bearing liabilities category. The disclosure change, resulted, in the non-current liabilities caption, to an €18,684,000 of other non-current debt reclassification, as at 31 December 2008, to interest bearing debt and in addition, in the current liabilities, it related to a €194,000 of trade and other payables reclassification to interest bearing debt. In 2007, no similar liabilities existed in 2007 that required such reclassification. 7.2 Assets The Group’s assets comprise non-current assets and current assets. The Group’s non-current assets consist mainly of property, plant and equipment, goodwill and other intangible assets. The Group’s current assets consist mainly of assets held to maturity, inventories and receivables. As at 31 December 2008 the non-current assets were €254.2 million, an increase of €172.5 million, as compared to €81.7 million as at 31 December 2007. The changes in the non-current assets mainly related to assets acquired though acquisitions, primarily the acquisition of the European minerals processing business and the acquisition of the Group’s interest in Junnikkala. The Group’s goodwill increased by €53.8 million to €87.2 million on 31 December 2008 from the previous year-end’s €33.4 million, which was mainly due to the acquisition of the European minerals processing business. The other intangible assets increased from €5.8 million on 31 December 2007 to €72.1 million on 31 December 2008 primarily due to the €72.2 million of other intangible assets which were consolidated as a result of the acquisition of the European minerals processing business and €4.3 million of other intangible assets (excluding emmission allowances) which were consolidated as result of the acquisition of Junnikkala. The other intangible assets for the European minerals processing business consist of technology, customer relationships and customer lists, with a high proportion of the assets being attributed to this due to the integrated role EWW plays in its customers’ supply chains, with many of EWW’s products being developed with individual customers. The exact product composition is critical for many of those customers’ quality assurance programmes for their own production and the Group is often the only supplier of the exact product required. The other intangible assets for Junnikkala consist of the Junnikkala group’s customer base. Non-current assets were increased by investment at Junnikkala and investment in plant and equipment for the Kostroma investment project. The increases were partly offset by disposals and write downs. As at 31 December 2009, the Group’s non-current assets were €386.6 million, an increase of €132.4 million, as compared to €254.2 million as at 31 December 2008. The change was mainly due to the acquisition of Mogale. The Group’s goodwill increased by €85.6 million to €172.9 million on 31 December 2009 from the previous year-end’s €87.2 million. The increase was due to the acquisition of Mogale although the increase from the acquisition was reduced later in the year due to an impairment of €19.1 million of that goodwill. The other intangible assets increased from €72.1 million on 31 December 2008 to €103.1 million on 31 December 2009 primarily due to the €32.0 million of technology assets and €12.7 million of customer base which where consolidated as a result of the acquisition of Mogale. These changes, however, was partly offset by the disposals of the Lappipaneli, Tervola and Kittilä sawmills at the end of 2009, which reduced non-current assets. As of 31 December 2008 the current assets were €309.1 million, a decrease of €106.3 million, as compared to €415.4 million as at 31 December 2007. The principal reasons for the change were reductions of cash and financial investments used to fund the acquisitions of the European minerals processing business (€80.0 million paid in October 2008) and Junnikkala and capital
91 expenditure at Junnikkala and on the Kostroma investment project. Net working capital increased due to the acquisitions of the European minerals processing business and interest in Junnikkala, but this was partly offset by operational decreases. The share buy back programme payments of €12.3 million and the 2008 dividend payment for the 2007 financial year of €11.6 million also reduced current assets in 2008 compared to 2007. The decreases were partly offset by cash received for the disposal of the care services business. As at 31 December 2009 the Group’s current assets were €163.9 million, a decrease of €145.2 million, as compared to €309.1 million as at 31 December 2008. The principal reason for the change was the reduction of financial investments, which were converted into cash, a significant proportion of which was used to fund the acquisition of Mogale in May 2009 (cash payments of ZAR 1,125 million plus expenses and interest plus ZAR 75 million to the management trust were paid on completion (the aggregate ZAR 1,200 million being approximately €103.7 million at €/ZAR 11.58)). Net working capital increased due to the acquisition of Mogale and for operational reasons due to increased production at the end of 2009. These changes, however, were partly offset by the disposals of the Lappipaneli, Tervola and Kittilä sawmills at the end of 2009 for cash paid in 2009 and early 2010, and corresponding reductions in inventories and receivables. The share buy back programme payments of €57.7 million and the 2009 capital redemption payment of €10.1 million for the 2008 financial year also reduced current assets in 2009 compared to 2008. 7.3 Liabilities The Group’s liabilities consist of non-current liabilities and current liabilities. The Group’s non-current liabilities comprise other non-current debt, deferred tax liabilities and interest- bearing debt. The Group’s current liabilities comprise trade payables, deferred income and interest bearing debt, tax liabilities and provisions. As at 31 December 2008 the non-current liabilities were €140.9 million, an increase of €111.7 million, as compared to €29.2 million as at 31 December 2007. The change was mainly due to the increase in non-current debt related primarily to additional earn-out liabilities and options from the acquisition of subsidiaries, the consolidation of the existing non-current liabilities of those subsidiaries upon their acquisition and the increase in deferred tax liabilities which relates to the acquisitions. As at 31 December 2009 the Group’s non-current liabilities were €169.3 million, an increase of €28.4 million, as compared to €140.9 million as of at December 2008. The increase was primarily due to the acquisition of Mogale which included conditional deferred consideration of ZAR 600 million (approximately €51.8 million at €/ZAR 11.58), in addition to consideration due at completion and in May 2010. The acquisition of Mogale also increased the provisions and deferred tax the Group needed to recognise and caused Mogale’s non-current liabilities to be consolidated. However, there was also a decrease due to reductions in the earn out liability relating to the European business due to poorer performance, the cancellation of the Junnikkala put option and some debt moving from non-current to current liabilities. Even though the deferred payment liabilities relating to the Mogale acquisition are not interest-bearing based on the Group’s interpretation, those liabilities have been classified into interest-bearing debt, since the liability will become partially or fully interest-bearing at the latest from the date when Mogale obtains the environmental permits and licences agreed in conjunction with the acquisition. The non-current liabilities at 31 December 2009 included earn out and other purchase price liabilities of €83.8 million comprising €48.8 million* in respect of Mogale, €26.2 million* in respect of the European minerals processing business and €8.8 million in respect of EWW. As at 31 December 2008 the current liabilities were €65.6 million, an increase of €7.1 million, as compared to €58.6 million as at 31 December 2007. The increase was primarily due to the increase in trade payables due to acquisition of businesses with trade payables as well as increase in tax liabilities mainly due to taxes payable in Malta by the European minerals processing business subsidiary, RCS, which was acquired in 2008. These increases were, however, partly
* Source: management accounts, unaudited.
92 offset by the reduction of trade payables in the existing businesses due to reduced turnover, reduction in deferred income due to the reduced order volumes in the house building business which receives advanced payment for houses, and reduction in interest bearing debt due to the partial disposal and de-consolidation of the furniture business and the disposal of the care services business. As at 31 December 2009 the Group’s current liabilities were €101.6 million, an increase of €35.9 million, as compared to €65.6 million as at 31 December 2008. The increase was primarily due to the increase of interest bearing debt due to the acquisition of Mogale (part of the debt is recorded as non-current liabilities). There was also a significant further increase in tax liabilities, mainly due to RCS’s operations in Malta. There was an operational increase in trade payables due to increased turnover which was offset by the net effect of acquisitions and disposals and the consequential consolidation and deconsolidation of trade payables in those other businesses. The current liabilities at 31 December 2009 included earn out and other purchase price liabilities of €29.0 million comprising €25.1 million* in respect of Mogale, €2.9 million in respect of the European minerals processing business and €1.0 million* in respect of the house building business. 7.4 Contingent liabilities As at 31 December 2009, the Group had the following contingent liabilities: South African environmental liabilities An environmental management plan has been prepared for Mogale and following expert advice on the likely cost to implement the plan, the Group has estimated that the cost to implement would be approximately ZAR 200 million (approximately €20.6 million at the spot rate of €/ZAR 9.73 on 27 May 2010). The Group has recorded a provision of €7.1 million, in line with IAS 37; however, future costs in excess of the €7.1 million may be payable in the future. Interest payment relating to Mogale permits and licences Under the terms of the sale and purchase agreement for Mogale, ZAR 525 million of the purchase price and ZAR 75 million to be paid into the management incentive trust (the aggregate ZAR 600 being approximately €51.8 million at €/ZAR 11.58)) is conditional upon Mogale obtaining certain operational permits and licences. The vendors have informed Ruukki that they consider that all relevant licences had been obtained prior to 31 December 2009; Ruukki’s view is that not all the permits and licences required to satisfy the payment condition have been provided. However, if all the licences have been obtained, the deferred consideration will no longer be conditional and furthermore will be interest bearing from the date at which all licences had been obtained, or if obtained prior to 31 December 2009, from the completion date in May 2009. Investment commitments The Group has entered into conditional commitments, relating to the assembly of the sawmill purchased for the cancelled Kostroma investment project which would be payable if the Group proceeds with taking the sawmill into production. If the Group chooses to bring the sawmill into production use, it will be obliged to pay further machinery and equipment delivery commitments of approximately €2.0 million and assembly commitments estimated at €3.7 million and Ruukki would be required to provide a guarantee for the Group’s commitment. Litigation Rautaruukki Oyj, another listed Finnish company, announced on 21 December 2009 that they had initiated legal proceedings against the Group concerning claims to the “Ruukki” name and has claimed in the Helsinki District Court and Helsinki City Court for: (i) €5.0 million in fixed damages; and (ii) €12.1 million based on royalties Rautaruukki has calculated based on Ruukki’s actual revenue for 2004 to 2008; and (iii) reasonable legal fees. These claims have not been recognised on the balance sheet of the Group. According to Rautaruukki Oyj, it has also initiated legal proceedings in other countries where it had earlier rights to the “Ruukki” name. Such proceedings have been initiated in Switzerland and South Africa in addition to the Finnish proceedings.
* Source: management accounts, unaudited.
93 Government subsidies Certain subsidiaries have previously received subsidies from Finnish government agencies. If the conditions attaching to the grant of these subsidies are not met, the subsidies (or part thereof) may have to be returned. Management has control over the majority of these conditions (for example relating to the ownership of the relevant subsidiaries) and has no reason to believe that any of the conditions will not continue to be met. 7.5 Contractual obligations The following table sets out the on balance sheet obligations as at 31 December 2009:
(IFRS)(1) Less than Between More than 1 year 1 and 5 years 5 years Total €’000 €’000 €’000 €’000 Secured bank loans (7,469) (17,505) (1,507) (26,480) Unsecured bank loans (2,934) — — (2,934) Finance lease liabilities (537) (396) — (933) Trade and other payables (53,435) (95,197) (3) (148,635) Bank overdraft (3,880) — — (3,880) Total on balance sheet (68,253) (113,098) (1,510) (182,862)
Notes: (1) The underlying numbers used in the table above are audited. The numbers for (i) “6 months or less” and “6-12 months” and (ii) “1-2 years” and “2-5 years” which are disclosed separately in the 2009 financial statements have been aggregated in the table above and the “total” row and column which are not included in the 2009 financial statements have been added. Further details of the obligations in respect of the earn out and deferred liabilities related to acquisitions are set out in paragraphs 10.3 and 10.4 of Part XII of this document. 7.6 Off balance sheet arrangements Other than the arrangements below, the Group is not a party to any material off balance sheet arrangements. There have been no material changes to the arrangements below in the period from 1 January 2010 until 29 June 2010 (being the latest practicable date prior to the date of this document). Mortgages and guarantees pledged as security As at 31 December 2009, the Group had pledged €1.7 million of business mortgages and €11.8 million real estate mortgages as security with external finance providers. The Company has entered into direct liability guarantees for funding subsidiaries, for €4.0 million in aggregate. The Group has also given cash deposits of €2.5 million and €0.6 million of land and equipment, the Group’s shares in Oplax Oy and 40 per cent. of the Group’s shares in Mogale as security for various loans. Investment commitments As at 31 December 2009, the Group had irrevocable investment commitments and liabilities of €3.1 million in aggregate, of which €2.9 million related to the Turkish beneficiation plant investment. Rental agreements Liabilities associated with rental and operating lease agreements (whose maturity typically varies between three to eight years) totalled €5.3 million at 31 December 2009. As guarantees for these rental agreements, the Group has made cash deposits of approximately €0.1 million at 31 December 2009.
94 8. Recent Developments and Current Outlook 8.1 Results of operations for the three month interim period ended 31 March 2010 compared to three month interim period ended 31 March 2009 The Group’s summary consolidated income statement data and statement of comprehensive income for the three month interim periods ended 31 March 2009 and 31 March 2010 have been extracted from the unaudited interim report for the three months ended 31 March 2010. The Company made a number of changes to the way it presented certain financial information following the publication of its interim report for the three months ended 31 March 2009. The changes affecting the numbers reproduced in this operating and financial review are set out below. The Company decided in conjunction with the 2009 financial statements to change the way it presents share of associated profits, sales gains and losses related to associates, and impairment on associates’ shares and receivables, to the extent they relate to associated companies owned by the Group parent company and not belonging to business segments. The comparative periods for the first quarter of 2009 have been changed accordingly. From 31 December 2009, with retrospective implementation, the Company has presented realised and unrealised gains and losses in relation to emission rights in other operating income and expenses above EBIT, whereas previously those items have been included in finance income and finance expense. Consolidated profit and loss (unaudited IFRS) 3 months ended 31 March 2009 2010 €’000 €’000 Revenue 44,488 54,429 Other operating income 158 392 Operating expenses (42,959) (52,634) Depreciation and amortisation (5,614) (7,236) Impairment — (517) Items related to associates (core) — (1) Operating profit/loss (3,927) (5,567) Finance income and expense (1,936) (215) Items related to associates (non-core) (11) 42 Profit/loss before taxes (5,874) (5,740) Income taxes 236 1,300 Profit/loss for the period (5,638) (4,440) Profit attributable to: Owners of the parent (3,572) (3,459) Non-controlling interests (2,065) (981) (5,638) (4,440)
95 Statement of comprehensive income (unaudited IFRS) 3 months ended 31 March 2009 2010 €’000 €’000 Profit/loss for the period Other comprehensive income (5,638) (4,440) Exchange rate differences on translating foreign operations 428 8,468 Income tax relating to other comprehensive income (193) (3,548) Other comprehensive income, net of tax 234 4,920 Total comprehensive income for the year (5,403) 480 Total comprehensive income attributable to: Owners of the parent (3,331) 738 Non-controlling interests (2,072) (258) Revenue The Group’s consolidated revenues increased by €9.9 million (22 per cent.), from €44.5 million to €54.4 million. The following table presents the Group’s consolidated revenues by segment:
Revenue by segment (unaudited IFRS) 3 months ended 31 March 2009 2010 €’000 €’000 Minerals processing 12,814 29,968 House building and wood processing 31,674 24,461 Other — — Total 44,488 54,429
Minerals processing businesses Overall revenues increased significantly due to the acquisition of Mogale in 2009, subsequent to 31 March 2009. Revenues from Mogale for the three months ended 31 March 2010 were €15.4 million compared to €nil for the three months ended 31 March 2009. Revenues from the Southern European minerals processing business for the three months ended 31 March 2010 were €27.9 million compared to €12.8 million for the three months ended 31 March 2009, an increase of €15.0 million. However, the revenues for 2010 include €15.5 million related to the sale of Mogale’s products by RCS. The European minerals business receives a commission of two per cent. in those sales, which totalled €0.3 million in 2010. Mogale’s revenues in the first quarter of 2010 increased compared to the period since its acquisition in May 2009, due to modest increases in demand and market price for its products due to the weak economic recovery. However, production problems at Mogale’s furnaces adversely affected production volumes and revenues in early 2010. Although all four furnaces were in operation, they were not operating at full capacity. The Group expects the furnaces will continue to operate at a reduced capacity until after the third quarter of 2010. The market for the Southern European minerals processing business’ products, especially for low carbon products, suffered due to oversupply and consequential reductions in market prices in the first quarter of 2010, resulting from increased production output at the end of 2009, following growing demand at the end of 2009, as there was little increase in demand until the latter part of the first quarter of 2010. Production at the EWW smelter was suspended in January and February 2010, due to high inventory levels of low carbon products. Although order levels in early 2010 were higher than in 2009, they still were not at a level to support continuous operation of the smelter. Due to the market fluctuations in low carbon products, the business focussed on the production of ultralow carbon products.
96 House building and wood processing businesses Overall revenues decreased in the first quarter of 2010 compared to the first quarter of 2009 due to the disposal of three of the Group’s sawmills in late 2009. Although the house-building business’ order book at the end of 2009 was significantly better than at the end of 2008, the number of houses delivered in the first quarter of 2010 declined, with 62 houses delivered in that period, compared to 96 delivered in the first quarter of 2009 (including 22 of the 31 houses delivered for the Suomutunturi project) due to the production time for the houses. Revenues for the house building business decreased from €12.2 million in the first quarter of 2009 to €9.2 million in the first quarter of 2010, a decrease of €3.0 million, due to the reduced number of deliveries. Total revenues for the sawmills business (excluding pallets) decreased from €17.5 million in 2009 to €13.1 million in 2010, a decrease of €4.4 million. The total volume of sawn timber produced also decreased by 25,000 m3, from 79,000 m3 in the first quarter of 2009 to 54,000 m3 in the first quarter of 2010. The decrease in revenues and production volumes was due to the disposal of the Lappipaneli, Tervola and Kittilä sawmills in the fourth quarter of 2009. Production volumes at the two remaining sawmills, operated by Junnikkala, increased by 14,000 m3, from 40,000 m3 in the first quarter of 2009 to 54,000 m3 in the first quarter of 2010. However production volumes, and consequently revenues, at those two sawmills remained below the nominal 300,000 m3 per annum capacity (75,000 m3 per quarter). Sales volumes increased in all of Junnikkala’s product groups, with deliveries to Finnish domestic house producers showing particularly increased growth, as market conditions improved and businesses started to recover from the downturn which affected the segment in the first quarter of 2009. Sales volumes in the pallets business increased in the first quarter of 2010 after a difficult year in 2009, with revenues for the first quarter of 2010 increasing by €0.2 million from €2.1 million in the first quarter of 2009 to €2.3 million in the first quarter of 2010. The number of pallets delivered to customers decreased from approximately 248,000 in the first quarter of 2009 to approximately 230,000 in the first quarter of 2010, a decrease of 18,000. A strike by Finnish harbour workers meant that the pallet business’ key customers were unable to export products which caused a reduction in their production and consequently their demand for pallets. However, the Group expects the effect of the strike will not be significant for the year as a whole as orders from those customers increased in April and May to make up for reduced production in March. Operating profit and EBITDA (unaudited IFRS) For the three months ended 31 March 2009 2010 House House building building Minerals and wood Minerals and wood processing processing Other processing processing Other €‘000 €‘000 €‘000 €‘000 €‘000 €‘000 Operating profit/(loss), EBIT (3,598) 1,959 (2,288) (3,826) 1,367 (3,108) Add back Impairment — — — — 517 — Amortisation & depreciation 4,290 1,304 19 6,328 897 11 EBITDA 693 3,263 (2,269) 2,502 2,781 (3,096)
Minerals processing businesses Underlying profitability, at the EBITDA level, increased by €1.8 million, from €0.7 million for the first quarter of 2009, to €2.5 million for the first quarter of 2010. The minerals processing businesses’ operating loss at the EBIT level increased slightly, from €3.6 million in the first quarter of 2009 to €3.8 million in the first quarter of 2010, an increase of €0.2 million. The main
97 reason for the change was the acquisition of Mogale. Although electricity prices have increased, the Group has focussed on cutting other costs and improving targeted segmentation in sales of various product groups in order to improve profitability. However, the benefit was partly offset by the adverse impact of other production problems at Mogale’s furnaces. Costs of sales across the two businesses were reduced for the combined business in the first quarter of 2010 compared to the separate businesses in 2009, due to the use of RCS for the sale of Mogale’s products. Due to oversupply in the market as a whole, the production of the smelter at EWW was suspended during January and February 2010, resulting in the saving of some operating costs during the shutdown. It was restarted in March 2010, with the start up costs increasing production costs for that period. The smelter was halted for the whole of the first quarter of 2009. No impairments were recorded in the first quarters of 2009 or 2010 in the minerals processing businesses. Depreciation and amortisation costs increased by €2.0 million, from €4.3 million in the first quarter of 2009 to €6.3 million in the first quarter of 2010, primarily due to the increased asset base being depreciated following the acquisition of Mogale in mid-2009. House building and wood processing businesses Underlying profitability, at the EBITDA level, decreased by €0.5 million from €3.3 million in the first quarter of 2009 to €2.8 million in the first quarter of 2010, primarily due to the decreased profitability of the house building business. Profit, at the EBIT level, decreased by €0.6 million, from €2.0 million in the first quarter of 2009 to €1.4 million in the first quarter of 2010. Operating profits in the house building business decreased due to the reduced number of houses delivered and increased costs following increased sales in late 2009 and early 2010 compared to late 2008 and early 2009, including hiring new staff and increased marketing and administration expenses. Operating profit at the EBITDA level decreased by €1.7 million, from €3.3 million in the first quarter of 2009 to €1.6 million in the first quarter of 2010, while at the EBIT level it decreased by €1.6 million, from €3.2 million in the first quarter of 2009 to €1.6 million in the first quarter of 2010. The small underlying loss at the EBITDA level in the sawmills business in the first quarter of 2009 of €0.1 million was turned into a modest profit of €0.7 million, a net positive change of €0.8 million. Losses at the EBIT level were also reduced, from a loss of €1.1 million in the first quarter of 2009 to a loss of €0.4 million in the first quarter of 2010, a reduction of €0.7 million. The increased utilisation of the sawmill capacity at Junnikkala due to increased demand contributed positively to profitability, although production at the sawmills and in the industry as a whole was limited by the supply of round wood logs by local forest owners. The margins in the pallet business improved, increasing profitability. Profitability at the EBITDA level increased by €0.4 million, from €0.0 million in the first quarter of 2009 to €0.5 million in the first quarter of 2010, while at the EBIT level, there was a positive change of €0.3 million from a loss of €0.1 million in the first quarter of 2009 to a profit of €0.2 million in the first quarter of 2010. An impairment of €0.5 million was recorded in the sawmills business in the first quarter of 2010. No impairments were recorded in the house building and wood processing business in the first quarters of 2009. Depreciation and amortisation decreased by €0.4 million, from €1.3 million in the first quarter of 2009 to €0.9 million in the first quarter of 2010 primarily due to the reduced asset base following the disposal of part of the sawmills business in late 2009. Other The Group’s other operations recorded costs of €3.1 million in the first quarter of 2010, an increase of €0.8 million compared to the €2.3 million in the first quarter of 2009. Expenses of €1.1 million in connection with the London listing were recognised in the first quarter of 2010, with no such costs incurred in the first quarter of 2009. The majority of the other losses in the first quarter of 2010 and the majority of losses in the first quarter of 2009 relate to the Group’s headquarters’ operations. Finance income/expenses Net finance expenses decreased by €1.7 million from €1.9 million in the first quarter of 2009 to €0.2 million in the first quarter of 2010. The principal reasons for the decrease were that costs related to the hedging losses and costs in relation to the Kostroma investment project were recorded as finance expenses in the first quarter of 2009 and no such expenses were recorded in the first quarter of 2010. 98 Income tax The income tax credit of €0.2 million in the first quarter of 2009 increased by €1.1 million to €1.3 million in the first quarter of 2010. 8.2 Cash flow for the three month interim period ended 31 March 2010 compared to three month interim period ended 31 March 2009 The Group’s summary consolidated cash flow statements for the three month interim periods ended 31 March 2009 and 31 March 2010 have been extracted from the audited interim report for the three months ended 31 March 2010. (unaudited IFRS) 3 months ended 31 March 2009 2010 €’000 €’000 Cash flows from operating activities Net profit/loss (5,638) (4,440) Adjustments to net profit/loss: 9,293 1,849 Working capital changes 164 7,077 Net cash from operating activities 3,819 4,486 Cash flows from investing activities Acquisitions of subsidiaries and associates (1) (319) Disposal of subsidiaries and associates (393) — Capital expenditures and other investing activities (4,731) (2,735) Net cash used in investing activities (5,124) (3,054) Cash flows from financing activities Share buy-back (23,324) (10) Dividends paid — (14) Deposits 42,109 2,500 Interest received on investments 820 33 Proceedings from borrowings 6,653 902 Repayment of borrowings and other financing activities (6,105) (1,990) Net cash used in financing activities 20,154 1,422 Increase in cash and cash equivalents 18,848 2,854
Net cash flows from operating activities were €4.5 million in the first quarter of 2010, compared to €3.8 million in the first quarter of 2009, an increase of €0.7 million. There was a net increase in cash of €7.1 million due to working capital changes in the first quarter of 2010 due primary to a reduction in inventories and a reduction in trade payable and receivables, compared to a modest increase of €0.2 million in the first quarter of 2009. There was a cash inflow to operations in the first quarter of 2010, compared to cash generation in the first quarter of 2009 due to a reduction in cash generated by the minerals processing and house building and wood processing businesses and an increase in cash utilised by the Group headquarters, primarily expenses relating to the London listing process. Net cash outflow from investing activities reduced from €5.1 million in the first quarter of 2009 to €3.1 million in the first quarter of 2010, a reduction of €2.1 million, primarily due to the reduction in cash used in capital expenditure and other investing activities. The principal capital expenditure in the first quarter of 2009 was the expansion and efficiency upgrade works at Junnikkala, and in 2010 was the Turkish beneficiation plant. In both cases further capital expenditures were incurred outside the first quarter of the year. Net cash generated from financing activities decreased from €20.2 million in the first quarter of 2009 to €1.4 million in the first quarter of 2010. The principal changes were (i) the reduction in cash received from previously deposited funds, with €2.5 million received in the first quarter of 2010 compared to €42.1 million in the first quarter of 2009, a reduction of €39.6 million and (ii) the reduction in cash returned to shareholders with less than €0.1 million returned in the first quarter of 2010 compared to €23.3 million returned through share buy backs in the first quarter of
99 2009. Interest received in the first quarter of 2010 was also reduced compared to the first quarter of 2009, due to the reduced investments on which interest was payable and lower interest rates. There was a net outflow of €1.1 million of cash due to repayment of borrowings and other financing activities netted against proceeds from borrowings in the first quarter of 2010 compared to a net inflow of €0.6 million in the first quarter of 2010, a net change of €1.6 million. 8.3 Balance sheet data at 31 March 2010 compared to 31 December 2009 The Group’s summary consolidated balance sheet statement data for the three month interim periods ended 31 March 2009 and 31 March 2010 have been extracted from the interim report for the three months ended 31 March 2010. (IFRS)(1) as at 31 December 31 March 2009 2010 €’000 €’000 Assets Non-current assets Investments and intangible assets Goodwill 172,850 180,736 Investments in associates 507 553 Other intangible assets 103,063 102,070 Investments and intangible assets total 276,421 283,359 Property, plant and equipment 80,655 83,650 Other non-current assets(2) 29,506 30,909 Non current assets total 386,583 397,918 Current assets Inventories 55,951 55,034 Receivables 49,283 46,077 Held to maturity investments 2,500 — Other investments 314 313 Cash and cash equivalents 55,852 58,976 Current assets total 163,900 160,401 Assets held for sale 12,714 12,197 Total assets 563,198 570,516 Equity and Liabilities Equity attributable to equity holders of the parent Share capital 23,642 23,642 Share premium reserve 25,740 25,740 Revaluation reserve 2,193 2,193 Paid-up unrestricted equity reserve 260,357 260,347 Translation reserve 6,165 10,363 Retained earnings (49,953) (53,264) Equity attributable to equity holders of the parent 268,144 269,021 Minority interest 17,878 17,621 Total equity 286,022 286,643 Liabilities Non-current liabilities 169,318 176,723 Current liabilities Advances received/deferred income 13,480 14,526 Other current liabilities(3) 88,097 86,763 Current liabilities total 101,577 101,289 Liabilities classified as held for sale 6,280 5,862 Total liabilities 277,175 283,873 Total equity and liabilities 563,198 570,516
100 Notes: (1) The data as at 31 December 2009 has been extracted from the Group’s 2009 the Company’s audited consolidated IFRS financial statements for the years ended 31 December 2007, 31 December 2008 and 31 December 2009, which are incorporated by reference into and/or included in full in Part of VIII of this document; however certain line items have been aggregated for consistency with the presentation adopted in the summary data extracted from the interim report for the three months ended 31 March 2010. The Group’s summary consolidated balance sheet statement data as at 31 March 2010 has been extracted from the unaudited interim report for the three months ended 31 March 2010. (2) “Other non-current assets” is the sum of “other financial assets”, “receivables” and “deferred tax assets” which are presented separately in the 2009 financial statements. (3) “Other current liabilities” is the sum of “trade and other payables”, “provisions”, “tax liabilities” and “interest bearing debt” which are presented separately in the 2009 financial statements.
As at 31 March 2010 the non-current assets were €397.9 million, an increase of €11.3 million, as compared to €386.6 million as at 31 December 2009. The change was mainly due to (i) the increase in goodwill by €7.9 million to €180.7 million on 31 March 2010 from €172.9 million on 31 December 2009 primarily due to the change in the €/ZAR exchange rate which affected the Euro value of Mogale’s goodwill and (ii) the increase in property plant and equipment by €3.0 million to €83.7 million on 31 March 2010 from €80.7 million on 31 December 2009 due primarily to change in the €/ZAR exchange rate which affected the Euro value of Mogale’s assets and the capital expenditure on the beneficiation plant in Turkey. The acquisition of Intermetal added €0.4 million of non-current assets in aggregate including goodwill and property, plant and equipment. As at 31 March 2010 the Group’s current assets were €160.4 million, a decrease of €3.5 million, as compared to €163.9 million as at 31 December 2009. The principal reasons for the change were a decrease in receivables of €3.2 million a reduction in inventories of €0.9 million and a disposal of €2.5 million of short term euro denominated deposits classified as held to maturity investments, offset by an increase in cash and cash equivalents of €3.1 million. As at 31 March 2010 the Group’s non-current liabilities were €176.7 million, an increase of €7.4 million, as compared to €169.3 million as at 31 December 2009. The factor was the increase in the earn out and other purchase price liabilities since 31 December 2009 due to the change in the €/ZAR exchange rate and a slight increase (of less than €0.1 million*) following the revaluation of the EWW option right. The non-current liabilities at 31 March 2010 included earn out and other purchase price liabilities of €87.6 million* comprising €52.6 million* in respect of Mogale, €26.2 million* in respect of the European minerals processing business and €8.8 million* in respect of EWW, whereas at 31 December 2009 the earn out and other purchase price liabilities were €83.8 million comprising €48.8 million* in respect of Mogale, €26.2 million in respect of the European minerals processing business and €8.8 million in respect of EWW. In addition deferred tax liabilities and other non-current liabilities increased. As at 31 March 2010 the Group’s current liabilities were €101.3 million, a decrease of €0.3 million, as compared to €101.6 million as at 31 December 2009. Tax liabilities and current provisions decreased, of which tax liabilities was the larger decrease. The decrease was mostly offset by an increase in the earn out and other purchase price liabilities since 31 December 2009 due to the change in the €/ZAR exchange rate and an increase in trade and other payables. Advances received, primarily relating to customers’ pre-payments in the house building business increased by €1.0 million from €13.5 million at 31 December 2009 to €14.5 million at 31 March 2010. The current liabilities at 31 March 2010 included earn out and other purchase price liabilities of €30.9 million* comprising €27.0 million* in respect of Mogale, €2.9 million* in respect of the European minerals processing business and €1.0 million* in respect of the house building business, whereas at 31 December 2009 the earn out and other purchase price liabilities were €29.0 million comprising €25.1 million* in respect of Mogale, €2.9 million in respect of the European minerals processing business and €1.0 million* in respect of the house building business.
* Source: management accounts, unaudited.
101 8.4 Other recent developments In February 2010, TMS acquired 99 per cent. of the share capital of Intermetal for a cash consideration of €0.3 million from TMS’s managing director to acquire Intermetal’s mineral exploration rights. Intermetal has six chrome ore exploration and exploitation licences in Turkey with a total land area of approximately 5,000 hectares. The rationale of the transaction was to expand the Group’s chrome ore reserve in Turkey. The Turkish beneficiation plant was completed in May 2010 and full scale production operations at the plant commenced in June. The plant enables TMS to use nearby waste tailings rather than mined chrome ore for production of chromite concentrate, which management expects to reduce production costs for the chromite concentrate. In the fourth quarter of 2009, the Group’s house building and wood processing business purchased its first land for development purposes in Kirkkonummi. Further land purchases may be made in due course. Prior to this, all houses had been constructed on land purchased by the future home owner. The house business will therefore be affected by movements in land prices. The house building business diversified its product range, expanding its target market, with the launch of a weekend house collection. The Directors consider this to be a strong strategic step in the longer term which should support growth and reduce the dependence on the single family houses although they do not expect it will have any significant impact on financial performance in the short term. The Group paid ZAR 187 million (approximately €19.2 million at €/ZAR 9.73) on 27 May 2010 in respect of the second tranche of ZAR 200 million of the purchase price for the Mogale acquisition and expects to pay a further ZAR 13 million (approximately €1.3 million at €/ZAR 9.73) in July 2010*. See also paragraph 10.4 of Part XII and also paragraph 14.3 of Part XII of this document. On 27 May 2010 Ruukki entered into a standby facility with Kermas for working capital purposes. An amendment agreement was entered into on 30 June 2010. Further details of the facility are set out in paragraph 9.2 below. 8.5 Current outlook Although the global economy remains fragile, the Company expects demand for Ruukki’s products to be better in 2010 than in 2009 in its major product markets. Ruukki will continue to emphasise cash flow generation from its operations in 2010. The Group is looking for expansion opportunities and potential acquisition targets within its main business areas and is evaluating alternative structures for reorganising its house building and wood processing businesses. The Company expects demand for the minerals processing business’ products for 2010 to be higher than in 2009 and for this to result in higher volumes and better prices for the segment’s products. However input prices, particularly raw materials and electricity costs may also develop unfavourably. Despite recent positive signals the Company expects the sector will remain volatile. Market conditions for the house building and wood processing businesses have improved and demand for the segment’s products has increased compared to 2009. Sales volumes in the house building business in 2010 have increased compared to 2009 (although the number of houses delivered in the first quarter was lower due to the production lead time) and the Company expects this trend to continue. However, after two years of generally decreasing prices there is now pressure for price increases for the raw materials used by the house building and wood processing businesses, which may adversely affect production costs. The Group is reviewing its interests in the house building and wood processing sectors and alternatives available to develop and maximise the value of its related businesses. The Group is evaluating alternative structures for reorganising its house building and wood processing assets. The outcome of this review may be a decision to retain these businesses and develop them to maximise their value or may include a disposal of, and/or demerger and separate listing of, the Group’s house building and wood processing businesses.
* Source: management accounts, unaudited.
102 9. Capitalisation and Indebtedness 9.1 Capitalisation The following table sets out the capitalisation (calculated in accordance with IFRS) of the Group as at 31 March 2010 as extracted without material adjustment from the unaudited accounting records of the Group: (Unaudited IFRS) At 31 March 2010 €’000 Shareholders’ equity(1) Share capital 23,642 Share premium reserve 25,740 Treasury shares — Other reserves(2) 272,903 Total capitalisation 322,285
Notes: (1) Excludes the accumulated loss of €53,263,000 as at 31 March 2010 in retained earnings. (2) Of which €260,347,000 comprises paid up unrestricted equity and €15,961,000 of treasury shares recorded as a reduction against paid up unrestricted equity.
9.2 Indebtedness At 31 March 2010, the Group had net indebtedness of €37.4 million. The following table sets out the unaudited total current debt and the total non-current debt (excluding the current portion of long term debt) of the Group as at 31 March 2010 (calculated in accordance with IFRS) as extracted without material adjustment from the unaudited accounting records of the Group: (Unaudited IFRS) At 31 March 2010 €’000 Current debt Guaranteed and unsecured — Secured(1) 14,298 Unguaranteed and unsecured(2) 6,399 Total current debt(3) 20,697 Non-current debt (excluding current portion of long-term debt) Guaranteed and unsecured — Secured 15,923 Unguaranteed and unsecured(2) 799 Total non-current debt (excluding current portion of long-term debt) 16,722 Total indebtedness 37,419
Notes: (1) Current secured debt includes loans of €2,944,000 to be transferred to the purchasers of the assets of Lappipaneli, which has now been transferred to the purchasers. (2) Unguaranteed and unsecured liability includes liabilities of €2,917,000 to be transferred to the purchasers of the assets of Lappipaneli, which has now been transferred to the purchasers. (3) Total current debt includes €5,861,000 as noted in (1) and (2), of debt which has now been transferred to the purchasers.
Various Group companies have given business and real estate mortgages as collateral for loans to the counterparties to various finance agreements, mainly to Finnish financial institutions. All of the shares in Oplax Oy are pledged as collateral for a loan taken out by the Group in connection
103 with the acquisition Oplax Oy in 2007. When the Group acquired the majority stake in Mogale Alloys (Pty) Ltd, deferred conditional and unconditional payments were agreed upon for a total nominal amount of ZAR 800 million (approximately €69 million at the exchange rate at the time of the transaction and approximately €82 million at the spot rate of €/ZAR 9.73 on 27 May 2010). In relation to these deferred payments, 40% of the total number of Mogale shares owned by the Group are pledged as collateral in favour of the vendors of Mogale. The Group’s non-current liabilities at 31 March 2010 included earn out and other purchase price liabilities of €87.6 million* comprising €52.6 million* in respect of Mogale, €26.2 million* in respect of the European minerals processing business and €8.8 million* in respect of EWW. The current liabilities at 31 March 2010 included earn out and other purchase price liabilities of €30.9 million* comprising €27.0 million* in respect of Mogale, €2.9 million* in respect of the European minerals processing business and €1.0 million* in respect of the house building business. These liabilities are not included in the indebtedness table above. For further details of the EWW call option and RCS and TMS earn-out clauses, please refer to paragraph 10.3 of Part XII. For further details of the Mogale deferred payment liabilities please refer to paragraph 10.4 of Part XII. Financing agreements The Group’s sawmill subsidiary, Junnikkala, was unable to make all of the required repayments of capital under its financing agreements in April 2010 and was in breach of its financing agreements. In order to correct the situation, Ruukki Yhiöt Oy (a wholly-owned subsidiary of the Company holding the Group’s 51.02 per cent. interest in Junnikkala) subscribed for convertible bonds on 26 April 2010 with an aggregate value of €2.5 million. The other shareholders in Junnikkala did not subscribe for any convertible bonds or invest other capital. If the bonds are converted, the Group’s interest in Junnikkala would increase to 75.51 per cent., from its current level of 51.02 per cent. and there would also be an adjustment to the Group’s call option over the remaining Junnikkala shares. Part of the capital injected was used by Junnikkala to repay certain overdue payments of capital under the facility agreements and as a result of the capital injection and repayment, the banks agreed to waive the breaches and extended the term of the loan by seven months. There were also covenant breaches related to one of the Company’s loans relating to the pallets business in 2009. The Group was required to repay an additional capital contribution to obtain waiver for that breach. On 27 May 2010, Ruukki agreed a new US$55 million standby facility with Kermas, for working capital purposes. An amendment agreement was entered into on 30 June 2010 under which Kermas agreed to provide security over US$25 million of bonds issued by Citigroup Inc. and Merrill Lynch & Co. as collateral in respect of its obligations under the facility agreement. A pledge agreement was also entered into on 30 June 2010 between Kermas and the Company. The facility was originally available to be drawn down for a period of two years from the date of the agreement, although this has now been amended to a period ending on 31 December 2011. The pledge agreement is in effect until 31 December 2011 too. As at 30 June 2010 the facility was undrawn. If drawn down, the loan is repayable in a single payment on the final day of the loan term, being three years from the date of the first draw down, subject to Ruukki’s right to pre-pay the whole or part of the loan on 2 business days’ notice. The interest rate is 3 month LIBOR plus a margin of 1.0 per cent. per annum. Ruukki is also obliged to pay a transaction fee of 0.5 per cent. per annum of the loan facility amount for two years irrespective of any drawdown. Ruukki’s obligations under the loan are unsecured. Ruukki has provided certain representations and warranties to Kermas and these will be repeated on any drawdown. The Group also has a variety of loans overdrafts and other facilities with multiple, predominantly Finnish, banks. Most of the facilities have been entered into by the relevant subsidiaries rather than the Company, due to the Company’s historical decentralised management model.
* Source: management accounts, unaudited.
104 Ruukki also has loans with Kaupthing Bank and with Finnvera Oyj. The former includes financial covenants which are assessed quarterly on a rolling twelve month basis that: (i) the total senior debt must not exceed 3.25 times EBITDA of Oplax Oy; (ii) the equity ratio of Ruukki must not be below 40 per cent. and (iii) the capital expenditure for Oplax Oy for the current financial year and future years must not exceed €0.5 million each year. Junnikkala has loans, overdraft facilities, hire purchase agreements and finance leases with Finnvera Oyj, Keskinäinen työeläkevakuutusyhtiö Varma, Nordea Pankki Suomi Oyj, Sampo Pankki Oyj and other banks. Some of these loans include financial covenants including the following: (i) the equity ratio of Junnikkala must be above 30 percent; and (ii) interest bearing debt must not exceed 4.0 times EBITDA at 31 December 2010. Oplax has a loan and a finance lease with Nordea Pankki Suomi Oyj. Mogale has overdraft facilities and a financial lease with Absa Bank Ltd. TMS has a finance lease agreement with Volvo Finansal Kiralama A.S. There are no financial covenants in respect of any of these facilities or leases. In addition, although some of the loans do not include specific financial covenants, they are repayable on demand if the relevant entity is subject to a substantial decline in business activity or insolvency proceedings. Certain loans to Junnikkala are also repayable in the event of a direct change of control in Junnikkala. At 31 March 2010, all of Mogale’s facilities with Absa Bank Ltd, which total ZAR 79 million, were undrawn. The substantial majority of the total permissible facility amounts under the Group’s other facilities had been drawn down at 31 March 2010. The aggregate undrawn amount under the finance agreements of the house building and wood processing businesses at 31 March 2010 was less than €0.1 million. There were no undrawn amounts under any finance agreements entered into by the European minerals processing business at 31 March 2010. 9.3 Net Financial Indebtedness The following table shows the unaudited net financial indebtedness (calculated in accordance with IFRS) of the Group as at 31 March 2010 as extracted without material adjustment from the unaudited accounting records of the Group: (Unaudited IFRS) At 31 March 2010 €’000 Cash 58,976 Cash equivalents — Trading securities — Liquidity 58,976 Current financial receivable — Current bank debt 10,681 Current portion of non-current debt 6,635 Other non-current debt 3,380 Current financial debt 20,697 Net current financial indebtedness (38,279) Non-current bank loans 15,923 Bonds issued — Other non-current loans 799 Non-current financial indebtedness 16,722 Net financial indebtedness (21,557) Notes: (1) Includes loans of €2,944,000 to be transferred to the purchasers of the assets of Lappipaneli. (2) Includes liabilities €2,917,000 to be transferred to the purchasers of the assets of Lappipaneli. (3) Loans relating to finance leases are classified as other debt current €463,000 and non-current €234,000.
105 10. Critical Accounting Policies The preparation of IFRS-compliant consolidated financial statements requires management to make certain estimates and to use its discretion in the application of accounting policies. The Group’s significant accounting policies are set out in the notes to the 2009 consolidated financial statements set out in Part VIII. The most critical accounting policies, including the primary areas in which management are required to make judgements, are set out below. Some further detail has been added to the “principles of consolidation; subsidiaries” and “allocation of the cost of a business combination” paragraphs below which does not appear in the 2009 consolidated financial statements. Principles of consolidation Subsidiaries The consolidated financial statements include the parent company Ruukki and its subsidiaries. Subsidiaries refer to companies in which the Group has control. The Group gains control of a company when it holds more than half of the voting rights or otherwise exercises control. The existence of potential voting rights has been taken into account in assessing the requirements for control in cases where the instruments entitling their holder to potential voting rights can be exercised at the time of assessment. Control refers to the right to govern the financial and operating policies of an enterprise so as to obtain benefits from its activities. Acquired subsidiaries are consolidated from the time when the Group gained control, and divested subsidiaries until the time when control ceased. All intra-group transactions, receivables, debts, and unrealised profits, as well as internal distribution of profits are eliminated when the consolidated financial statements are prepared. The distribution of profits between parent company owners and minorities is shown in the income statement, and the minority share of equities is shown as a separate item in the balance sheet under shareholders’ equity. The minority share of accumulated losses is recorded in the financial statements up to the amount of the investment. The Company has incorporated the financial statements of EWW in its consolidated financial statements for the financial years ended 31 December 2008 and 31 December 2009 and the interim financial statements for the three month period ended 31 March 2010. While the Company has not held shares of EWW, the Board of Directors of the Company has deemed the Company to have control over EWW mandating consolidation. The Company has accrued the benefits from and controlled the business of EWW and, in fact, has been able to govern the financial and operating policies of EWW primarily as a result of a toll manufacturing agreement between EWW and RCS, the Company’s subsidiary. This has been reflected by the Company directing key business decision of EWW and EWW reporting on its business and financial information to the Company. Furthermore, the Company has taken the view that, in fact, it has been able to exercise its call option to acquire EWW at any time (see paragraph 10.3 of Part XII). Kermas and the Company have also formally agreed on 3 June 2010 that the call option can be executed by the Company at any time. The Company will include EWW in its consolidated financial statements for as long as it continues to control EWW as described above. Associates Associates are companies in which Ruukki exercises significant influence. The Group exercises significant influence if it holds more than 20 per cent. of the target company’s voting rights, or if the company in other ways exercises significant influence but not control. Associates have been consolidated in the Group’s financial statements using the equity method. If the Group’s share of the associate’s losses exceeds the carrying amount of the investment, the investment is recognised at zero value in the balance sheet, and losses exceeding the carrying amount are not consolidated unless the Group has made a commitment to fulfil the associates’ obligations. Unrealised profits between the Group and the associates have been eliminated in line with the Group’s ownership. Investment in an associate includes the goodwill arising from its acquisition. Goodwill and intangible assets identified at acquisitions Goodwill represents the portion of acquisition cost that exceeds the Group’s share of the fair value at the time of acquisition if the net assets of a company acquired after 1 January 2004. Goodwill arising from previous business combinations represents the carrying amount under the previous accounting standards, which has been used as the deemed cost. The classification or accounting process for these
106 acquisitions has not been adjusted in preparation of the Group’s opening IFRS balance sheet on 1 January 2004. Instead of regular amortisation, goodwill is tested annually for potential impairment. For this purpose, goodwill has been allocated to cash-generating units or, in the case of an associated company, is included in the acquisition cost of the associate in question. Goodwill is measured at original acquisition cost less impairment losses. Goodwill, arising from acquisitions after 1 January 2004, is initially measured at cost being the excess of the cost of the acquisition over the Group’s share of the net fair value of the identifiable assets, liabilities and contingent liabilities of the acquired company at the date of acquisition. Intangible assets typically recognised include customer relationships, trademarks and brands and technology. The cost of acquisition is measured as the fair value of the assets given, equity instruments issued and liabilities incurred or assumed at the date of the acquisition. Contingent purchase consideration is included in the cost based on an estimate at the date of an acquisition, and adjusted subsequently to reflect the current estimate or the final outcome. Allocation of the cost of a business combination In accordance with IFRS 3, the acquisition cost of an acquired company is allocated to the assets of the acquired company. The management has to use estimates when determining the fair value of identifiable assets and liabilities. Determining a value for intangible assets such as trademarks or customer relationships requires estimation and discretion because in most cases, no market value can be assigned to these assets. Determining fair value for tangible assets requires particular discretion as well. This is especially the case where the companies are small or geographically situated in areas where there are no active markets for real property, for instance. In these cases, the management has to select an appropriate method for determining the value and must estimate future cash flows. Similarly, determining the discount rate to be used for discounting future cash flows requires discretion. The principal risks and difficulties in the allocation of the cost of a business combination are (i) the correct identification of the assets acquired, particularly intangible assets such as technology and customer relationships, (ii) deciding whether assets should be combined or presented separately (for example whether intangible technology assets can be separated from customer relationships and customer lists); and (iii) valuation of the assets, particularly where no readily identifiable market valuation or comparators exist for such asset. Determination of the amount of the earn-out and contingent liabilities associated with business acquisitions The Group has made a significant number of business acquisitions in the past few years. These acquisitions have typically involved contingent considerations, in particular in relation to the acquisition of RCS and TMS as well as Mogale, either subject to a specified future event to occur, or calculated and paid on the basis of the future operative profitability of the acquired company (earn-out arrangements). The discounted estimated contingent considerations have been included in the Company’s other liabilities at the time of acquisition. The estimates presented in the financial statements may differ from the actual earn-out liability if the realised profit or loss of the acquired company differs from the estimated profit. Furthermore, the estimated earn-out items may differ from the subsequent actual sale prices as a result of the discounting of future liabilities. The earn-out liabilities are reviewed at each balance sheet date and adjusted if the estimate has changed, which affects the goodwill and the corresponding contingent consideration liability on the other hand. Impairment testing Goodwill is tested annually for impairment, and assessments of whether there are indications of any other asset impairment are made at each balance sheet date, and more often if needed. The recoverable amounts of cash flow generating units have been determined by means of calculations based on value in use. Preparation of these calculations requires the use of estimates to predict future developments. Future cash flow forecasts are made for a five-year period, after which the cash flow growth rate is assumed to be zero in all of the Group’s cash flow generating units except for the South African minerals business, where a seven per cent. growth rate assumption has been used to reflected South African circumstances and the nominal discount rate used in impairment testing.
107 The forecasts used in the testing are based on the budgets and projections of the operative units, which strive to identify any expansion investments and rearrangements. Carving out the expansion investments from replacement investments and the elimination of their impact from the projected figures require the use of discretion. To prepare the estimates, efforts have been made to collect background information from the operative business area management as well as from different sources describing general market activity. The risk associated with the estimates is taken into account in the discount rate used. The definition of components of discount rates applied in impairment testing requires discretion, such as estimating the asset or business related risk premiums and average capital structure for each business segment. When determining the carrying amount of assets to be tested, the liabilities that can be allocated to that cash flow generating units have been taken into account. Rehabilitation provision As part of the purchase price allocation for the acquisition of Mogale in 2009, the Group has recognised a provision for environmental rehabilitation obligations associated with Mogale’s plants and facilities. In determining the fair value of the provision, assumptions and estimates are made in relation to discount rates, the expected cost to rehabilitate the area and remove or cover the contaminated soil from the site, and the expected timing of those costs, as well as whether the obligations stem from Mogale’s past activity.
11. Financial Policies and Risk Management The Group’s normal operating, investing and financing activities expose it to a variety of financial risks. The Group’s overall risk management policy is designed to identify, manage and mitigate financial risks. The main financial risks are foreign exchange rate, interest rate, liquidity, credit and commodity price risks. The general risk management principles are accepted by Ruukki’s Board of Directors and monitored by its audit committee. The management of the business segments and of the subsidiaries are in turn responsible for the implementation of risk management. Until recently, the treasury and risk management functions have not been managed at the Group level and historically had generally been managed on a decentralised basis at subsidiary level. However, the Board of Directors decided to start to centralise the Group’s treasury and risk management functions during 2009 at the segment level in order to centrally manage risks and utilise economies of scale. These processes are now managed centrally by the Group. The Group’s normal operating, investing and financing activities expose it to a variety of financial risks. The Group’s overall risk management policy is designed to identify, manage and mitigate financial risk. 11.1 Foreign exchange risk Due to the diversification of its operations into e.g. Turkey, Malta and South Africa, the foreign exchange risks to which the Group is exposed have increased, both directly, via the outstanding commercial cash flows and currency positions, and indirectly, via the changes in competitiveness between various competitors in the relevant product markets. A significant portion of the Group’s acquisition-related liabilities are denominated in foreign currency. The translation risk, when converting foreign subsidiaries’ financial statements into Euro, has significantly affected the Group’s balance sheet via translation differences in 2009. As a guiding principle, the Board of Directors has decided not to hedge open foreign currency positions or other foreign currency risks, and hence the Group is exposed to currency-derived risks that affect its financial results, balance sheet and cash flows.
108 The following table sets out the key foreign currency receivables and payables at 31 December 2009: (audited IFRS) ZAR USD TRY SEK GBP ’000 ’000 ’000 ’000 ’000 Cash in currency 22,169 4,789 428 25 167 Receivable in currency 61,979 10,067 165 0 421 Derivatives in currency 0 (400) 0 0 0 Payables in currency (857,245) (2,065) (2,899) (2,480) (660) Net receivables in currency (773,097) 12,391 (2,306) (2,455) (72) Net receivables in EUR (’000) (at 31 December 2009 exchange rates) (72,482) 8,601 (1,070) (240) (81) The Group management’s view is that the currency distribution at the balance sheet date does not necessarily fully describe the real direct or indirect foreign exchange rate risk, since the year-end situation does not fully reflect the average situation during the ended or coming financial years. The Group’s overall foreign exchange rate risks increased during 2009 compared to 2008 and during 2008 compared to 2007, due to the diversification of its operations and management expects the risk will continue to be important also in the future. The most significant exchange rates for the Group are the US Dollar / Rand and Euro / Rand exchange rates. 11.2 Commodity price risk The Group is exposed to price risks on various output and input products, materials and commodities. The Group considers that it is not possible or economically feasible to hedge commodity price risks in the Group’s business sectors with derivative contracts, so the Group did not have any commodity derivative contracts in place as of 31 December 2009. However, the vertical integration of parts of the Group’s existing businesses mitigate, to a degree, the commodity price risks and the Group intends to increase the vertical integration of its business operations in future to reduce the commodity price risk. 11.3 Liquidity and financing risk The Group regularly assesses and monitors its investment and working capital needs and financing on an ongoing basis with the object to have enough liquidity to serve and finance its operations and pay back loans. The Group aims to guarantee the availability and flexibility of financing by using multiple financial instruments and financial institutions in the financing as well as agreeing on financial limit arrangements. Cash flow forecasts on both incoming and outgoing cash flows are taken into account when the Group companies make decisions on liquidity management and investments, as well as when they plan short-term and long-term financing needs. There were covenant breaches related to certain finance facilities in 2009 and early 2010 in the pallets business and sawmills business. The Group’s sawmill subsidiary, Junnikkala, was unable to make all of the required repayments of capital under its financing agreements in April 2010 and was in breach of its financing agreements. In order to correct the situation, Ruukki Yhiöt Oy subscribed for convertible bonds on 26 April 2010 with an aggregate value of €2.5 million. Part of the capital injected was used by Junnikkala to repay the certain overdue payments of capital under the facility agreements and as a result of the capital injection and repayment, the banks agreed to waive the breaches and extended the term of the loan by seven months. There were also covenant breaches related to one of the Company’s loans relating to the pallets business in 2009. The Group was required to repay an additional capital contribution to obtain a waiver for that breach in 2009.
109 The Group’s cash reserves declined during 2009, mainly due to acquisition of Mogale and share buy-backs. However, Ruukki’s management believes that there are no major short-term challenges to the Group’s liquidity. 11.4 Interest rate risk The Group is exposed to interest rate risk when the Group companies take loans or make other financing agreements or deposits and investments related to liquidity management and when Group companies are party to interest bearing vendor loans in connection with acquisitions and disposals. Moreover, changes in interest rates can indirectly affect the conditions in which the business units operate since, for example, the demand for ready-to-move-in houses is dependant upon the prevailing interest rate level and the customers’ abilities to get debt financing. In addition, the changes in interest rates can influence the profitability of investments or the changes can alter the fair values of Group assets via the IFRS impairment tests. To manage interest rate risks, the Group uses both fixed and floating rate debt instruments, and when needed derivative instruments, such as interest rate swaps. At the end of 2009, the Group’s interest-bearing debt was mainly based on floating interest rates; although the Group had a total of €0.9 million nominal value interest rate swaps in place where floating interest was effectively converted into fixed rates. The Group also aims to match the loan maturities with the businesses’ needs and to have the maturities spread over various periods, whereby the Group’s interest rate risks are somewhat diversified. Floating rate financing is mainly tied to 3-12 month Euribor interest rates, the changes of which will then influence the Group’s total financing cost and cash flows. Under the Group’s interpretation, Mogale’s related deferred contingent liability is currently non- interest bearing, but once the appropriate conditions are met it will become interest-bearing with a rate linked to the South African prime rate as published by the Reserve Bank of South Africa. The short-term interest-bearing receivables of the Group are mainly fixed-rate deposits made for predetermined periods of varying lengths. The Group’s revenue and operative cash flows are mainly independent of the changes in market interest rates. 11.5 Counterparty/credit risk Credit risk can be realised when the counterparties in commercial, financial or other agreements cannot meet their obligations and thus cause financial damage to the Group. The Group’s operational policies define the creditworthiness requirements for customers and for counterparties in financial and derivative transactions, as well as the principles followed when investing liquidity. Due to the general economic situation, credit risks in general have increased. Although the Group has not faced any major losses due to this reason to date, it is possible, depending on the market development, that the Group may face such losses in the future. The Board of Directors of Ruukki has determined a cash management policy for the Group’s parent company, according to which the excess cash reserves are deposited for a short-term only and with sound financial institutions with which the Group has had business relations. These reserves are diversified into a number of counterparties so that a single entity can have a maximum of 40 per cent. share of total deposits. The credit rating of all significant counterparties is analysed from time to time. The Group is exposed to the credit risk for collection of cash from Kermas for the payment of any loss share under the earn out arrangements relating to the European minerals business for the 2009-2013 financial years.
110 Counterparty credit risk as at 31 December 2009 for cash and short term deposits: (audited IFRS) Cash and short-term deposits Financial institution’s/counterparty’s rating Counterparty’s domicile € million % of total Aa2 (Moody’s, long-term), multiple banks Finland 39.8 68% A3 (Moody’s, long-term) Malta 8.9 15% Baa2 (Moody’s, long-term) Great Britain 4.3 7% A1 (Moody’s, long-term) Great Britain 1.7 3% Other/not rated Various 3.7 7% Total 58.4 100%
The Group’s aggregate credit losses in 2007, 2008 and 2009 were not significant.
12. Dividends When proposing any dividend or distribution, the Board takes into account Group results, financial conditions, capital requirements and growth-related financing requirements and other factors. In addition, attention is paid to the effect a particular distribution method would have on taxation payable by the Company and its Shareholders. There are no specific limitations on dividend payments beyond those applied by the Finnish Companies Act. Although distributions have been made in recent years, there is no guarantee that any further distribution will be made to the Shareholders for the next few years. The following table sets out the distribution per Ordinary Share paid in 2007, 2008 and 2009. Distribution per Ordinary Distribution per Ordinary Share (actual, unadjusted) Share (as adjusted)(1) (€ per Ordinary Share) (€ per Ordinary Share) (audited) (unaudited) 2007 (dividend) 0.03 0.0162 2008 (dividend) 0.04 0.0462 2009 (capital redemption distribution)(2) 0.04 0.0400 Notes: (1) As the number of shares in issue for each year has changed, the dividends are also shown as adjusted figures, as if the total amounts paid in 2007 and 2008 had been divided by the number of shares in issue when the distribution was paid in 2009. (2) No dividend was paid in 2009; the distribution was made by way of a capital redemption distribution. The distributions in 2007 and 2008 were by way of dividend.
111 PART VIII HISTORICAL FINANCIAL INFORMATION
Note: any statement included within this Part VIII (Historical Financial Information) shall be deemed to be modified or superseded for the purpose of this Prospectus to the extent that a statement contained elsewhere in this Prospectus modifies or supersedes such statement (whether expressly, by implication or otherwise). Any statement so modified or superseded shall not be deemed, except as so modified or superseded, to constitute part of this Prospectus.
Section A – Historical Financial Information on the Company Each of the audited consolidated financial statements for the years ended 31 December 2007 and 31 December 2008 contained in the annual reports and accounts for the years ended 31 December 2007 and 31 December 2008 (together with the auditors’ reports thereto) are incorporated by reference in this document as described in further detail in Part XIII of this document (“Relevant Documentation and Incorporation by Reference”). Each of the audited parent company unconsolidated financial statements for the years ended 31 December 2007, 31 December 2008 and 31 December 2009 contained in the annual reports and accounts for the years ended 31 December 2007, 31 December 2008 and 31 December 2009 (together with the auditors’ reports thereto) are incorporated by reference in this document as described in further detail in Part XIII of this document (“Relevant Documentation and Incorporation by Reference”). KPMG Oy Ab (Authorised Public Accountants) of PO Box 1037, 00101 Helsinki, Finland, and Mr Reino Tikkanen (Authorised Public Accountant) of c/o KPMG Oy Ab, PO Box 1037, 00101 Helsinki, Finland have issued unqualified audit opinions in respect of the consolidated IFRS financial statements of the Company and the parent company unconsolidated financial statements of the Company for each of the financial years ended 31 December 2007 and 31 December 2008. Ernst & Young Oy (Authorised Public Accountants) of Elienlinaukio 5, 00100 Helsinki, Finland, which are authorised as public accountants by the Finnish Central Chamber of Commerce. Ernst & Young Oy has issued an unqualified audit opinion in respect of the consolidated IFRS financial statements for the Company and the parent company unconsolidated financial statements of the Company for the twelve month period ended 31December 2009. The audited consolidated financial statements for the year ended 31 December 2009 and the auditor’s report thereto are set out in full in this Section A of this Part VIII. The unaudited consolidated financial statements for the three month period ended 31 March 2010 contained in the interim report for the three month period ended 31 March 2010 is incorporated by reference in this document as described in further detail in Part XIII of this document (“Relevant Documentation and Incorporation by Reference”).
112 Audited consolidated financial statements of the Company for the year ended 31 December 2009
1. Income Statement For the years ended 31 December 2008 2009 Continuing Discontinued Continuing Note operations operations Total operations €’000 €’000 €’000 €’000 Revenue G1 158,665 88,696 247,361 193,359 Other operating income G2 1,301 2,347 3,648 7,587 Changes in inventories of finished goods and work in progress (6,653) (2,397) (9,050) (17,495) Raw materials and consumables used (109,352) (62,242) (171,595) (115,255) Employee benefits expense G3 (19,724) (17,634) (37,358) (28,230) Depreciation and amortisation G4 (10,839) (3,328) (14,168) (26,960) Other operating expenses G5 (22,150) (5,542) (27,691) (20,611) Impairment, net G4 (38,187) (2,847) (41,034) (17,020) Items related to associates (core) G11 — — — 6 Operating profit/loss (46,939) (2,947) (49,886) (24,617) Finance income G6 16,784 (1) 16,783 5,871 Finance cost G6 (11,557) (1,402) (12,958) (9,306) Items related to associates (non-core) G11 171 — 171 (284) Profit/loss before taxes (41,541) (4,349) (45,891) (28,336) Income taxes G7 174 997 1,171 5,609 Gain on disposal from discontinued operations — 12,033 12,033 — Profit/loss for the period (41,367) 8,680 (32,687) (22,727)
Profit attributable to: Owners of the parent (40,066) 8,680 (31,386) (19,744) Non-controlling interests (1,301) 0 (1,301) (2,983) (41,367) 8,680 (32,687) (22,727)
Earnings per share (counted from profit attributable to owners of the parent): G8 basic (€) (0.14) 0.03 (0.11) (0.08) diluted (€) (0.14) 0.03 (0.11) (0.08)
2. Consolidated Statement of Comprehensive Income For the years ended 31 December 2008 2009 €’000 €’000 Profit/loss for the period (32,687) (22,727) Other comprehensive income Exchange differences on translation of foreign operations 1,026 9,534 Income tax relating to other comprehensive income (379) (3,518) Other comprehensive income, net of tax 646 6,016 Total comprehensive income for the year (32,041) (16,711) Profit attributable to: Owners of the parent (30,739) (14,038) Non-controlling interests (1,301) (2,673) (32,041) (16,711)
113 3. Statement of Financial Position For the years ended 31 December Note 2008 2009 €’000 €’000 Assets Non-current assets Property, plant and equipment G9 69,633 80,655 Goodwill G10 87,248 172,850 Other intangible assets G10 72,137 103,063 Investments in associates G11 1,770 507 Other financial assets G12 1,082 1,113 Receivables G12 19,469 26,130 Deferred tax assets G13 2,815 2,264 254,154 386,583 Current assets Inventories G14 40,419 55,951 Trade and other receivables G15 36,672 49,283 Held to maturity investments G12/G15 186,485 2,500 Other financial assets G12/G15 133 314 Cash and cash equivalents G16 45,413 55,852 309,121 163,900 Assets held for sale — 12,714 Total assets G18 563,275 563,198 Equity and Liabilities Equity attributable to equity holders of the parent G19 Share capital 23,642 23,642 Share premium reserve 25,740 25,740 Revaluation reserve 2,193 2,193 Paid-up unrestricted equity reserve 328,025 260,357 Translation reserve (434) 6,165 Retained earnings (30,224) (49,953) 348,943 268,144 Non-controlling interest 7,768 17,878 Total equity 356,710 286,022 Non-current liabilities Deferred tax liabilities G13 30,979 43,949 Interest-bearing debt G21 41,779 75,506 Other non-current debt G22 63,352 37,261 Provisions G23 4,815 12,602 140,925 169,318 Current liabilities Trade payables G22 31,742 32,295 Deferred income G22 13,215 13,480 Provisions G23 479 1,690 Tax liabilities G22 6,917 15,104 Interest-bearing debt G21 13,286 39,008 65,640 101,577 Liabilities classified as held for sale — 6,280 Total liabilities G18 206,565 277,175 Total equity and liabilities 563,275 563,198
114 4. Statement of Cash Flows For the years ended 31 December 2008 2009 €’000 €’000 Cash flows from operating activities Net profit/(loss) (32,687) (22,727) Adjustments to net profit/(loss): Non-cash items Depreciation and impairment 55,202 43,980 Finance income and expense (3,341) 4,330 Income from associates (571) (111) Income taxes (1,171) (5,609) Option expenses 358 991 Proceeds from non-current assets (13,063) (1,564) Working capital changes: Change in trade and other receivables 18,836 (11,164) Change in inventories 17,345 (3,832) Change in trade payables and other debt (31,182) 4,757 Change in provisions (1,708) 1,274 Payment to trust fund to provide for future remuneration in relation to acquisition — (6,479) Interest paid (6,549) (2,145) Interest received 1,340 1,623 Income taxes paid (3,763) (3,138) Net cash from operating activities (952) 185 Cash flows from investing activities Acquisitions of subsidiaries, net of cash acquired (89,157) (102,452) Payments for earn-out liabilities (403) (438) Acquisitions of associated companies (5) (63) Capital expenditure on non-current assets (38,704) (10,772) Other investments, net (1,175) (40) Disposal of subsidiaries, net of cash sold 11,101 5,602 Disposal of associated companies 10 718 Net cash used in investing activities (118,334) (107,443) Cash flows from financing activities Share buy-back (12,273) (57,714) Capital redemption — (10,055) Dividends paid (12,433) (479) Proceeds from borrowings 16,731 9,417 Repayment of borrowings (14,498) (14,237) Deposits (52,770) 184,230 Other investment 173,056 — Interest received on investments 14,741 1,233 Repayments of loan receivables and loans given, net 3,872 5,590 Repayment of finance leases (212) (279) Net cash used in financing activities 116,214 117,706 Change in cash and cash equivalents (3,071) 10,449 Cash at beginning of period 48,527 45,413 Exchange rate differences (42) (10) Cash at end of period 45,413 55,852 Change in the balance sheet (3,071) 10,449
115 In relation to the operations discontinued in 2008, within the 2009 cash flows there are a €0.8 million cash inflow in relation to deferred sales price and a €0.2 million cash outflow due to adjustments to the original sales price; both of these items in relation to the care services business that was divested in 2008.
5. Statement of Changes in Equity A Share capital F Retained earnings B Share premium reserve G Equity attributable to shareholders, total C Fair value and revaluation reserves H Non-controlling interests D Paid-up unrestricted equity reserve I Total equity E Translation reserve
Attributable to owners of the parent ABCDEFGH I €’000 €’000 €’000 €’000 €’000 €’000 €’000 €’000 €’000 Equity at 1 January 2008 23,642 25,740 969 340,690 (1,080) 19,694 409,655 1,995 411,650
Profit for the period 1-12/2008 (31,386) (31,386) (1,301) (32,687) Other comprehensive income 646 646 646 Total comprehensive income 646 (31,386) (30,739) (1,301) (32,041) Dividend distribution (12,033) (12,033) (986) (13,019) Share-based payments 878 878 878 Acquisition of own shares (12,665) (12,665) (12,665) Acquisitions and disposals of subsidiaries 1,224 (7,378) (6,154) 8,060 1,906 Equity at 31 December 2008 23,642 25,740 2,193 328,025 (434) (30,224) 348,943 7,768 356,710 Profit for the period 1-12/2009 (19,744) (19,744) (2,984) (22,728) Other comprehensive income 6,599 (893) 5,706 311 6,016 Total comprehensive income 6,599 (20,637) (14,038) (2,673) (16,711) Dividend distribution — (479) (479) Share-based payments 908 908 908 Acquisition of own shares (57,614) (57,614) (57,614) Capital redemption (10,055) (10,055) (10,055) Acquisitions and disposals of subsidiaries — 13,263 13,263 Equity at 31 December 2009 23,642 25,740 2,193 260,357 6,165 (49,953) 268,144 17,878 286,022
6. Notes to the Consolidated Financial Statements 6.1 Company information Ruukki Group specialises in the industrial refining of certain natural resources. The Group currently has two business segments: minerals and wood processing. The Minerals business has ferro alloys smelting operations in South Africa; mining and beneficiation operations in Turkey; and specialty grade ferrochrome refining operations in Germany. The Wood Processing business has a strong presence in the northern and western part of Finland in the house building, sawmill and pallet businesses. The Group’s parent company is Ruukki Group Plc (business ID: 0618181-8). The parent company is domiciled in Espoo, and its registered address is Keilasatama 5, FI-02150 Espoo. Copies of the consolidated financial statements are available at Ruukki Group Plc’s head office at Keilasatama 5, FIN-02150 Espoo. Ruukki Group Plc is quoted (trading code: RUG1V) on the NASDAQ OMX Helsinki Oy in the industrials group, in the mid-cap category. 6.2 Accounting principles Basis of preparation These consolidated financial statements of Ruukki Group have been prepared in accordance with the International Financial Reporting Standards (IFRS) and in conformity with the IAS and IFRS standards as well as the SIC and IFRIC interpretations in force on 31 December 2009. In the Finnish Accounting Act and the regulations issued on the basis thereof, International Financial Reporting Standards refer to the standards and their interpretations that have been approved for
116 application within the EU in accordance with the procedure prescribed in the EU regulation (EC) 1606/2002. Notes to the consolidated financial statements also meet the requirements set forth in the Finnish accounting and company legislation. The consolidated financial statements have been prepared on the basis of original acquisition cost, unless otherwise explicitly stated. All the figures in the consolidated financial statements are given in € thousands. Ruukki Group Plc’s Board of Directors has on 25 February 2010 resolved that these financial statements are to be published, and on 30 March 2009 the Board has confirmed subsequent changes and amendments. According to the Finnish Companies Act, shareholders have the right to approve or disapprove of the financial statements or to change them after financial statements have been published when they attend the Annual General Meeting. Principles of consolidation Subsidiaries The consolidated financial statements include the parent company Ruukki Group Plc and its subsidiaries. Subsidiaries refer to companies in which the Group has control. The Group gains control of a company when it holds more than half of the voting rights or otherwise exercises control. The existence of potential voting rights has been taken into account in assessing the requirements for control in cases where the instruments entitling their holder to potential voting rights can be exercised at the time of assessment. Control refers to the right to govern the financial and operating policies of an enterprise so as to obtain benefits from its activities. Acquired subsidiaries are consolidated from the time when the Group gained control, and divested subsidiaries until the time when control ceased. All intra-group transactions, receivables, debts, and unrealised profits, as well as internal distribution of profits are eliminated when the consolidated financial statements are prepared. The distribution of profits between parent company owners and minorities is shown in the income statement, and the minority share of equities is shown as a separate item in the balance sheet under shareholders’ equity. The minority share of accumulated losses is recorded in the financial statements up to the amount of the investment. Associates Associates are companies in which Ruukki Group exercises significant influence. The Group exercises significant influence if it holds more than 20 per cent. of the target company’s voting rights, or if the company in other ways exercises significant influence but not control. Associates have been consolidated in the Group’s financial statements using the equity method. If the Group’s share of the associate’s losses exceeds the carrying amount of the investment, the investment is recognised at zero value in the balance sheet, and losses exceeding the carrying amount are not consolidated unless the Group has made a commitment to fulfil the associates’ obligations. Unrealised profits between the Group and the associates have been eliminated in line with the Group’s ownership. Investment in an associate includes the goodwill arising from its acquisition. Translation of foreign currency items Figures indicating the profit/loss and financial position of Group entities are measured in the currency of each entity’s main operating environment (‘functional currency’). Figures in the consolidated financial statements are presented in €, which is the functional and presentation currency of the Group’s parent company, Ruukki Group Plc. Transactions in foreign currencies have been recorded at the functional currency using the exchange rate on the date of the transaction or mid reference rates of central banks. Monetary items denominated in foreign currencies have been translated into the functional currency using the exchange rates for the balance sheet date. Exchange rate gains and losses are included in the revenue, operational costs or financial items, corresponding to their respective origin. Hedge accounting was not applied.
117 In the Group accounts foreign subsidiaries’ income statement and cash flow statement are converted into € by using average exchange rates for the period, and balance sheet is converted by using the period-end exchange rate. The translation differences caused by this are recognised in other comprehensive income. If and when the foreign subsidiary would be partially or fully divested, these accrued translation differences will be taken into account in adjusting the sales gain or sales loss. When acquiring foreign subsidiaries, the Group has applied IFRS3, and hence the purchase price allocation process has led to goodwill, other assets and liabilities to be recognised on the Group accounts, and these entries have been entered in using the functional currency of each acquired subsidiary. The balances in that functional currency have then been translated into € using the exchange rates prevailing at the end of the reporting period. Operating profit IAS 1 Presentation of financial statements does not define the concept of operating profit. Ruukki Group has defined it as follows: Operating profit is the net amount derived by adding to revenue other operating income, less purchase costs adjusted with the change in inventories of finished goods and work in progress and expenses from work performed by the enterprise and capitalised, less costs from employee benefits, depreciation and impairment losses, and other expenses. All other income statement items are excluded from operating profit. Translation differences arising from operational transactions with third parties are included in operating profit; otherwise they are recorded under financial items. Income recognition principles Goods sold and services provided Income from the sale of goods is recognised once the substantial risks and benefits associated with ownership have been transferred to the buyer. Income from services is recognised after the service has been provided. Construction contracts Ruukki Group’s house building business area has had some projects that fell under the definition applied in the IAS 11 standard Construction Contracts. Revenue and expense from construction contracts is recognised by reference to the stage of completion of a contract. The stage of completion of the contract activity is defined by the share of actual costs incurred of total estimated costs of the contract activity. The profit margin of the contract activity is recognised based on the estimated total profit margin. The sales of single houses, which currently comprise the majority of deliveries, from standard product mix to consumers are recognised as the contract is completed. Financial income and expense Interest income and expense is recognised using the effective yield method, and dividends are recognised when the right to dividends is established. Unrealised changes in value of items measured at fair value are recognised in the income statement. These items relate to currency forward contracts and interest rate swaps. Exchange rate gains or losses that arise from intercompany loans that are considered as part of the net investment in the foreign entity are included, net of any deferred tax effects, in the translation reserve within equity. Employee benefits Pension liabilities All pension arrangements in Ruukki Group are classified as defined contribution plans with the exception of a defined benefit plan which is effective in Germany. Payments for defined contribution plans are recorded in the income statement for the relevant period. The present value of obligation for the defined benefit plan effective in Germany has been estimated applying the Projected Unit Credit Method and recognised as a non-current liability on the balance sheet.
118 Share-based payments Option rights are measured at fair value at the time they were granted and recorded as expenses in the income statement on a straight-line basis during the vesting period. The expenses at the time the options were granted are determined according to the Group’s estimate of the number of options expected to vest at the end of the vesting period. Fair value is determined on the basis of the Black & Scholes option pricing model. The effects of nonmarket- based terms and conditions are not included in the fair value of the option; instead, they are taken into account in the estimated number of options expected to vest at the end of the vesting period. The Group updates the estimated final number of options on each balance sheet date. Changes in the estimates are recorded in the income statement. When the option rights are exercised, the cash payments received from the subscriptions adjusted with potential transaction costs are recorded under share capital and paid-up unrestricted equity reserve. Other benefits In conjunction with the Mogale Alloys acquisition, Ruukki Group has agreed to pay altogether ZAR 150 million into a management trust, which is not consolidated into the Group. In relation to this trust payment, Ruukki Group treats the ZAR 150 million payments in its Group accounts as an expense, evenly split over a five-year term; however, no pension or other social expenses or taxes are recognised. Impairment On each balance sheet date, the Group makes an assessment of whether there are any indications of asset impairment. If such indications exist, the recoverable amount of the asset is estimated. In addition, goodwill is assessed annually for its recoverable amount regardless of whether there are any signs of impairment. Impairment is examined at the cash-generating unit level; in other words, the lowest level of entity that is primarily independent of other entities and whose cash flows can be separated from other cash flows. Impairment related to associates and other assets are tested on a company/asset basis. The recoverable amount is the fair value of an asset less divestment costs, or the higher value in use. Value in use means the present value of estimated future cash flows expected to arise from the asset or cash-generating unit. Value in use is forecast on the basis of circumstances and expectations at the time of testing. The discount rate takes into account the time value of money as well as the special risks involved for each asset, different industry-specific capital structures in different lines of business, and the investors’ return expectations for similar investments, in addition to the specific risks related to of these particular businesses. An impairment loss is recorded when the carrying amount of an asset is greater than its recoverable amount. Impairment losses are recorded in the income statement. If the impairment loss involves a cash-flow generating entity, it is allocated first to reduce the goodwill of the entity and subsequently to reduce other assets of the entity. An impairment loss is reversed if a change has occurred in circumstances and the recoverable amount of the asset has changed since the impairment loss was recognised. However, the reversal must not cause the adjusted value to be higher than the carrying amount without the recognition of the impairment loss. An impairment loss recognised for goodwill is not reversed in any circumstances. Goodwill is tested for impairment annually at the year’s end; for the 2009 financial year, testing took place on 31 December 2009. Impairment testing and the methods used are discussed in more detail elsewhere in ‘Notes to the consolidated financial statements’. Provisions Provisions are recognised when the Group has a present obligation (legal or constructive) as a result of a past event, it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation and a reliable estimate can be made of the amount of the obligation. Where the Group expects some or all of a provision to be reimbursed, for example under an insurance contract, the reimbursement is recognised as a separate asset but only when the reimbursement is virtually certain. The expense relating to any provision is presented in the income statement net of any reimbursement. If the effect of the time value of money is material,
119 provisions are discounted using a current pre-tax rate that reflects, where appropriate, the risks specific to the liability. Where discounting is used, the increase in the provision due to the passage of time is recognised as a finance cost. Rehabilitation and decommissioning liability The provision for rehabilitation and decommissioning costs has arisen on operating manufacturing site and facility for the processing of minerals. These costs are provided at the present value of expected costs to settle the obligation using estimated cash flows. The cash flows are discounted at a current pre-tax rate that reflects the risks specific to the rehabilitation and decommissioning liability. The unwinding of the discount is expensed as incurred and recognised in the income statement as a finance cost. The estimated future costs of decommissioning are reviewed annually and adjusted as appropriate. Changes in the estimated future costs of or in the discount rate applied to the rehabilitation obligation are added or deducted from the profit or loss, or respectively, decommissioning obligation adjusted to the carrying value of the asset dismantled. The unwinding of the discount is added to the finance cost of the period. Product warranties in house-building The prefabricated houses manufactured by Ruukki Group’s house building segment involve a one-year repair liability and an additional ten-year structural safety guarantee. On the basis of the historical data of the company operating in the house building business area, the one-year repair liability has been recorded as expenses in the income statement and as provisions in the balance sheet. No expenses have been recorded in the income statement for the ten-year structural safety guarantee due to its immaterial nature. Other The Group has recognised a long-term provision on employee severance indemnities for the Group’s employees working in Turkey in accordance with Turkish legislation. Income taxes Tax expenses in the income statement consist of the tax based on taxable income for the year and deferred taxes. Taxes based on taxable income for the year are calculated using the applicable tax rates. Taxes are adjusted with any taxes arising from previous years. Deferred taxes have been calculated for all temporary differences between the carrying amount and taxable amount. No deferred taxes have been recorded for goodwill impairment. Deferred taxes have been calculated using the tax rates prescribed by the balance sheet date. Deferred tax assets arising from taxable losses carried forward have been recognised up to the amount for which there is likely to be taxable income in the future, and against which the temporary difference can be used. Tangible assets Tangible assets have been measured at original acquisition cost less accumulated depreciation and impairment losses. If a tangible asset item consists of several parts with different useful lives, a components approach is applied. In this case, expenses from material component replacements are capitalised. Heavy production machinery contains components with different useful lives, and thus a component approach is applied. Material component replacements and overhauls are capitalised. Lighter machinery’s and other intangible items’ repair and maintenance are recognised as expense when occurred. Interest expenses are activated as part of the tangible asset’s value if and when the Group acquires or constructs assets that satisfy the required terms and conditions. At the end of the financial period there were some tangible assets fitting into that definition, but the total activated interest expense was insignificant. Minerals tailings acquired in business combinations and recognised as separate assets are measured based on estimated volume and the market price of the mineral content at the time of the acquisition.
120 Assets are depreciated over their useful lives using the straight-line method, except for the tailings which are depreciated based on reported consumption. Land areas are not depreciated. The estimated useful lives of assets are as follows: Buildings 15 – 25 years Machinery and equipment 3 – 15 years Other tangible assets 5 – 10 years Tailings consumption The residual value of assets and their useful life are reviewed in connection with each financial statement and, if necessary, they will be adjusted to reflect the changes that have occurred in the expected financial benefit. The sales gains or losses arising from the decommissioning or divestment of tangible assets are included in other operating income or expenses. Public subsidies for the acquisition of tangible assets have been recorded as a deduction of the acquisition cost. The subsidies are recognised as income indirectly in the form of smaller depreciation amounts over the useful life of the asset. Intangible assets Goodwill and intangible assets identified at acquisitions Goodwill represents the portion of acquisition cost that exceeds the Group’s share of the fair value at the time of acquisition of the net assets of a company acquired after 1 January 2004. Goodwill arising from previous business combinations represents the carrying amount under the previous accounting standards, which has been used as the deemed cost. The classification or accounting process for these acquisitions has not been adjusted in preparation of the Group’s opening IFRS balance sheet on 1 January 2004. Instead of regular amortisation, goodwill is tested annually for potential impairment. For this purpose, goodwill has been allocated to cash-generating units or, in the case of an associated company, is included in the acquisition cost of the associate in question. Goodwill is measured at original acquisition cost less impairment losses. Goodwill, arising from acquisitions after 1/2004, is initially measured at cost being the excess of the cost of the acquisition over the Group’s share of the net fair value of the identifiable assets, liabilities and contingent liabilities of the acquired company at the date of acquisition. Intangible assets typically recognised include customer relationships, trademarks and brands and technology. The cost of acquisition is measured as the fair value of the assets given, equity instruments issued and liabilities incurred or assumed at the date of the acquisition. Contingent purchase consideration is inclined in the cost based on an estimate at the date of an acquisition, and adjusted subsequently to reflect the current estimate or the final outcome. Increase in ownership interest after obtaining control Ruukki Group is applying the ‘Parent entity extension method’, where the entire difference between the cost of the additional interest in the subsidiary and the minority interest’s share of the assets and liabilities reflected in the consolidated balance sheet at the date of the acquisition of the minority interest is reflected as goodwill. Decrease in ownership interest without loss of control Consistently with increases in ownership interest, Ruukki Group is also applying the ‘Parent entity extension method’ in the decrease in ownership interest, where an adjustment to goodwill and gain or loss is recognised from the difference between the proceeds received of the disposed interest in the subsidiary and the minority interest’s share of the assets and liabilities reflected in the consolidated balance sheet at the date of the disposal. Research and development costs Research costs are always recognised as expenses in the income statement. The development costs, which primarily relate to the development of existing products, are expensed as incurred. The development of new products is recognised as an intangible asset when the Group can demonstrate the technical and commercial feasibility of the product, and the intention to complete the development project successfully. 121 Emission rights One of the Group’s sawmills has received emission rights without compensation. The Group has no operational use for the emission rights and the intention is to sell them. The emission rights have been classified as intangible assets measured at fair value; the reception of the rights, their subsequent fair value adjustments and the sale gain or loss are recognised as other operating income of the income statement. Exploration and evaluation expenses in relation to mineral resources In Group’s mining operations exploration and evaluation expenses incurred, based on e.g. drilling activities, are activated on the balance sheet under the IFRS6 principles. If and when the exploitation phase starts, the Group will to relevant extent reclassify those assets and amortise them under the economic life according to the volume of that exploitation activity. Moreover, these exploration and evaluation assets are assessed for impairment if and when facts and circumstances suggest that the carrying amount exceeds its recoverable amount. Other intangible assets Other intangible assets are initially recognised on the balance sheet at cost when the costs can be reliably determined and it is probable that the expected financial benefits of that assets will be reaped by the Group. Other intangible assets mainly relate to IT software utilised as support to Group’s business operations. Amortisation periods are as follows: Computer software 3 – 5 years Other intangible rights 3 – 5 years (e.g. customer relationships) Trademarks 5 or 10 years Inventories Inventories are measured at acquisition cost or a lower probable net realisable value. Acquisition costs are determined using the average cost method. The cost of finished goods and work in progress comprises raw materials, direct labour expenses, other direct expenses, and an appropriate share of fixed and variable production overheads based on the normal capacity of the production facilities. In ordinary operations, the net realisable value is the estimated selling price that is obtainable, less the estimated costs incurred in completing the product and the selling expenses. At the end of 2009, Group’s house building business area acquired some land areas with a target to develop the land in the future into house sites, on which single family houses delivered by the Group could be erected as well as the houses and the attached land could be sold to customers. This acquired land asset is classified into inventory, and the balance sheet value is based on the purchase price agreed at the time of the transaction. The project contains a profit-sharing agreement with a third party determining principles in sharing any added value to be achieved from the expected zoning and area development activities. As the fair value of the project appreciates, the inventory value and the discounted profit-share liability will be adjusted accordingly. The appreciation is based on the expected impact of the zoning and other development activities, when they become probable. Financial assets and liabilities Financial instruments – initial recognition and subsequent measurement
Financial assets Initial recognition and measurement Financial assets within the scope of IAS 39 are classified as financial assets at fair value through profit or loss, loans and receivables, held-to-maturity investments, available-for-sale financial assets, or as derivatives designated as hedging instruments in an effective hedge, as appropriate.
122 The Group determines the classification of its financial assets at initial recognition. All financial assets are recognised initially at fair value plus, in the case of investments not at fair value through profit or loss, directly attributable transaction costs. Purchases or sales of financial assets that require delivery of assets within a time frame established by regulation or convention in the marketplace (regular way trades) are recognised on the trade date, i.e. the date that the Group commits to purchase or sell the asset. The Group’s financial assets include cash and short-term deposits, trade and other receivables, loan and other receivables, quoted and unquoted financial instruments, and derivative financial instruments. Subsequent measurement The subsequent measurement of financial assets depends on their classification as follows: Financial assets at fair value through profit or loss Financial assets at fair value through profit or loss include financial assets held for trading and financial assets designated upon initial recognition at fair value through profit or loss. Financial assets are classified as held for trading if they are acquired for the purpose of selling or repurchasing in the near term. This category includes derivative financial instruments entered into by the Group that are not designated as hedging instruments in hedge relationships as defined by IAS 39. Derivatives, including separated embedded derivatives are also classified as held for trading unless they are designated as effective hedging instruments. Financial assets at fair value through profit and loss are carried in the statement of financial position at fair value with changes in fair value recognised in finance income or finance cost in the income statement. Derivatives embedded in host contracts are accounted for as separate derivatives and recorded at fair value if their economic characteristics and risks are not closely related to those of the host contracts, and the host contracts are not held for trading or designated at fair value though profit or loss. These embedded derivatives are measured at fair value with changes in fair value recognised in the income statement. Reassessment only occurs if there is a change in the terms of the contract that significantly modifies the cash flows that would otherwise be required. Loans and receivables Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. After initial measurement, such financial assets are subsequently measured at amortised cost using the effective interest rate method (EIR), less impairment. Amortised cost is calculated by taking into account any discount or premium on acquisition and fee or costs that are an integral part of the EIR. The EIR amortisation is included in finance income in the income statement. The losses arising from impairment are recognised in the income statement in finance costs. Held-to-maturity investments Non-derivative financial assets with fixed or determinable payments and fixed maturities are classified as held-to-maturity when the Group has the positive intention and ability to hold it to maturity. After initial measurement, held-to-maturity investments are measured at amortised cost using the effective interest method, less impairment. Amortised cost is calculated by taking into account any discount or premium on acquisition and fee or costs that are an integral part of the EIR. The EIR amortisation is included in finance income in the income statement. The losses arising from impairment are recognised in the income statement in finance costs. The Group has had funds that are placed into euro-denominated deposits whose maturities range from 0 to 1 month. These deposits are classified as short-term assets held to maturity during the periods ending on 31 December 2009 and 2008.
123 Available-for-sale financial investments Available-for-sale financial investments include equity and debt securities. Equity investments classified as available for sale are those which are neither classified as held for trading nor designated at fair value through profit or loss. Debt securities in this category are those which are intended to be held for an indefinite period of time and which may be sold in response to needs for liquidity or in response to changes in the market conditions. After initial measurement, available-for-sale financial investments are subsequently measured at fair value with unrealised gains or losses recognised as other comprehensive income in the available-for-sale reserve until the investment is derecognised, at which time the cumulative gain or loss is recognised in other operating income; or determined to be impaired, at which time the cumulative loss is recognised in the income statement in finance costs and removed from the available-for-sale reserve.
Derecognition A financial asset (or, where applicable a part of a financial asset or part of a group of similar financial assets) is derecognised when: • the rights to receive cash flows from the asset have expired • the Group has transferred its rights to receive cash flows from the asset or has assumed an obligation to pay the received cash flows in full without material delay to a third party under a ‘pass-through’ arrangement; and either (a) the Group has transferred substantially all the risks and rewards of the asset; or (b) the Group has neither transferred nor retained substantially all the risks and rewards of the asset, but has transferred control of the asset. When the Group has transferred its rights to receive cash flows from an asset or has entered into a pass-through arrangement, and has neither transferred nor retained substantially all the risks and rewards of the asset nor transferred control of the asset, the asset is recognised to the extent of the Group’s continuing involvement in the asset. In this case, the Group also recognises an associated liability. The transferred asset and the associated liability are measured on a basis that reflects the rights and obligations that the Group has retained. Continuing involvement that takes the form of a guarantee over the transferred asset is measured at the lower of the original carrying amount of the asset and the maximum amount of consideration that the Group could be required to repay. Financial liabilities Presentation principles Liabilities are classified as current and non-current, and they include both interest bearing and interest-free liabilities. Interest bearing liabilities include liabilities that either include a contractual interest component, or are discounted to reflect the fair value of the liability. Discounted non-current liabilities include acquisition related deferred conditional and un-conditional liabilities. Conditional liabilities have an earn-out component that need to be met to make the liability unconditional and fix the amount of the future payment. Certain acquisition related conditional purchase considerations are payable in the Company’s shares, and are presented as interest-free liabilities. Initial recognition and measurement Financial liabilities within the scope of IAS 39 are classified as financial liabilities at fair value through profit or loss, loans and borrowings, or as derivatives designated as hedging instruments in an effective hedge, as appropriate. The Group determines the classification of its financial liabilities at initial recognition. All financial liabilities are recognised initially at fair value and in the case of loans and borrowings, plus directly attributable transaction costs. The Group’s financial liabilities include trade and other payables, bank overdrafts, loans and borrowings, financial guarantee contracts and derivative financial instruments.
124 Subsequent measurement The measurement of financial liabilities depends on their classification as follows: Financial liabilities at fair value through profit or loss Financial liabilities at fair value through profit or loss includes financial liabilities held for trading and financial liabilities designated upon initial recognition as at fair value through profit or loss. Financial liabilities are classified as held for trading if they are acquired for the purpose of selling in the near term. This category includes derivative financial instruments entered into by the Group that are not designated as hedging instruments in hedge relationships as defined by IAS 39. Separated embedded derivatives are also classified as held for trading unless they are designated as effective hedging instruments. Gains or losses on liabilities held for trading are recognised in the income statement. The Group has not designated any financial liabilities upon initial recognition as at fair value through profit or loss. Loans and borrowings After initial recognition, interest bearing loans and borrowings are subsequently measured at amortised cost using the effective interest rate method. Gains and losses are recognised in the income statement when the liabilities are derecognised as well as through the effective interest rate method (EIR) amortisation process. Amortised cost is calculated by taking into account any discount or premium on acquisition and fee or costs that are an integral part of the EIR. The EIR amortisation is included in finance cost in the income statement. Financial guarantee contracts Financial guarantee contracts issued by the Group are those contracts that require a payment to be made to reimburse the holder for a loss it incurs because the specified debtor fails to make a payment when due in accordance with the terms of a debt instrument. Financial guarantee contracts are recognised initially as a liability at fair value, adjusted for transaction costs that are directly attributable to the issuance of the guarantee. Subsequently, the liability is measured at the higher of the best estimate of the expenditure required to settle the present obligation at the reporting date and the amount recognised less cumulative amortisation. Derecognition A financial liability is derecognised when the obligation under the liability is discharged or cancelled or expires. When an existing financial liability is replaced by another from the same lender on substantially different terms, or the terms of an existing liability are substantially modified, such an exchange or modification is treated as a derecognition of the original liability and the recognition of a new liability, and the difference in the respective carrying amounts is recognised in the income statement. Fair value of financial instruments The fair value of financial instruments that are traded in active markets at each reporting date is determined by reference to quoted market prices or dealer price quotations (bid price for long positions and ask price for short positions), without any deduction for transaction costs. For financial instruments not traded in an active market, the fair value is determined using appropriate valuation techniques. Such techniques may include: using recent arm’s length market transactions; reference to the current fair value of another instrument that is substantially the same; discounted cash flow analysis; or other valuation models.
125 Derivative financial instruments and hedge accounting Initial recognition and subsequent measurement The Group has to some extent used derivative financial instruments, such as forward currency contracts and interest rate swaps, to hedge its foreign currency risks and interest rate risks. At the end of December 2009, the Group had no material outstanding currency or interest rate derivative contracts in place. Such derivative financial instruments are initially recognised at fair value on the date on which a derivative contract is entered into and are subsequently remeasured at fair value. Derivatives are carried as financial assets when the fair value is positive and as financial liabilities when the fair value is negative. Any gains or losses arising from changes in fair value on derivatives are taken directly to the income statement, except for the effective portion of cash flow hedges, which is recognised in other comprehensive income. Derivative contracts and hedge accounting Derivative contracts are measured at fair value in the income statement. The Group does not apply hedge accounting. Borrowing costs Borrowing costs that are directly attributable to the acquisition, construction or production of a qualifying asset form part of the cost of that asset are capitalised if it is likely that they will provide future economic benefit and can be measured in a reliable manner. Other borrowing costs are recognised as an expense in the period in which they are incurred. Arrangement fees linked to loan commitments are entered as transaction costs. Non-current liabilities are valued at amortised cost using the effective interest method. Treasury shares Own equity instruments which are reacquired (treasury shares) are recognised at cost and deducted from the paid-up unrestricted equity reserve. No gain or loss is recognised in the income statement on the purchase, sale, issue or cancellation of the Group’s own equity instruments. Any difference between the carrying amount and the consideration is recognised in other capital reserves. Lease agreements (the Group as the lessee) Leases of tangible assets where the Group possesses a material portion of the risks and benefits of ownership are classified as financial leases. An asset acquired through a financial lease agreement is recorded in the balance sheet at the fair value of the leased object at the beginning of the lease period, or at a lower current value of minimum lease. An asset obtained through a finance lease is depreciated over the useful life of the asset or the lease term, whichever is shorter. The leases payable are divided into financial expenses and loan repayment during the lease term so that the interest rate for the remaining loan is roughly the same each financial year. Leasing obligations are included in interest-bearing liabilities. Lease agreements in which the risks and benefits typical of ownership remain with the lessor are classified as other leases. Leases paid under other lease agreements are recognised as expenses in the income statement on a straight-line basis over the lease term. Non-current assets held for sale and discontinued operations The standard IFRS 5 requires that an entity must classify a non-current asset or a disposal group as assets held for sale if the amount equivalent to its carrying amount is accumulated primarily from the sale of the item rather than from its continued use. In this case, the asset or disposal group must be available for immediate sale in its present condition under general and standard terms for the sale for such assets and the sale must be highly probable. At the end of the financial year 2009, the Group agreed to dispose of Lappipaneli Oy’s sawmilling business. The tangible assets related to that transaction, which will be transferred to the buyers in 2010 have been presented on the Group balance sheet as assets held for sale. Also the liabilities related to those fixed assets are shown in a separate balance sheet line as liabilities held for sale.
126 Accounting policies requiring management discretion and key uncertainty factors for estimates Preparation of the financial statements requires the management to make estimates, assumptions, and forecasts regarding the future. Future developments may deviate significantly from the assumptions made if changes occur in the business environment and/or business operations. In addition, the management is required to use its discretion in the application of the financial statements’ preparation principles. Ruukki Group is engaged in several different lines of business, and each business requires different kinds of estimates and assumptions. Group Companies vary by their size and they are located both in different parts of Finland and abroad. The nature of Ruukki Group’s operations essentially involves business acquisitions and other arrangements, which often requires the management’s discretion in the application of accounting policies. Allocation of the cost of a business combination In accordance with IFRS 3, the acquisition cost of an acquired company is allocated to the assets of the acquired company. The management has to use estimates when determining the fair value of identifiable assets and liabilities. Determining a value for intangible assets such as trademarks or customer relationships requires estimation and discretion because in most cases, no market value can be assigned to these assets. Determining fair value for tangible assets requires particular discretion as well. This is especially the case where the companies are small or geographically situated in areas where there are no active markets for real property, for instance. In these cases, the management has to select an appropriate method for determining the value and must estimate future cash flows. Similarly, determining the discount rate to be used for discounting future cash flows requires discretion. Determination of the amount of the earn-out and contingent liabilities associated with business acquisitions The Group has made a significant number of business acquisitions in the past few years. These acquisitions have typically involved contingent considerations, in particular in relation to the acquisition of RCS Ltd and Türk Maadin Sirketi A.S. as well as Mogale Alloys (Pty) Ltd, either subject to a specified future event to occur, or calculated and paid on the basis of the future operative profitability of the acquired company (earn-out arrangements). The discounted estimated contingent considerations have been included in the Company’s other liabilities at the time of acquisition. The estimates presented in the financial statements may differ from the actual earn-out liability if the realise profit or loss of the acquired company differs from the estimated profit. Furthermore, the estimated earn-out items may differ from the subsequent actual sale prices as a result of the discounting of future liabilities. The earn-out liabilities are reviewed at each balance sheet date and adjusted if the estimate has changed, which affects the goodwill and the corresponding contingent consideration liability on the other hand. Impairment testing Goodwill is tested annually for impairment, and assessments of whether there are indications of any other asset impairment are made at each balance sheet date, and more often if needed. The recoverable amounts of cashflow-generating units have been determined by means of calculations based on value in use. Preparation of these calculations requires the use of estimates to predict future developments. Future cash flow forecasts are made for a five-year period, after which the cash flow growth rate is assumed to be zero in all of Group’s cash flow generating units except for the South African minerals business, where a seven percent growth rate assumption has been used to reflected South African circumstances and the nominal discount rate used in impairment testing. The forecasts used in the testing are based on the budgets and projections of the operative units, which strive to identify any expansion investments and rearrangements. Carving out the expansion investments from replacement investments and the elimination of their impact from the projected figures require the use of discretion. To prepare the estimates, efforts have been made to collect background information from the operative business area management as well as from different sources describing general market activity. The risk associated with the estimates is taken into account in the discount rate used. The definition of components of discount rates
127 applied in impairment testing requires discretion, such as estimating the asset or business related risk premiums and average capital structure for each business segment. When determining the carrying amount of assets to be tested, the liabilities that can be allocated to that cash flow generating units have been taken into account. Trade receivable The individual companies in Ruukki Group make assessments of the recoverability of their trade receivables based on known facts, previous experience, and foreseeable future events; therefore, the information includes estimates made by the management of the companies in question. Tangible and intangible assets Ruukki Group management is required to use its discretion when determining the useful lives of various tangible and intangible assets, which affects the amount of depreciation and thereby the balance sheet value of the assets concerned. In particular, when the Group acquires new subsidiaries, assessments have to be made to make the acquired companies’ depreciation policy consistent with policy of the Group wherever applicable. Similarly, the management is required to use its discretion in determining the useful lives of intangible assets identified in accordance with IFRS 3, and in determining the amortisation period. This affects the financial result for the period through depreciation and change in deferred taxes. Inventories Those Ruukki Group companies that have inventories make, in case needed, an estimate-based non-marketability provision for inventories; as a result, the balance sheet value of inventories has been changed somewhat. The estimates are based on stocktaking as well as the predicted future need and inventory turnover rate. Provisions Guarantee expenses The deliveries of prefabricated houses manufactured by Ruukki Group’s house building business area involve repair liabilities. To estimate these liabilities, the management has to prepare estimates based on the historical data of the company operating in the division, as well as on experience of similar realised repair costs. Rehabilitation provision As part of the purchase price allocation for the acquisition of Mogale Alloys in 2009, the Group has recognised a provision for environmental rehabilitation obligations associated with Mogale’s plants and facilities. In determining the fair value of the provision, assumptions and estimates are made in relation to discount rates, the expected cost to rehabilitate the area and remove or cover the contaminated soil from the site, and the expected timing of those costs, as well as whether the obligations stem from Mogale’s past activity. Taxes Uncertainties exist with respect to the interpretation of complex tax regulations and the amount and timing of future taxable income. Given the wide range of international business relationships and the long-term nature and complexity of existing contractual agreements, differences arising between the actual results and the assumptions made, or future changes to such assumptions, could necessitate future adjustments to tax income and expense already recorded. The Group establishes provisions, based on reasonable estimates, for estimated consequences of audits by the tax authorities of the respective countries in which it operates. The amount of such provisions is based on various factors, such as experience of previous tax audits and differing interpretations of tax regulations by the taxable entity and the responsible tax authority. Such differences of interpretation may arise on a wide variety of issues depending on the conditions prevailing in the respective group company’s domicile.
128 Deferred tax assets are recognised for all unused tax losses to the extent that it is probable that taxable profit will be available against which the losses can be utilised. Significant management judgment is required to determine the amount of deferred tax assets that can be recognised, based upon the likely timing and the level of future taxable profits together with future tax planning strategies. The Group has certain tax losses carry forward. Some of these losses relate to subsidiaries that have a history of losses and may not be used to offset taxable income elsewhere in the Group. There may not be taxable temporary differences or any tax planning opportunities available that could partly support the recognition of these losses as deferred tax assets. Share-based payments For share-based payments, Ruukki Group applies the IFRS 2 standard, according to which option rights are measured at fair value at the time they were granted. Share-based payments are recorded as expenses in the profit and loss account on a straight-line basis during the vesting period until the first potential exercise date of the options. Expenses on the option grant date are determined according to the Group’s estimate of the number of options expected to vest at the end of the vesting period. The Group updates the estimated final number of options on each balance sheet date. Changes in the estimates are recorded in the profit and loss account. Fair value is determined using the Black & Scholes option pricing model. The management is required to assess the parameters of this model in terms of the volatility of the underlying share, which is based on historical volatility data. Moreover, as part of the incentive package of the Group’s wood processing segment CEO, during the fourth quarter of 2009 shares were granted for free as a signing bonus for the segment CEO, and the valuation of that transaction was based on the written employment contract where a fixed monetary value was agreed and the amount of shares granted was determined by using the previous month-end exchange rate. Segment reporting IFRS 8 ‘Operating Segments’ became effective as of 1 January 2009. Ruukki Group Plc’s Board of Directors decided at the beginning of 2009 that the Group change its segments based on the new IFRS 8. Consequently, from 1 January 2009 the Group has reported two operating segments: Minerals business and Wood Processing business. Reclassifications The Group decided in conjunction with 2009 financial statements to change the way it presents share of associated profits, sales gains and losses related to associates, and impairment on associates’ shares and receivables, to the extent they relate to associated companies owned by the Group parent company and not belonging to business segments. Hence, from 2009 onwards these items are presented in finance items below EBIT, when previously they have been presented above EBIT in various lines. The comparatives of financial year 2008 have been changed accordingly as well. The rationale behind the change in the way of presenting these items is that these associated companies are not material and that they are classified as non-core assets. From 31 December 2009, with retroactive implementation, the Group has presented realised and unrealised gains and losses in relation to emission rights in other operating income above EBIT, whereas earlier those items have been included in finance income and finance expense. Acquisition-related liabilities, both conditional and unconditional items, have from 31 December 2009 been retroactively presented in interest-bearing liabilities to the extent those liabilities are to be settled with cash regardless whether the payments are fixed in nominal terms or whether there are interest determined in the transaction documentation. The earn-out liabilities where the payment is in the form of the Company’s shares, no reclassification has been carried out, and hence those items are shown in the non-interest bearing liabilities category. Compared to the previous year-end 31 December 2008 the reclassifications described above have not had a material effect.
129 Application of new or amended IFRS standards The Group applies new or amended IFRS standards and interpretations related to its business activities since their effective date. Amended standards As the Group has been active in corporate restructuring, and might be carrying out mergers and acquisitions or divestments in the future, the revised IFRS3 standard (IFRS 3R), changes effective from 1 July 2009, that is applied to business combinations is expected to have significant impact on the Group’s financial position and results for future financial periods in relation to new business combinations. To the extent the Group realises transaction expenses, it will lead to those expenses being recognised in the income statement. The Group has also typically carried out acquisitions where there has been earn-out components tied to future profitability of the target. Hence, if there are deviations between the expected and actual outcomes, it could have significant impact of Group’s earnings in various periods, since those estimation changes will be reflected in the income statement rather than balance sheet as previously. The other amendments to the standards presented below have been or will be taken into account to the relevant extent; however, it is expected that no major changes to the Group’s financial statements arise from these standard changes that have or can have implications to the Group’s disclosures: • IAS1 ‘Presentation of Financial Statements’ was changed effective 1 January 2009, which was to a relevant extent reflected in the 2009 financials. • IAS 23 ‘Borrowing Costs’ was changed effective 1 January 2009, but it did not have a major impact in 2009 financial statements even though it was applied to certain capital expenditures in 2009. • IAS 27 ‘Consolidated and Separate Financial Statements’ was changed effective 1 July 2009, but it did not affect the Group’s 2009 financial statements. This standard charge affects acquisitions and divestments carried out in steps. If the parent company control is still with the Group, the changes in subsidiary ownership interest is directly recognised in the Group equity, Of these arrangements with minority shareholders, no goodwill nor income or expenses though profit and loss are realised. If the control in the subsidiary is lost, any investment left will be recognised through profit and loss. Moreover, similar bookkeeping is applied to also to associated companies and to joint ventures. In the future subsidiary losses can be allocated to minority shareholders even if they exceed the value of the minority investment. • IAS 19 standard has been amended, effective 1 January 2009, in relation to curtailments and negative past service costs, but it did not affect the Group’s 2009 financial statements. • IAS 39 (and IFRIC 9) has been amended, effective to financial periods ending on or after 30 June 2009, in relation to reassessment of embedded derivatives, but it did not affect the Group’s 2009 financial statements. • IFRS 2 was changed in relation to vesting conditions and cancellations effective from 1 January 2009, but it did not affect the Group’s 2009 financial statements, but can impact Group’s future profitability if and when new share-based incentive schemes are initiated. • IFRS 7 was changed in relation to improving disclosures about financial instruments effective from 1 January 2009, which was to a relevant extent reflected in the 2009 financials. New IFRIC interpretations As far as the new IFRIC interpretations are concerned, the following changes have been effected: • IFRIC 15 ‘Agreements for the Construction of Real Estate’, effective from 1 January 2009, but its implications have not led to changes in Group’s accounting policies. • IFRIC 16 ‘Hedges of a Net Investment in a Foreign Operation’, effective from 1 October 2009.
130 • IFRIC 17 ‘Distributions of Non-cash Assets to Owners’, effective from 1 July 2009. • IFRIC 18 ‘Transfers of Assets from Customers’, transfers on or after 1 July 2009, which will not be relevant to Group’s current operations. • IFRIC 19 ‘Extinguishing Financial Liabilities with Equity Instruments’, effective for annual periods beginning on or after 1 July 2010 with earlier application permitted. 6.3 Financial indicators 2007 2008 2009 Continuing Continuing Group operations Group operations Group Revenue, €’000 213,910 128,378 247,361 158,665 193,359 EBITDA, €’000 24,729 17,276 17,348 2,087 19,363 % of revenue 11.6% 13.5% 7.0% 1.3% 10.0% Operating profit/loss, €’000 15,674 12,667 (37,853) (46,939) (24,617) % of revenue 7.3% 9.9% (15.3%) (29.6%) (12.7%) Profit/loss before taxes, €’000 19,158 17,981 (45,891) (41,541) (28,336) % of revenue 9.0% 14.0% (18.6%) (26.2%) (14.7%) Return on equity, % 5.8% 5.3% (8.5%) (10.8%) (7.1%) Return on capital employed, % 8.8% 7.0% (5.8%) (7.9%) (5.0%) Equity ratio, % 85.1% 85.1% 64.8% 64.8% 52.0% Gross capital expenditure, €’000 34,442 12,065 241,243 235,411 215,700 % of revenue 16.1% 9.4% 97.5% 148.4% 111.6% Personnel, average 866 279 916 418 824 Earnings per share, basic, € 0.06 0.05 (0.11) (0.14) (0.08) Earnings per share, diluted, € 0.06 0.05 (0.11) (0.14) (0.08) Equity per share, € 1.41 1.41 1.20 1.20 1.03 Dividends, €’000(1) 11,601 10,055 9,919 Dividend per share, €(1) 0.04 0.04 0.04 Dividend per earnings, % (1) 68.9% Effective dividend yield, % 1.4% Price to earnings, € 48.6 (10.6) (27.1) Highest share price, € 3.59 2.99 2.68 Lowest share price, € 1.18 1.02 1.04 Average share price, € 2.40 2.03 1.67 Market capitalisation, €’000 817,896 333,539 558,613 Turnover, €’000 623,228 884,635 547,018 Turnover, % 89.7% 149.9% 125.7% Average number of shares, (1,000) 217,889 290,034 250,175 Average number of shares, diluted, (1,000) 221,432 303,891 295,456 Number of shares at the end of the period (1,000) 290,034 290,034 261,034
(1) In 2009 the Company distributed a capital redemption of €0.04 per share out of the paid-up restricted equity reserve and no dividend was distributed; in 2010 the Board of the Company has proposed to the AGM that €0.04 per share capital redemption would be paid and that no dividend would be distributed.
131 Formulas for calculation of indictors Return on equity, % Net profit/Total equity (average for the period) * 100 Return on capital employed, % Profit before taxes + financing expenses/(balance sheet total – non-interest bearing liabilities) average * 100 Equity ratio, % Total equity/balance sheet – prepayments received * 100 Earnings per share, basic, € Profit attributable to shareholders of the parent company/Average number of shares during the period Earnings per share, diluted, € Profit attributable to shareholders of the parent company/Average number of shares during the period, diluted Equity per share, € Shareholders’ equity/Average number of shares during the period Dividend per share, € Dividends/Number of shares at the end of the period Dividend per earnings, % Dividend per share/Earnings per share * 100 Effective dividend yield, % Dividend per share/Share price at the end of the period Price to earnings, € Share price at the end of the period/Earnings per share Average share price Total value of shares traded in €/Number of shares traded during the period Market capitalisation, €’000 Number of shares * Share price at the end of the period Operating profit Operating profit is the net of revenue plus other operating income, plus gain on finished goods inventory change, minus employee benefits expense, minus depreciation, amortisation and impairment and minus other operating expense. Foreign exchange gains or losses are included in operating profit when generated from ordinary activities. Exchange gains or losses related to financing activities are recognised as financial income or expense. Gross capital expenditure Gross capital expenditure consists of the additions in the acquisition cost of non-current tangible and intangible assets as well as additions resulting from acquisitions. 6.4 Operating segment information The Group has two reportable segments (strategic business units) which are organised based on their products and services. The segments are managed and reviewed separately by the Group’s CEO and Board as well as the appointed segment CEO’s. The Group’s operating segments are the following: • Minerals segment comprises mining, beneficiation, processing and smelting of ores and metal alloys including chrome ore, ferrochrome, silico manganese and chromium-iron-nickel alloy. The production plants are located in Europe and in South Africa. The sales of all production units has from the latter half of 2009 been centralised into the European trading arm located in Malta, and processes have been started to centralise the treasury functions as well; and
132 • Wood Processing segment is engaged in refining natural resources available in the coniferous zone of Finland. The segment specialises in mechanical production of wood-based products including sawmilling products, prefabricated houses and loading pallets. Segment’s customers are predominantly in Finland, but the sawmilling business units have export operations as well. Management reviews the operating results of its separate business segments regularly for the purpose of making decisions about resource allocation and performance assessment. Segment performance is measured based on earnings before interest, taxes, depreciation and amortisation (EBITDA) as included in the internal management reports and defined consistently with the consolidated EBITDA. Moreover, the Board of Directors of the Group’s parent company has for the last years emphasised the ability of the businesses to generate positive cash flow operations. In its operations the Group targets to utilise operational and financial synergies between the various units, and also targets to become a vertically integrated mine-to-metals producer in its Minerals segment. Hence, there are inter-company transactions between the segments’ units. Inter-company transactions are carried out based on arm’s length logic. There have practically not been any transactions between the two operating segments of the Group, i.e. Minerals and Wood Processing, but the Group’s parent company has provided funding and administrative services for the those segments. The Group’s other business units are classified under All Other Operations section. As of 1 January 2009, the Group has changed the presentation of operational segments in accordance with IFRS 8 Operating segments so that the sawmill business and house building business previously reported as separate segments are now presented under Wood Processing and the Russian investment projects under All Other Operations. Information for the corresponding period 2008 has been changed accordingly. Investments in associates are presented in the segments classified by the nature of their operations. During 2008, the Group divested the majority stake in the furniture business and all of its care services segments which have been presented as discontinued operations. Over the last years, various corporate restructurings have taken place, and a number of mergers, acquisitions and divestments have been either concluded or targeted with the Group’s parent company having a key role in those processes. In 2009 the Board of Directors of Ruukki Group Plc decided that expenses of unsuccessful transactions or other activities will be allocated to the relevant business segments.
133 Operating segment information 2009 For the year ended 31 December 2009 Continuing operations Eliminations and Wood All other Segments unallocatedConsolidated Minerals Processing operations total items Group €’000 €’000 €’000 €’000 €’000 €’000 External revenue Services 278 1,461 1 1,739 — 1,739 Goods sold 70,757 120,863 — 191,620 — 191,620 Total external revenue 71,035 122,324 1 193,359 — 193,359 Inter-segment revenue — 63 321 384 (384)1 — Total revenue 71,035 122,387 322 193,744 (384) 193,359 Associates (core) 6 — — 6 — 6 Segment EBITDA 10,380 17,086 (8,104) 19,363 — 19,363 Depreciation and amortisation (21,367) (5,535) (57) (26,960) — (26,960) Impairment, net (19,079) 2,059 — (17,020) — (17,020) Segment operating profit/loss (30,066) 13,610 (8,161) (24,617) — (24,617) Finance income 5,871 Finance cost (9,306) Associates (non-core) (284) Income taxes 5,609 Profit/loss for the period (22,727) Segment’s assets(2) 390,005 83,623 362,749 836,378 (273,180) 563,198 Segment’s liabilities(2) 404,944 96,561 44,596 546,101 (268,926) 277,175 Other disclosures Gross capital expenditure(3) 202,754 11,989 957 215,700 — 215,700 Investments in associates 27 — 481 507 — 507 Provisions 14,164 128 — 14,292 — 14,292
(1) Inter-company items are eliminated on consolidation. (2) The assets and liabilities of the segments represent items that these segments use in their activities or that can be reasonably allocated to them. (3) Investments consist of increases in tangible and intangible assets whose life is longer than one financial year.
134 Minerals segment more detailed information 2009 Continuing operations Minerals Southern South Europe Africa €’000 €’000 External revenue Services 278 — Goods sold 56,790 13,967 Total external revenue 57,068 13,967 Inter-segment revenue 232 14,235 Total revenue 57,300 28,202 Associates (core) (36) 42 Segment EBITDA 9,992 409 Depreciation and amortisation (16,888) (4,479) Impairment, net — (19,079) Segment operating profit/loss (6,896) (23,149) Segment’s assets(1) 307,574 214,526 Segment’s liabilities(1) 300,312 236,702
(1) The assets and liabilities of the segments represent items that these segments use in their activities or that can be reasonably allocated to them. Wood processing business segment more detailed information 2009 Continuing operations Wood Processing Sawmill House Pallet business building business €’000 €’000 €’000 External revenue Services 9 1,076 376 Goods sold 81,045 30,763 9,055 Total external revenue 81,054 31,839 9,431 Inter-segment revenue 1,635 — — Total revenue 82,689 31,839 9,431 Associates (core) — — — Segment EBITDA 8,374 7,182 1,512 Depreciation and amortisation (4,195) (350) (990) Impairment, net 2,059 — — Segment operating profit/loss 6,238 6,832 522 Segment’s assets(1) 58,022 21,361 9,221 Segment’s liabilities(1) 72,876 23,089 5,572
(1) The assets and liabilities of the segments represent items that these segments use in their activities or that can be reasonably allocated to them.
135 House building and wood processing business segment more detailed information 2008 Continuing operations Wood Processing Sawmill House Pallet business building business €’000 €’000 €’000 External revenue Services — 1,548 503 Goods sold 84,484 48,820 8,711 Total external revenue 84,484 50,368 9,214 Inter-segment revenue 2,640 11 — Total revenue 87,123 50,379 9,214 Associates (core) — — — Segment EBITDA 2,340 10,384 1,747 Depreciation and amortisation (6,152) (288) (1,385) Impairment, net (17,949) — (2,427) Segment operating profit/loss (21,761) 10,097 (2,066) Segment’s assets(1) 61,279 19,318 6,050 Segment’s liabilities(1) 74,803 17,495 3,036
(1) The assets and liabilities of the segments represent items that these segments use in their activities or that can be reasonably allocated to them. Operating segment information 2008 For the year ended 31 December 2008 Continuing operations Discontinued operations Eliminations and Wood All other Segments Furniture Care Segments unallocated Consolidated Minerals Processing operations total business services total items Group €’000 €’000 €’000 €’000 €’000 €’000 €’000 €’000 €’000 External revenue Services — 2,051 7 2,058 — 10,190 10,190 — 12,248 Goods sold 12,308 142,015 2,300 156,623 78,506 — 78,506 (16)1 235,113 Total external revenue 12,308 144,066 2,308 158,681 78,506 10,190 88,696 (16) 247,361 Inter-segment revenue — 840 381 1,221 — — — (1,221)1 — Total revenue 12,308 144,906 2,689 159,902 78,506 10,190 88,696 (1,237) 247,361 Associates (core) — — — — — — — — — Segment EBITDA 1,880 14,483 (13,346) 3,016 2,125 13,136 15,260 (929) 17,348 Depreciation and amortisation (2,880) (7,824) (135) (10,839) (2,959) (369) (3,328) — (14,168) Impairment, net — (20,376) (17,810) (38,187) (2,847) — (2,847) — (41,034) Segment operating profit/loss (999) (13,718) (31,292) (46,010) (3,681) 12,767 9,085 (929) (37,853) Finance income 16,783 Finance expense (12,958) Associates (non-core) 171 Income taxes 1,171 Profit/loss for the period (32,687) Segment’s assets(2) 57,943 85,675 453,102 596,721 — — — (33,446) 563,275 Segment’s liabilities(2) 58,210 106,831 71,317 236,358 — — — (29,793) 206,565 Other disclosures Gross capital expenditure(3) 154,787 80,584 39 235,411 4,687 1,146 5,833 — 241,243 Investments in associates — — 1770 1,770 — — — — 1,770 Provisions 5,202 92 — 5,294 — — — — 5,294
(1) Inter-segment items are eliminated on consolidation. (2) The assets and liabilities of the segments represent items that these segments use in their activities or that can be reasonably allocated to them. (3) Investments consist of increases in tangible and intangible assets whose life is longer than one financial year. 136 Other operations include investment projects, Group headquarters and other operations not included in the two segments reported. In the care services segment’s 2008 EBITDA and EBIT, a gain on disposal resulting from the sale of the segment and totalling about €12.0 million is included. 6.5 Business combinations Financial year 2009 Ruukki Group has carried out the following business acquisitions and disposals during the financial year 2009: Month Segment Transaction description May Minerals Acquisition of an effective stake of 84.9% in Mogale Alloys (Pty) Ltd October Wood (sawmills) Sale of Lappipaneli Oy’s sawmilling business December Wood (sawmills) Disposal of the 91.4% stake in Tervolan Saha ja Höyläämö Oy In addition to the abovementioned transactions, the Group’s house building business (Pohjolan Design-Talo Oy) acquired some land areas in December, which are controlled by Keski-Lapin Kiinteistösijoitus Oy, of which the Group owns 100 per cent. However, this transaction was not a business combination as defined in IFRS3, but rather is treated under IAS2. Group Companies Mogale Alloys (Pty) Ltd At the end of May, Ruukki Group acquired an effective stake of 84.9 per cent. in South African ferroalloys producer Mogale Alloys. The acquired business has been consolidated into Ruukki Group since the beginning of June 2009. The total nominal purchase consideration, at the exchange rate prevailing at the date of the payment of purchase consideration (€/ZAR rate of 11.58) totals some €162.5 million for the 84.9 per cent. share in Mogale. Based on the timing and contingencies of the various payments in relation to purchase consideration as well as to management compensation, cash outflow liabilities can be split into the following categories: (i) ZAR 1,200 million (about €103.7 million at EUR/ZAR 11.58) paid in cash at the closing date, of which ZAR 1,125 million was paid to the vendors and ZAR 75 million allocated to a trust set up for Mogale’s management. In addition about ZAR 24 million was paid as interest compensation; (ii) ZAR 200 million (about €17.3 million) in cash as unconditional deferred payment on the first anniversary of the closing date, i.e. in May 2010; and (iii) ZAR 600 million (about €51.8 million) in cash as conditional deferred payment via a five-year vendor loan arrangement, which includes ZAR 75 million to be allocated to Mogale’s management trust. This tranche is payable only if and from the date when Mogale receives environmental permits and licences for its four furnaces, with the ZAR 600 million split into four furnace – specific tranches. Ruukki Group’s new subsidiary Ruukki South Africa (Proprietary) Ltd acquired the following shares in the Mogale transaction: (i) directly 17.7 per cent. of shares in Mogale Alloys (Proprietary) Ltd; (ii) through 100 per cent. owned subsidiaries; and (iii) through an 49 per cent. owned associated company directly 17.70% via PGR 17 34.60% via Dezzo 184 27.70% via PGR Manganese 4.90% total effective stake 84.90%
137 The remaining 15.10 per cent. is effectively held by Mogale Alloys Trust and PGR Manganese (Pty) Ltd’s major shareholders, both of which are controlled or owned by black entrepreneurs or Mogale’s employees. Hence, in the transaction, South African Black Economic Empowerment legislation was taken into account. Since Ruukki South Africa (Pty) Ltd ceded 40 per cent. of the shares, and rights thereby, of Mogale, PGR 17 and Dezzo, it acquired as collateral for the unpaid portion of the purchase consideration, at inception the effective unpledged ownership interest of Ruukki totalled 52.90 per cent. If the acquisition had taken place with a corresponding holding already on 1 January 2009, this would have changed the consolidated figures reported by Ruukki Group for the review period 1 January – 31 December 2009 as follows: Consolidated revenue € +10.5 million (+5.5%) Consolidated EBIT(1) € -4.4 million (-17.9%) Consolidated net profit(1) € -3.8 million (-16.6%)
(all these figures compared with the accounting period 2009 figures reported by the Group) (1) When (i) taking into account the depreciations and deferred taxes related to purchase price allocations, and (ii) assuming 31 May 2009 fair values to be valid for the earlier periods as well; and (iii) taking into account ZAR 150 million management incentive schemes’ accruals based portion for 1-5/2009.
Ruukki Group prepared a preliminary purchase price allocation based on the target companies’ balance sheets at the date of the conclusion of the deal, which was published in August 2009 within the Q2/2009 interim report. On 31 December 2009, the Group adjusted the purchase price allocation particularly based on changes in Mogale’s environmental and rehabilitation provision, based on additional analysis pursued post-transaction. This was in particular based on analysis whether those liabilities have been caused by historical action and operation or whether they are future related. Based on the adjustments above, the following key changes have been recognised compared to the balance sheet reported earlier: • decrease of goodwill by ZAR 60.3 million (about €5.2 million) • decrease of provisions by ZAR 118.4 million (about €10.2 million) • decrease of deferred taxes by ZAR 44.2 million (about €3.8 million) The target companies’ adjusted balance sheets as well as the assets and liabilities recognised in the purchase price allocation process on 31 December 2009 are presented on the next page. The figures include, to some extent, transactions between those parties and hence cannot be simply added up. The goodwill recognised as a consequence of the transaction is based on the following factors: • the utilisation of Ruukki Group’s internal resources and sales channels for the sales and logistics operations thereby saving expenses, and therefore a total of about €24.4 million of the goodwill recognised in conjunction with Mogale acquisition has been reallocated to Southern European Minerals business, i.e. to another cash generating unit which reaps those benefits, based on the present value of the expected synergy gains; • a broader portfolio of alloys providing the Group with new and better opportunities to change its production and redirect resources to optimise profit margins; • the knowledge of management and employees of the acquired company generating cost savings and higher returns, thus one key component of the deal has been to structure a five-year incentive package for key management and employees; • providing access to the infrastructure, including but not limited to the supply of electricity; • a platform for future expansion, which decreases the lead time to expand the current business or to adjust the business model in accordance with market conditions.
138 In the following tables, and when calculating the total purchase consideration and when converting the balance sheet of the acquired business, the exchange rate at the time of transaction has been used. The exchange rate used at the end of December to convert the balance sheet differs from this; hence, the translation differences have been recognised in Group equity. In addition to transaction value, ZAR 150 million has been allocated to the Mogale management incentives scheme rather than to purchase consideration, and that is expensed over a five-year term. At the end of 2009, the Board of Directors of Ruukki Group Plc resolved, based on IAS 36 impairment testing results, that an impairment of goodwill of about ZAR 208 million (€19.1 million) was recognised in relation to the Mogale Alloys transaction. A revised preliminary purchase price allocation of the acquisition: Fair value Book value Fair value of acquired FV before of acquired assets adjustments acquisition assets €’000 €’000 €’000 ZAR’000 Non-current assets Property, plant and equipment 21,959 8,299 13,660 254,185 Intangible assets Technology 31,964 31,964 — 370,000 Clientele 12,699 12,699 — 147,000 Financial assets 321 — 321 3,711 66,943 52,962 13,981 774,896 Current assets Inventories 9,528 — 9,528 110,288 Trade and other receivables 6,153 — 6,153 71,222 Tax receivables 314 — 314 3,634 Cash and cash equivalents 4,244 — 4,244 49,127 20,238 — 20,238 234,270 Total assets 87,181 52,962 34,219 1,009,166 Non-current liabilities Loans — — — 4 Finance lease obligation 658 — 658 7,613 Deferred tax liability 17,247 14,829 2,418 199,646 17,905 14,829 3,076 207,264 Current liabilities Trade and other payables 4,600 — 4,600 53,247 Provisions 7,048 (2,057) 9,106 81,590 Income taxes 1,672 — 1,672 19,353 13,320 (2,057) 15,378 154,189 Total liabilities 31,226 12,772 18,454 361,454 Net assets 55,955 40,190 15,766 647,712
139 On 31 December 2009, Mogale had some ZAR 78.0 million worth of active unused banking, guarantee and loan facilities from a financial institution, corresponding to €7.3 million at the exchange rate prevailing at the end of the financial year (€/ZAR rate of 10.67). €’000 ZAR’000 Purchase consideration, paid 98,265 1,137,461 Purchase consideration, unpaid 61,556 712,539 Interest 2,084 24,119 Stamp duty 400 4,625 Transaction costs 1,673 19,365 Acquisition cost 163,976 1,898,109
Acquisition cost 163,976 1,898,109 Ruukki’s direct share of net assets 44,838 519,023 Ruukki’s indirect share of net assets 2,718 31,462 Goodwill 116,420 1,347,625
Net cash outflow on the acquisition: Cash consideration for the acquisition (99,272) (1,149,119) Management remuneration (6,479) (75,000) Ruukki’s share of acquired cash 4,244 49,127 Net cash flow effect (101,507) (1,174,993)
Lappipaneli Oy Lappipaneli Oy concluded in the fourth quarter of 2009 the sale of its sawmilling assets to Pölkky Oy, Pölkky Metsä Kmo Oy and Kitkawood Oy. Inventories were sold in October 2009 and the transfer of fixed assets is expected to happen in April 2010. The consideration for Lappipaneli’s gross assets totalled €14.6 million. The consideration is to be paid in instalments, to a major extent during the fourth quarter of 2009 and April 2010. Tervolan Saha ja Höyläämö Oy As part of refocusing the Group’s Wood Processing business, Ruukki Group’s subsidiary Ruukki Yhtiöt Oy entered on 20 November 2009 into an agreement to sell its 91.4 per cent. stake in Tervolan Saha ja Höyläämö Oy (“TSH”).The effective date for the transfer of the shares was 31 December 2009. In conjunction with the deal, the call option agreement with TSH’s minority shareholders was dissolved. The consideration for the shares totalled approximately €4.1 million, and was paid in cash in December. RCS Ltd and Türk Maadin Sirketi A.S. Related to the October 2008 acquisition of RCS Ltd and Türk Maadin Sirketi A.S., there is an earn-out purchase price component linked to the financial results of the companies in 2009 – 2013. At the end of 2009, the actual 2009 financial results and revised forecasts for 2010 – 2013 have been taken into account, and thus the total purchase consideration has been revised down by €21.7 million compared to the corresponding total expected liability at year-end 2008. The earn-out, sum, if positive, has to be paid in Ruukki shares, for which a fixed (with dividend and capital redemption adjustment) exercise price has been set (on 31 December 2009: €2.26 per share). Therefore, on 31 December 2009 altogether 22,774,441 (31.12.2008: 39,725,720) shares was estimated to be given as earn-out payment to the seller based on revised forecasts of the target companies’ future results. The fair value of these shares has been determined to be €1.28 per share based on the market price of the share on 28 October 2008, the date of the Company’s General Meeting. Elektrowerk Weisweiler GmbH On the consolidated balance sheet on 31 December 2009, Ruukki Group Plc assumed that the option rights in relation to Elektrowerk Weisweiler would be exercised in 2018. The nominal exercise price was determined by using judgment and a simplified valuation model based on so-called Stuttgarter Verfahren model. At the end of 2009, this component changed due to discounting.
140 Associates As part of refocusing the Group’s core business and strategy, Ruukki Group sold its 37.5 per cent. stake in Cybersoft Oy to Headpower Oy in an all-cash transaction. The effective date for the transfer of the shares was 1 November 2009. The consideration of the shares totalled about €0.9 million and the transaction generated a sales gain of €0.5 million. In addition, there are potential earn-out elements related to the transaction which have not been taken into account in the consolidated financial statements. Other corporate activity Pyyn Liikehuoneisto Oy, a subsidiary of Junnikkala Oy operating in the Wood Processing business, was merged into its parent company in January 2009. During December 2009, Ruukki Yhtiöt Oy terminated the put options it had written in relation to the Junnikkala acquisition after which it only has the call option left in accordance with the original transaction agreements. This led to a €5.3 million non-recurring income positively affecting both the EBITDA and EBIT. PSL Räinä Oy, a fully owned subsidiary of Oplax Oy, was merged into its parent company in November. Financial year 2010 Intermetal In February 2010 Ruukki Group Plc’s Turkish subsidiary, Türk Maadin Sirketi A.S., acquired 99 per cent. of the shares in Intermetal Madencilik ve Ticaret A.S. The rationale of the transaction was to expand the Group’s chrome ore reserves potential in Turkey. Hence, to the extent that the purchase consideration exceeded the value of target company’s net assets on its balance sheet the residual was recognised on the Group balance sheet as minerals reserves. Intermetal has six chrome ore exploration and exploitation licenses with a total land area of about 5,000 hectares. There is no external quantification of the total minerals reserve of Intermetal’s licence areas. In 2009, Intermetal’s revenue was approximately €1.8 million, EBITDA €12,400 and net profit €9,300 when using the average exchange rate of 2.1631 for EUR/TRY. The purchase consideration of the Intermetal shares was close to USD 0.5 million (about €0.3 million), and was paid in cash. Other corporate activity In the beginning of 2010, certain initiatives have been taken targeted to dissolve or merge some non-active Finnish subsidiaries. Intermetal A preliminary purchase price allocation of the acquisition: Fair value Book value of acquired before assets acquisition €’000 €’000 Intangible assets 7 7 Property, plant and equipment Machinery and equipment 119 119 Ore reserves 61 — Other tangible assets 193 193 Inventories 14 14 Trade and other receivables 87 87 Cash and cash equivalents 27 27 Total assets 508 447 Deferred tax liability 12 —
141 Fair value Book value of acquired before assets acquisition €’000 €’000 Current liabilities Interest-bearing liabilities 130 130 Trade and other payables 29 29 Total liabilities 172 159 Net assets 336 287
€’000 Acquisition cost 336 Net assets 336 Goodwill — Net cash outflow on the acquisition: Consideration paid in cash 336 Acquired cash and cash equivalents (27) Cash flow 309
Financial year 2008 Ruukki Group has carried out the following business acquisitions and disposals during the financial year 2008:
Month Segment(1) Transaction description January Wood (sawmills) Acquisition of a 51.02 per cent. (51.06% of votes) stake in Junnikkala Oy January Non-segment Disposal of Pan-Oston Oy July Non-segment Disposal of Mikeva Oy and the group it formed August Non-segment Disposal of an 80.6% stake in Selka-line Oy September Wood (house building) Acquisition of 9.9% in Pohjolan Design-Talo Oy September Wood (house building) Acquisition of all the business operations of Gloria House Finland Oy October Minerals Acquisition of a 100% stake in RCS Ltd and a 98.75% stake in Türk Maadin Sirketi A.S. October Wood (pallet) Acquisition of 100% of PSL Räinä Oy December Non-segment Disposal of a 23% stake in Incap Furniture Oy
(1) Segments following 2009 segment reporting structure
Group Companies Junnikkala Oy The Group’s sawmill business area acquired a 51 per cent. interest in Junnikkala Oy and the Group it forms in January. Junnikkala Oy was consolidated into Ruukki Group as a 100 per cent. subsidiary based on a share option arrangement as of February. Junnikkala Oy practises saw milling and the further processing of sawn wood mainly targeted for the prefabricated housing business. At the same time, Junnikkala Oy acquired all shares of Pyyn Saha ja Höyläämö Oy, which operates in Oulainen. It was merged into its parent company on 1 October.
142 If the acquisition had taken place with a corresponding holding already on 1 January 2008, it would have changed the consolidated figures reported by Ruukki Group for the accounting period 1 January – 31 December 2008 as follows: Consolidated revenue + €3.384 million (+ 1.4%) Consolidated EBIT(1) + €118,000 (0%) Consolidated net profit + €47,000 (0%)
(all these figures compared with the accounting period 2008 figures reported by the Group) (1) When (i) taking into account the depreciation and deferred taxes related to purchase price allocations, and (ii) assuming 31 January 2008 fair values to be valid for the earlier periods as well.
If the Junnikkala Group had been consolidated into Ruukki Group’s sawmill business already on 1 January 2008, the business area’s revenue would have been €99.7 million (+ 3.5 per cent. compared with the business area’s 2008 revenue) and EBIT about €-23.6 million (+ 0.5 per cent. compared with the business area’s 2008 EBIT). The acquisition generated €2.5 million goodwill, which was based on synergies expected to be gained, e.g. from wood procurement, cooperation in export markets and potentially from rationalisation measures in administration to be taken in the future. According to the preliminary purchase price allocation, the acquisition generated €5.4 million goodwill, which was written off in conjunction with the impairment test carried out on 30 September. Consequently, there was no goodwill on the Group’s balance sheet on 31 December 2008. The difference in goodwill between the preliminary and final purchase price allocation was recognised by decreasing the value of the clientele. Pan-Oston Oy In January, Ruukki Group sold all the shares of its metal industry subsidiary, Pan-Oston Oy, in an all-cash transaction and recognised a gain on disposal totalling about €0.7 million. Selka-line Oy On 29 August, Ruukki Group’s metal industry subsidiary, Alumni Oy, sold 80.6 per cent. of the share capital of Selka-line Oy, a company operating in the metal contract furniture and furniture component businesses, to the company’s Managing Director Ismo Räty. Ruukki Group’s share in the company decreased from 100 per cent. to 19.4 per cent., and Selka-line was consolidated into Ruukki Group up until the end of August. The sales price of the shares was €10,000 and the gain on disposal some €150,000. The revenue of Selka-line totalled approximately €2.9 million in 2007 and the operating profit was slightly positive. The transaction did not have a significant effect on the Group’s income statement or balance sheet. Pohjolan Design-Talo Oy Ruukki Group Plc’s Board of Directors decided in September to strengthen the house building business operations by redeeming all the minority shareholder’s shares in its subsidiary, and by acquiring the business of Gloria House Finland Oy. Ruukki Group Plc acquired 9.9 per cent. of Pohjolan Design-Talo Oy from Kimmo Kurkela, its Managing Director, with approximately a €6.1 million cash consideration. The share of the purchase price exceeding the minority interest, about €6 million, was recognised as goodwill. After the transaction, Ruukki Group Plc owns all the shares in Pohjolan Design-Talo Oy. Moreover, Pohjolan Design-Talo Oy entered into a preliminary agreement to acquire, by the end of 2008 at the latest, all the business operations and related intellectual property rights of Gloria House Finland Oy, with a fixed cash consideration of €0.3 million. The transaction was completed in November.
143 Junnikkala Oy The following assets and liabilities were recognised relating to the acquisition: Fair value Book value of acquired before assets acquisition €’000 €’000 Intangible assets Clientele 3,869 — Emission allowances 795 — Order book 104 — Other intangible assets 318 318 Property, plant and equipment Land and water 730 730 Buildings and constructions 6,243 6,243 Machinery and equipment 13,984 13,984 Investments 59 59 Other tangible assets 687 687 Current assets Inventories 11,761 10,873 Non-interest bearing receivables(1) 12,296 12,296 Cash and cash equivalents 415 415 Total assets(1) 51,260 45,605 Interest-bearing liabilities 16,811 16,811 Non-interest bearing payables Deferred tax liability 1,470 — Other non-interest bearing payables 10,538 10,538 Total liabilities(1) 28,820 27,350 Net assets(1) 22,440 18,255
Note: (1) The following line items in the book value before acquisition column were incorrectly shown in the notes to the 2009 financial statements: non-interest bearing receivables €10,731,000, total assets €44,040,000, total liabilities €28,696,000 and net assets €15,344,000.
€’000 Acquisition cost 24,902 Net assets 22,440 Goodwill 2,462 Net cash outflow on the acquisition: Consideration paid in cash 5,740 Acquired cash and cash equivalents (415) Cash flow 5,326
RCS Ltd and Türk Maadin Sirketi A.S. Ruukki Group Plc purchased 99.93 per cent. and its subsidiary Rekylator Oy 0.07 per cent. of the shares of the Maltese company RCS Ltd; further, Ruukki Group Plc purchased 98.75 per cent. of the shares of the Turkish company Türk Maadin Sirketi A.S. from Kermas Ltd. Ruukki Group Plc paid as a purchase consideration €80 million in cash at the closing and will pay, as a potential additional earn-out purchase consideration, 50 per cent. of the combined net profit of RCS and TMS over a five-year period covering the financial years 2009– 2013. The maximum total earn-out consideration is €150 million. In addition, the transaction includes a long term ferrochrome toll manufacturing agreement between RCS Ltd and the German Elektrowerk Weisweiler GmbH (EWW), a put option for two years related to the shares of Türk Maadin Sirketi A.S., and a call option related to the shares of Elektrowerk Weisweiler GmbH after five years. 144 The purchased Minerals business became a separately reported business segment, which was consolidated into Ruukki Group from the beginning of November 2008. Also, EWW has been consolidated into the Ruukki Group even though the share of ownership is 0 per cent. and even though the exercise period of the EWW option only starts on 1 January 2014, since based on the IFRS SIC-12 principles and on a comprehensive view of the target, the signs of control are estimated to exist. Related to the acquisition, Ruukki Group Plc has issued 73,170,731 option rights to the seller, Kermas Ltd, based on the General Meeting resolution on 28 October 2008. These options can be exercised only on the condition that the companies acquired generate positive net results, and are based on a €2.30 per share exercise price with dividend adjustment mechanism. Based on estimates, as confirmed by Ruukki Group Plc’s Board of Directors, for 2009 – 2013 profits of the acquired entities and assuming the maximum dividend adjustment of the share purchase agreements, 39,725,720 shares were, on 31 December 2008, estimated to be given as earn-out payment to the seller. The fair value of these shares has been determined to be €1.28 per share based on the market price of the share on 28 October 2008, the date of the company’s General Meeting. There is no resolution as to the exercise of option rights related to Elektrowerk Weisweiler GmbH. Moreover, the exercise price of the option rights on that company are not fixed in advance; however, the exercise price will be based on the fair value of Elektrowerk Weisweiler GmbH, which will be separately determined in the future. In the consolidated balance sheet on 31 December 2008, Ruukki Group Plc assumed that option rights would be exercised in 2018. The nominal exercise price was determined by using judgment and a valuation model. If the business entity had been acquired in a corresponding way already on 1 January 2008, it would have changed the consolidated figures reported by Ruukki Group for the accounting period 1 January – 31 December 2008 as follows: Consolidated revenue + €98 million (+39%) Consolidated EBIT(1) + €12 million (+31%) Consolidated net profit + €11 million (+34%)
(all these figures compared with the accounting period 2008 figures reported by the Group) (1) when (i) taking into account the depreciations and deferred taxes related to purchase price allocations, and (ii) assuming 31 January 2008 fair values to be valid for the earlier periods as well.
The following assets and liabilities were recognised relating to the acquisition: Fair value Book value of acquired before assets acquisition €’000 €’000 Non-current assets Intangible assets Intangible assets 260 260 Clientele 66,587 — Technology 5,573 — Property, plant and equipment Land and buildings 4,741 1,519 Machinery and equipment 3,110 1,181 Other tangible assets 1,170 1,170 Ore reserves 10,435 — Financial Assets 15,657 15,657 Deferred tax assets 2,009 1,615 109,542 21,402
145 Fair value Book value of acquired before assets acquisition €’000 €’000 Current assets Inventories 20,135 16,789 Order book 237 — Receivables 16,870 16,870 Cash and cash equivalents 8,576 8,576 45,818 42,235 Total assets 155,362 63,637 Liabilities Non-current liabilities 87 87 Provisions 17,716 15,746 Deferred tax liabilities 30,308 683 Current liabilities 23,768 23,768 Total liabilities 71,880 40,284 Net assets 83,482 23,353 Acquisition cost 144,571 Net assets 83,482 Goodwill 61,089 Net cash outflow on the acquisition: Consideration paid in cash 84,889 Acquired cash and cash equivalents (8,576) Cash flow 76,313
Related to the acquisition, Ruukki Group recognised about €61.1 million goodwill based on the following factors: • As part of the transaction, Ruukki Group Plc acquired a mining company operating in Turkey with mining sites and ore reserves in a number of Turkish locations. To the extent that external experts’ geological and other surveys have established proven or probable quantities of ore reserves, the reserves have been recognised as a separate asset on Ruukki Group’s balance sheet. The value of ore reserves at the time of acquisition was determined to be €10.4 million. However, there are no certain survey data on reserves below the surface, even though they might have major significance according to the studies; hence goodwill has been recognised. • In implementing the acquisition, Ruukki Group’s target was to create a combined business consisting of the acquired companies so that as tight integration as possible can be achieved. The Group will get efficiency and cost gains from the increase in operational integration, which also enables diminishing the relative importance of external service and goods providers thus giving added value into the Group. Via the acquisition, it is possible to gain with the ferrochrome business economies of scale – something that has not been possible in the past, for example in the production of chrome ore concentrate. • To a certain extent, Ruukki Group can utilise the same global agent or trade house channels, which can lead to added value or cost savings in the operations of the Group’s wood products businesses. • Since at the time of the acquisition Ruukki Group’s cash reserves were significant, the expansion into the Minerals business has enlarged the Group’s investment opportunities; as a result, the Group can make such investments or acquisitions that it could not make previously.
146 • The acquisition of the Minerals business increases the debt capacity of the Group, diversifies business risks, and consequently can affect the stability and potentially also the predictability of cash flows. This can lead to more optimal capital structure and tax benefits. PSL Räinä Oy Oplax Oy, a subsidiary of Ruukki Group’s sawmill business, entered on 31 October 2008 into an agreement to acquire the entire share capital of PSL Räinä Oy, located in Rovaniemi, and which operates in the wooden loading pallets business. PSL Räinä Oy was consolidated into the Group as of November. If the acquisition of PSL Räinä Oy had taken place with a corresponding holding already on 1 January 2008, this would have increased the Group’s revenue by about €2 million. Otherwise, the acquisition would not have had a material effect on the Group’s reported figures. The acquisition generated goodwill €40,000, which is based on expected synergies to be generated by cost savings from streamlining the administrative functions and lowering the prices of sawn timber due to higher procurement volumes. Discontinued Operations Mikeva Oy At the end of June, Ruukki Group entered into an agreement to sell all the shares of Mikeva Oy, the parent company of its care services business, to DF-Care Oy. The transaction was closed at the beginning of July. The business was presented in the Group’s 2008 income statement as a discontinued operation. The net gain on disposal amounted to €12 million. The cash consideration paid in July to Ruukki Group Plc by the buyer was €10.2 million. According to the transaction, Ruukki Group Plc’s receivables from the sold subsidiary have been converted into non-interest-bearing vendor notes, whose total nominal amount is about €3.8 million, and given to the buyer to be paid back in arrears over the next three years. Moreover, Ruukki Group Plc has, until the end of 2012, a call option to buy up to 5 per cent. of the buyer’s shares. Incap Furniture Oy Ruukki Group decreased its stake in the furniture business by selling altogether 23 per cent. of the shares in Incap Furniture Oy, the parent company of its furniture business, with a total cash consideration of €200 on 29 December 2008. After the transaction, Ruukki Group owns 48.3 per cent. of Incap Furniture Oy’s shares and the company is currently the Group’s associated company. Net gain on disposal amounted to €5.2 million, which was fully recognised against impairment losses on the furniture business’ property, plant and equipment recognised in September 2008. The combined results and cash flows of the discontinued operations are set out on the next page. The comparative figures include care services and furniture business profit, and cash flows for the previous financial year. Associates Ruukki Group Plc’s former associates, Lanux Oy, Orienteq Capital Oy and SG Systems Oy, closed down their operations during the financial year 2008.
147 PSL Räinä Oy The following assets and liabilities were recognised relating to the acquisition: Fair value Book value of acquired before assets acquisition €’000 €’000 Intangible assets Clientele 368 — Property, plant and equipment 33 33 Inventories 252 252 Receivables Trade receivables 386 386 Other receivables 11 11 Cash and cash equivalents — — Total assets 1,050 682 Deferred tax liability 96 — Current liabilities Trade payables 91 91 Other liabilities 335 335 Total liabilities 522 426 Net assets 528 256 Acquisition cost 568 Net assets 528 Goodwill 40 Net cash outflow on the acquisition: Consideration paid in cash 568 Acquired cash and cash equivalents — Cash flow 568
Discontinued Operations 1.1.2008 – 1.1.2007 – 31.12.2008 31.12.2007 €’000 €’000 Revenue 88,696 85,532 Other operating income 2,347 6,282 Operating expenses (93,991) (88,808) Operating profit (2,947) 3,007 Finance income and expense (1,402) (1,830) Profit before tax (4,349) 1,177 Income tax 997 (51) Net profit (3,352) 1,126 Gains on disposals of discontinued operations 12,033 — Profit from discontinued operations 8,680 1,126 Cash flows from discontinued operations Cash flow from operating activities 6,919 (4,158) Cash flow from investing activities (3,973) 1,016 Cash flow from financing activities (3,761) 3,326 Net cash flows (815) 183
148 6.6 Impairment testing General principles of impairment testing Ruukki Group has carried out impairment testing on goodwill and other assets as of 31 December 2009. During 2008 the Group carried out impairment testing as of 31 December 2008, and additionally due to market circumstances also on 30 September 2008. For the impairment testing as of 31 December 2009 the following cash generating units were identified, which quite closely resembles the cash generating units used in the 2008 impairment testing: Cash generating units belonging to Minerals business: • Southern European Minerals Processing business (RCS, Türk Maadin Sirketi and Elektrowerk Weisweiler) with a vertically integrated mining-beneficiation-smelting-sales operation in the specialty grade ferrochrome business and having an annual capacity of about 30,000 metric tons; and • South African Minerals Processing business (Ruukki South Africa and Mogale Alloys), which has ferroalloys smelting operations with four furnaces and with a total capacity of about 96 MVA corresponding to about 135,000(1) metric tons per year production capacity.
Note: (1) The annual production capacity was incorrectly stated in the notes to the 2009 annual financial statements as 110,000 metric tons, which was the production capacity prior to completing the new 12 MVA DC furnace.
Cash generating units belonging to Wood Processing segment: • House building business (Pohjolan Design-Talo and subsidiaries), producing and selling wooden ready-to-move-in houses into the Finnish market mainly for private families; and • Sawmill business (Junnikkala), which has sawmills in Kalajoki and Oulainen producing sawn timber and further processed products from pine and spruce with annual capacity of about 300,000 m3 with sales into domestic and export markets; and • Pallet business (Oplax) producing and selling wooden loading pallets and related logistical services. • The Group assesses at each balance sheet date whether there is any indication that assets may be impaired. If any such indication exists, the recoverable amount of these assets is estimated. Moreover, the recoverable amount of any goodwill and unfinished investment projects will be estimated annually, at the end of the year, irrespective of whether there is an indication of impairment. At the financial year-end 2009 sawmill business and pallet business, two of the abovementioned cash generating units, did not have any goodwill on their balance sheet nor any indication of impairment, and they were not tested. Changes in goodwill during 2009 During financial year 2009 the total goodwill of the Group increased by approximately €86.4 million net, as compared to the end of financial year 2008, to a total of €172.9 million. Related to certain acquisitions there are earn-out liabilities or deferred liabilities, which are conditional upon future years’ results of the target entity. The amounts of earn-outs are revised when the actual target company results are finalised or in case there is reason to believe that the original assumptions and forecasts used for the determination of these earn-outs have changed. Changes made in earn-outs have affected the amount of goodwill during 2009 mainly due to the change in future profit estimates for the Southern European Minerals Processing business. In the impairment testing process, the Group has reallocated about €24.4 million of the goodwill recognised in conjunction with the Mogale Alloys acquisition from South African minerals CGU to the Southern European minerals CGU based on the present value of the expected synergy gains to be benefited by the Southern European minerals CGU due to Mogale Alloys acquisition.
149 Reversal of earlier impairment on other assets during 2009 In 2008 the Group recognised impairment losses on non-current tangible assets for its sawmill business and pallet business. Based on the actual realisation of the non-current assets, the Group reversed some of those earlier impairment losses by a total amount of €2.1 million in relation to the divestment of Lappipaneli Oy’s assets to external parties. The methodology applied in impairment testing For all cash generating units, which have been tested for impairment, the value in use has been calculated by discounting estimated future net cash flows that have been based on the conditions and assumptions prevailing at the During the financial time of the testing. In certain cases the Group has applied the net realisable value approach, as an example when testing the associated companies’ values. Future cash flows have been projected for a 5-year period after which a zero percent growth assumption has been used for all European assets. As far as the Group’s South African assets are concerned, a fixed 7 per cent. per annum nominal growth rate has been applied to reflect local inflation and the discount rate used. For the terminal year after the 5-year estimation period the essential assumptions (e.g. revenue, variable costs and fixed costs) have been based at the estimation period’s last year figures excluding inflation adjustments. To take into account possible variations in the amount or timing of cash flows, the price for bearing uncertainty and other factors like illiquidity of the assets, adjustments are made to the discount rate used in discounting the projected future cash flows. The weighted average cost of capital (WACC) has been calculated separately for each cash generating unit and testable asset taking into account unit-specific risk factors, each businesses typical capital structures, investors’ average required rate of return for similar investments and company size and operational location related factors, as well as the prevailing risk-free interest rates and required margins for debt financing. The Group has used publicly available information to get market information on the peer group companies’ capital structure, risk premium and other factors. As there are not perfect matches available, to fully incorporate all specific aspects of the assets, peer group averages have been used, and moreover, asset specific risks added where applicable. The changes in goodwill during 2009 are described below: Minerals, Minerals, Wood, Group Southern Europe South Africa House building Total €’000 €’000 €’000 €’000 Goodwill 1.1.2009 61,830 — 25,418 87,248 Acquisitions 116,420 116,420 Reallocation between CGUs 24,390 (24,390) — Changes in earn-out liabilities(1) (21,638) 105 (21,533) Impairment (19,079) (19,079) Exchange rate movement 9,462 9,462 Other changes 333 333 Goodwill 31.12.2009 64,914 82,413 25,523 172,850
Note: (1) The changes in earn out liabilities for the Minerals Southern Europe and Group Total columns were incorrectly shown in the notes to the 2009 financial statements as follows: Minerals Southern Europe (€21,698,000) and Group Total (€21,592,000).
150 The changes in goodwill during 2008 are presented below: Minerals, Wood, Wood, Wood Southern House Sawmill Pallet Continued Other Discontinued Group Europe building business business operations businesses operations total €’000 €’000 €’000 €’000 €’000 €’000 €’000 €’000 Goodwill 1.1.2008 — 19,518 6,554 1,239 27,310 1,460 5,669 34,440 Acquisitions 61,830 5,918 5,470 40 73,258 73,258 Divestments — (1,460) (5,665) (7,125) Changes in earn-out liabilities (18) (218) (236) (5) (241) Impairment (11,805) (1,279) (13,084) (13,084) Goodwill 31.12.2008 61,830 25,418 — — 87,248 — — 87,248
Goodwill was split in the following way on balance sheet dates 31 December 2009 and 31 December 2008: 31.12.2009 % 31.12.2008 % Change €’000 €’000 €’000 €’000 €’000 Minerals business 147,327 85.2% 61,830 70.9% 85,497 Wood Processing business 25,523 14.8% 25,418 29.1% 105 Total continuing operations 172,850 100.0% 87,248 100.0% 85,603
Goodwill as a ratio of the Group’s equity has been the following on 31 December 2009 and 31 December 2008: 31.12.2009 31.12.2008 €’000 €’000 Goodwill 172,850 87,248 Equity 286,022 356,710 Goodwill/Equity % 60% 24% The information used in the 31 December 2009 impairment testing is based on subsidiary management future forecasts, on general third-party industry expert or analyst reports where available and to the extent possible, on current business and asset base excluding any non-committed expansion plans. Moreover, peer group market data has been utilised to determine certain components, such as beta coefficients, of the WACC. The market interest rates have been changed from previous year-end to reflect the rates applicable on 31 December 2009. The functional currencies of the cash generating units have been used, which has been EUR for all the other assets than the Turkish minerals business, where Turkish lira has been converted into EUR, and the South African minerals business, where ZAR has been used for all cash flows and for carrying amount as well. By using the local currency and related South African economic indicators to determine the discount rate also the country-specific risk component has been taken into account. Pre-tax discount rates used in 2009 impairment testing were the following: Revelered Asset Pre-tax discount rate Risk-free Average Beta specific Segment (2009) (2008) interest equity-% multiplier risks total(1) Southern European Minerals 16.1% (17.8%) 4.25% 82.7% 1.40 2.50% South African Minerals 22.6% — 9.13% 82.7% 1.35 1.50% House building 11.8% (12.6%) 3.44% 55.8% 0.90 2.50%
(1) total in addition to the WACC applied, including factors like: company size, liquidity of assets, customer concentration risks, stability of cash flows
The key reasons for the changes in the discount rates compared to 2008 are the following, the effect in parentheses presenting the impact to house building business discount rate: • changes in market interest rate (decrease)
151 • change in the assumed debt/funding margin (decrease) • update of the risk premia, asset specific and general market related (decrease) The results of impairment testing have been evaluated by comparing the cash generating units’ recoverable amount to the corresponding carrying amount based on the following judgment rules: Recoverable amount divided by the carrying amount Conclusion < 100% Impairment 101 – 120% Slightly above 121 – 150% Clearly above > 150% Significantly above Results of the impairment testing done at 31 December 2009 The results of the impairment testing were the following: Carrying Goodwill, Goodwill, amount Cash generating unit pre-testing post-testing pre-testing Conclusion €’000 €’000 €’000 Southern European Minerals 64,914 64,914 124,961 Significantly above South African minerals business 101,957 82,413 157,839 Impairment House building 25,523 25,523 26,715 Significantly above Key background and assumptions used in the cash flow forecasts of the impairment testing process are summarised in the table below:
Net working capital, Cash generating unit Sales volume Sales prices Costs % of revenue Southern FeCr: 22,000 tn/a Assuming 40% Raw material costs about 24% European (capacity about LC FeCR and 60% changes moving in line Minerals 30,000 tn/a) lumpy ULC FeCr product mix, with sales price changes to Cr ore: 27,000 – and based on external main extent, Turkish plant 30,000 tn/a experts (CRU International investment expected to and Heinz Pariser) decrease chrome ore price forecasts average concentrate production costs from mid-2010 South African metal alloys total: Based on external experts About 40% increase about 11–14% Minerals business 88,000 – 102,000 tn/a (CRU International and in electricity price assumed (capacity about Heinz Pariser) charge to take place in 2010, 110,000 tn/a) chrome price forecasts and longer term about average 15% annual increase, with inflation from 2012 at 5.5% p.a, House building ready-to-move-in Based on order backlog on Inflation assumption about about – 10%, houses: balance sheet date, 2% p.a., personnel when including 320 – 360 houses/a thereafter inflation-based expenses expected to received changes increase by about prepayments 3% p.a. The carrying amount in the adjacent table is equal to the sum of: + goodwill + intangible and tangible assets (including purchase price allocation entries) + net working capital (if positive) – provisions – deferred tax liabilities (in relation to purchase price allocation entries).
152 Compared to the year-end 2008, the Company’s Board somewhat changed in 2009 the way the carrying amount is determined: • if and when the cash flows used in determining the value in use include the cash outflows related to provisions related to the acquired assets are taken into account, then also those provisions are deducted from the carrying amount; and • since typically in the purchase allocation process deferred tax liabilities are recognised on the balance sheet, these liabilities are netted from the testable assets. Sensitivity analysis of the impairment testing Group has analysed the sensitivity of the impairment testing results by estimating how the essential assumptions should change in order for the recoverable value to be equal to the corresponding carrying amount. During the financial year 2009 impairment loss was recognised, so the recoverable amount is equal to the carrying amount after the impairment. In order to illustrate the sensitivities, the sensitivity of the testing results of the South African minerals business to changes in key parameters is presented below: • if the used pre-tax discount rate would have been at least 2.0 per cent.-units lower than the used rate no impairment would have recognised; • free cash flow should have been at least 14.9 per cent. higher on average than the used forecast for not to recognise impairment; • average EBITDA margin should have been at least 3.3 per cent.-units higher on average than the used forecast for not to recognise impairment. The results of this sensitivity analysis as of 31 December 2009 are shown below: Change in free Change in pre-tax cash flow (%, on discount rate average for each Change in (% units, compared year, compared segment’s average to the level to the used EBITDA margin Segment used in testing) estimated values) (% units) Southern European Minerals business 5.2%-units -24.6% -6.6%-units House building 24.8%-units -64.9% -10.2%-units Summary of impairment losses During the financial years 2009 (2008 in parentheses, based on 2009 segment structure) the Group has recorded the following net impairment losses and/or reversals of earlier impairment in Group income statement, split below by segment: € million Minerals business -19.1 (-) Wood Processing business +2.1 (-20.4) Non-segment and discontinued operations(1) -(-20.6) (1) excluding associated companies
The more detailed split by each of the cash generating units is summarised in the table below: 2008 2009 € million € million Southern European Minerals business — — South African Minerals business acquired in 2009 -19.1 House building — — Sawmill business -18.0 +2.1 Pallet business -2.4 — Russian Investment Project (unfinished investment) -17.7 — Furniture business -2.9 discontinued in 2008 Total -41.0 -17.0
153 During the financial years 2009 and 2008 the Group has realised the following impairment losses or reversal of earlier impairment by type of asset: 2008 2009 € million € million Land and buildings -11.5 — Machinery and equipment -19.5 — Reversal of fixed assets’ impairment +5.2 +2.1 Intangible assets -1.6 — Goodwill -13.6 -19.1 Total -41.0 -17.0
The impairment losses and reversals of impairment have been recognised in a separate line “impairment losses” in the Group income statement, immediately after the depreciation and amortisation, and hence it has not affected EBITDA, but has affected EBIT and profit lines below EBIT as well. Impairment on other assets during 2009 For balance sheet date 31 December 2009 the value of shares in associated companies was written down by about €0.9 million (during 2008 an impairment of about €0.4 million on associated companies shares was recognised) based on one associated company’s deteriorated financial situation and market outlook. These impairment losses are presented below EBIT in the income statement. 6.7 Commitments and risks Commitments and contingent liabilities Mortgages and guarantees pledged as security On 31 December 2009, the Group companies had given business mortgages as collateral for loans and other liabilities totalling approximately €17.5 million (€18.5 million on 31 December 2008). Of the parent company’s €4.2 million business mortgages, €1.7 (1.7) million had been pledged as security with external financial institutions on 31 December 2009. Real estate mortgages amounted to approximately €11.8 (13.5) million. The Group’s parent company has given a total of €4.0 (5.6) million in direct-liability absolute guarantees for the financing of Group companies. Moreover, the Group companies had given cash deposits totalling altogether €2.5 (3.7) million as a security for their commitments. In addition, a Group company has given a total of €0.6 million as a guarantee for equipment and land areas. Machinery financing typically involves the acquired machinery to be pledged as a guarantee with the debt repayment. With the mortgages and guarantees given to the Company’s third parties, mainly to Finnish financial institutions, the Group companies have received loans that, in turn, have been used either for financing acquisition, capital expenditures or working capital needs. In relation to debt financing arrangements of the acquisition of the pallet business in 2007, all of Oplax Oy’s shares are pledged as collateral for a loan, taken by Ruukki Group Plc, the nominal value of which stood at €1.5 million (2.9) at year-end. When the Group acquired the majority stake in Mogale Alloys (Pty) Ltd, deferred conditional and unconditional payments were agreed upon for a total nominal amount of ZAR 800 million (about €69 million at the exchange rate at the time of transaction). In relation to these deferred payments, 40 per cent. of the total number of Mogale shares owned by the Group is pledged as collateral in favour of the Mogale vendors. The sawmill business of Lappipaneli Oy was divested at the end of 2009, and the transfer of fixed assets is expected to take place in April 2010. These assets are on 31 December 2009 classified as assets held for sale. As specific guarantees to external funding, these assets have been used for asset and real estate pledges, and these pledges will be transferred out of the Group when the transfer of those assets will be concluded.
154 Covenants included in the Group’s financing agreements Some of the Group’s debt financing agreements include covenants tied to the Group’s or individual Group companies’ solvency or profitability ratios; or have covenants that restrict the payment of the Group companies’ liabilities to the parent company; or that require the parent company not to divest significant parts of the business operations without first consulting the financier. During the financial year 2009, one of Ruukki Group Plc’s loans was in breach of its covenants due to the pallet business subsidiary’s senior debt to EBITDA ratio being worse than agreed in the loan agreement. By the end of the year, the covenant breach was waived by the bank and an amendment letter was signed. In conjunction with and as a consequence of this, loan margin was increased, and moreover, Ruukki Group Plc paid out €0.9 million as additional partial loan capital repayment. The Group’s sawmill subsidiary, Junnikkala Oy, has a number of debt agreements where there are financial covenants tied to, e.g., the profitability and capital structure of Junnikkala. At the end of the financial year 2009, those covenants were not yet breached; however, due to tight liquidity, the sawmill subsidiary has during the first quarter not been able to make all the repayments of capital to the financial institutions, and hence is currently in breach of its financing agreements. In order to correct the situation, the owners of Junnikkala Oy, including Ruukki Yhtiöt Oy, most probably have to put in shareholders’ loans or other funding into Junnikkala during the first half of 2010. There are also some conditions and covenant-type terms in the debt facility agreements that Mogale Alloys had in place with an external bank; however, these facilities were not utilised during the financial year or at year end, and at the end of 2009 no breach of these terms were acknowledged. Investment commitments The irrevocable investment commitments and liabilities not paid at the end of the year totalled some €3.1 (3.8) million. Of that sum, about €2.9 (-) relates to finalising Turkish beneficiation plant investment, €0.1 (-) million to South African furnaces and €0.1 (3.8) million to the Finnish wood processing businesses. Moreover, there is about €2.0 million worth of machinery and equipment delivery commitments related to the sawmill intended originally to be located in Kostroma, Russia, and also an estimated €3.7 million assembly commitments if and when the sawmill would be later taken into production use. Mogale Alloys has budgeted funds to implement its environmental management plan which, for example, requires some refurbishing of the existing furnaces. There are also some early-stage feasibility studies on potential furnace capacity expansion projects; however, the Group has not yet committed to conclude those projects. As the Group’s target is to become a vertically integrated mine-to-metals operator, the Group might have to buy additional minerals resources or further processing capacity; however, as yet there are no known commitments. At the end of 2009, the Group’s house building business acquired a land area with a target to develop the land and build Design-Talo houses on it. If and when the project would be developed as preliminarily planned, it will require capital outlays. There is also a profit-share agreement in place with a third party of any future value added created via the area development. Earn-out and deferred liabilities related to acquisitions Earn-out and deferred liabilities related to acquisitions carried out by the Group have been capitalised on the Group’s financial statements, and presented in the consolidated balance sheet as short-term or long-term debt based on the contractual obligations as to the date of payment. The earn-out liabilities on the balance sheet as of 31 December 2009 are dependant upon future financial periods’ results, so the exact amount to be paid as earn-outs will only be finalised in the future and based on the results of the acquired entities; hence the amounts recognised on the balance sheet at year-end are based on estimates. The earn-outs, recognised in discounted values
155 to relevant extent, will be paid partially in cash and, to a major extent, in Ruukki Group Plc shares. There are also some deferred purchase considerations where the nominal sum is fixed; however, payments’ time and terms can vary. Related to the acquisition of RCS Ltd and Türk Maadin Sirketi A.S, Ruukki Group Plc has issued 73,170,731 option rights to the seller, Kermas Ltd, based on Extraordinary General Meeting’s resolution on 28 October 2008. These options can be exercised only on condition that the companies acquired generate positive net results, and are based on €2.30 per share exercise price with a dividend adjustment mechanism. Based on estimates at the end of 2009, as confirmed by Ruukki Group Plc’s Board of Directors, for 2010 – 2013 net profits of the acquired entities, and assuming a maximum dividend adjustment of the share purchase agreements, altogether 22,774,441 (31.12.2008: 39,725,720) shares are estimated to be given as earn-out payment to the seller. The fair value of these shares has been determined to be €1.28 per share based on the market price of the share on 28 October 2008, the date of the Company’s Extraordinary General Meeting confirming the acquisition. The total earn-out to be realised in the future can deviate from the amount estimated should the net results in 2010 – 2013 of the acquired companies deviate from the estimated results; or Ruukki Group Plc’s dividend distribution is not equal to the amount estimated; or Ruukki Group Plc would exercise the put option on Türk Maadin Sirketi A.S.’s shares. Since the maximum amount of the earn-out is capped at the total amount of option rights issued, Ruukki Group Plc’s total earn-out liability cannot exceed 73,170,731 shares. If the combined net profit of RCS Ltd and Türk Maadin Sirketi A.S. is negative during 2009 – 2013 (considered on annual basis separately for each year), then the seller is obliged to pay back Ruukki Group Plc 50 per cent. of the losses in cash as a refund of the purchase consideration. There is no resolution as to the exercise of option rights related to Elektrowerk Weisweiler GmbH. Moreover, the exercise price of the option rights on that company is not fixed in advance; however, the exercise price will be based on fair value of Elektrowerk Weisweiler GmbH, which will be separately determined in the future based on Stuttgarter Verfahren formula, used in certain circumstances in determining fair value of business entities. In the consolidated balance sheet on 31 December 2009, Ruukki Group Plc has assumed that option rights would be exercised in 2014. The nominal exercise price has been determined by using judgment and a valuation model. At the end of May 2009, Ruukki South Africa (Pty) Ltd acquired an 84.9 per cent. stake in Mogale Alloys (Pty) Ltd. The purchase consideration is denominated in rand. According to the acquisition agreement there is a total of ZAR 800 million deferred payment, of which ZAR 200 million is unconditional and ZAR 600 million is conditional upon licences and permits being received from the relevant authorities, and this deferred conditional consideration will be paid in cash. If and when the exchange rate of ZAR changes that changes the EUR value of that liability. Rental agreements Liabilities associated with rental and operating lease agreements totalled some €5.3 million (3.1 million on 31.12.2008). Typically, the rental agreements maturity varies between three to eight years, and normally there is a possibility to continue these agreements after the end of original maturity date. For these contacts, their price indexing, renewing and other terms differ contract by contract. As guarantees for these rental agreements, the Group companies have made cash deposits of approximately €0.1 (0.1) million at year-end. Other liabilities and commitments In December 2009, the Group’s Minerals business subsidiary had a liability of about €0.2 million related to the employees’ social security payments; and as a guarantee of paying this statutory commitment, the subsidiary has provided a guarantee of less than €0.1 million and has also pledged some real estate.
156 The Group’s house building products involve quality or quantity guarantees to customers, typically consisting of a short-term obligation to carry out repairs (one-year) and a statutory ten-year guarantee in respect of structural safety issues. For the potential short-term one-year repair liabilities, the Group has accrued a provision based on past realised repair expenses. Up until year-end 2009, a fixed percentage of 0.2 per cent. of revenue was used; however, at the end of 2009, the percentage was increased by the subsidiary’s Board of Directors to 0.4 per cent. in order to take into account the expected repair costs for the houses delivered in 2009. As far as the longer-term ten-year contingent guarantee liability is concerned, the Group has not recognised any provision on its balance sheet. The following table presents the earn-out liabilities related to the Minerals business acquisition in October 2008 (RCS Ltd, Türk Maadin Sirketi A.S. and Elektrowerk Weisweiler GmbH) and based on future profits. The sums in brackets represent the corresponding bookkeeping entries at 31 December 2008: Estimated earn-out and call option related Estimated time Company liability of payment Other € million RCS Ltd and 29.2 (50.8)(1), of which 2010, 2011, 2012, Earn-out to be paid in Türk Maadin Sirketi A.S. short-term portion 2.9 2013 and 2014 Ruukki Group Plc shares Elektrowerk Weisweiler GmbH 8.8 (8.4)(2) 2014 Based on assumption that Ruukki Group Plc would buy Elektrowerk Weisweiler shares in cash by exercising its redeem options Total 38.0 (59.2)
(1) movement based on revised future profit forecasts and actual 2009 results, being the basis of the earn-out (2) movement based on unwinding of interest due to discounting
At the end of December 2009, Ruukki Group terminated its put option granted to Junnikkala Oy’s minority shareholders. Moreover, the Group sold Tervolan Saha ja Höyläämö’s shares. Hence, at the end of 2009 in the Wood Processing business, the earn-out and deferred purchase consideration liabilities are only related to the acquisition of the 9.9 per cent. stake in Pohjolan Design-Talo Oy (house building business, increase in stake acquired during 2008), the sums in brackets at 31.12.2008: Earn-out Deferred liability liability Total € million € million € million Short-term liabilities 0.1 (0.2) 0.9 (0.9) 1.0 (1.1) Long-term liabilities - (0.0) - (0.9) - (0.9) Total liabilities 0.1 (0.2) 0.9 (1.8) 1.0 (2.0)
Collaterals given by Ruukki Group Plc Collaterals for the Company’s own behalf 31.12.2008 31.12.2009 €’000 €’000 Corporate mortgage 1,682 1,682 Pledged subsidiary shares 7,936 7,936 Other collaterals 943 —
157 Guarantees for Group companies 31.12.2008 31.12.2009 €’000 €’000 Payment guarantees for subsidiaries 7,250 — Pledges for subsidiaries’ liabilities 2,500 2,500 The amount of the above payment guarantees is the maximum amount; their realisation in full is unlikely in the opinion of the Company’s management. If the Russian sawmill project would be continued and the equipment be assembled, would that most probably oblige the Group’s parent company to give a guarantee to third parties on behalf of its subsidiary for the assembly costs, currently estimated to be about €3.7 million. Environmental and rehabilitation liabilities As the Group has mining and minerals processing operations, there are certain known and potential environmental and rehabilitation liabilities in relation to the business activity as detailed below. During 2009, the Group commissioned an external expert to assess the Group’s Turkish exploration and exploitation areas from the environmental site assessment perspective. The key target was to identify and quantify to the extent possible any potential environmental liabilities that may have resulted from existing and previous landuse or site development activities on and adjacent to the sites. Moreover, the aim was to identify any conditions or practices that may represent additional significant environmental risks or liabilities under Turkish laws and regulations. Based on the analysis at the Group’s Turkish sites, there are no observed acid rock drainage or apparent inhibition of vegetative growth on the tailings. The reclamation of the open pit and subsidence areas would require implementation of a reclamation plan, which may involve further backfilling of the underground openings via boreholes from the surface and terracing of the slopes with heights about 15 to 20 meters. Since the Group is planning to start reworking the on-ground tailings dumps, some additional preparation work for those areas was recommended by the expert. Based on the external study, decommissioning costs were estimated to be some USD 3.3million, using the Group’s Turkish subsidiaries’ expected unit rehabilitation costs as the basis, of which about half relates to the on-ground tailings dumps. This estimate, based on the additional analysis run in 2009, i.e. after the acquisition was concluded in October 2008, confirmed the €2.0 million liability that the Group recognised in conjunction with the purchase price allocation process in 2008. In relation to EWW smelting operations in Germany, the Group has altogether €4.1 million provisions on its 31 December 2009 balance sheet, of which about €2.9million is long-term, to main extent related to environmental and waste treatment liabilities. At the end of May 2009, the Group acquired the majority stake in Mogale Alloys (Pty) Ltd. As part of the due diligence process carried out pre-transaction, a third-party environmental expert was used to determine the environmental liabilities related to Mogale’s operations. The due diligence report gave a range of ZAR 154 - 226 million as the nominal total environmental liability including a 10 per cent. subcharge for any potential contingencies. The liability consisted of the following parts: environmental monitoring activities; waste site permission procedures; environmental impact assessment; storm water and groundwater management; slag and dust storage areas; and refurbishing and capital outlays mainly related to smoke hoods and electrode columns. At the time the transaction was concluded, the Group capitalised on its balance sheet a total nominal liability of ZAR 200 million based on the report and as part of the purchase price allocation process. After the transaction was concluded, Mogale Alloys submitted an environmental management plan to the South African authorities. Moreover, post-transaction Mogale Alloys management and its auditors reanalysed the environmental liabilities from the perspective of IAS 37 standard, to which extent the obligating event is a result of a past event and to which extent they are expected to be settled. Based on this additional analysis, the amount of the liability was reduced to about €7.1 million at the end of 2009.
158 Litigation processes Rautaruukki Oyj, another listed Finnish company, announced on 21 December 2009 that they had initiated legal proceedings against Ruukki Group Plc concerning claims to the Ruukki name. This legal process is still in its early stages, and hence its outcome or timing is not yet known. Rautaruukki has claimed for: (i) fixed €5.0 million for damages; and (ii) €12.1 million based on royalties Rautaruukki has calculated based on the Group’s 2004-2008 actual revenue; and (iii) reasonable legal fees. On 31 December 2009, these claims have not been recognised on the balance sheet of the Group. Ruukki Group Plc and its subsidiaries will defend their position on all relevant fronts. The sawmill business subsidiary Lappipaneli Oy, the business assets of which were resolved to be sold at the end of 2009, has an ongoing legal dispute where Lappipaneli has claimed for damages from Sampo Bank. Ruukki Group has recognised all the expenses of that process in its financial statements excluding the counterparty’s fees. The timing and outcome of this legal process is uncertain. There is also a legal dispute at Mogale Alloys, in relation to its earlier acquisition of a 30 per cent. stake in Nuco Chrome (BOP), which should not have any material effect and which is expected to be commercially settled later in 2010. Maximum Credit limit Maximum liability in use/loan liability 31.12.2008 31.12.2009 31.12.2009 Guarantees given to financial institutions for group companies’ financing limits: — — — Guarantees for equipment financing Guarantees given to financial institutions for group companies’ loans 2,744 909 1,840 Bonds 2,875 2,200 2,200 5,619 3,109 4,040
Ruukki Group Plc’s rental and leasing liabilities were on 31 December 2009 some €0.4 (0.6) million, of which about €0.3 (0.3) million will mature in less than one year and the rest in 1-5 years.
Risks The Board of Directors of Ruukki Group Plc has outlined the key risks of the Group in the Board of Directors’ Report. In the following section, some more information is presented: first, on the short-term risk outlook for the Group; and second, on the financial and commodity risks with the related sensitivity analyses. Risks and uncertainties at the end of 2009 By the acquisition of the chrome ore and ferrochrome businesses at the end of October 2008 and by the expansion into South African minerals sector via Mogale Alloys acquisition in May 2009, the Group has somewhat diversified its industry risks and is thus less vulnerable to the wood processing industry; however, it has more exposures to minerals sector commodity price risks. Although the number of geographical locations has increased and therefore dependence on any one location or country is decreased, the Group is now exposed to South Africa related risks. As a consequence of the recent acquisitions, more intangible assets and less cash were recognised on the Group balance sheet at the end of 2009 as compared to 2008. Changes in the Group’s business and legal structure have increased the absolute and relative importance of foreign operations and also foreign exchange rate risks, both directly and indirectly. Ruukki Group is dependent on the competence of the key employees in the acquired businesses. Based on studies and surveys carried out so far, the Group has no knowledge of any environmental risks or changes in environmental requirements that relate to its businesses in
159 excess of what is disclosed in the financial statements. However, the Group might face some additional environmental liabilities or there might be changes in regulations that can lead to additional costs or investment needs. Even though the general uncertainty in the global economy has somewhat alleviated compared to the year-end 2008, in the commodity and end-customer markets that are most important to the Group, such as the stainless steel industry, there is still considerable uncertainty in relation to future demand. Ruukki Group currently has quite a strong cash position, but if the availability or terms of external financing would be inadequate for longer term, it could have a major adverse impact on the implementation of the Group’s strategy, on its future growth and on the implementation of mergers or acquisitions. Moreover, the uncertainty in the capital markets could limit the opportunities for the Group to pursue capital expenditure projects within the current businesses, or could adversely affect the profitability or return on capital of those projects. The short-term success of the Group’s Minerals businesses is to a large extent dependant on the global demand for stainless steel on which ferrochrome is one key raw material. During the latter half of 2009, there was a pick-up in demand and a trend of sales price increases; however, there is general uncertainty as to how the 2010 demand will develop. The Group’s Minerals business segment’s management expects the demand for the Group’s ferroalloys products in general to be higher in 2010 compared to that of 2009; however, the Group has decided to curtail the production of the specialty grade ferrochrome during the first quarter, and later if needed, to manage the cash flow and inventories. Both producers as well as end-users seem to be having quite low inventory levels, which can create short-term imbalances between supply and demand. The changes in exchange rate, if adverse, can have a major negative impact on Group’s profitability, in particular in relation to changes in USD/ZAR. Changes in the ZAR exchange rate also affect the € value of the deferred purchase consideration of Mogale Alloys. The Group is expecting to finalise its Turkish beneficiation plant investment by the second quarter of 2010, and is expecting the utilisation of the on-ground tailings resources to significantly reduce production costs. If there would be any material delays, unexpected costs or other operational friction in the implementation process, there is the risk that the financial performance would be worse than expected. Since the Minerals segment operations, in particular in the smelting processes, require of a considerable amount of electricity and power, the availability and price of electricity can have a significant effect on the segment profitability. In South Africa in particular, there is a substantial risk of an increase in the unit price of electricity. For the Wood Processing segment, the success of the house building business is one key driver of cash flows and profitability. Therefore, the development of the Finnish house building sector in general impacts the financial performance. Currently, the Finnish single-family house market in general is rebounding from a couple of years of declining volumes; however, there is still uncertainty as to the length and depth of the recovery. As the Group has at the end of 2009 started to diversify the house building business into larger area development projects, this typically ties in cash more than the earlier basic business model of the Group would have required. In the sawmill business, major short-term risks and uncertainties relate to customer demand and the development of market prices. Capacity utilisation rate was at a low level in 2009, and if this remains unchanged, it can continue to have an adverse effect on profitability since losing efficiency benefits typically increase average production costs per unit. If there are any public sector changes to taxes, laws, required safety measures or any other similar issues, these can increase the costs of the Group’s wood processing businesses. Also, changes in foreign exchange rates can have major impact on the Group’s sawmill business’s performance, as sawn timber products are commodities produced and traded on global markets with only very minor differentiation between competitors. Since the Group has made and might still carry out mergers and acquisitions, there are a number of implementation and integration related risks. Further, as the Group has during the last two years quickly acquired and established operations in a number of foreign jurisdictions, there might be some administrative or tax related issues that might require attention later or have some implications not currently known. There is also uncertainty whether the Group will exercise its call or put options in certain of the acquisitions, in particular in relation to the minerals segment.
160 Consequently, the income statement, balance sheet or cash flow statement could change and might not correctly reflect the actual situation in retrospect. There is also uncertainty what the total purchase consideration is for some of the Group’s acquisitions, both related to options’ exercise prices and also related to earn-out purchase components, as they can only be verified when the total purchase considerations are finally settled, which to some extent takes place only after a few years. The Group is also considering some alternative options on how to organically grow its minerals business. Risk management Management of strategic and operative risks Ruukki Group has in both 2009 and 2008 operated in various businesses, which has diversified the Group’s overall business risk as the businesses are not perfectly correlated. Moreover, since the Group has geographically expanded, the impact of changes in any single market is lower than previously. Ruukki Group Plc’s Board is responsible for the comprehensive management of strategic risks. Long-term planning and a flexible business model play a key role in managing operative risks. Due to the historically decentralised and heterogenic business structure, each business unit’s role in managing operative risks has been very important; however, during the latter half of 2009 the Group has started to implement more centralised approaches to management, for example by establishing segment level management teams, and to risk and control issues, for example by hiring in-house and external resources for analysing and implementing internal control mechanisms. The success of the Group’s business is also dependant upon recruitment and holding on to professional and motivated personnel. As the Ruukki Group’s operations have been growing, the relative importance of any one key employee has decreased. In order to commit the key employees at Group, segment or subsidiary level management, there are share-based and performance-based incentive schemes in place. The damage and liability risks are covered by insurances to a major extent. To a certain extent, the Group has used insurances brokers and international insurance experts to build insurance packages that are needed to fulfil risk management needs. The internal audit function, whose practical operations have been outsourced to an external specialist, is involved in ensuring the implementation of risk management activities and the appropriate follow-up on business processes and instructions. During 2009, there has been a change in the way the internal audit function is organised: for the first half there was an outsourced service solution; however, at the end of the year, the Group employed an internal resource to organise and develop the function. Management of financial risks In its normal operations, the Group is exposed to various financial risks. The objective of Group risk management is to identify and to a selected extent mitigate the adverse effects of the changes in the financial markets on the Group’s results. The main financial risks are foreign exchange rate, interest rate, as well as liquidity and credit risks. The general risk management principles are accepted by Ruukki Group Plc’s Board of Directors and monitored by its audit committee with the management of the business segments and of the subsidiaries being responsible for the implementation. The Group has not, for the time being, had a centralised Group risk management organisation; however, it decided to start to centralise its treasury functions during 2009 in order to centrally manage risks and utilise economies of scale. When analysing risks, the Group’s financial and operational information is utilised. The Group has not used e.g. VaR (Value at Risk) tools for risk measurement. The Group’s operations expose the Group and its business units to the following market risks: (i) foreign exchange rate risk (ii) interest rate risk
161 (iii) credit risk (iv) liquidity risk (v) commodity risks (i) Foreign exchange rate risk The Group operates internationally and has, during 2008 and 2009, diversified its operations out of Finland into, e.g. Turkey, Malta and South Africa. The Group thus has foreign exchange rate risks to an increasing extent - both directly via the outstanding commercial cash flows and currency positions, as well as indirectly via the changes in competitiveness between various competitors in the relevant product markets. Moreover, a significant portion of its acquisition-related liabilities are denominated in foreign currency. During 2009 translation differences, when converting foreign subsidiaries’ financial statements into EUR, have affected the Group’s balance sheet. As a fundamental principle, the Group companies do not hedge the open foreign currency positions by using currency derivatives. To the extent possible the Group targets to match its cash inflows and outflows as well as receivables and liabilities in terms of the currency these items are denominated. Hence the Group is exposed to currency-derived risks that affect its financial results, balance sheet and cash flows. At the end of 2009, the Group had only one foreign currency derivatives position, with approximately €0.3 million of nominal value, to hedge its commercial foreign currency denominated cash flows. As the single most significant change in 2009 in the Group’s currency exposure relates to the acquisition of Mogale Alloys in May, the changes in the USD/ZAR and €/ZAR exchange rates thus have a major impact on Mogale Alloys’ profitability in EUR. Mogale’s cash inflows are denominated in USD, whereas most of the costs are denominated in ZAR. Furthermore, Ruukki South Africa has about ZAR 0.8 billion deferred liabilities. In the Southern European minerals business USD, EUR and GBP are used in the operations; however, during 2009, inflows and outflows in those currencies were quite closely matched. In the sawmill business, the relative importance of exports is quite high, even though the sale of Lappipaneli’s assets diminished the Group’s exposure to the Japanese yen. The sawmill business area’s sales and purchases are now more closely than before linked to €. The sawmill business also has some sales to and purchases from Sweden, denominated in SEK, which directly affects the euro cash flows, and indirectly the competitiveness towards Swedish competitors. The following tables present the currency composition of receivables and debt, and changes thereby vis-à-vis the previous year-end. At the balance sheet date of 31 December 2009, the major open foreign exchange rate risk was against the ZAR, and in particular the deferred payments in relation to Mogale Alloys. Currency exposure of receivables and liabilities
€ exchange rate 31.12.2009 1.0000 1.4406 0.8881 2.1547 10.6660 10.2520 €’000 € USD GBP TRY ZAR SEK Cash and cash equivalents (€) 50,060 3,325 188 199 2,078 2 Trade receivables (€) 15,218 5,806 474 16 4,150 — Loans and other receivables (€) 49,660 1,182 — 61 1,661 — Trade payables (€) (9,978) (1,429) (743) (872) (6,052) (168) Loans and other payables (€) (118,542) (5) — (473) (74,319) (74) Derivatives (€) — (278) — — — — Currency position, net (€) (13,581) 8,601 (81) (1,070) (72,482) (240) Currency position, net (in each currency) (13,581) 12,391 (72) (2,306) (773,097) (2,455)
162 Currency exposure of receivables and liabilities
€ exchange rate 1.0000 1.4721 35.9860 164.9300 31.12.2008 €’000 USD RUB JPY Others Cash and cash equivalents (€) 43,515 1,450 5 162 281 Trade receivables (€) 14,587 1,450 507 162 282 Loans and other receivables (€) 221,828 2,782 888 261 13 Trade payables (€) (17,961) (1,352) — — — Loans and other payables (€) (150,436) (169) (344) — (29) Derivatives (€) — (340) — (10,914) — Currency position, net (€) 111,533 3,821 1,056 (10,328) 547 Currency position, net (in each currency) 111,533 5,625 37,994 (1,703,441)
The €-based earn-out payments, to be settled with Company’s shares, in relation to RCS and TMS acquisition, are not taken into account in the table above.
The effect on 31 December 2009 balance sheet’s currency denominated items by changes in foreign exchange rates vis-à-vis the rates used in the Group balance sheet consolidation is presented in the next page. To the extent that the Group has internally financed foreign subsidiaries with foreign currency loans and when these loans have been considered as net investments into the subsidiaries, not foreseen to be repaid, the corresponding foreign exchange rate difference has been recognised as conversion difference in the Group equity. Due to the high market volatility rates, the range of change was kept at +/- 20 per cent. applied also in 2008. The Group management’s view is that the currency distribution at the balance sheet date does not necessarily describe the real direct or indirect foreign exchange rate risk, since the year-end situation does not fully reflect the average situation during the ended or coming financial years. Furthermore, should the Group’s geographical focus change during the coming years, the foreign exchange rate risks can change. Generally, the Group’s foreign exchange rate risks increased during 2009 over 2008 and are expected to be important also in the future. At the end of 2009, the weakening of US dollar and strengthening of rand would have the most adverse effect on Group’s results and financial position. Sensitivity analysis of currency denominated net receivables
USD GBP TRY ZAR SEK (‘000) (‘000) (‘000) (‘000) (‘000) Group balance sheet on 31.12.2009 Cash in currency 4,789 167 428 22,169 25 Receivables in currency 10,067 421 165 61,979 — Derivatives in currency (400) — — — — Payables in currency (2,065) (660) (2,899) (857,245) (2,480) Net receivables in currency at 31.12.2009 exchange rates: 12,391 (72) (2,306) (773,097) (2,455) Net receivables in € 8,601 (81) (1,070) (72,482) (240)
Sensitivity analysis compared with the actual conversion rates
Exchange rate change in currency value vs. € USD GBP TRY ZAR SEK 20% strengthening 1.15 0.71 1.72 8.53 8.20 15% strengthening 1.22 0.75 1.83 9.07 8.71 10% strengthening 1.30 0.80 1.94 9.60 9.23 5% strengthening 1.37 0.84 2.05 10.13 9.74 0% no change 1.44 0.89 2.15 10.67 10.25 -5% weakening 1.51 0.93 2.26 11.20 10.76 -10% weakening 1.58 0.98 2.37 11.73 11.28 -15% weakening 1.66 1.02 2.48 12.27 11.79 -20% weakening 1.73 1.07 2.59 12.80 12.30
163 The effect of the change in currency rates compared with the actual rates
€’000 change, ceteris paribus change in currency value vs. € USD GBP TRY ZAR SEK 20% strengthening 2,150 (20) (268) (18,121) (60) 15% strengthening 1,518 (14) (189) (12,791) (42) 10% strengthening 956 (9) (119) (8,054) (27) 5% strengthening 453 (4) (56) (3,815) (13) 0% no change — — — — — -5% weakening (410) 4 51 3,452 11 -10% weakening (782) 7 97 6,589 22 -15% weakening (1,122) 11 140 9,454 31 -20% weakening (1,434) 14 178 12,080 40 (ii) Interest rate risk The Group is exposed to interest rate risk when the Group companies take loans or make other financing agreements or deposits and investments related to liquidity management. Moreover, changes in interest rates can indirectly affect the conditions in which the business units operate since, for example, the demand for ready-to-move-in houses is dependant upon the prevailing interest rate level and the customers’ possibilities to get debt financing. In addition, the changes in interest rates can influence the profitability of investments or the changes can alter the fair values of Group assets via the IFRS impairment tests. To manage interest rate risks, the Group has used both fixed and floating rate debt instruments, and when needed derivative instruments, such as interest rate swaps. At the end of 2009, the Group’s interest-bearing debt was mainly based on floating interest rates, and there was a total of €0.9 million nominal value of interest rate swaps in place where floating interest was effectively converted to fixed rates. The Group also aims to match the loan maturities with the businesses’ needs and to have the maturities spread over various periods, whereby the Group’s interest rate risks are somewhat diversified. Floating rate financing is mainly tied to 3 – 12 months Euribor interest rates, the changes of which will then influence the Group’s total financing cost and cash flows. The Mogale Alloys related deferred contingent liability, if and when interest-bearing, is directly tied to the South African prime rate as published by the Reserve Bank of South Africa. The short-term interest-bearing receivables of the Group are mainly fixed-rate deposits made for predetermined periods of varying lengths. The Group’s revenue and operative cash flows are mainly independent of the changes in market interest rates. The split of interest-bearing debt and receivables, also classified into fixed rate and floating rate instruments, was the following on the balance sheet dates 31 December 2009 and 31 December 2008: 31.12.2008 31.12.2009 €’000 €’000 Fixed rate instruments Financial assets (including mutual funds) 221,527 12,500 Financial liabilities (3,030) (1,089) Fixed rate instruments, net 218,497 11,411 Variable rate instruments Financial assets (including mutual funds) 27,708 3,805 Financial liabilities (33,157) (37,068) Variable rate instruments, net (5,448) (33,263) Interest bearing net debt 213,049 (21,852)
164 The following table presents the rough effect on the Group’s income statement by changes in market interest rates should the deposits’ and loans’ interest rates change. The changes in interest rates have been taken into account in the floating rate items. The following sensitivity analysis is illustrative in nature and primarily takes into account the forthcoming twelve-month period, if the periods’ balance sheet structure would be equal to that of 31 December 2009 and if there would be no changes in exchange rates. Therefore, the analysis is primarily applicable to assessing the variation in the 2009 financial year’s interest income and expenses. Moreover, any potential acquisition or investment can alter the Group’s capital structure to a major extent. Due to the increase in market volatility in 2008, the range of change was widened last year to +/- 200 basis points (from +/- 100 basis points); this has also been selected as the basis for 2009. Sensitivity analysis Effect of changes in interest rate on interest expense and income. Main assumptions: • interest rates for deposits and loans change simultaneously as market rates change, i.e. both are based on market rates, however the interest rate of fixed rate deposits and loans remains unchanged • the amount of loans and deposits remains unchanged the whole year (compared with the balance sheet 31.12.2009) • the interest rates of deposits and loans in different currencies change simultaneously as market rates change, and the changes are parallel, ie exactly similar in all maturities, so there is no change in yield curve shape • all group companies and the amounts of their deposits and loans on 31 December 2009 are constant and they are taken into account for full financial year of 12 months • the change of interest rate for cash and liquidity deposits is taken into account • it should be taken into account that in the reality the changes of the Euribor rates for loans and for deposits do not materialise and the beginning of the next year, therefore most probably the effect would be slightly less, even if the interest rate change would take place 1.1.2010 and be unchanged for all of the year 2010 Group balance sheet 31.12.2009
Average change in average interest rate for 2010 compared with the interest rates on 31.12.2009 percentage points, % p.a. Change €’000 Change €’000 Change €’000 (net change in market rate + any potential interest income interest expense net effect in profit change in margin) full year full year or loss full year (2.00%) (76) 741 665 (1.50%) (57) 556 499 (1.00%) (38) 371 333 (0.50%) (19) 185 166 0.00% — — — 0.50% 19 (185) (166) 1.00% 38 (371) (333) 1.50% 57 (556) (499) 2.00% 76 (741) (665)
In a separate section covering impairment testing, a sensitivity analysis is presented on the changes in impairment tests’ values due to changes in interest rates used in the calculations. One component that affects the used weighted average cost of capital is the market interest rate and the changes in it. Any changes in the impairment tests’ outcome can change the Group’s financial result and values of assets on the Group balance sheet.
165 (iii) Credit risk Credit risk can be realised when the counterparties in commercial, financial or other agreements cannot take care of their obligations and thus cause financial damage to the Group. The Group’s operational policies define the creditworthiness requirements for customers and for counterparties in financial and derivative transactions, as well as the principles followed when investing liquidity. Related to the major sales agreements, the counterparty’s creditworthiness information is checked. Due to the general economic turmoil, credit risks in general have increased based on available market information from, e.g. Moody’s; however, it is expected that the default rates would decline. Although the Group has not faced any major losses due to this reason to date, depending on the market development in the future it could happen. Although the customer base is quite well diversified, geographically the house building and pallet businesses are concentrated in Finland – both in terms of customers and production facilities. The Group’s business-to-business operations’ customers quite often operate in certain industries, such as the stainless steel industry for ferrochrome production and the construction industry for sawmills; for this reason, there are some risk concentrations at the customer end. In the pallet business, although there are only a limited number of customers, the Group has, to a large extent, long-term delivery agreements with them. The Minerals segment’s key customers are major international stainless steel companies, or some specialty agents selling to the steel sector, with which there are typically long business histories. Since the customers represent one sector of industry, major changes in that industry’s profitability could increase the credit risk; furthermore, the payment terms of the Minerals business are typically quite short. The house building business area gets prepayments from its customers in accordance with the completion rate of the houses, which clearly diminishes potential credit risks. The sawmill business sells predominantly to the domestic and foreign construction industry, with some exposure in the pulp market as far as sales of wood chips are concerned. Changes in demand in these market areas can considerably affect the segment’s profitability if no other customers can be found to replace any lost sales. The Board of Directors of Ruukki Group Plc has determined a cash management policy for the Group’s parent company, according to which the excess cash reserves are deposited for a short-term only and with sound financial institutions with which the Group has had business relations. These reserves are diversified into a number of counterparties so that a single entity can have a maximum of 40 per cent. share of total deposits. The credit rating of all significant counterparties is analysed from time to time. The exposure to foreign currencies at the end of 2008 was very minor, since the deposits were almost fully denominated in EUR. During the financial year, credit losses booked through the profit and loss account were not significant. At the end of 2009, the Group’s cash and short-term deposits at financial institutions were split in the following way: Ruukki Group’s cash and short-term % of cash and deposits, interest-bearing Counterparty’s 31.12.2009 receivables, Financial institution’s/counterparty’s rating domicile € million 31.12.2009 Aa2 (Moody’s, long-term), multiple banks Finland 39.8 68% A3 (Moody’s, long-term) Malta 8.9 15% Baa2 (Moody’s, long-term) Great Britain 4.3 7% A1 (Moody’s, long-term) Great Britain 1.7 3% Other/not rated Various 3.7 7% Total 58.4 100%
166 The maximum credit risk is equal to the balance sheet value of the receivables as of 31 December, and is split in the following way: 31.12.2009 31.12.2008 € million € million Interest-bearing Cash and cash equivalents 55.9 45.4 Held-to-maturity investments, short-term 2.5 186.5 Receivable from related party 10.1 16.4 Other interest-bearing receivables 6.7 4.4 Interest-bearing, total 75.1 252.7 Non-interest bearing Trade receivables 25.7 17.0 Current prepayments and accrued income 10.9 16.2 Other short-term receivables 11.5 2.9 Long-term receivables 11.9 0.5 Non-interest-bearing, total 60.0 36.6 Total 135.2 289.3
Of the interest-bearing liabilities as of 31 December 2009 about €2.2 million have been put on an escrow account of a third party authority due to claims from Sampo Bank. The Group considers the receivable amount undisputed, and the Sampo Bank requirements relate to other legal dispute between Lappipaneli and Sampo Bank. (iv) Liquidity risk The Group regularly assesses and monitors the investment and working capital needs and financing so that the Group has enough liquidity to serve and finance its operations and pay back loans. The availability and flexibility of financing are targeted to be guaranteed by using multiple financial institutions in the financing and financial instruments, and to agree on financial limit arrangements. Cash flow forecasts on both incoming and outgoing cash flows are taken into account when the Group companies make decisions on liquidity management and investments, as well as when they plan short-term and long-term financing needs. Even though the Group’s cash reserves declined during 2009, mainly due to Mogale Alloys acquisition and share buy-backs, there are still no major short-term challenges to the Group’s liquidity. However, in the sawmill business, which is capital-intensive, there might be some needs to restructure the financing portfolio. In addition to the debt from financial institutions, the Mogale Alloys deferred purchase consideration has to be settled in cash. At the end of 2009, the Group had about €7.3 (31.12.2008: 0.0) million worth of unused credit facilities in place. If the liquidity risks would be realised, it would probably cause overdue interest expenses and may make cooperation with goods and services suppliers more difficult. Consequently, the pricing and other terms for input goods and services and for financing could be affected.
167 The maturity distribution of the Group debt was the following at the balance sheet date:
31.12.2008 Carrying Contractual 6 months 6-12 1-2 2-5 More than amount cash flows or less months years years 5 years €’000 €’000 €’000 €’000 €’000 €’000 €’000 Financial liabilities Secured bank loans 27,317 (32,846) (3,882) (4,111) (10,017) (11,387) (3,449) Unsecured bank loans 4,480 (5,308) (797) (716) (1,027) (2,193) (576) Convertible loans — — — — — — — Finance lease liabilities 6 (6) (6) — — — — Trade and other payables 113,545 (118,805) (54,733) (900) (19,605) (43,564) (3) Bank overdraft 4,367 (1,906) (1,472) (57) (94) (283) — Derivatives Currency derivatives Outflow (2,527) (3,498) (3,498) — — — — Inflow — — — — — — — Interest rate swaps — — — — — — — Total 147,187 (162,370) (64,388) (5,784) (30,743) (57,427) (4,028)
31.12.2009 Carrying Contractual 6 months 6-12 1-2 2-5 More than amount cash flows or less months years years 5 years €’000 €’000 €’000 €’000 €’000 €’000 €’000 Financial liabilities Secured bank loans 23,678 (26,480) (3,458) (4,011) (6,819) (10,686) (1,507) Unsecured bank loans 2,934 (2,934) — (2,934) — — — Convertible loans — — — — — — — Finance lease liabilities 783 (933) (280) (257) (253) (143) — Trade and other payables 133,620 (148,635) (36,903) (16,532) (47,061) (48,136) (3) Bank overdraft 3,817 (3,880) (232) (3,647) — — — Derivatives Currency derivatives — — — — — — — Outflow — — — — — — — Inflow — — — — — — — Interest rate swaps — — — — — — — Total 164,831 (182,862) (40,872) (27,381) (54,133) (58,965) (1,510)
(v) Commodity risks The Group is exposed to price risks on various output and input products, materials and commodities. Also, securing the availability of raw materials without any major discontinuation is essential to the industrial processes. The price risks on input materials and commodities are managed by pricing policies so that changes in input materials and commodities could be moved into sales prices. This, however, is not always possible or there might be delays due to contractual or competitive reasons. The Group’s units that have industrial production operations are exposed to the availability, quality and price fluctuations in raw materials and commodities. To diminish these risks, the Group’s business units try to enter into long-term agreements with known counterparties; however, in certain industries like the Minerals business, this is not possible due to the tradition and practice of the business. For the most part, as it is not possible or economically feasible to hedge commodity price risks in the Group’s business sectors with derivative contracts, the Group did not have any commodity derivative contracts in place as of 31 December 2009. The effect of changes in the sales price of special grade ferrochrome, produced by the Group’s Southern European minerals business, to the Group’s EBITDA is illustrated in the table next page, assuming that the EUR/USD rate would be constant. Since the products are effectively priced in USD, the exchange rate changes could have a major effect on the Group’s EBITDA in EUR. Full capacity for simulation purposes is set at 30,000 tn/a. In ferrochrome production, a number of raw materials are used, including chrome ore
168 concentrate and ferrosilicochrome. Electricity usage is also substantial, and hence changes in electricity prices have a significant effect on profitability; typically, the electricity price does not correlate perfectly with changes in commodity prices. However, in practice, the purchase prices of the main raw materials typically change to the same direction as the sales prices, even though the correlation is not perfect and the timing might differ. Therefore, the net effect on the Group’s EBITDA most probably would be lower than shown below. The South African ferroalloys smelting business of Mogale Alloys, acquired into the Group in 2009, can change its product mix quite rapidly and flexibly. Therefore, only rough estimates on its sensitivity to commodity price changes can be given. In general, the full production capacity is about 110,000 metric tn/a of various metal alloys. Assuming that all of the Mogale capacity would be used to charge chrome production only, which is only a simplification, and using the year-end 2009 sales price indications for charge chrome, the table below can be used as a rough proxy of the sales price sensitivities. It also shall be taken into account that both changes in exchange rate, both USD and ZAR, and changes in electricity prices can substantially affect the profitability in addition to changes in market prices. Sensitivity analysis Effect of changes in ferrochrome sales prices to Group EBITDA Main assumptions, Southern European minerals business: • Sales price is equal to the 8 January 2010 average price (quote in Metal Bulletin) • Ferrochrome 0.10 per cent. C, average 68-70 per cent. Cr major European destinations $/lb Cr • Average price was 1.825 USD/lb Cr • Average chrome content of 70 per cent. assumed • USD/EUR rate on 31.12.2009 fixed at 1.4406 (Bank of Finland) • Full capacity is assumed to be 30,000 tn / year Main assumptions, South African minerals business: • Mogale assumed to utilise all of its capacity, with about 1 month maintenance break, for charge chrome FeCr production only • Sales price is equal to the 8 January 2010 average price (quote in Metal Bulletin) • Ferro-chrome 6-8 per cent. C basis 60 per cent. Cr, max 1,5 per cent. Si • Average price was 0.95 USD/lb Cr • Average chrome content of 50 per cent. assumed • USD/EUR rate on 31.12.2009 fixed at 1.4406 (Bank of Finland) • Full capacity is assumed to be 100,000 tn / year
169 Southern European minerals business Change in full year EBITDA Change in sales price compared to 30,000 tn/a 22,500 tn/a 15,000 tn/a 7,500 tn/a 8.1.2010, price full capacity 75% capacity 50% capacity 25% capacity €’000 €’000 €’000 €’000 €’000 2.19 20% 11,730 8,798 5,865 2,933 2.10 15% 8,798 6,598 4,399 2,199 2.01 10% 5,865 4,399 2,933 1,466 1.92 5% 2,933 2,199 1,466 733 USD/lb Cr 1.83 0% — — — — 1.73 (5%) (2,933) (2,199) (1,466) (733) 1.64 (10%) (5,865) (4,399) (2,933) (1,466) 1.55 (15%) (8,798) (6,598) (4,399) (2,199) 1.46 (20%) (11,730) (8,798) (5,865) (2,933) South African minerals business Change in full year EBITDA Change in sales price compared to 100,000 tn/a 75,000 tn/a 50,000 tn/a 25,000 tn/a 8.1.2010, price full capacity 75% capacity 50% capacity 25% capacity €’000 €’000 €’000 €’000 €’000 1.14 20% 14,538 10,904 7,269 3,635 1.09 15% 10,904 8,178 5,452 2,726 1.05 10% 7,269 5,452 3,635 1,817 1.00 5% 3,635 2,726 1,817 909 USD/lb Cr 0.95 0% — — — — 0.90 (5%) (3,635) (2,726) (1,817) (909) 0.86 (10%) (7,269) (5,452) (3,635) (1,817) 0.81 (15%) (10,904) (8,178) (5,452) (2,726) 0.76 (20%) (14,538) (10,904) (7,269) (3,635) The effect of changes in the sawmill business sales prices of end-products and purchase prices of logs are illustrated in the following table under various capacity utilisation rates. It should be taken into account that side-products (like chips) are not included, and that since the Group’s sawmills sell their products to some extent to the Group’s house building and pallet businesses, the net effect of consolidated Group results should typically be somewhat different from the presented figures. Logs present roughly two thirds of production costs and thus have a substantial effect to the EBITDA margin. As far as the capacity utilisation rate is concerned, it must also be taken into account that if the capacity utilization rate would be lowered, it typically would increase the cost per output unit, since fixed costs would be stable at least for the short-term; however, this would normally decrease the capital tied up in working capital. Also, the product mix can change, which is not taken into account in the table. Main assumptions: • Sales price is equal to December 2009 average pine and spruce export price from Finnish Customs statistics/Woodnotes
• Full capacity of the sawmills assumed to be 300,000 m3 of sawn timber products/year • Purchase price of logs is based on Metla December 2009 statistics (average price of spruce and pine, Finland average) • Log yield (input-output) is assumed to be 2.34 times the output value • Mix of raw material assumed to be 50 per cent. spruce and 50 per cent. pine • Effect of the chip sales price and prices of other sawmill side-products excluded • Effect of the exchange rates excluded, direct and indirect
170 • Changes in volumes having linear effect on revenue and costs, no economies of scale, linear interdependencies • Not taken into account the effect on the input costs of the Group’s house building and pallet businesses
Sensitivity analysis Effect of changes in sawn timber sales prices and log purchase prices to Group EBITDA Change in full year EBITDA Change in sales price compared to 300,000 m3/a 225,000 m3/a 150,000 m3/a 75,000 m3/a Dec 2009 price full capacity 75% capacity 50% capacity 25% capacity €’000 €’000 €’000 €’000 €’000 216.00 20% 10,800 8,100 5,400 2,700 207.00 15% 8,100 6,075 4,050 2,025 198.00 10% 5,400 4,050 2,700 1,350 189.00 5% 2,700 2,025 1,350 675 €/m3 180.00 0% — — — — 171.00 (5%) (2,700) (2,025) (1,350) (675) 162.00 (10%) (5,400) (4,050) (2,700) (1,350) 153.00 (15%) (8,100) (6,075) (4,050) (2,025) 144.00 (20%) (10,800) (8,100) (5,400) (2,700)
Change in full year EBITDA Change in sales price compared to 300,000 m3/a 225,000 m3/a 150,000 m3/a 75,000 m3/a Dec 2009 price full capacity 75% capacity 50% capacity 25% capacity €’000 €’000 €’000 €’000 €’000 57.36 20% (6,711) (5,033) (3,356) (1,678) 54.97 15% (5,033) (3,775) (2,517) (1,258) 52.58 10% (3,356) (2,517) (1,678) (839) 50.19 5% (1,678) (1,258) (839) (419) €/m3 47.80 0% — — — — 45.41 (5%) 1,678 1,258 839 419 43.02 (10%) 3,356 2,517 1,678 839 40.63 (15%) 5,033 3,775 2,517 1,258 38.24 (20%) 6,711 5,033 3,356 1,678
171 6.8 Related Party Disclosures Group Structure 31.12.2009 Ruukki Group Group Plc ownership direct ownership and share of and share of Subsidiary name and domicile votes (%) votes (%) Minerals business Southern European minerals business Ruukki Holdings Ltd, Valletta, Malta 100.00 99.99 RCS Ltd, Valletta, Malta 100.00 0.00 Türk Maadin Sirketi A.S., Istanbul, Turkey 98.74 98.74 TH Ören Madencilik TAO, Istanbul, Turkey 73.08 0.00 Metal ve Maden ic ve Dis Pazarlama Tic Ltd, Sti, Istanbul, Turkey 97.76 0.00 Elektrowerk Weisweiler GmbH, Eschweiler-Weisweiler, Germany 0.00 0.00 Ruukki Suisse SA, Switzerland 100.00 100.00 South African minerals business Ruukki South Africa (Pty) Ltd, South Africa 100.00 0.00 Dezzo Trading 184 (Pty) Ltd, South Africa 100.00 0.00 PGR17 Investments (Pty) Ltd, South Africa 100.00 0.00 PGR3 (Pty) Ltd, South Africa 63.00 0.00 Mogale Alloys (Pty) Ltd, South Africa 84.90 0.00 Wood Processing business House building business Pohjolan Design-Talo Oy, Oulunsalo 100.00 100.00 Nivaelement Oy, Nivala 100.00 0.00 RG Design-Talotekniikka Oy, Ii 70.10 0.00 Kirkkonummen Kiinteistösijoitus Oy, Helsinki 100.00 0.00 Storms Villa Oy, Kirkkonummi 100.00 0.00 Storms Gård Oy, Kirkkonummi 100.00 0.00 Sawmill business Ruukki Yhtiöt Oy, Espoo 100.00 100.00 Ruukki Wood Oy, Espoo 100.00 0.00 Ruukki Wood Oy, Espoo 100.00 0.00 Utawood Oy, Utajärvi 96.70 0.00 Lappipaneli Oy, Kuusamo 100.00 0.00 Junnikkala Oy, Kalajoki 51.02 0.00 Pallet business Oplax, Oulu 100.00 100.00 Other group companies Alumni Oy, Espoo 100.00 100.00 Balansor Oy, Espoo 99.99 99.99 Hirviset Group Oy, Espoo 100.00 100.00 Rekylator Oy, Helsinki 100.00 100.00
(1) Ruukki Group Plc holds a put option on the shares of Türk Maadin Sirketi A.S. to sell the shares at any time until 28 October 2010 at their purchase price. (2) Elektrowerk Weisweiler GmbH is consolidated into Ruukki Group in accordance with SIC-12 principles as described in accounting policies of consolidated financial statements. Ruukki Group Plc also has a call option from 1 January 2014 to 31 March 2014 to acquire all the shares of Elektrowerk Weisweiler GmbH. (3) Ruukki Group has a call option to carry out transactions after which Ruukki Group would have all shares of Junnikkala Oy. The vesting period of the option begins in spring 2011 and ends in spring 2013. Ruukki Group controls about 51.02 per cent. of the shares and 51.06 per cent. of the voting rights of Junnikkala Oy.
172 Associated Companies Ruukki Group Group Plc ownership direct ownership and share of and share of Associated company’s name and domicile votes (%) votes (%) Minerals business PGR Manganese (Pty) Ltd, South Africa(1) 49.00 0.00 Special Super Alloys SSA Inc., United States 20.00 0.00 Other (excluding passive companies) Incap Furniture Oy(2) 24.06 12.45 ILP-Group Ltd Oy 33.44 33.44 Widian Oy 39.64 39.64 Stellatum Oy 34.00 34.00 Arc Technology Oy 37.40 37.40 Valtimo Components Oyj(3) 24.90 24.90
(1) A holding company that is founded in relation to Mogale Alloys (Pty) Ltd acquisition and which owns 10 per cent. of Mogale shares. (2) Incap Furniture Oy is in corporate restructuring process. (3) Valtimo Components Oyj is in corporate restructuring process, ownership can increase to 39.23 per cent. if the shares sold earlier, held as pledge, are not to be paid to Ruukki Group in cash. The Group’s South African subsidiary Mogale Alloys owns a 30 per cent. interest in Nuco Chrome Bophuthatswana (Pty) Ltd, but there are certain outstanding legal disputes around the ownership. Moreover, South African subsidiary of the Group PGR3 Investments (Pty) Ltd has a 30 per cent. ownership interest in Leswikeng Minerals UG2 (Pty) Ltd. Related party transactions Ruukki Group Plc defines the related party consisting of: • companies or entities having common control or considerable voting power in the Group • subsidiaries • associates • Ruukki Group Plc’s and the above mentioned entities’ top management Ruukki Group’s management, its significant shareholders and Group Companies’ management might, as private individuals or through companies or entities directly or indirectly controlled by them, or with other parties having considerable control or voting power, have transactions classified as related party transactions with any companies belonging to Ruukki Group. Their close family members might also, as private individuals or through companies or entities directly or indirectly controlled by them, or with other parties having considerable control or voting power, have transactions classified as related party transactions with any companies belonging to Ruukki Group. These individuals or entities might also have had existing agreements or business operations with Ruukki Group companies prior to the date that Ruukki Group has obtained control in the entities. IAS 24 standard defines top management as those company employees who have direct or indirect power, authority and responsibility to affect company operations planning, management and control functions. This definition includes Board members and company top management team.
173 Related party transaction with persons belonging to group board and management Finnish accounting legislation, KPA 2:8 § 4 mom disclosure requirement 2008 2009 Salaries Fees Salaries Fees €’000 €’000 €’000 €’000 Borman Thomas, Board member 11.7.2008 – 2.8.2008 — Havia Jukka, Deputy CEO 12.9.2008 onwards 48 243 Haapanen Mikko, Board member 26.4.2006 – 31.3.2008 2 Hoyer Thomas, Board member 7.10.2008 onwards(3) 14 150 60 Hukkanen Esa, Board member 11.7.2008 – 7.5.2009(1) 79 28 32 20 Kankaala Markku, Board member 30.6.2003 onwards(3) 47 66 Kivimaa Antti, CEO’s deputy 1.9.2007 – 12.9.2008; Deputy CEO 12.9.2008 – 30.9.2009(2) 161 123 Koncar Danko, Board member 31.3.2008 – 11.7.2008 17 Lainema Matti, Board member 26.4.2006 onwards; Chairman 1.9.2007 – 11.7.2008 28 Manojlovic Jelena, Board member 11.7.2008 onwards, Chairperson from 17.6.2009 28 75 McConnachie Terence, Board member 7.10.2008 onwards 14 60 Mäkelä Kai, Board member 10.2.2000 onwards, Deputy Chairman 26.4.2006 – 31.3.2008 2 Pelkonen Arno, Board member 20.4.2007 – 24.1.2008 1 Poranen Timo, Board member 20.4.2007 – 11.7.2008 33 Ryzhkov Konstantin, Board member 31.3.2008 – 11.7.2008 17 Smit Alwyn, Board member 31.3.2008 onwards, Chairman 11.7.2008 – 17.6.2009 Group CEO 12.9.2008 onwards 120 96 458 75 Vikkula Matti, Board member 7.6.2005 onwards, Chairman 6.4.2006 – 31.8.2007 Group CEO 1.9.2007 – 31.7.2008 1,237 Vilppula Ahti, Board member 7.6.2005 – 11.7.2008 12 Total(3) 1,645 338 929 356
Note: (1) salaries up until 30.4.2009 (2) salaries up until 30.9.2009 (3) Thomas Hoyer’s salary in 2009 was incorrectly stated in the annual report as €150,000 rather than €74,000 and as a consequence the total salaries were incorrectly stated as €1,005,000 rather than €929,000. Markku Kankala’s board fees in 2009 were incorrectly stated as €60,000 being his fees as a director of the Company. He also received a further €6,000 as Chairman of Junnikkala Oyj. As a consequence the total fees were incorrectly stated as €350,000
174 As some of the Company’s Board members have also had executive management roles both the Board fees and the salaries in relation to the executive role have been presented above. Of the aforementioned items, accruals based and unpaid salaries and fees totalled about €265,000 on 31.12.2009, which was mainly related to bonus accruals for the Company’s CEO and for a subsidiary’s CEO (about €44,000 on 31.12.2008). In addition to the above mentioned salaries, Alwyn Smit has altogether 2,900,000 Ruukki Group Plc option rights, based on which a total of €637,000 has been recognised in Group accounting as option expenses for the 2009 income statement (€55,000 in 2008). Moreover, in October 2009 Thomas Hoyer was granted Ruukki Group Plc shares with a total value of €100,000 that has been recognised as expense in the 2009 income statement in addition to the sums presented above. A total options expense of €354,000 was recognised in 2009 (2008: €339,000) for the Group’s previous Deputy CEO Kivimaa (Deputy CEO, Wood processing business until end of third quarter) and Deputy CEO Havia. The ex-CEO Vikkula had, in addition to the above mentioned and based on his CEO contract, a synthetic option arrangement and 300,000 free shares received as incentive. Based on this arrangement a total of €484,000 was recorded according to IFRS 2 standard as expenses in the 2008 income statement even though no synthetic option cash flows were eventually realised. The main terms of the CEO agreement signed with Alwyn Smit on 11 September 2008, valid at the end of December 2009, are the following: • a fixed monthly gross salary of €30,000 • the bonus salary is based on targets set by the Board in advance and annually capped at 24 months’ gross salary • the bonus salary for the financial year 2009 performance has been tied to four indicators as defined by the Board in the summer 2009 (the relative importance of each indicator presented in brackets): (1) realised EBITDA of the current businesses (60 per cent.); (2) Ruukki Group Plc’s share price performance (25 per cent.); (3) completion of unfinished acquisition processes (10 per cent.); (4) other factors (5 per cent.) • based on the EGM resolution in October 2008, Smit has altogether 2,900,000 option rights from the I/2008 option scheme; if the CEO resigns on his initiative the Company has the unilateral right to cancel the options • Smit does not have any extra pensions and pension age benefits • the Company is obliged to arrange Smit life, travel and occupational health insurances • five weeks annual vacation • non-competition is valid six months after the CEO agreement has been terminated • in case the employer terminates the agreement, six months notice period and the notice period pay is applied; if the CEO terminates the agreement the notice period is three months Based on their membership in the Ruukki Group Plc Board, the Board members received a total of €350,000 as Board membership fees during 2009 (€323,000 in 2008). In addition, Board members received fees on other bases to a total of €0 (2008: 15,000). For group companies’ Managing Directors and Board members a total of €1,600,000 has been paid as salaries and Board membership fees in 2009 (€1,110,000 in 2008). In addition, as additional pension insurance payments a total of €7,600 has been paid to these persons (€26,000).
175 Management remuneration, including the individuals detailed above as well as other Ruukki Group Plc management: Management remuneration IAS 24.16 disclosure 2008 2009 €’000 €’000 Short-term remuneration 2,813 1,355 Pensions (TyeL) 329 237 Total 3,142 1,592
The information above includes IFRS 2 based options expenses and other similar share-based expenses a total of €991,000 in 2009 (€878,000 in 2008). The 2008 figures also include ex-CEO Matti Vikkula’s non-recurring resignation costs. Paid/accrued earn-outs On the period on which results the earn-outs are based 2008 2009 2010 2011 2012 2013 2014 €’000 €’000 €’000 €’000 €’000 €’000 €’000 Jelena Manojlovic, chairperson of Ruukki Group Plc’s Board of Directors – via Danko Koncar (Kermas Limited) 2,933 4,801 5,841 7,134 8,407 Segment management and their related parties, total 197 62 Other Ruukki Group employees and their related parties, total 358 181 Total 555 3,175 4,801 5,841 7,134 8,407 —
The parent companies of the business areas were the following on 31.12.2009 Minerals business • Ruukki Holdings Ltd
• Southern European minerals business(1) • Ruukki South Africa (Pty) Ltd • South African minerals business Wood Processing business • Pohjolan Design-Talo Oy; house building • Ruukki Yhtiöt Oy; sawmill business • Oplax Oy; pallet business
(1) Ruukki Group Plc directly holds the shares in the Turkish subsidiary For certain Ruukki Group’s acquisitions, future earn-out structures, based on the future profitability of target companies, have been typical. These earn-out liabilities have been settled either by cash or by Ruukki Group’s own shares. Within these annual accounts, there is a separate section where earn- out structures are written out in more detail. All future related conditional earn-out payments have been estimated, and the estimated amounts have been recognised on the balance sheet as liabilities.
176 Certain Ruukki Group Plc’s Board members and group companies’ management team members, or their related parties, are and/or have been either directly or through entities controlled by them counterparties in acquisitions where there are earn-out structures to be settled either in cash or in Ruukki Group’s shares. Of the unsettled earn-out liabilities, as estimated and recognised on 31 December 2009, with related parties altogether €29.1 million will be settled in Ruukki Group Plc’s shares (estimate on 31 December 2008 was €50.8 million) and the rest in cash. Other related party transactions in or after 2009 Earn-out and deferred purchase consideration payments to related parties As part of Mogale Alloys acquisition deferred and conditional purchase consideration tranches were agreed upon, totalling about 40 per cent. of the total rand denominated cash outflows. Based on that, Ruukki Group’s subsidiary Ruukki South Africa paid a total of about €0.7 million to related parties in 2009. At the end of 2009 the parties however had different opinions as to if all the conditions are met, so no additional payments have been made after the €0.7 million payment. Ruukki Group Plc paid about €0.2 million in cash as earn-out payments to the ex-CEO of the house building business parent company in 2009 and in addition an €0.9 million fixed deferred purchase consideration. Ruukki Group’s sawmill business area’s parent company, Ruukki Yhtiöt Oy, paid about €0.2 million in cash at the end of December as earn-out payments to the sellers of Tervolan Saha ja Höyläämö Oy. Dividend payout to related parties The Group’s parent company paid a total of €4.5 million in capital redemption to related parties, based on the dividend payout decision by the Annual General Meeting held on 7 May 2009. Furthermore, the Group’s subsidiaries have paid about €0.1 million as dividends to the related parties who are minority shareholders of those companies. Loans to related parties Ruukki Group Plc had on 31 December 2009 an interest-bearing, long-term receivable, with no collateral backing, from the company’s ex-CEO for an outstanding amount of about €0.9 million, including capital and accrued interest. During 2009, a total of €0.5 million of this loan was repaid to the Company. Group’s sawmill business area subsidiary had on 31 December 2009 about €0.5 million dividend distribution liability to its minority shareholders. Subsidiary of Group’s Minerals business segment has given a retention loan to one member of the subsidiary management. At the end of 2009 the balance of the nominal loan capital stood at about €0.1 million. Elektrowerk Weisweiler GmbH, of which Ruukki Group owns no shares but which has been consolidated into the Group based on SIC-12 interpretation, had on 31 December 2009 a €10.0 million receivable (€15.0 million) from Kermas Ltd, the parent company of Elektrowerk Weisweiler which, in turn, is a major shareholder in Ruukki Group Plc. The accrued interest on 31 December 2009 on this loan totalled €0.1 million. Consultancy and other fees to entities controlled by related parties Ruukki Group paid a total of about €0.4 million in 2009 as consultancy fees and other expenses to companies controlled by individuals being related parties of the Group. Transactions with associated companies Relating to the preparations of Ruukki Group’s Russian sawmill project, the Group’s subsidiary has temporarily used (since summer 2008) warehousing services partially provided by an associated company minority-owned by Ruukki Group Plc. The Group’s subsidiary has paid altogether about €0.5 million for these services during the financial year 2009.
177 The Group’s sawmills sold sawn timber to an associated company for a total value of €0.3 million during 2009. Other related party transactions In 2009, the Group’s Minerals business subsidiary bought chromite concentrate from a related party for a value of €0.3 million. In February 2010, the Group’s Turkish subsidiary acquired 99 per cent. of shares in another Turkish company, Intermetal, from the subsidiary’s Managing Director for a cash consideration of about €0.3 million. During 2009, the Group’s house building business sold single-family houses to the employees for a total value of about €1.1 million including VAT. The Group’s house building subsidiary sold electro-technical work to a controlled corporation of its minority shareholder for a total value of €0.1 million. The Group’s sawmill business subsidiary acquired an office building from a related party for a total value of €0.2 million. Ruukki Group’s sawmill business’ parent company, Ruukki Yhtiöt Oy, sold its 91.42 per cent. stake in Tervolan Saha ja Höyläämö Oy (‘TSH’) to TSH as part of TSH’s directed acquisition of TSH’s own shares. The effective date for the transfer of the shares to TSH was 31 December 2009. In conjunction with the deal, the call option agreement with TSH minority shareholders was dissolved. The consideration for the shares totalled approximately €4.1 million and was paid in cash in December. TSH also distributed a dividend of about €3.7 million to Ruukki Yhtiöt Oy. During December 2009, Ruukki Yhtiöt Oy terminated the put options it had written in relation to the Junnikkala acquisition after which it only has the call option left in accordance with the original transaction agreements. During 2009, the Group’s Minerals business subsidiary purchased raw materials from Leswikeng UG2 Minerals (Pty) Ltd, for a total value of about €0.4 million. Kermas Ltd, a company being a related party to the Group, committed itself in October to grant Ruukki South Africa (Pty) Ltd, a subsidiary of Ruukki Group, a pledge in relation to the environmental liabilities of Mogale Alloys (Pty) Ltd. This pledge will be given in Ruukki Group Plc shares, so that Kermas Ltd pledges shares for an amount corresponding to 5 per cent. of Ruukki Group Plc’s shares outstanding. However, this has not yet been implemented on 31 December 2009. Other related party transactions 2008 Purchase of RCS Ltd and Türk Maadin Sirketi A.S. Based on the 28 October 2008 resolutions by the Extraordinary General Meeting, Ruukki Group Plc paid Kermas Ltd €80 million in cash as purchase consideration for the acquisition of the chrome ore and ferrochrome businesses. In addition, Ruukki Group Plc granted Kermas Ltd a total of 73,170,731 option rights related to potential future earn-out consideration, whose payment is conditional upon the future financial performance of the acquisition targets for the five financial years 2009 – 2013. Earn-out is paid to Kermas Ltd in Ruukki Group Plc’s shares, if the combined net result of the acquired RCS Ltd and Türk Maadin Sirketi A.S. is positive. In case the combined net result is negative, Kermas Ltd returns Ruukki Group Plc’s payment in cash. The amount of earn-out, and also the payback, is 50 per cent. of the net result, and it is calculated annually. In conjunction with the transaction, Ruukki Group Plc and Kermas Ltd have also entered into a management agreement, which is valid until 31 December 2013, and under which Kermas Ltd provides its know-how and assistance in relation to the business operations of the acquired companies. Kermas Ltd is a major shareholder in Ruukki Group Plc and also acquired, as part of the previously described transaction, at the end of 2008, in its own name 15,000,000 Ruukki Group Plc’s shares with a five-year lock-up commitment.
178 Other acquisitions and divestments with related parties During the third quarter, Ruukki Group Plc acquired 9.9 per cent. of the shares in Pohjolan Design-Talo Oy, parent company of Ruukki Group’s house building business, from its Managing Director Kimmo Kurkela. The cash consideration agreed upon totalled approximately €6.1 million, of which €4.2 million was paid to Mr. Kurkela during the financial year 2008. Ruukki Group sold, during the third quarter, about 80.6 per cent. of Group’s subsidiary Selka-line Oy to its Managing Director. Financing arrangements During the first quarter, the Group’s parent company made a €10.0 million short-term deposit so that the counterparty in the transaction was a company controlled by a related party. The capital and accrued interest of €0.1 million were fully paid back during the first quarter. Option rights related to sawmill segment’s acquisition In January, Ruukki Group’s sawmill business’s subsidiary, Ruukki Yhtiöt Oy, acquired a 51 per cent. majority stake in Junnikkala Oy. As a part of the arrangement, a shareholders’ agreement was signed according to which, Ruukki Yhtiöt Oy has call options and Junnikkala Oy’s minority stakeholders have put options regarding the remaining 49 per cent. minority ownership. As collateral for these options, Junnikkala Oy’s minority stakeholders have pledged the shares in question. Earn-out payments to related parties Ruukki Group’s sawmill business’s parent company, Ruukki Yhtiöt Oy, paid about €0.4 million in cash as earn-out payments to the sellers of Tervolan Saha ja Höyläämö Oy. Dividend payout to related parties The Group’s parent company has paid a total of €1.3 million in dividends to related parties based on the dividend payout decision by the Annual General Meeting on 31 March 2008. Furthermore, the group companies have paid about €1.1 million dividends to the related parties that are minority shareholders of those companies. Loans to related parties Ruukki Group Plc had on 31 December 2008 an interest bearing, long-term receivable with no collateral backing, from the company’s ex-CEO for an outstanding amount of €1.4 million, including capital and accrued interest. A subsidiary of the Group had a short-term receivable amounting to €0.8 million from a company controlled by a related party of Ruukki Group Plc. Elektrowerk Weisweiler GmbH, of which Ruukki Group owns no shares but which has been consolidated into the Group based on SIC-12 interpretation, had on 31 December 2008 a €15 million receivable from Kermas Ltd that is the parent company of Elektrowerk Weisweiler and that is a major shareholder in Ruukki Group Plc. The accrued interest on 31 December 2008 on this loan totalled €0.3 million. Consultancy and other fees to entities controlled by related parties Ruukki Group Plc paid a total of about €0.2 million in 2008 as consultancy fees and other expenses to companies controlled by individuals being related parties of the Group. Transactions with associated companies Relating to the preparations of Ruukki Group’s Russian sawmill project, the Group’s subsidiary temporarily used, starting in the summer of 2008, transportation and warehousing services partially provided by an associated company minority-owned by Ruukki Group Plc. The Group’s subsidiary paid altogether some €0.4 million for these services during 2008. Other related party transactions A sawmill business area’s company purchased timber raw material for about €0.3 million during 2008 from a company controlled by persons belonging to the related party of that company.
179 During 2008, a subsidiary of the house building business area sold services to companies controlled or managed by the management of the subsidiary for a total value of close to €0.3 million; it also, to minor extent, bought some services from those companies. The Group’s Russian subsidiary paid about €0.2 million as rent for its premises to a related party during 2008. During 2008, the Group’s house building business made an agreement to deliver 31 wooden holiday houses to a company controlled by related parties. The total value of this delivery including value added tax was about €4.3 million. Related to this transaction, the Group’s house building business had approximately an €0.9 million receivable on 31.12.2008. The Group subsidiary had, however, received a real security from the customer as collateral for receivables. 6.9 Other notes to the consolidated financial statements G1. Revenue 2008 2009 €’000 €’000 Continuing operations Sale of goods 153,849 190,753 Rendering of services 2,058 1,739 Construction contracts 2,758 867 158,665 193,359 Discontinued operations Sale of goods 78,506 — Rendering of services 10,190 — 88,696 — Total 247,361 193,359
Construction contracts above relate to the Group’s house building business, where there were deliveries of leisure home, and that projects’ revenue was recognised based on the stage of completion of those projects. The services revenue comes mainly from house building business’s HVAC and electrical services sales as well as from services attached to the deliveries of wooden pallets. G2. Other operating income 2008 2009 €’000 €’000 Gain on disposal of property, plant and equipment 294 217 Gain on disposal of investments 841 840 Government grants 6 3 Insurance compensations 1,785 2 Other 722 6,526 Total 3,648 7,587
The 2009 other operating income includes a total of an €5.3 million non-recurring item based on termination of put option arrangement in relation to Junnikkala Oy sawmill and about €0.8 million gain in relation to the sale of Lappipaneli Oy’s sawmill business.
180 G3. Employee benefits 2008 2009 €’000 €’000 Salaries and wages (29,841) (22,177) Share-based payments (395) (991) Pensions, defined contribution plans (5,117) (3,253) Pensions, defined benefit plans — (806) Other employee related costs (2,006) (1,003) Total (37,358) (28,230)
Average personnel during the accounting period 2008 2009 Wood Processing business 306 295 House building 113 88 Sawmills business 151 158 Pallets 42 49 Minerals business 69 517 Group Management 8 9 Other operations 35 3 Discontinued operations 495 — Total 913 824
Personnel at the end of the accounting period 2008 2009 Wood Processing business 301 253 House building 99 91 Sawmills business 150 116 Pallets(1) 52 46 Minerals business 404 629 Group Management 8 9 Other operations 8 2 Discontinued operations — — Total 721 893
Note: (1) The personnel in Pallets at the end of 2008 was incorrectly shown in the notes to the 2009 financial statements as 42.
Defined benefit pension plans The majority of the Group’s pension plans are defined contribution plans for which total expense of €2.9 million has been recognised in the income statement for 2009. In addition, the Group’s German subsidiary has defined benefit plans. The obligations relating to those plans have been defined by actuarial calculations. The pension scheme is arranged by recognising a provision in the balance sheet. The pension plan in question has been transferred into the Group in consequence of a business combination carried out on 31 October 2008. The present value of the obligation less fair value of plan assets totalled €11.0 million on 31 December 2009 (€11.1 million on 31 December 2008). The Group has considered that the value on 31 December also corresponds with the amount of net obligation at the balance sheet date. The Group does not possess the assets of the pension plans.
181 Retirement benefit obligation 2008 2009 €’000 €’000 Present value of funded obligation 13,082 13,740 Fair value of plan assets 1,966 3,035 11,116 10,705 Unrecognised actuarial gains (losses) 330 Net liability 11,116 11,035
Movements in defined benefit obligation 2008 2009 €’000 €’000 Defined benefit obligations at 1.1. — 13,082 Benefits paid by the plan (573) Current service costs 198 Interest expense 748 Business combinations 13,082 Actuarial (gains) losses 285 Closing balance 31.12. 13,082 13,740 Movements in defined benefit obligation 2008 2009 €’000 €’000 Fair value of the plan assets at 1.1. 2,660 Expected return on plan assets 140 Benefits paid by the plan (58) Business combinations 1,966 Actuarial gains (losses) (79) Contributions paid into the plan 372 Closing balance 31.12. 1,966 3,035
The funded pension plan has been financed through insurance company and therefore asset specification is not available. Expense recognised in profit or loss 2008 2009 €’000 €’000 Current service cost 198 Interest cost 748 Expected return on plan assets (140) 806
Actual return on plan assets was €46,000 in 2009. Principal actuarial assumptions 2008 2009 €’000 €’000 Discount rate 5.85% 5.75% Expected retirement age 65 65 Expected return on plan assets 5% 5% Expected rate of salary increase 3% 3% Inflation 2.25% 2.25%
182 Moreover, mortality expectancy in accordance with the German “Richttafeln 2005 G” has been applied in valuations. The expected pension increases are in line with German pension legislation. The Group expects that in financial year 2010 expense for defined benefit plan of €0.4 million will be recognised in the income statement. Historical information 2008 2009 €’000 €’000 Present value of defined benefit obligation (13,082) (13,740) Fair value of plan assets 1,966 3,035 Deficit in the plan (11,116) (10,705) Experience adjustments arising on plan liabilities (110) Experience adjustments arising on plan assets (79) Provision for retirement pay liability in Turkey In accordance with the existing social legislation in Turkey, the Turkish subsidiary of the Group is required to make lump-sum payments to employees whose employment is terminated due to retirement or for reasons other than resignation or misconduct. The computation of the liability was based upon the retirement pay ceiling announced by the Government. As of 31 December 2009, employee severance indemnity of about €0.5 million (TRY 1.1 million) is recognised in the financial statements in accordance with IAS 19. The key actuarial assumptions used at 31 December 2009, were the following: interest rate 11 per cent., expected rates of salary/limit increases 4.8 per cent. G4. Depreciation, amortisation and impairment Depreciation/amortisation by asset category 2008 2009 €’000 €’000 Intangible assets Trademarks (141) (141) Clientele (5,249) (15,029) Technology (186) (2,432) Other intangible assets (243) (310) Total (5,818) (17,911) Property, plant and equipment Buildings and constructions (1,859) (1,621) Machinery and equipment (6,034) (5,868) Other tangible assets (456) (1,559) Total (8,349) (9,048)
Impairment by asset category 2008 2009 €’000 €’000 Buildings and constructions (1,888) — Machinery and equipment (24,012) — Goodwill (13,526) (19,079) Clientele (1,567) — Other intangible assets (41) — Total (41,034) (19,079)
Reversal of impairment losses by asset category 2008 2009 €’000 €’000 Machinery and equipment — 2,059 Total — 2,059
183 In December 2009, goodwill in relation to Mogale Alloys was impaired by €19.1 million. Due to the sale of Lappipaneli Oy’s assets at the end of the year, a €2.1 million impairment recognised in 2008 on tangible assets was reversed in December 2009. In addition, below EBIT in the income statement there are additional impairment on the shares of associates (in 2009 altogether €0.9 million) and write-downs of financial assets in relation to the Russian projects (in 2009 altogether €1.5 million). Of the 2008 impairment losses altogether €17.7 million are related to changes in the Russian investment project preparations. As a result of the general economic situation and changes in financial markets, the sawmill business area recognised €20.4 million impairment and correspondingly the furniture business, which was not consolidated into the Group at the balance sheet date, recognised impairment losses amounting to €2.9 million. In addition, the value of loan receivables of associated companies was written down by about €0.1 million. The impairment losses recognised have been to major extent caused by changes in the actual and forecasted demand as well as sales and purchase prices of the key customer markets of the Group’s business areas. In particular the financial crisis has from the latter half of 2008 adversely contributed to that. Most of the Group’s business areas operate in commodity markets, whose volatility has been high over the last years. Moreover, the Russian wood processing investments, being part of the Group’s earlier strategy, have been affected by changed circumstances. G5. Other operating expenses 2008 2009 €’000 €’000 Loss on disposal of property, plant and equipment (106) — Research and development expenditure (5) — Rental costs (3,788) (1,416) External services (3,785) (1,786) Other (20,008) (17,409) Total (27,691) (20,611)
During 2009, a total of about €1.9 million of London listing related expenses were recognised. Moreover, a total of €2.1 million expenses were booked based on the intended acquisition of Sylvania Resources. Based on other Minerals business related projects about €0.3 million were recognised. G6. Finance income and expense Finance income 2008 2009 €’000 €’000 Interest income on available-for-sale financial assets 2 — Dividend income on available for-sale financial assets 3 4 Interest income on held-to-maturity investments 13,500 1,123 Interest income on loans and trade receivables 1,363 1,419 Net foreign exchange gains 1,983 1,959 Gain on disposal of available-for-sale financial assets 93 — Gain on disposal of financial assets at fair value through profit or loss (161) — Other finance income — 1,366 Total 16,783 5,871
184 Finance expense 2008 2009 €’000 €’000 Interest expense on financial liabilities measured at amortised cost (2,903) (1,930) Impairment losses on receivables relating to discontinued operations in Russia — (1,483) Impairment losses on available for-sale financial assets (300) — Impairment losses on trade receivables (42) — Net foreign exchange losses (5,594) (4,707) Net change in fair value of financial assets at fair value through profit or loss (2,527) — Other finance expenses (1,592) (1,186) Total (12,958) (9,306) Net finance income/expense 3,824 (3,435)
G7. Income taxes 2008 2009 €’000 €’000 Income tax for the period (3,585) (703) Income tax for previous years (228) (1,764) Deferred taxes 4,985 8,076 Total 1,171 5,609
2008 2009 €’000 €’000 Profit before taxes (33,858) (28,336) Income tax calculated at income tax rate 8,803 7,367 Tax exempt income 5,027 206 Difference between domestic and foreign tax rates 1,052 577 Malta tax refund — 7,486 Income tax for previous years (228) (1,764) Income from associates 148 29 Impairment losses (10,669) (4,425) Tax losses not recognised as deferred tax assets (5,046) (3,278) Non-tax deductible expenses (311) (589) Previously unrecognised tax losses now recognised 2,396 — Total adjustments (7,632) (1,758) Income tax recognised 1,171 5,609
G8. Earnings per share 2008 2009 Continuing Discontinued operations operations Total Total Profit attributable to equity holders of parent company (€’000) (40,066) 8,680 (31,386) (19,744) Weighted average number of shares, basic (1,000) 290,034 290,034 290,034 250,175 Basic earnings per share (€) total (0.14) 0.03 (0.11) (0.08)
185 2008 2009 Continuing Discontinued operations operations Total Total Profit attributable to equity holders of parent company (€’000) (40,066) 8,680 (31,386) (19,744) Weighted average number of shares, basic (1,000) 290,034 290,034 290,034 250,175 Effect of share options on issue (1,000) 13,857 13,857 13,857 45,281 Weighted average number of shares, diluted (1,000) 303,891 303,891 303,891 295,456 Diluted earnings per share (€) total (0.14) 0.03 (0.11) (0.08)
Basic earnings per share is calculated by dividing profit attributable to shareholders of the parent company by weighted average number of shares during the financial year. Share options have a dilution effect if the exercise price is lower than share price. The diluted number of shares is the number of shares, which will be issued free of charge when share options are exercised, because with the funds received from exercising options, the company is not able to issue the same number of shares at fair value. The fair value of shares is based on average share price of the period. In financial year 2009 the basic earnings per share of the company was negative, thus the diluted earnings per share is not presented, while it would be better than the basic (undiluted) earnings per share. The calculation method is though described above. G9. Property, plant and equipment Land and Buildings Machinery Other water and and tangible property constructions equipment assets Total €’000 €’000 €’000 €’000 €’000 Balance at 1.1.2009 1,841 23,627 79,753 12,791 118,012 Additions 3 1,343 11,063 475 12,883 Acquisitions of subsidiaries — 1,819 20,891 221 22,931 Disposals of subsidiaries (100) (3,933) (3,024) (100) (7,156) Disposals — (451) (4,491) (174) (5,116) Transfer to assets held for sale (527) (3,510) (10,486) (931) (15,454) Effect of movements in exchange rates — (79) 1,512 9 1,442 Balance at 31.12.2009 1,217 18,816 95,217 12,290 127,541 Accumulated depreciation and impairment at 1.1.2009 — (5,847) (41,630) (902) (48,378) Depreciation — (1,621) (5,868) (1,559) (9,048) Reversal of impairment — — 2,059 — 2,059 Disposals of subsidiaries — 2,061 2,949 55 5,065 Disposals — — 117 — 117 Transfer to assets held for sale — 426 2,605 256 3,287 Effect of movements in exchange rates — 76 (32) (29) 14 Accumulated depreciation and impairment at 31.12.2009 — (4,905) (39 800) (2,180) (46,885) Carrying amount at 1.1.2009 1,841 17,780 38,123 11,889 69,633 Carrying amount at 31.12.2009 1,217 13,911 55,417 10,110 80,655 Balance at 1.1.2008 669 18,635 28,653 1,394 49,351 Additions — 2,489 35,607 308 38,404 Acquisitions of subsidiaries 1,284 12,088 17,353 11,300 42,024 Disposals of subsidiaries (42) (9,586) (940) (131) (10,699) Disposals (70) — (920) (78) (1,068) 186 Land and Buildings Machinery Other water and and tangible property constructions equipment assets Total €’000 €’000 €’000 €’000 €’000 Balance at 31.12.2008 1,841 23,627 79,753 12,791 118,012 Accumulated depreciation and impairment at 31.12.2008 — (2,100) (11,584) (446) (14,130) Depreciation — (1,859) (6,034) (456) (8,349) Impairment — (1,888) (24,012) — (25,899) Accumulated depreciation and impairment at 31.12.2008 — (5,847) (41,630) (902) (48,378) Carrying amount at 1.1.2008 669 16,534 17,069 948 35,221 Carrying amount at 31.12.2008 1,841 17,780 38,123 11,889 69,633 Machinery and equipment include the prepayments paid of them. In the property there are assets purchased through finance leases as follows:
Machinery and equipment Buildings Total €’000 €’000 €’000 31.12.2009 Balance 427 — 427 Accumulated depreciation (131) — (131) Carrying amount 296 — 296 31.12.2008 Balance 84 — 84 Accumulated depreciation (78) — (78) Carrying amount 6— 6 G10. Intangible assets Intangible assets Other identified acc. intangible Goodwill to IFRS3 assets Total €’000 €’000 €’000 €’000 Balance at 1.1.2009 101,808 81,101 2,520 185,429 Additions 307 — 620 928 Acquisitions of subsidiaries 116,526 44,663 64 161,253 Disposals of subsidiaries (684) (1,222) (146) (2,052) Changes in earn-out liabilities (21,638) — — (21,638) Transfer to assets held for sale — — (101) (101) Effect of movements in exchange rates 9,963 3,766 — 13,729 Balance at 31.12.2009 206,280 128,308 2,959 337,547 Accumulated amortisation and impairment at 1.1.2009 (14,559) (10,500) (985) (26,044) Amortisation — (17,601) (310) (17,911) Impairment (19,079) — — (19,079) Disposals of subsidiaries 684 1,222 — 1,907 Effect of movements in exchange rates (475) (28) (2) (505) Accumulated amortisation and impairment at 31.12.2009 (33,430) (26,907) (1,297) (61,633) Carrying amount at 1.1.2009 87,248 70,601 1,536 159,385 Carrying amount at 31.12.2009 172,850 101,401 1,662 275,914 Balance at 1.1.2008 35,915 7,922 2,034 45,871 Additions 5,918 — 835 6,753 Disposals (241) (320) (214) (775) Acquisitions of subsidiaries 67,340 74,051 562 141,953 187 Intangible assets Other identified acc. intangible Goodwill to IFRS3 assets Total €’000 €’000 €’000 €’000 Disposals of subsidiaries (7,125) (552) (696) (8,373) Balance at 31.12.2008 101,808 81,101 2,520 185,429 Accumulated amortisation and impairment at 1.1.2008 (1,033) (3,357) (701) (5,091) Amortisation — (5,576) (243) (5,818) Impairment (13,526) (1,567) (41) (15,135) Accumulated amortisation and impairment at 31.12.2008 (14,559) (10,500) (985) (26,044) Carrying amount at 1.1.2008 34,882 4,565 1,333 40,780 Carrying amount at 31.12.2008 87,248 70,601 1,536 159,385 G11. Investments in associates The Group decided in conjunction with the 2009 financial statements to change the way it presents share of associated profits, sales gains and losses related to associates, and impairment on associates’ shares and receivables, to the extent they relate to associated companies owned by the Group’s parent company and not belonging to business segments. Hence, from 2009 onwards these non-core items are presented in finance items below EBIT, when previously they have been presented above EBIT in various lines. The rationale behind the change in the way of presenting these items is that these associated companies are not material and that they are classified as non-core assets. The income statement related items of associated companies of minerals and wood processing segments are presented within the segments and above the EBIT. Movements in 2009 Machinery and equipment €’000 1.1.2009 1,770 Additions Special Super Alloys SSA Inc 63 Leswikeng UG2 Minerals (Pty) Ltd 67 67 Disposals Cybersoft Oy (362) Share of profit 111 Dividends (213) Impairment (928) 31.12.2009 507 The impairment losses recognised in 2009 relate to ILP-Group Ltd Oy, and were caused by adverse changes in the company’s target markets development and financial situation. Movements in 2008 €’000 1.1.2008 1,702 Disposals Orienteq Capital (5) Share of profit 571 Dividends (98) Impairment (400) 31.12.2008 1,770
188 Balance Ownership Domicile sheet date Assets Liabilities Revenue Profit/loss (%) €’000 €’000 €’000 €’000 2008 Arc Technology Oy Helsinki 31.12.2008 976 643 1,979 77 37.4 Cybersoft Oy Ab Tampere 31.10.2008 514 147 1,137 81 37.5 ILP-Group Ltd Oy Helsinki 31.12.2008 6,765 3,518 20,884 1,101 33.4 Incap Furniture Oy Oulu 31.12.2008 22,244 30,266 78,506 (9,005) 48.3 Loopm Oy Helsinki inactive 28.4 Rivest Oy Helsinki 31.12.2008 16 15 52 (8) 40.0 Sportslink Group Oy Helsinki inactive 25.0 Stellatum Oy Helsinki 30.11.2008 347 320 1,120 (12) 34.0 Valtimo Components Oyj Valtimo 31.12.2008 2,119 3,114 2,178 (497) 24.9 Widian Oy Espoo 31.12.2008 733 956 623 2 39.6 33,713 38,979 106,479 (8,260) 2009 Arc Technology Oy Helsinki 31.12.2009 904 661 2,055 (33) 37.4 ILP-Group Ltd Oy Helsinki 31.12.2009 5,677 2,638 13,707 127 33.4 Incap Furniture Oy(1) Oulu 30.9.2009 9,264 15,487 21,559 (1,832) 24.1 Loopm Oy Helsinki inactive 28.4 PGR Manganese holding (Pty) Ltd(2) South Africa company 49.0 Rivest Oy Helsinki 31.12.2008 16 15 52 (8) 40.0 Special Super Alloys SSA Inc United States 31.12.2009 288 159 157 (181) 20.0 Sportslink Group Oy Helsinki inactive 25.0 Stellatum Oy Helsinki 31.12.2009 386 293 1,300 (15) 34.0 Valtimo Components Oyj(3) Valtimo 31.12.2008 2,119 3,114 2,178 (497) 24.9 Widian Oy Espoo 31.12.2009 589 808 733 4 39.6 19,243 23,173 41,742 (2,435)
(1) Incap Furniture Oy is in corporate restructuring process (2) Company founded in relation to Mogale acquisition that owns Mogale shares (3) Valtimo Components Oyj is in corporate restructuring process, ownership can increase to 39.23% if the shares sold earlier, held as pledge, are not to be paid to Ruukki in cash
The balance sheet date of certain associates differs from the Group’s balance sheet date, since all of the associated companies’ financial statements were not available when the Group’s financial statements have been prepared. Certain associates are also inactive. All subordinated loans are included in the associated companies’ liabilities. Other investments Company name Ownership (%) Leswikeng UG2 Minerals 18.9 Considered as an other investment, while (Pty) Ltd the Group’s effective stake is 18.9 per cent. Selka-line Oy 19.4 A former subsidiary of the Group that operates in the metal contract furniture and furniture component business Finnish Wood Research Oy 16.7
189 G12. Financial assets 31.12.2008
Liabilities Assets at at fair Liabilities fair value value measured Carrying Assets Assets Loans and through through at amounts available held-to- other profit or profit or amortised by balance -for-sale maturity receivables loss loss cost sheet items €’000 €’000 €’000 €’000 €’000 €’000 €’000 Non-current financial assets Non-current interest- bearing receivables 957 19,066 20,024 Trade and other receivables 403 403 Other financial assets 125 125 Current financial assets Current interest- bearing receivables 186,485 845 187,329 Trade and other receivables(1) 18,032 18,032 Other financial assets 133 133 Cash and cash equivalents 45,413 45,413 Carrying amount of financial assets 125 187,442 83,759 133 271,459 Fair value of financial assets 125 187,442 83,759 133 271,459 Non-current financial liabilities Non-current interest- bearing liabilities 41,778 41,778 Other non-current liabilities 52,237 52,237 Current financial liabilities Current interest- bearing liabilities 13,286 13,286 Trade and other payables(1) 20,800 20,800 Derivatives 2,527 2,527 Carrying amount of financial liabilities 2,527 128,101 130,628 Fair value of financial liabilities 2,527 128,101 130,628
(1) non-financial assets or liabilities not included in the figure
190 31.12.2009
Liabilities Assets at at fair Liabilities fair value value measured Carrying Assets Assets Loans and through through at amounts available held-to- other profit or profit or amortised by balance -for-sale maturity receivables loss loss cost sheet items €’000 €’000 €’000 €’000 €’000 €’000 €’000 Non-current financial assets Non-current interest- bearing receivables 281 669 14,525 15,475 Trade and other receivables 585 585 Other financial assets 163 163 Current financial assets Current interest- bearing receivables 2,500 2,765 5,265 Trade and other receivables(1) 24,686 24,686 Other financial assets 314 314 Cash and cash equivalents 55,852 55,852 Carrying amount of financial assets 444 3,169 98,413 314 102,339 Fair value of financial assets 444 3,169 98,413 314 102,339 Non-current financial liabilities Non-current interest- bearing liabilities 75,506 75,506 Other non-current liabilities 26,226 26,226 Current financial liabilities Current interest- bearing liabilities 39,008 39,008 Trade and other payables(1) 23,757 23,757 Carrying amount of financial liabilities 164,497 164,497 Fair value of financial liabilities 164,497 164,497
(1) non-financial assets or liabilities not included in the figure
191 Fair value hierarchy 31.12.2009 Carrying amounts at the end of the reporting period Level 1 Level 2 Level 3 €’000 €’000 €’000 Financial assets at fair value Derivatives Other financial assets 314 Total Available-for-sale financial assets Other financial assets 444 Financial liabilities at fair value Derivatives Total Level 3 reconciliation Acquisition cost at 1.1.2009 423 Additions 320 Disposals — Acquisition cost at 31.12.2009 743 Accumulated impairment losses at 1.1.2009 (299) Accumulated impairment losses at 31.12.2009 (299) Carrying amount at 31.12.2009 444 Financial assets at fair value through profit or loss include CO2 derivatives, whose fair value has been determined based on Nordpool closing price. Available for sale financial assets consists of non-listed equities that have been revalued at cost because their fair value cannot be estimated reliably. Non-current receivables 2008 2009 Carrying Carrying amount amount €’000 €’000 Loan receivables 16,380 10,954 Other receivables 3,089 15,176 Total 19,469 26,130
Balance sheet values of receivables closely correspond to the monetary value of maximum credit risk excluding the fair value of received guarantees in the potential case where the counterparties cannot fulfil their commitments. There is no significant credit risk concentration related to receivables.
192 G13. Deferred tax assets and liabilities Movements in deferred taxes in 2009 Recognised in P&L or Business deferred combinations Exchange taxes from and rate fair value Recognised divestment of 31.12.2008 differences adjustments in equity subsidiaries 31.12.2009 €’000 €’000 €’000 €’000 €’000 €’000 Deferred tax assets: Unrealised expenses 1,437 (10) (495) 932 Non-tax deductible depreciation 150 46 (196) Pension liabilities 1,088 (16) 1,072 Translation difference Group eliminations 139 120 259 Other items Total 2,815 (10) (346) — (196) 2,264 Deferred tax liabilities: Assets at fair value in acquisitions 28,753 748 (7,050) 14,829 37,280 Translation difference 3,325 3,325 Accumulated difference between actual and tax deductible depreciation 1,678 (860) (129) 689 Financial assets and investments at fair value 65 17 82 Other items 484 200 (529) 2,418 2,573 Total 30,979 948 (8,422) 3,325 17,118 43,949
Movements in deferred taxes in 2008 Recognised in P&L or Business deferred combinations Exchange taxes from and rate fair value Recognised divestment of 31.12.2007 differences adjustments in equity subsidiaries 31.12.2008 €’000 €’000 €’000 €’000 €’000 €’000 Deferred tax assets: Unrealised expenses 379 1,058 1,437 Non-tax deductible depreciation 130 20 150 Pension liabilities — 1,088 1,088 Translation difference 379 — (379) Group eliminations 180 (9) (32) 139 Other items 67 (30) (37) Total 1,136 — 2,127 (449) — 2,815 Deferred tax liabilities: Assets at fair value in acquisitions 1,968 26,785 28,753 Accumulated difference between actual and tax deductible depreciation 1,442 988 (752) 1,678 Financial assets and investments at fair value 142 (77) 65 Other items 342 142 484 Total 3,894 — 27,838 (752) — 30,979
G14. Inventories 2008 2009 €’000 €’000 Goods and supplies 8,296 14,670 Unfinished products 8,311 9,760 Unfinished construction projects — 2,610 Finished products 22,690 28,777 Prepayments 1,121 134 Total 40,419 55,951
193 At the end of 2009, the Group’s house building business area acquired land areas, which were recognised into inventory and shown as unfinished construction projects. At the end of 2008, based on declining log prices, the Group booked the raw material inventories of sawmills to net realisable value, which had a total effect of €(0.5) million. G15. Trade receivables and other current receivables 2008 2009 €’000 €’000 Trade receivables 16,988 25,664 Loan receivables 432 21 Interest-bearing receivables 845 2,765 Prepaid expenses and accrued income 16,156 10,926 Other receivables 2,250 9,907 Total 36,672 49,283
Prepaid expenses and accruals mainly relate to rental contracts, personnel expenses and accrued interest for loans. Balance sheet values of receivables closely correspond to the monetary value of maximum credit risk, excluding the fair value of received guarantees, in the potential case where the counterparties cannot fulfil their commitments. There is no significant credit risk concentration related to receivables. The aging of trade receivables at the balance sheet date 2008 2009 €’000 €’000 Not past due 10,139 9,524 Past due 0-30 days 4,597 1,648 Past due 31-60 days 1,374 9,041 Past due 61-90 days 473 4,616 Past due more than 90 days 405 834 Impairment 0 0 Trade receivables total 16,988 25,664
Construction contracts 2008 2009 €’000 €’000 Contracts in progress at the balance sheet date Construction costs plus recognised profits 2,758 — Progress billings (1,787) — Net 972 — Gross receivables for construction contracts 183 — G16. Cash and cash equivalents 2008 2009 €’000 €’000 Cash and bank balances 45,413 55,852 Pledged deposits: 1,118 80 Cash and cash equivalents in the cash flow statement 2008 2009 €’000 €’000 Cash and bank balances 45,413 55,852 Short-term money market investments (deposit certificates) — — Total 45,413 55,852
194 G17. Derivative agreements Forward contracts, contract values 2008 2009 €’000 €’000 Foreign exchange forward contracts 14,759 — Foreign exchange option contracts — 278 Interest rate swaps — 950 Other derivatives 1,030 — Forward contracts, fair value 2008 2009 €’000 €’000 Foreign exchange forward contracts (2,527) — Foreign exchange option contracts — (1) Interest rate swaps — (14) Other derivatives 893 — In order to hedge some of its exports related foreign exchange risks, the Group’s sawmill subsidiary entered at the end of December 2009 into a EUR/USD currency option agreement where the fair value and market value were practically equal. The nominal amount of the position is USD 0.4 million, and there are two options: one USD put option and one USD call option. The call option has a knock-in feature, which was after the year end activated based on EUR/USD exchange rate development. The maturity of these options is less than 3 months at the end of 2009. The same subsidiary also has €0.9 nominal value of interest rate swaps, whose fair value impact on 31 December 2009 was about €14,000. The maturity of foreign exchange rate and other derivatives was less than 6 months at the balance sheet date 31.12.2008. G18. Assets and liabilities classified as held for sale On the balance sheet date 2009 Ruukki Group presented the assets and related liabilities related to Lappipaneli’s asset sales, to the extent the assets are transferred after the year-end 2009, on the Group balance sheet as assets and liabilities classified as held for sale. On the balance sheet date for 31 December 2008 Ruukki Group did not have any assets classified as held for sale. 2008 2009 €’000 €’000 Non-current assets classified as held for sale Goodwill — — Other intangible assets — 101 Property, plant and equipment — 12,612 Other non-current assets — 1 Non-current assets classified as held for sale — 12,714 Current assets classified as held for sale —— Assets classified as held for sale — 12,714 Liabilities associated with assets held for sale Trade payables — 3,183 Other current liabilities — 3,096 Liabilities associated with assets held for sale — 6,280
195 The equity reserves are described below: Share premium reserve Related to the old Finnish Companies Act, the Company has share premium reserve in relation to old share issues, where the premium in excess of the par value of the shares subscribed has been recognised in share premium reserve. Fair value reserve The fair value reserve comprises the cumulative net change in fair value of available-for-sale financial assets until the investments are derecognised or impaired. Revaluation reserve The revaluation reserve comprises fair value allocation to the previously acquired share of Oplax in an acquisition achieved in stages. Translation reserve The translation reserve comprises all foreign currency differences arising from the translation of financial statements of foreign operations. Paid-up unrestricted equity reserve Paid-up unrestricted equity reserve comprises other equity investments and subscription price of shares to the extent that it is not recognised in share capital based on a specific decision. Number of Number of Share capital, registered shares shares on issue €’000 31.12.2007 290,034,022 290,034,022 23,642 Acquisitions of treasury shares — (10,685,000) 23,642 31.12.2008 290,034,022 279,349,022 23,642 Acquisitions and cancellations of treasury shares (29,000,000) (40,102,917) 23,642 31.12.2009 261,034,022 239,246,105 23,642 Treasury shares The Annual General Meeting held on 31 March 2008 authorised the company’s Board of Directors to acquire a maximum of 10,000,000 own shares and to transfer the acquired shares. This authorisation was valid until 31 March 2009. Based on the authorisation, the Board decided to acquire the maximum amount of own shares with the funds from the company’s unrestricted shareholders’ equity. The acquisition of the shares began on 5 November 2008, and the maximum amount 10,000,000 shares had been bought on 27 November 2008. The shares were acquired according to the section 5 of the Rules of NASDAQ OMX Helsinki related to the acquisition of company’s own shares and otherwise according to the rules related to acquisition of company’s own shares. The Extraordinary General Meeting held on 28 October 2008 authorised the company’s Board to acquire a maximum of 19,000,000 own shares and to transfer the acquired shares. The authorisation was valid until 28 October 2010. Based on the authorisation, the Board decided to start a trading plan, and the share buy-backs were started on 29 December 2008. A total of 19,000,000 own shares were acquired in accordance with the trading plan and the amount was reached on 30 January 2009. The shares were acquired according to the section 5 of the Rules of NASDAQ OMX Helsinki related to the acquisition of company’s own shares and otherwise according to the rules related to acquisition of company’s own shares. Therefore, at the end of January 2009 the company held altogether 29,000,000 treasury shares, which was equivalent to approximately 9.999 per cent. of all the registered shares. On 3 February 2009 the Company’s Board of Directors decided to cancel all the shares it held, altogether 29,000,000 shares. The cancellation was registered on 17 February 2009. After that the registered number of shares was 261,034,022.
196 The Extraordinary General Meeting held on 24 February 2009 authorised the Company’s Board of Directors to acquire a maximum of 26,000,000 own shares and to transfer the acquired shares. This authorisation is valid until 24 February 2010. Based on the authorisation, share buybacks were started on 5 March 2009. The shares were acquired according to the section 5 of the Rules of NASDAQ OMX Helsinki related to the acquisition of company’s own shares and otherwise according to the rules related to acquisition of company’s own shares. Based on the authorisation, Ruukki Group Plc’s Board of Directors decided on 6 October 2009 to grant 52,083 shares, held by Ruukki Group Plc as treasury shares, to Thomas Hoyer as part of his incentive package as the Managing Director of Ruukki Yhtiöt Oy, the parent company of the Group’s Wood Processing assets. On 31 December 2009 the company had in its possession altogether 21,787,917 own shares, which is equal to about 8.35 per cent. of the total amount of registered shares. Ruukki Group Plc’s Board of Directors decided on 19 January 2010 to cancel altogether 13,052,022 own shares held by the Company, which totals about 5 per cent. of the registered number of shares. The cancellation did not affect the Company’s share capital. After the cancellation the Company will hold 8,735,895 own shares. The registered number of shares was 247,982,000 after the cancellation, which became valid after it was registered at the Trade Register on 2 February 2010. The company’s subsidiaries do not hold any of Ruukki Group Plc’s shares. Share Issue Authorisations given to the Board of Directors The Extraordinary General Meeting held on 24 February 2009 decided to authorise the Board of Directors to decide on share issue and on the issuing of stock options and other special rights that entitle to shares. The authorisation replaces the authorisation given by the Annual General Meeting on 31 March 2008. By virtue of the authorisation shares could be emitted in one or more tranches in total a maximum of 100,000,000 new shares or shares owned by the Company. This equates approximately 38.3 per cent. of the Company’s registered number of shares on 31 December 2009. This authorisation was valid until 24 February 2010. Other option rights The Extraordinary General Meeting held on 28 October 2008 decided on issuing a maximum total of 73,170,731 option rights to Kermas Limited related to additional earn-out purchase consideration of a acquisition. The option rights entitle the recipients to subscribe for a maximum total of 73,170,731 new shares or shares that are in the possession of the Company. The subscription period for the shares occurs annually within 30 business days after the approval of the additional earn-out purchase consideration and matures on December 31, 2014. The share subscription price per share is €2.26 (with dividend and capital redemption adjustment). The whole paid subscription price shall be entered in the paid-up unrestricted equity fund. The number of shares in the Company can be increased by a maximum of 73,170,731 new shares as a result of share subscriptions. Share Price Development Ruukki Group Plc’s shares (RUG1V) are listed on NASDAQ OMX Helsinki in which the shares of the Company are traded in the mid cap segment, in the industrials sector since 1 July 2007. During the financial year, the price of Ruukki Group’s share varied between €1.04 (2008: 1.02) and €2.68 (2.99). A total of 328,119,128 (434,714,427) of Ruukki Group shares were traded in the financial year, representing 125.7 per cent. (149.9 per cent.) of all the shares registered at the end of the financial year. The closing price of the Company’s share on 31 December was €2.14 (1.15). The market capitalisation of the Group’s entire capital stock 261,034,022 (290,034,022) shares at the closing price on 31 December was €558.6 million (335.5).
197 Shareholders On 31 December 2009, the company had a total of 3,874 shareholders (4,136 shareholders on 31.12.2008), of which 9 were nominee-registered. The registered number of shares on 31 December 2009 was 261,034,022 (290,034,022). Largest shareholders on 31 December 2009 Shareholder Shares % Kermas Limited 70,766,500 27.1 Atkey Limited 50,281,401 19.3 Nordea Bank Finland Plc nominee-registered 33,459,371 12.8 Hanwa Company Limited 30,000,000 11.5 Ruukki Group Plc 21,787,917 8.3 Hino Resources Co. Ltd 10,610,405 4.1 Djakov Aida nominee-registered 9,952,500 3.8 Kankaala Markku 8,525,728 3.3 Skandinaviska Enskilda Banken nominee-registered 6,960,503 2.7 Hukkanen Esa 5,010,100 1.9 Total 247,354,425 94.8 Other Shareholders 13,679,597 5.2 Total shares registered 261,034,022 100.0
Ruukki Group Plc’s board members and CEO owned in total 82,168,811 Ruukki Group Plc shares on 31 December 2009 (113,675,890 on 31.12.2008) when including shares and forward contracts owned either directly, through persons closely associated with them or through controlled companies. This corresponds to approximately 31.5 per cent. of all outstanding shares that were registered to the Trade Register on 31 December 2009. On 31 December 2008 the total number of registered shares was 290,034,022 and the Board and CEO’s ownership corresponded to 39.2 per cent. of the total number of registered shares. Shareholders by category Number of Number of % share of shares % of shares Shares shareholders shareholders held held 1-100 688 17.76 44,155 0.02 101-1.000 2,215 57.18 1,149,405 0.44 1.001-10.000 877 22.64 2,693,646 1.03 10.001-100.000 73 1.88 1,587,990 0.61 100.001-1.000.000 9 0.23 2,798,401 1.07 1.000.001-10.000.000 6 0.16 35,854,831 13.74 in excess of 10.000.000 6 0.16 216,905,594 83.10 Total 3,874 100.00 261,034,022 100.00 of which nominee-registered 9 51,078,016 19.57 On common account — — Total outstanding 261,034,022 100.00
198 Shareholders by shareholder type on 31 December 2009 % of share capital Finnish shareholders 32.18% of which: Companies and business enterprises 8.57% Banking and insurance companies 16.12% Non-profit organisations 0.00% Households 7.48% Foreign shareholders 67.82% Shares on common account 0.00% Total 100.00% of which nominee-registered 19.57% G20. Share-based payments The company has option schemes I/2005 and I/2008. In order to increase the level of commitment and motivation of key persons, option rights of option scheme I/2005 are, deviating from shareholders’ pre-emptive rights, granted to Ruukki Group Plc’s CEO and management and other key employees, and furthermore as decided by the Board to the board members, management or employees of group subsidiaries, and potentially for persons having other contractual relationships with the Group. Option scheme I/2008 is granted to the company’s CEO. The Annual General Meeting, held on 7 May 2009, decided in accordance with the Board’s proposal to amend the terms of option schemes I/2005 and I/2008. The terms of the option plan I/2005 were amended so that the subscription price of the shares will be fixed based on the capital repayments respectively as the fixing made to the subscription price based on dividend according to the old terms. The terms of the option plan I/2008 were amended so that the subscription price of the shares will be fixed based on the payments of dividend as well as capital repayments. The company’s I/2005 option scheme entitles option holders to subscribe for a maximum of 2,700,000 shares in the company. The share subscription period is 1 July 2007 through 30 June 2015 for various options denoted with different letters, and the subscription price range is €0.36 – 0.86 (with dividend and capital redemption adjustment). As a result of subscriptions made with the I/2005 options, Ruukki Group Plc’s share capital may be increased by a maximum of €459,000.00 and the number of shares by a maximum of 2,700,000 new shares. The company’s I/2008 option scheme entitles option holder to subscribe for a maximum of 2,900,000 shares in the company for subscription price €2.26 per share (with dividend and capital redemption adjustment). The share subscription period for 1,450,000 stock options commences on October 1, 2009 and for 1,450,000 stock options on October 1, 2010. The subscription period matures on December 31, 2015. The number of Ruukki Group Plc shares can be increased by a maximum of 2,900,000 shares as a result of the subscriptions made with the I/2008 option rights. Of the option scheme I/2005, options on A, B, C, D and E series have been issued to Ruukki Group’s management totalling 1,075,000 option rights and of the option scheme I/2008 altogether 2,900,000 options. All options that have been granted after 7 November 2002 and that have not been vested prior to 1 January 2005 have been treated according to the principles set forth in IFRS 2 Share-based Payments standard. Share options will be expired if not redeemed as agreed in the terms of options. Options are forfeited if the option holder leaves the company prior to the effective date of the options.
199 The Group applies the Black & Scholes model to option arrangements that include employment terms. The expected volatility has been determined by calculating the historical volatility of the Company’s share price and adjusting it according to generally available factors that are expected to affect historical volatility. Historical volatility was calculated on the basis of changes in the Company’s share price. Changes in share options issued and in weighted average exercise prices: Weighted average exercise price (with dividend and capital redemption adjustment) Number of €/share options At the beginning of 2008 0.46 675,000 Granted new options 2.14 3,125,000 Exercised options — — Forfeited options — — At the end of 2008 1.85 3,800,000 Exercisable at the end of 2008 0.41 450,000 At the beginning of 2009 1.85 3,800,000 Granted new options 0.76 175,000 Exercised options — — Forfeited options — — At the end of 2009 1.80 3,975,000 Exercisable at the end of 2009 1.69 2,125,000
No share options were exercised during the financial year 2009.
The exercise prices of existing share options and their years of forfeiting are presented below: Exercise Number of price shares Year of forfeiting (€) 2010 0.45 225,000 2011 0.56 225,000 2012 0.66 225,000 2013 0.76 225,000 2014 0.86 175,000 2015 2.26 2,900,000 The exercise price above represents the original contractual exercise price adjusted by dividends and capital redemptions before AGM 2010.
200 The main terms of the option arrangements are detailed in the table below:
Share options, Share options, Share options, Share options, Share options, Share options, Share options, granted granted granted to granted to granted to granted to granted to to CEO to CEO employees employees employees employees employees Shares in 2008 in 2008 in 2009 in 2008 in 2007 in 2006 in 2005 Nature of the plan Share options Share options Share options Share options Share options Share options Share options issued issued issued issued issued issued issued Grant date 28.10.2008 28.10.2008 6.8.2009 28.10.2008 17.10.2007 14.8.2006 14 Dec 2005 Number of options 1,450,000 1,450,000 175,000 225,000 225,000 225,000 225,000 Options series I/2008 I/2008 E (I/2005) D (I/2005) C (1/2005) B (I/2005) A (I/2005) Exercise period 1.10.2010 - 1.10.2009 - 1.7.2011 - 1.7.2010 - 1.7.2009 - 1.7.2008 - 1.7.2007 - 31.12.2015 31.12.2015 30.6.2014 30.6.2013 30.6.2012 30.6.2011 30.6.2010 Dividend adjustment yes yes yes yes yes yes yes Exercise price (with dividend and capital redemption adjustment) 2.26 2.26 0.76 0.66 0.56 0.46 0.36 Share price at grant date 1.26 1.26 1.75 1.26 2.86 0.69 0.63 Option life 5.3 5.3 3.0 3.0 3.0 3.0 3.0 Conditions Employment Employment Employment Employment Employment Employment Employment until the until the until the until the until the until the until the vesting date vesting date vesting date vesting date vesting date vesting date vesting date Execution In shares In shares In shares In shares In shares In shares In shares Expected volatility 66% 66% 46% 66% 44% 89% 130% Expected option life at grant date (years) 5 years 5 years 4.9 years 4.7 years 4.7 years 4.9 years 4.5 years Risk free rate, Euribor 12 months 4.33% 4.33% 3.66% 4.33% 4.10% 3.65% 2.79% Expected dividend yield 3.17% 3.17% 0.00% 3.17% 1.40% 2.2% 0.00% Expected personnel reductions — — — — — — — Fair value at grant date 0.33 0.33 1.20 0.77 2.17 0.53 0.54 Valuation model Black & Black & Black & Black & Black & Black & Black & Scholes Scholes Scholes Scholes Scholes Scholes Scholes G21. Interest-bearing debt 2008 2009 Balance sheet Balance sheet values values €’000 €’000 Non-current Bank loans 19,769 17,249 Subordinated loans (liability component for convertibles) 5 5 Equipment financing 3,321 452 Finance lease liabilities — 247 Purchase price liabilities 18,683 57,552 Total 41,778 75,506
Current Bank loans and equipment financing 13,069 13,274 Finance lease liabilities 6 536 Purchase price liabilities 194 25,083 Other interest bearing liabilities 18 114 Total 13,286 39,008
Mogale Alloys acquisition in May 2009 is the main cause in the increase of interest-bearing debt. Even though these deferred payment liabilities are not interest-bearing based on the Group’s interpretation, those liabilities have been classified into interest-bearing debt, since the liability will become partially or fully interest-bearing at the latest from the date when Mogale receives the environmental permits and licences agreed in conjunction with the acquisition. The Group has at the end of 2009 changed the way it presents acquisition-related contingent or deferred receivables and liabilities so that those receivables and liabilities have been reclassified as interest-bearing to the extent they will be settled in cash even though the Group would have contractual obligations at the end of the year to pay interest
201 on those loans. This reclassification has not had any major impact on the balance sheet structure when compared to year-end 2008. When compared to earlier unaudited interim reports 2009 (Q2 and Q3), and to financial statements review published in February 2010, the Mogale Alloys related liabilities (totalling about €73.9 million at the year-end 2009) have earlier been presented in non-interest bearing liabilities but transferred on 31 December 2009 to the interest-bearing class. Finance lease liabilities 2008 2009 €’000 €’000 Finance lease liabilities, minimum lease payments No later than 1 year 6 577 Later than 1 year and not later than 5 years — 273 6 850
Finance lease liabilities, present value of minimum lease payments No later than 1 year 6 536 Later than 1 year and not later than 5 years — 247 6 783 Future finance charges —67 Total minimum lease payments 6 850
G22. Trade payables and other liabilities 2008 2009 €’000 €’000 Non-current Purchase price liabilities 843 — Purchase price liabilities (paid as shares) 50,849 26,219 Liabilities from defined benefit plans 11,116 11,035 Other liabilities 545 8 Total non-current 63,352 37,261
Current Purchase price liabilities 1,135 900 Purchase price liabilities (paid as shares) — 2,933 Trade payables 19,313 19,242 Prepayments 13,215 13,480 Accrued expenses and deferred income 6,727 7,179 Income tax liability 6,917 15,104 Other liabilities 4,566 2,042 Total current 51,875 60,880
The main reason for the movement in 2009 in the non-current noninterest bearing liabilities was caused by the change in the estimate of the earn-out liability for RCS and TMS acquisitions carried out in October 2008. Material items included into accrued expenses are related to personnel expenses and interests. Received prepayments are mainly advance payments made by clients of house building business area.
202 G23. Provisions Environmental and other Warranty provisions provisions Total €’000 €’000 €’000 Balance at 1.1.2009 5,202 92 5,294 Additions 1,013 36 1,049 Acquisitions of subsidiaries(1) 7,650 — 7,650 Reductions (157) — (157) Unwinding of discount 462 — 462 Translation difference (6) — (6) Balance at 31.12.2009 14,164 128 14,292
Note: (1) The environmental and other provisions recorded for the acquisition of subsidiaries was incorrectly stated as €9,882,000 in the 2009 financial statements.
2008 2009 €’000 €’000 Long-term provisions 4,815 12,602 Short-term provisions 479 1,690 Total 5,294 14,292
The long-term provisions in the balance sheet relate mainly to environment and restoration provisions of the Minerals business and also to some degree to future personnel expenses. Environment and restoration provisions are based on an estimate of the future commitments. The house building segment gives a quality guarantee of one year for its products. Short-term liabilities for repair have been recorded as expenses in the profit and loss account and as provisions in the balance sheet. Defects discovered during the warranty period are repaired by the company or the product is replaced with equal product. The provision is based on expected number of defective products based on previous experience. Provisions are expected to be used within the next year. G24. Summary on financial assets and loan arrangements Financial assets 31.12.2009 In addition to the operative result and the cash flow generated from it the following factors described below have most significantly affected the change in the amount of the Group’s financial assets at the balance sheet date 2009 year-on-year: Actions that have decreased financial assets: • Acquisition of own shares • Investment project in Turkey • Acquisition of Mogale Alloys (Pty) Ltd in May 2009 • Ruukki Group Plc’s capital redemption in May 2009 • The intended acquisition of Sylvania Resources Ltd • The intended listing on London Stock Exchange, preparation starter during fourth quarter Actions that have increased financial assets: • Disposal of Tervolan Saha ja Höyläämö Oy in December 2009
203 At the balance sheet date 31 December 2009 the cash and cash equivalents were invested mainly to interest-bearing euro-denominated bank accounts. At the balance sheet date 31 December 2008 the Group had invested significant part of its liquid funds in short-term euro-denominated fixed-term deposits. As a result of the acquisitions made, the amount of foreign-currency-denominated financial assets has increased. On 31 December 2009, the Group’s financial assets comprise of the euro and foreign-currency-denominated deposits and pledged deposits as follows: • Euro-denominated fixed-term deposits for €2.5 million (31.12.2008: 200.4). The annualised average interest rate is 0.7 per cent. p.a (3.1 per cent.). The maturity of the deposit is less than 1 month • Interest-bearing deposits pledged, when not taking into account the pledges for rented premises, the group companies have given for altogether €2.5 million (31.12.2008: 3.4) At the balance sheet date 31 December 2009, the amount of foreign-currency-denominated cash and cash equivalents is on its euro-value about €5.8 million (31.12.2008: 4.5 million). Euro-denominated cash and cash equivalents totalled €50.1 million (24.5). The company has interest-bearing receivables from its previous or current related parties for approximately €11.0 million, of which €10.0 million relates to a German company that is consolidated into the Group, but in which Ruukki Group’s ownership stake is zero. Interest-bearing debt 31.12.2009 • Floating rate loans from financial institutions totalling €37.1 million (33.2). Fixed rate loans altogether €1.1 million (3.0). • The interest rates of the loans are to major extent tied to Euribor rates. The weighted average interest rate at the balance sheet date 31 December 2009 was, based on market interest rates at that date, about 2.9 per cent. (4.4 per cent.) when the impact of interest rate swaps have been taken account. The average interest rate margin for floating rate notes was 2.3 per cent. p.a (1.1 per cent.) (over the reference rates of the loans). The range of the annualised interest rates was 1.0 (1.9) per cent. p.a. – 5.0 (7.4) per cent. p.a. The loans will mature in years 2010 – 2018. The loans include about €3.1 million liabilities classified as held for sale in the Group balance sheet. G25. Management of capital At the same time with preparing the financials statements for financial year 2008, the Board of Directors of Ruukki Group Plc has redefined the principles concerning management of capital as follows: (1) the Group has conservative approach to managing Group’s debt/equity ratio; and (2) return on capital employed will be optimised in all businesses; and (3) cash flow generation is emphasised in all operations; and (4) cash reserves and financing capacity are supervised and administered in a centralised and conservative manner. At the balance sheet date 31 December 2009, group’s equity ratio stood at 52.0 per cent. (2008: 64.8 per cent.). During the latter half of 2009 the Group established segment level management teams for both its Minerals business and Wood Processing business. In conjunction with the reorganization, the Group’s Board of Directors also set a long-term target capital structures for its segments: Minerals 50% equity, 50% debt Wood 35% equity, 65% debt
204 During the previous year the Group decided on principles as to how to manage its capital and cash flows, and those fundamental principles will be followed in the future as well. Therefore, even though there have been some easing in the global financial markets compared the previous year-end, the Group has a conservative way of managing its capital structure and tries to optimise its businesses’ cash generation. One key target, in addition to profitability, is return on capital employed. Furthermore, during 2009 the Group started processes where treasury operations will be run more centrally than historically, and this development will be continued in 2010. Ruukki Group’s Board reviews and monitors the adequacy of capital in all of its operations, and uses both internal and external measures to manage cash flows. In its minerals processing operations, if and when needed, also production slowdowns or stoppages are applied for short-term cash optimization. The Group’s creditworthiness and capital structure can also have either direct effects, on e.g. cost of capital, and indirect effects, for example via its effects on suppliers or customers. There are also debt financing arrangements with covenants tied to the Group’s or subsidiaries’ capital structure, and therefore, any adverse changes in the balance sheet structure can affect financing costs or expedite the payback of loan capital. The global financial and economic crisis has created quite considerable volatility in demand and prices in the markets the Group operates. Hence flexibility in financing arrangements and sources of capital is important, and the Group has during 2009 tried to decrease the level of total debt in its businesses to the extent possible. The Group has also sold some non-core assets, both to generate cash and to some extent to decrease the capital intensive subsidiaries’ relative importance. Since in 2009 there were low output volumes and capacity utilisation rates, if the markets recover and volumes increase that will most probably tie up cash in working capital. The Group is also considering operational partnership or joint venture options to diversify risks and potential sources of funding. The actual balance sheet structure at the year-end was the following: (M = Minerals business, W = Wood Processing business, G = Consolidated Group):
31.12.2008 31.12.2009 MW GM W G €’000 €’000 €’000 €’000 €’000 €’000 Equity (6,783) (22,408) 348,943 (27,277) (18,478) 268,144 Minority Interest 6,517 1,251 7,768 12,338 5,540 17,878 (1) Total Equity (266) (21,157) 356,710 (14,939) (12,937) 286,022 Balance Sheet Total 57,943 85,675 563,275 390,005 83,623 563,198 Prepayments received — 13,215 13,215 — 13,425 13,480 (2) Adjusted Balance Sheet 57,943 72,459 550,060 390,005 70,198 549,717 (3) Equity ratio = (1)/(2) (0.5%) (29.2%) 64.8% (3.8%) (18.4%) 52.0% Signatures to the financial statements and report of the Board of Directors Espoo, 25 February 2010 Jelena Manojlovic, Chairman of the Board Alwyn Smit, Member of the Board and Chief Executive Officer Markku Kankaala, Member of the Board Thomas Hoyer, Member of the Board Terence McConnachie, Member of the Board
205 THE AUDITOR’S NOTE
Our auditor’s report on Ruukki Group Plc’s 2009 financial statements and on Board report has been issued today. Espoo, 31 March 2010 Tomi Englund, Authorised Public Accountant Ernst & Young Oy
Translation To the Annual General Meeting of Ruukki Group Plc We have audited the accounting records, the financial statements, the report of the Board of Directors, and the administration of Ruukki Group Plc for the financial period 1.1.2009 – 31.12.2009. The financial statements comprise the consolidated balance sheet, statement of comprehensive income, statement of changes in equity, cash flow statement and notes to the consolidated financial statements, as well as the parent company’s balance sheet, income statement, cash flow statement and notes to the financial statements. The responsibility of the Board of Directors and the Managing Director The Board of Directors and the Managing Director are responsible for the preparation of the financial statements and the report of the Board of Directors and for the fair presentation of the consolidated financial statements in accordance with International Financial Reporting Standards (IFRS) as adopted by the EU, as well as for the fair presentation of the financial statements and the report of the Board of Directors in accordance with laws and regulations governing the preparation of the financial statements and the report of the Board of Directors in Finland. The Board of Directors is responsible for the appropriate arrangement of the control of the company’s accounts and finances, and the Managing Director shall see to it that the accounts of the company are in compliance with the law and that its financial affairs have been arranged in a reliable manner. Auditor’s responsibility Our responsibility is to perform an audit in accordance with good auditing practice in Finland, and to express an opinion on the parent company’s financial statements, on the consolidated financial statements and on the report of the Board of Directors based on our audit. Good auditing practice requires that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance whether the financial statements and the report of the Board of Directors are free from material misstatement and whether the members of the Board of Directors of the parent company and the Managing Director have complied with the Limited Liability Companies Act. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements and the report of the Board of Directors. The procedures selected depend on the auditor’s judgment, including the assessment of the risks of material misstatement of the financial statements or of the report of the Board of Directors, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity’s preparation and fair presentation of the financial statements and the report of the Board of Directors in order to design audit procedures that are appropriate in the circumstances. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the financial statements and the report of the Board of Directors. The audit was performed in accordance with good auditing practice in Finland. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. Opinion on the consolidated financial statements In our opinion, the consolidated financial statements give a true and fair view of the financial position, financial performance, and cash flows of the group in accordance with International Financial Reporting Standards (IFRS) as adopted by the EU.
206 Opinion on the company’s financial statements and the report of the Board of Directors In our opinion, the financial statements and the report of the Board of Directors give a true and fair view of both the consolidated and the parent company’s financial performance and financial position in accordance with the laws and regulations governing the preparation of the financial statements and the report of the Board of Directors in Finland. The information in the report of the Board of Directors is consistent with the information in the financial statements. Espoo, March 31, 2010 Ernst & Young Oy, Authorized Public Accountant Firm Tomi Englund, Authorized Public Accountant
207 Section B – Historical Financial Information on Mogale Alloys (Pty) Ltd
The Directors 30 June 2010 Ruukki Group Plc (the “Company”) Keilasatama 5 FI-01250 Espoo Finland Dear Sirs
Mogale Alloys Group We report on the financial information set out in section B of Part VIII of the prospectus dated 30 June 2010 of Ruukki Group Plc (the “Prospectus”). This financial information has been prepared for inclusion in the Prospectus on the basis of the accounting policies set out in note 1. This report is required by item 20.1 of Annex I of the Commission Regulation EC 809/2004 and is given for the purpose of complying with that item and for no other purpose. Save for any responsibility under applicable law to investors purchasing ordinary shares of Ruukki Group Plc in reliance on this report, to the fullest extent permitted by law we do not assume any responsibility and will not accept any liability to any other person for any loss suffered by any such other person as a result of, arising out of, or in connection with this report or our statement, required by and given solely for the purposes of complying with item 23.1 of Annex I of Commission Regulation (EC) 809/2004 and item 10.3 of Annex III of Commission Regulation (EC) 809/2004, consenting to its inclusion in the prospectus.
Responsibilities The Directors of Ruukki Group Plc are responsible for preparing the financial information on the basis of preparation set out in note 1 to the financial information. It is our responsibility to form an opinion as to whether the financial information gives a true and fair view, for the purposes of the prospectus, and to report our opinion to you.
Basis of opinion We conducted our work in accordance with Standards for Investment Reporting issued by the Auditing Practices Board in the United Kingdom. Our work included an assessment of evidence relevant to the amounts and disclosures in the financial information. It also included an assessment of significant estimates and judgments made by those responsible for the preparation of the financial information and whether the accounting policies are appropriate to the entity’s circumstances, consistently applied and adequately disclosed. We planned and performed our work so as to obtain all the information and explanations which we considered necessary in order to provide us with sufficient evidence to give reasonable assurance that the financial information is free from material misstatement whether caused by fraud or other irregularity or error. Our work has not been carried out in accordance with auditing or other standards and practices generally accepted in other jurisdictions and accordingly should not be relied upon as if it had been carried out in accordance with those standards and practices.
Opinion In our opinion, the financial information gives, for the purposes of the prospectus dated 30 June 2010, a true and fair view of the state of affairs of Mogale Alloys Group as at the dates stated and of its profits, cash flows and changes in equity for the periods then ended in accordance with the basis of preparation set out in note 1.
208 Declaration For the purposes of Commission Regulation (EC) 809/2004, we are responsible for this report as part of the prospectus and declare that we have taken all reasonable care to ensure that the information contained in this report is, to the best of our knowledge, in accordance with the facts and contains no omission likely to affect its import. This declaration is included in the prospectus in compliance with item 1.2 of Annex I and item 1.2 of Annex III of Commission Regulation (EC) 809/2004. Yours faithfully
Ernst & Young LLP London 30 June 2010
209 The information in respect of Mogale in this Section B of this Part VIII is presented in Rand and in accordance with IFRS.
MOGALE ALLOYS GROUP COMBINED FINANCIAL STATEMENTS
Statement of Comprehensive Income 18 Months Year ended Year ended ended 31 March 31 March 30 September Notes 2007 2008 2009 ZAR ZAR ZAR Revenue 15 417,018,715 667,950,104 1,127,338,554 Cost of sales 16 (248,204,934) (293,150,970) (724,712,568) Gross profit 168,813,781 374,799,134 402,625,986 Other income 1,245,492 7,509,614 28,153,521 Operating expenses (76,871,559) (72,793,185) (35,766,006) Operating profit 17 93,187,714 309,515,563 395,013,501 Investment revenue 18 247,533 5,525,381 12,696,675 Finance costs 19 (16,874,723) (11,402,531) (10,517,500) Profit before taxation 76,560,524 303,638,413 397,192,676 Taxation 20 (21,119,333) (94,221,182) (136,589,057) Profit for the period 55,441,191 209,417,231 260,603,619
210 Statement of Financial Position 31 March 31 March 30 September Notes 2007 2008 2009 ZAR ZAR ZAR Assets Non-current assets 96,147,950 130,744,400 162,039,469 Property, plant and equipment 3 93,080,724 127,022,880 159,029,244 Other financial assets 5 30 3,010,225 3,010,225 Deferred tax 6 3,067,196 711,295 — Current assets 114,693,717 302,183,933 226,538,562 Inventories 7 45,781,866 67,929,587 121,287,175 Loans to shareholders 4 2,095,028 2,253,705 — Trade and other receivables 8 54,519,562 119,284,216 49,510,319 Cash and cash equivalents 9 12,297,261 112,716,425 55,741,068 Total assets 210,841,667 432,928,333 388,578,031 Equity and Liabilities Equity 9,475,811 186,183,482 230,062,646 Share capital 10 1,000 1,000 1,000 Combination shares 10 (32,722,499) (32,722,499) (32,722,499) Retained earnings 42,197,310 218,904,981 262,784,145 Non-current liabilities 11,921,689 11,930,774 7,444,256 Other financial liabilities 11 11,921,689 3,708,638 — Finance lease obligation 12 — 8,222,136 1,957,887 Deferred tax 6 — — 5,486,369 Current liabilities 189,444,167 234,814,076 151,071,129 Loans from shareholders 4 61,538,437 25,130,745 — Other financial liabilities 11 — 16,455,010 3,708,638 Current tax payable 14,147,005 51,934,544 12,657,610 Finance lease obligation 12 156,828 3,613,011 4,272,365 Trade and other payables 14 49,652,883 67,100,520 46,897,394 Provisions 13 62,756,627 70,580,246 83,535,122 Bank overdraft 9 1,192,387 — — Total equity and liabilities 210,841,667 432,928,333 388,578,031
211 Statement of Cash Flows 18 Months Year ended Year ended ended 31 March 31 March 30 September Notes 2007 2008 2009 ZAR ZAR ZAR Net cash flow from operating activities 70,645,431 198,824,979 237,945,887 Profit before taxation 76,560,524 303,638,413 397,192,676 Non-cash adjustments to reconcile profit before tax to net cash flows: Depreciation and amortisation 14,140,561 11,210,093 28,474,901 Loss on sale of assets — — 166,852 Profit/(loss) on foreign exchange 330,247 (3,430,194) (27,388,276) Dividends received — (1,606,327) (1,319,999) Interest income (247,533) (3,919,054) (11,376,676) Interest expense 16,874,723 11,402,531 10,517,500 Impairment loss 5,953,590 3,125,528 — Movements in provisions 857,741 2,202,608 6,722,223 Changes in working capital: Inventories (5,739,956) (22,147,721) (53,357,588) Trade and other receivables (17,603,075) (64,764,654) 69,773,897 Trade and other payables (4,415,120) 17,447,637 (20,203,125) Cash generated from operations 86,711,702 253,158,860 399,202,385 Interest income 247,533 3,919,054 11,376,676 Dividends received — 1,606,327 1,319,999 Interest paid (11,763,806) (5,781,520) (4,284,847) Tax paid 22 (4,549,998) (54,077,742) (169,668,326) Net cash flow from investing activities (6,412,109) (47,857,778) (33,259,843) Purchase of property, plant and equipment 3 (16,704,307) (49,431,492) (61,349,530) Sale of property, plant and equipment 3 10,622,445 1,153,715 701,411 Purchase of financial assets — (3,010,195) — Foreign exchange gain/(loss) (330,247) 3,430,194 27,388,276 Net cash flow from financing activities (54,560,521) (49,355,650) (261,661,401) Proceeds from/(repayment) of other financial liabilities (36,146,083) 8,241,959 (16,455,010) (Repayment)/proceeds from shareholders loan (14,768,256) (36,566,369) (22,877,040) Net movement on finance lease liability 156,828 11,678,320 (5,604,896) Dividends paid 23 (3,803,010) (32,709,560) (216,724,455) Net cash movement for the period 9,672,801 101,611,551 (56,975,357) Cash at the beginning of the period 1,432,073 11,104,874 112,716,425 Cash at end of the period 9 11,104,874 112,716,425 55,741,068
212 Statement of Changes in Equity Share Combination Retained Capital shares earnings Total equity ZAR ZAR ZAR ZAR Balance at 1 April 2006 1,000 — (9,440,868) (9,439,868) Profit for the period — — 55,441,191 55,441,191 Purchase of combination shares — (32,722,499) — (32,722,499) Dividends — — (3,803,013) (3,803,013) Balance at 31 March 2007 1,000 (32,722,499) 42,197,310 9,475,811 Profit for the period — — 209,417,231 209,417,231 Dividends — — (32,709,560) (32,709,560) Balance at 31 March 2008 1,000 (32,722,499) 218,904,981 186,183,482 Profit for the period — — 260,603,619 260,603,619 Dividends — — (216,724,455) (216,724,455) Balance at 30 September 2009 1,000 (32,722,499) 262,784,145 230,062,646 Note 10 10
213 Notes to the Combined Financial Statements 1. Accounting Policies Presentation of Combined Financial Statements On 25 May 2009 the Group entered into an agreement to acquire Mogale Alloys (Pty) Ltd, PGR 17 Investments (Pty) Ltd, PGR 3 Investments (Pty) Ltd, Dezzo Trading 184 (Pty) Ltd, collectively representing the Mogale Alloys Group. As such, these separate companies did not previously form a legal group and therefore were not consolidated, however as they are now under common ownership and control they are presented on a combined basis. Accordingly the financial information, which has been prepared specifically for the purpose of the prospectus, is prepared on a basis that combines the results and assets and liabilities of Mogale Alloys (Pty) Ltd, PGR 17 Investments (Pty) Ltd, PGR 3 Investments (Pty) Ltd, Dezzo Trading 184 (Pty) Ltd, collectively representing the Mogale Alloys Group that was acquired by the Group (together “the Combined Entity”) by applying the principles underlying the consolidation procedures of IAS27 for the two years ended 31 December 2007 and 31 December 2008 and the 18 month period ended 30 September 2009 and as at those dates. The combined financial information has been prepared in accordance with the requirements of the Prospectus Directive regulation and the UK Listing Rules and in accordance with this basis of preparation. The basis of preparation describes how the financial information has been prepared in accordance with International Financial Reporting Standards as adopted by the European Union (IFRSs as adopted by the EU) except as described below. IFRSs as adopted by the EU do not provide for the preparation of combined financial information, and accordingly in preparing the combined financial information certain accounting conventions commonly used for the preparation of historical financial information for inclusion in investment circulars as described in the Annexure to SIR 2000 (Investment Reporting Standard applicable to public reporting engagements on historical financial information) issued by the UK Auditing Practices Board have been applied. The application of these conventions results in the following material departures from IFRSs as adopted by the EU. In other respects IFRSs as adopted by the EU have been applied. • As explained above, the historical financial information is prepared on a combined basis and therefore is not a requirement of IAS27 – Consolidated and Separate Financial Statements. • They consist of the aggregation of financial statements of the abovementioned companies and the elimination of intergroup balances and transactions. • The Share Capital disclosed is Mogale’s share capital. The shares which arose when the investment companies acquired their share in Mogale Alloys are treated as combination shares. The combined financial statements are also prepared in accordance with the Companies Act of South Africa, 1973. The combined financial statements have consistently been prepared on the historical cost basis, and incorporate the principal accounting policies set out below in all periods presented unless otherwise stated. The functional and presentation currency is in South African Rand, designated by ZAR. Significant judgements In preparing the combined financial statements, management is required to make estimates and assumptions that affect the amounts represented in the combined financial statements and related disclosures. Use of available information and the application of judgement is inherent in the formation of estimates. Actual results in the future could differ from these estimates which may be material to the combined financial statements. Significant judgements include: Provisions Provisions were raised and management determined an estimate based on the information available. Refer to note 12.
214 Property, plant and equipment The cost of an item of property, plant and equipment is recognised as an asset when: • it is probable that future economic benefits associated with the item will flow to the company; and • the cost of the item can be measured reliably. Costs include costs incurred initially to acquire or construct an item of property, plant and equipment and costs incurred subsequently to add to, replace part of, or service it. If a replacement cost is recognised in the carrying amount of an item of property, plant and equipment, the carrying amount of the replaced part is derecognised. The initial estimate of the costs of dismantling and removing the item and restoring the site on which it is located is also included in the cost of property, plant and equipment. Item Average useful life Buildings 50 years Plant and machinery 15 years Furniture and fixtures 3 years Motor vehicles 5 years Office equipment 3 years Computer software 3 years Furnace refractories 3 years Plant vehicles 3 years The residual value and the useful life of each asset are reviewed at each financial period end. Each part of an item of property, plant and equipment with a cost that is significant in relation to the total cost of the item shall be depreciated separately. The depreciation charge for each period is recognised in profit or loss unless it is included in the carrying amount of another asset. The gain or loss arising from the derecognition of an item of property, plant and equipment is included in profit or loss when the item is derecognised. The gain or loss arising from the derecognition of an item of property, plant and equipment is determined as the difference between the net disposal proceeds, if any, and the carrying amount of the item. Financial instruments Initial recognition The company classifies financial instruments, or their component parts, on initial recognition as a financial asset, a financial liability or an equity instrument in accordance with the substance of the contractual arrangement. Financial assets and financial liabilities are recognised on the company’s balance sheet when the company becomes party to the contractual provisions of the instrument. Loans to shareholders, directors, managers and employees These financial assets are initially recognised at fair value plus direct transaction costs. Subsequently these loans are measured at amortised cost using the effective interest rate method, less any impairment loss recognised to reflect irrecoverable amounts. On loans receivable an impairment loss is recognised in profit or loss when there is objective evidence that it is impaired. The impairment is measured as the difference between the investment’s carrying amount and the present value of estimated future cash flows discounted at the effective interest rate computed at initial recognition.
215 Impairment losses are reversed in subsequent periods when an increase in the investment’s recoverable amount can be related objectively to an event occurring after the impairment was recognised, subject to the restriction that the carrying amount of the investment at the date the impairment is reversed shall not exceed what the amortised cost would have been had the impairment not been recognised. Trade and other receivables Trade receivables are measured at initial recognition at fair value, and are subsequently measured at amortised cost using the effective interest rate method. Appropriate allowances for estimated irrecoverable amounts are recognised in profit or loss when there is objective evidence that the asset is impaired. Significant financial difficulties of the debtor, probability that the debtor will enter bankruptcy or financial reorganisation, and default or delinquency in payments (more than 30 days overdue) are considered indicators that the trade receivable is impaired. The allowance recognised is measured as the difference between the asset’s carrying amount and the present value of estimated future cash flows discounted at the effective interest rate computed at initial recognition. The carrying amount of the asset is reduced through the use of an allowance account, and the amount of the loss is recognised in the income statement within operating expenses. When a trade receivable is uncollectible, it is written off against the allowance account for trade receivables. Subsequent recoveries of amounts previously written off are credited against operating expenses in the income statement. Trade and other receivables are classified as loans and receivables. Trade and other payables Trade payables are initially measured at fair value, and are subsequently measured at amortised cost, using the effective interest rate method. Cash and cash equivalents Cash and cash equivalents comprise cash on hand and demand deposits, and other short-term highly liquid investments that are readily convertible to a known amount of cash and are subject to an insignificant risk of changes in value. These are initially and subsequently recorded at fair value. Other loans and receivables Other financial assets classified as loans and receivables are initially recognised at fair value plus transaction costs, and are subsequently carried at amortised cost less any accumulated impairment. These financial assets are not quoted in an active market and have fixed or determinable payments. Financial assets at fair value through profit or loss Investments are recognised and derecognised on a trade date basis where the purchase or sale of an investment is under a contract whose terms require delivery of the investment within the timeframe established by the market concerned. The Group has not designated any financial assets as at fair value through profit or loss. Available for sale financial assets These financial assets are non-derivatives that are either designated in this category or not classified elsewhere. Investments are recognised and derecognised on a trade date basis where the purchase or sale of an investment is under a contract whose terms require delivery of the investment within the timeframe established by the market concerned. These investments are measured initially and subsequently at fair value. Gains and losses arising from changes in fair value are recognised directly in equity until the security is disposed of or is determined to be impaired. The company assesses at each balance sheet date whether there is objective evidence that a financial asset or a group of financial assets is impaired. In the case of equity securities classified as available for sale, a significant or prolonged decline in the fair value of the security below its cost is considered as
216 an indicator that the securities are impaired. If any such evidence exists for available-for-sale financial assets, the cumulative loss – measured as the difference between the acquisition cost and the current fair value, less any impairment loss on that financial asset previously recognised in profit or loss – is removed from equity and recognised in the income statement. Impairment losses recognised in the income statement on equity instruments are not reversed through the income statement. Impairment losses recognised in profit or loss for equity investments classified as available-for-sale are not subsequently reversed through profit or loss. Impairment losses recognised in profit or loss for debt instruments classified as available-for-sale are subsequently reversed if an increase in the fair value of the instrument can be objectively related to an event occurring after the recognition of the impairment loss. Changes in the fair value of monetary securities denominated in a foreign currency and classified as available-for-sale are analysed between translation differences resulting from changes in amortised cost of the security and other changes in the carrying amount of the security. The translation differences on monetary securities are recognised in profit or loss, while translation differences on non-monetary securities are recognised in equity. Changes in the fair value of monetary and nonmonetary securities classified as available-for-sale are recognised in equity. Interest on available-for-sale securities calculated using the effective interest method is recognised in the income statement as part of ‘other income’. Dividends on available-for-sale equity instruments are recognised in the income statement as part of ‘other income’ when the company’s right to receive payments is established. Held to maturity These financial assets are initially measured at fair value plus direct transaction costs. At subsequent reporting dates these are measured at amortised cost using the effective interest rate method, less any impairment loss recognised to reflect irrecoverable amounts. An impairment loss is recognised in profit or loss when there is objective evidence that the asset is impaired, and is measured as the difference between the investment’s carrying amount and the present value of estimated future cash flows discounted at the effective interest rate computed at initial recognition. Impairment losses are reversed in subsequent periods when an increase in the investment’s recoverable amount can be related objectively to an event occurring after the impairment was recognised, subject to the restriction that the carrying amount of the investment at the date the impairment is reversed shall not exceed what the amortised cost would have been had the impairment not been recognised. Financial assets that the company has the positive intention and ability to hold to maturity are classified as held to maturity. Taxes Current tax assets and liabilities Current tax for current and prior periods is, to the extent unpaid, recognised as a liability. If the amount already paid in respect of current and prior periods exceeds the amount due for those periods, the excess is recognised as an asset. Current tax liabilities (assets) for the current and prior periods are measured at the amount expected to be paid to (recovered from) the tax authorities, using the tax rates (and tax laws) that have been enacted or substantively enacted by the balance sheet date. Deferred tax assets and liabilities A deferred tax liability is recognised for all taxable temporary differences, except to the extent that the deferred tax liability arises from the initial recognition of an asset or liability in a transaction which at the time of the transaction, affects neither accounting profit nor taxable profit (tax loss).
217 A deferred tax asset is recognised for all deductible temporary differences to the extent that it is probable that taxable profit will be available against which the deductible temporary difference can be utilised. A deferred tax asset is not recognised when it arises from the initial recognition of an asset or liability in a transaction at the time of the transaction, affects neither accounting profit nor taxable profit (tax loss). A deferred tax asset is recognised for the carry forward of unused tax losses and unused STC credits to the extent that it is probable that future taxable profit will be available against which the unused tax losses and unused STC credits can be utilised. Deferred tax assets and liabilities are measured at the tax rates that are expected to apply to the period when the asset is realised or the liability is settled, based on tax rates (and tax laws) that have been enacted or substantively enacted by the balance sheet date. Tax expenses Current and deferred taxes are recognised as income or an expense and included in profit or loss for the period, except to the extent that the tax arises from: • a transaction or event which is recognised, in the same or a different period, directly in equity, or • a business combination. Current tax and deferred taxes are charged or credited directly to equity if the tax relates to items that are credited or charged, in the same or a different period, directly to equity. Secondary taxation on companies Secondary tax on companies (STC) is recognised on the declaration date of all dividends and is included in the taxation expense in the profit or loss in the related period. Unutilised STC credits are raised as deferred tax assets to the extent that a dividend is expected to be paid in the foreseeable future. Leases A lease is classified as a finance lease if it transfers substantially all the risks and rewards incidental to ownership. A lease is classified as an operating lease if it does not transfer substantially all the risks and rewards incidental to ownership. Finance leases – lessee Finance leases are recognised as assets and liabilities in the balance sheet at amounts equal to the fair value of the leased property or, if lower, the present value of the minimum lease payments. The corresponding liability to the lessor is included in the balance sheet as a finance lease obligation. The discount rate used in calculating the present value of the minimum lease payments is the interest rate implicit in the lease. The lease payments are apportioned between the finance charge and reduction of the outstanding liability. The finance charge is allocated to each period during the lease term so as to produce a constant periodic rate of on the remaining balance of the liability. Finance charges are recognised in profit and loss. Operating leases – lessee Operating lease payments are recognised as an expense on a straight-line basis over the lease term. The difference between the amounts recognised as an expense and the contractual payments are recognised as an operating lease asset. Any contingent rents are expensed in the period they are incurred. Inventories Inventories are measured at the lower of cost and net realisable value. Net realisable value is the estimated selling price in the ordinary course of business less the estimated costs of completion and the estimated costs necessary to make the sale.
218 The cost of inventories comprises all costs of purchase, costs of conversion and other costs incurred in bringing the inventories to their present location and condition. The cost of inventories of items that are not ordinarily interchangeable and goods or services produced and segregated for specific projects is assigned using specific identification of the individual costs. The cost of inventories is assigned using the first-in, first-out (FIFO) formula. The same cost formula is used for all inventories having a similar nature and use to the entity. When inventories are sold, the carrying amount of those inventories are recognised as an expense in the period in which the related revenue is recognised. The amount of any write-down of inventories to net realisable value and all losses of inventories are recognised as an expense in the period the write-down or loss occurs. The amount of any reversal of any write-down of inventories, arising from an increase in net realisable value, are recognised as a reduction in the amount of inventories recognised as an expense in the period in which the reversal occurs. Impairment of assets The company assesses at each balance sheet date whether there is any indication that an asset may be impaired. If any such indication exists, the company estimates the recoverable amount of the asset. Irrespective of whether there is any indication of impairment, the company also: • tests intangible assets with an indefinite useful life or intangible assets not yet available for use for impairment annually by comparing its carrying amount with its recoverable amount. This impairment test is performed during the annual period and at the same time every period. • tests goodwill acquired in a business combination for impairment annually. If there is any indication that an asset may be impaired, the recoverable amount is estimated for the individual asset. If it is not possible to estimate the recoverable amount of the individual asset, the recoverable amount of the cash-generating unit to which the asset belongs is determined. The recoverable amount of an asset or a cash-generating unit is the higher of its fair value less costs to sell and its value in use. If the recoverable amount of an asset is less than its carrying amount, the carrying amount of the asset is reduced to its recoverable amount. That reduction is an impairment loss. An impairment loss of assets carried at cost less any accumulated depreciation or amortisation is recognised immediately in profit or loss. An impairment loss is recognised for cash-generating units if the recoverable amount of the unit is less than the carrying amount of the units. The impairment loss is allocated to reduce the carrying amount of the assets of the unit in the following order: • first, to reduce the carrying amount of any goodwill allocated to the cash-generating unit and • then, to the other assets of the unit, pro rata on the basis of the carrying amount of each asset in the unit. An entity assesses at each reporting date whether there is any indication that an impairment loss recognised in prior periods for assets other than goodwill may no longer exist or may have decreased. If any such indication exists, the recoverable amounts of those assets are estimated. The increased carrying amount of an asset other than goodwill attributable to a reversal of an impairment loss does not exceed the carrying amount that would have been determined had no impairment loss been recognised for the asset in prior periods. A reversal of an impairment loss of assets carried at cost less accumulated depreciation or amortisation other than goodwill is recognised immediately in profit or loss.
219 Share capital and equity An equity instrument is any contract that evidences a residual interest in the assets of an entity after deducting all of its liabilities. Ordinary shares are classified as equity. Provisions and contingencies Provisions are recognised when: • the company has a present obligation as a result of a past event; • it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation; and • a reliable estimate can be made of the obligation. The amount of a provision is the present value of the expenditure expected to be required to settle the obligation. Where some or all of the expenditure required to settle a provision is expected to be reimbursed by another party, the reimbursement shall be recognised when, and only when, it is virtually certain that reimbursement will be received if the entity settles the obligation. The reimbursement shall be treated as a separate asset. The amount recognised for the reimbursement shall not exceed the amount of the provision. Provisions are not recognised for future operating losses. If an entity has a contract that is onerous, the present obligation under the contract shall be recognised and measured as a provision. The Group records the present value of estimated costs of legal and constructive obligations required to restore operating locations in the period in which the obligation is incurred. The nature of these restoration activities includes dismantling and removing structures, rehabilitating areas and tailings dams, dismantling operating facilities, closure of plant and waste sites, and restoration, reclamation and re-vegetation of affected areas. The obligation generally arises when the asset is installed or the ground/environment is disturbed at the production location. When the liability is initially recognised, the present value of the estimated cost is capitalised by increasing the carrying amount of the related assets. Over time, the discounted liability is increased for the change in present value based on the discount rates that reflect current market assessments and the risks specific to the liability. The periodic unwinding of the discount is recognised in the income statement as a finance cost. Additional disturbances or changes in rehabilitation costs will be recognised as additions or charges to the corresponding assets and rehabilitation liability when they occur. For closed sites, changes to estimated costs are recognised immediately in the income statement. Revenue Revenue from the sale of goods is recognised when all the following conditions have been satisfied: • the company has transferred to the buyer the significant risks and rewards of ownership of the goods; • the company retains neither continuing managerial involvement to the degree usually associated with ownership nor effective control over the goods sold; • the amount of revenue can be measured reliably; • it is probable that the economic benefits associated with the transaction will flow to the company; and • the costs incurred or to be incurred in respect of the transaction can be measured reliably.
220 Revenue is measured at the fair value of the consideration received or receivable and represents the amounts receivable for goods and services provided in the normal course of business, net of trade discounts and volume rebates, and value added tax. Interest is recognised, in profit or loss, using the effective interest rate method. Dividends are recognised, in profit or loss, when the company’s right to receive payment has been established. Cost of sales When inventories are sold, the carrying amount of those inventories is recognised as an expense in the period in which the related revenue is recognised. The amount of any write-down of inventories to net realisable value and all losses of inventories are recognised as an expense in the period the write-down or loss occurs. The amount of any reversal of any write-down of inventories, arising from an increase in net realisable value, is recognised as a reduction in the amount of inventories recognised as an expense in the period in which the reversal occurs. The related cost of providing services recognised as revenue in the current period is included in cost of sales. Contract costs comprise: • costs that relate directly to the specific contract; • costs that are attributable to contract activity in general and can be allocated to the contract; and • such other costs as are specifically chargeable to the customer under the terms of the contract. Borrowing costs Borrowing costs that are directly attributable to the acquisition, construction or production of a qualifying asset are capitalised as part of the cost of that asset until such time as the asset is ready for its intended use. The amount of borrowing costs eligible for capitalisation is determined as follows: • Actual borrowing costs on funds specifically borrowed for the purpose of obtaining a qualifying asset less any temporary investment of those borrowings. • Weighted average of the borrowing costs applicable to the entity on funds generally borrowed for the purpose of obtaining a qualifying asset. The borrowing costs capitalised do not exceed the total borrowing costs incurred. The capitalisation of borrowing costs commences when: • expenditures for the asset have occurred; • borrowing costs have been incurred; and • activities that are necessary to prepare the asset for its intended use or sale are in progress. Capitalisation is suspended during extended periods in which active development is interrupted. Capitalisation ceases when substantially all the activities necessary to prepare the qualifying asset for its intended use or sale are complete. All other borrowing costs are recognised as an expense in the period in which they are incurred. Translation of foreign currencies Foreign currency transactions A foreign currency transaction is recorded, on initial recognition in Rands, by applying to the foreign currency amount the spot exchange rate between the functional currency and the foreign currency at the date of the transaction.
221 At each balance sheet date: • foreign currency monetary items are translated using the closing rate; • non-monetary items that are measured in terms of historical cost in a foreign currency are translated using the exchange rate at the date of the transaction; and • non-monetary items that are measured at fair value in a foreign currency are translated using the exchange rates at the date when the fair value was determined. Exchange differences arising on the settlement of monetary items or on translating monetary items at rates different from those at which they were translated on initial recognition during the period or in previous combined financial statements are recognised in profit or loss in the period in which they arise. When a gain or loss on a non-monetary item is recognised directly in equity, any exchange component of that gain or loss is recognised directly in equity. When a gain or loss on a non-monetary item is recognised in profit or loss, any exchange component of that gain or loss is recognised in profit or loss. Cash flows arising from transactions in a foreign currency are recorded in Rands by applying to the foreign currency amount the exchange rate between the Rand and the foreign currency at the date of the cash flow. Reporting period The financial period reported for 30 September 2009 is an 18 month period (2008 – 12 months; 2007 – 12 months). The use of a longer reporting period is due to the change in financial year end for the Group in order to align itself with the holding company. For the above mentioned reason the 2009 results are not entirely comparable with the 2008 results.
2. Changes in accounting policy and disclosures The accounting policies adopted are consistent with those of the previous periods except as follows: The group early adopted the following IFRS and IFRIC interpretations as of 1 April 2008: • IAS 23 Borrowing Costs (Revised) effective 1 January 2009 The Group has adopted the following new and amended IFRS and IFRIC interpretations as of 1 April 2008: • IFRS 7 Financial Instruments: Disclosures effective 1 January 2009 • IAS 1 Presentation of Financial Statements effective 1 January 2009 • Improvements to IFRSs (May 2008) • Improvements to IFRSs (April 2009, early adopted) When the adoption of the standard or interpretation is deemed to have an impact on the financial statements or performance of the Group, its impact is described below: IAS 23 Borrowing Costs The IASB issued an amendment to IAS 23 in April 2007. The revised IAS 23 requires capitalisation of borrowing costs that are directly attributable to the acquisition, construction or production of a qualifying asset. The Group’s previous policy was to expense borrowing costs as they were incurred. In accordance with the transitional provisions of the amended IAS 23, the Group has adopted the standard on a prospective basis. Therefore, borrowing costs are capitalised on qualifying assets with a commencement date on or after 1 January 2008. During the 12 months to 31 December 2008, €303,000 of borrowing costs have been capitalised on long-term construction in progress. IFRS 7 Financial Instruments: Disclosures The amended standard requires additional disclosures about fair value measurement and liquidity risk. Fair value measurements related to items recorded at fair value are to be disclosed by source of inputs using a three level fair value hierarchy, by class, for all financial instruments recognised at fair value.
222 In addition, a reconciliation between the beginning and ending balance for level 3 fair value measurements is now required, as well as significant transfers between levels in the fair value hierarchy. The amendments also clarify the requirements for liquidity risk disclosures with respect to derivative transactions and assets used for liquidity management. IAS 1 Presentation of Financial Statements The revised standard separates owner and non-owner changes in equity. The statement of changes in equity includes only details of transactions with owners, with non-owner changes in equity presented in a reconciliation of each component of equity. In addition, the standard introduces the statement of comprehensive income: it presents all items of recognised income and expense, either in one single statement, or in two linked statements. The Group has elected to present two statements. Improvements to IFRSs In May 2008 and April 2009 the IASB issued omnibus of amendments to its standards, primarily with a view to removing inconsistencies and clarifying wording. There are separate transitional provisions for each standard. The adoption of the following amendments resulted in changes to accounting policies but did not have any impact on the financial position or performance of the group. • IAS 1 Presentation of Financial Statements Assets and liabilities classified as held for trading in accordance with IAS 39 Financial Instruments: Recognition and Measurement are not automatically classified as current in the statement of financial position. The Group analysed whether the expected period of realisation of financial assets and liabilities differed from the classification of the instrument. This did not result in any reclassification of financial instruments between current and non-current in the statement of financial position. • IAS 7 Statement of Cash Flows Explicitly states that only expenditure that results in recognising an asset can be classified as a cash flow from investing activities. This amendment will impact the presentation in the statement of cash flows of the contingent consideration on the business combination completed in 2009 upon cash settlement. • IAS 16 Property, Plant and Equipment Replaces the term “net selling price” with “fair value less costs to sell”. The Group amended its accounting policy accordingly, which did not result in any change in the financial position. • IAS 18 Revenue The Board has added guidance (which accompanies the standard) to determine whether an entity is acting as a principal or as an agent. The features to consider are whether the entity: • Has primary responsibility for providing the goods or service • Has inventory risk • Has discretion in establishing prices • Bears the credit risk The Group has assessed its revenue arrangements against these criteria and concluded that it is acting as principal in all arrangements. The revenue recognition accounting policy has been updated accordingly.
223 3. Property, plant and equipment Attributable to owners of the parent Plant Furniture and and Motor Office IT Furnace Total Land Buildings machinery fittings vehicles equipment equipment refractories ZAR ZAR ZAR ZAR ZAR ZAR ZAR ZAR ZAR ZAR Cost or valuation Balance at 1 April 2006 2,500,000 — 88,014,386 21,841 5,671,023 — 447,806 16,152,725 112,807,781 Additions — — 15,441,839 — 1,262,468 — — — 16,704,307 Transfers — — — — — — — (1,090,206) (1,090,206) Disposals — — (10,622,445) — — — — — (10,622,445) Impairment loss — — (5,953,590) — — — — — (5,953,590) Balance at 31 March 2007 2,500,000 — 86,880,190 21,841 6,933,491 — 447,806 15,062,519 111,845,847 Additions — 7,924,143 30,417,723 99,844 10,899,572 90,210 — — 49,431,492 Disposals — — — — (1,153,715) — — — (1,153,715) Impairment loss — — (3,125,528) — — — — — (3,125,528) Balance at 31 March 2008 2,500,000 7,924,143 114,172,385 121,685 16,679,348 90,210 447,806 15,062,519 156,998,096 Additions — — 56,489,480 — 902,382 122,595 — 3,835,073 61,349,530 Disposals — — (615,500) — (765,861) (165,515) — — (1,546,876) Balance at 30 September 2009 2,500,000 7,924,143 170,046,365 121,685 16,815,869 47,290 447,806 18,897,592 216,800,750 Accumulated depreciation and impairment Balance at 1 April 2006 — — — 9,129 — — 281,853 4,333,580 4,624,562 Depreciation expense — — 11,463,796 7,556 1,398,789 — 92,044 1,178,376 14,140,561 Balance at 31 March 2007 — — 11,463,796 16,685 1,398,789 — 373,897 5,511,956 18,765,123 Depreciation expense — 6,200,711 23,641 1,944,235 — 70,264 2,971,242 11,210,093 Balance at 31 March 2008 — — 17,664,507 40,326 3,343,024 — 444,161 8,483,198 29,975,216 Depreciation expense — 792,414 14,361,150 27,631 8,171,768 47,290 3,645 5,071,003 28,474,901 Disposals — — (307,750) — (370,861) — — — (678,611) Balance at 30 September 2009 — 792,414 31,717,907 67,957 11,143,931 47,290 447,806 13,554,201 57,771,506 Net book value: At 30 September 2009 2,500,000 7,131,729 138,328,458 53,728 5,671,938 — — 5,343,391 159,029,244 At 31 March 2008 2,500,000 7,924,143 96,507,878 81,359 13,336 324 90,210 3,645 6,579,321 127,022,880 At 31 March 2007 2,500,000 — 75,416,394 5,156 5,534 702 — 73,909 9,550,563 93,080,724 At 1 April 2006 2,500,000 — 88,014,386 12,712 5,671 023 — 165,953 11,819,145 108,183,219
31 March 31 March 30 September 2007 2008 2009 ZAR ZAR ZAR Pledged as security Carrying value of assets pledged as security: Portion 176 (a portion of 136) of the farm Luipaardvlei 246 2,500,000 2,500,000 2,500,000 – Emcumbered by 1st CCMB for ZAR46,800,000 and 2nd CCMB for ZAR20,000,000 Plant equipment 3,267,772 3,267,772 — – Encumbered as per note 12 Plant vehicles 8,559,326 8,559,326 4,209,327 – Encumbered as per note 12 Details of properties Farm 246, Portion 176, Luipaardsvlei, Title Deed No T65199 Property is encumbered as per note 12 Purchase price – 14 February 2005 2,500,000 2,500,000 2,500,000 A register containing the information required by paragraph 22(3) of Schedule 4 of the Companies Act is available for inspection at the registered office of the company.
224 4. Loans Receivable/(Payable) 31 March 31 March 30 September 2007 2008 2009 ZAR ZAR ZAR Atoll Holdings (Pty) Limited (41,407,506) (14,777,702) — – The loan is unsecured, interest free and is repayable on reasonable demand. Sebeso Benefication (Pty) Limited (19,734,418) (9,166,059) — – The loan is unsecured, bears interest at prime plus 1% and the full amount is repayable on 30 April 2008. The loan has been ceded to the bank as surety for the facilities granted. Mogale Alloys Trust 2,095,028 2,253,705 — – The loan is unsecured and bears interest at prime and will be repayable within the next twelve months Leswikeng Minerals and Energy (Pty) Limited (396,513) (1,186,984) — – The loan is unsecured and bears interest at prime plus 1% and has no fixed terms of repayment. (59,443,409) (22,877,040) — Loans to shareholders 2,095,028 2,253,705 — Loans from shareholders (61,538,437) (25,130,745) — (59,443,409) (22,877,040) —
Other financial assets with a carrying value of ZAR 3,125,528 were impaired during the year. The loan relates to the Nuco transaction costs that were capitalized. Due to the legal complications of the transaction, the recoverability of the loan is doubtful and it is no longer a cash generating unit, therefore it was impaired. There were no gains or losses realised on the disposal of held to maturity financial assets in 2007 and 2008, as all the financial assets were disposed of at their redemption date.
5. Other Financial Assets 31 March 31 March 30 September 2007 2008 2009 ZAR ZAR ZAR Non-current Held to maturity – Mortgage bond — 10,195 10,195 Loans and receivables – Amount held in an Attorneys Trust account for Mogale Alloys (Pty) Limited — 3,000,000 3,000,000 Investment – Leswikeng Minerals UG2 (Pty) Ltd 30 30 30 30 3,010,225 3,010,225
There were no gains or losses realised on the disposal of held to maturity financial assets in 2007, 2008 and 2009, as all the financial assets were disposed of at their redemption date.
225 6. Deferred Tax 31 March 31 March 30 September 2007 2008 2009 ZAR ZAR ZAR Deferred tax asset/(liability) Accelerated capital allowances (15,044,952) (20,011,302) (28,217,259) Provisions raised 18,112,148 20,722,597 22,730,889 3,067,196 711,295 (5,486,370) Reconciliation of deferred tax asset/(liability) At beginning of period 8,064,684 3,067,196 711,295 – Deferred tax assets 16,468,511 18,112,148 20,722,597 – Deferred tax liabilities (8,403,827) (15,044,952) (20,011,302) Accelerated capital allowances for tax purposes (15,044,952) (4,966,350) (8,205,957) Provisions raised 10,047,464 2,610,449 2,008,292 At end of the period 3,067,196 711,295 (5,486,370) – Deferred tax assets 18,112,148 20,722,597 22,730,889 – Deferred tax liabilities (15,044,952) (20,011,302) (28,217,259) Recognition of deferred tax asset An entity shall disclose the amount of a deferred tax asset and the nature of the evidence supporting its recognition, when: • the utilisation of the deferred tax asset is dependent on future taxable profits in excess of the profits arising from the reversal of existing taxable temporary differences; and • the entity has suffered a loss in either the current or preceding period in the tax jurisdiction to which the deferred tax asset relates.
7. Inventories 31 March 31 March 30 September 2007 2008 2009 ZAR ZAR ZAR Raw materials 18,208,716 22,207,129 22,983,043 Finished goods 15,560,379 28,429,447 76,971,855 Consumable inventories 12,012,771 17,293,011 21,332,277 45,781,866 67,929,587 121,287,175
Mr Ian Mckie, an internal quantity surveyor, conducts the inventory count of the raw materials on hand for Mogale Alloys (Pty) Ltd on a monthly basis. Mr Mckie has over 30 years’ experience in the industry and as a result is well qualified to perform the inventory counts of this nature. Due to the nature and volume of raw material inventory, the physical quantities on hand have to be estimated. The estimation of the physical raw material inventory on hand, is based on the following parameters, this is an accepted method used in the industry: Density, Length, Width, Weight
8. Trade and Other Receivables 31 March 31 March 30 September 2007 2008 2009 ZAR ZAR ZAR Trade receivables 53,942,248 118,567,880 41,988,380 Prepayments — — 2,260,777 Deposits 52,800 54,200 54,200 VAT — — 4,418,743 Other receivables 524,514 662,136 788,219 54,519,562 119,284,216 49,510,319
226 Trade and other receivables were pledged as security for overdraft facilities.
9. Cash and Cash Equivalents 31 March 31 March 30 September 2007 2008 2009 ZAR ZAR ZAR Cash and cash equivalents consist of: Cash on hand 8,900 21,043 28,074 Bank balances 12,288,361 112,695,382 55,712,994 12,297,261 112,716,425 55,741,068
10. Share Capital 31 March 31 March 30 September 2007 2008 2009 ZAR ZAR ZAR Authorised 750 ordinary type A shares of ZAR1 each 750 750 750 250 ordinary type B shares of ZAR1 each 250 250 250 1,000 1,000 1,000 Ordinary shares issued and fully paid Reported as at 1 April 1,000 1,000 1,000 Issued during the year — — — 1,000 1,000 1,000 Combination shares (32,722,499) (32,722,499) (32,722,499)
Combination shares arose when the underlying investment companies acquired their share in Mogale Alloys (Pty) Limited from third parties. The amounts were determined based on open market fair value. Due to the nature of this purchase where Mogale did not issue shares to these investment companies this is not a traditional acquisition whereby there is share premium against which to eliminate the investment.
11. Other Financial Iiabilities 31 March 31 March 30 September 2007 2008 2009 ZAR ZAR ZAR Held at amortised cost Mindev (Pty) Limited 11,921,689 20,163,648 3,708,638
The loan bears interest at prime and the total amount is repayable in three equal instalments with the final instalment due on 31 December 2009. The loan is secured by certain undertakings from PGR 17 Investments (Pty) Limited. 31 March 31 March 30 September 2007 2008 2009 ZAR ZAR ZAR Non-current liabilities – At amortised cost 11,921,689 3,708,638 — Current liabilities – At amortised cost — 16,455,010 3,708,638 11,921,689 20,163,648 3,708,638
227 12 Finance Lease Obligation 31 March 31 March 30 September 2007 2008 2009 ZAR ZAR ZAR Minimum lease payments due – Within one year 178,000 5,037,055 4,703,755 – In second to fifth year inclusive — 8,752,759 1,940,025 178,000 13,789,814 6,643,780 Less future finance charges (21,172) (1,954,666) (413,528) Present value of minimum lease payments 156,828 11,835,148 6,230,252 Non current liabilities — 8,222,136 1,957,887 Current liabilities 156,828 3,613,012 4,272,365 156,828 11,835,148 6,230,252
The average remaining lease term is between 1 – 5 years and the average effective borrowing rate was 9.5 per cent. Interest rates are linked to prime at the contract date. All leases have fixed repayments and no arrangements have been entered into for contingent rent. The company’s obligations under finance leases are secured by the lessor’s charge over the leased assets. Refer to note 3.
13. Provisions Arising Discount Restatement Opening during rate during Closing balance the period adjustment the period balance ZAR ZAR ZAR ZAR ZAR 30 September 2009 Other provisions — 4,042,925 — — 4,042,925 Environmental rehabilitation 70,051,697 2,433,023 6,232,653 — 78,717,373 Leave pay — 774,824 — — 774,824 Audit and survey fees 528,549 — — (528,549) — 70,580,246 7,250,772 6,232,653 (528,549) 83,535,122 31 March 2008 Environmental rehabilitation 62,455,681 1,975,005 5,621,011 — 70,051,697 Audit and survey fees 300,946 227,603 — — 528,549 62,756,627 2,202,608 5,621,011 — 70,580,246 31 March 2007 Environmental rehabilitation 56,787,969 5,667,712 — — 62,455,681 Audit and survey fees — 300,946 — — 300,946 56,787,969 5,968,658 — — 62,756,627
Leave pay provision The leave pay provision represents management’s best estimate of the companies’ leave pay liability. The leave pay provision excludes management. The outflow of the leave pay is uncertain as no leave pay is forfeited as in terms of the BCEA. Environmental Rehabilitation provision The Group makes full provision for the future cost of rehabilitating the raw material sites and related production facilities on a discounted basis on the development of mines or installation of those facilities.
228 The rehabilitation provision represents the present value of rehabilitation costs relating to mine sites, which are expected to be incurred up to 2028. The provision has been determined by Golder Associates Africa (Pty) Limited and management. Assumptions, based on the current economic environment, have been made which management believes are reasonable basis upon which to estimate the future liability. These estimates are reviewed regularly to take into account any material changes to the assumptions. However, actual rehabilitation costs will ultimately depend upon future market prices for the necessary decommissioning works required which will reflect market conditions at the relevant time.
14. Trade and Other Payables 31 March 31 March 30 September 2007 2008 2009 ZAR ZAR ZAR Trade payables 9,416,617 7,448,392 2,583,557 VAT 1,999,151 2,125,086 7,584 Accrued expenses 16,013,637 5,496,528 4,252,947 Inventory creditors 22,223,478 52,030,514 40,053,306 49,652,883 67,100,520 46,897,394
15. Revenue Year ended Year ended 18 Months ended 31 March 31 March 30 September 2007 2008 2009 ZAR ZAR ZAR Sale of goods 417,018,715 667,950,104 1,127,338,554
16. Cost of Sales Year ended Year ended 18 Months ended 31 March 31 March 30 September 2007 2008 2009 ZAR ZAR ZAR Cost of production 207,794,513 246,627,585 628,654,070 Employee costs 26,269,860 35,313,292 67,583,597 Depreciation 14,140,561 11,210,093 28,474,901 248,204,934 293,150,970 724,712,568
229 17. Operating Profit Year ended Year ended 18 Months ended 31 March 31 March 30 September 2007 2008 2009 ZAR ZAR ZAR Operating profit for the period is stated after accounting for the following: Profit on sale of property, plant and equipment — — (166,852) Impairment on property, plant and equipment 5,953,590 3,125,528 — Impairment on other financial assets — 3,413,711 — Profit on exchange differences 330,247 3,430,194 27,388,276 Depreciation on property, plant and equipment 14,140,561 11,210,093 28,474,901 Management fee 4,379,039 3,999,996 6,738,758 Insurance — — 6,187,635 Consulting and professional fees 953,245 2,394,239 2,337,010 Environmental expenses 1,155,912 4,603,275 10,079,389 Concrete repairs 3,345,179 1,355,524 1,480,597 Furnace startup costs — — 1,948,095 Selling expenses 20,639,752 37,309,639 73,650,555 Taphole repairs — 3,557,098 — Employee costs 26,269,860 35,313,292 67,583,597 Operating lease charges – Premises (Contractual amounts) 183,000 187,350 302,424 The contractual amounts for the operating lease relate to a property that Mogale has purchased. The transaction will be finalised once the property has been sub-divided, until the transaction has been finalised, Mogale has agreed to pay a fixed rental amount for that property.
18. Investment Revenue Year ended Year ended 18 Months ended 31 March 31 March 30 September 2007 2008 2009 ZAR ZAR ZAR Dividend revenue Unlisted financial assets – Local — 1,606,327 1,319,999 Leswikeng UG2 Minerals (Pty) Ltd — — — Interest revenue 247,533 3,919,054 11,376,676 Bank 246,007 3,447,336 9,746,764 Other interest 1,526 471,718 1,629,912 247,533 5,525,381 12,696,675
19. Finance Costs Year ended Year ended 18 Months ended 31 March 31 March 30 September 2007 2008 2009 ZAR ZAR ZAR Shareholders 5,090,007 3,739,490 414,009 Non-current borrowings 204,151 1,708,209 174,712 Finance leases 179,031 176,386 — Bank 4,406,675 148,946 3,687,637 Other interest paid 1,883,942 8,489 8,489 Unwinding of discount on environmental provision 5,110,917 5,621,011 6,232,653 16,874,723 11,402,531 10,517,500
230 20. Taxation Year ended Year ended 18 Months ended 31 March 31 March 30 September 2007 2008 2009 ZAR ZAR ZAR Major components of the tax expense Current tax 16,121,845 91,865,281 130,391,392 – Current year 16,121,845 88,428,880 107,380,981 – STC — 3,436,401 23,010,411 Deferred tax 4,997,488 2,355,901 6,197,665 – Current year 4,997,488 2,355,901 6,173,138 – Change in tax rates — — 24,527 21,119,333 94,221,182 136,589,057 Reconciliation of the tax expense Reconciliation between accounting profit and tax expense. Accounting profit 76,560,524 303,638,413 397,192,676 Tax at the applicable tax rate of 28% (2008: 29%) 22,202,552 88,055,140 111,213,949 Tax effect of adjustments on taxable income – Non deductable expenses 610,682 1,950,225 1,767,317 – Non-taxable income 465,834 369,601 – Temporary differences on tax bases used (1,693,901) 313,582 203,252 – Tax rate adjustment 24,527 – STC 3,436,401 23,010,411 At the effective income tax rate of 34% (2008: 31%; 2007: 28%) 21,119,333 94,221,182 136,589,057
The income tax rate changed from 29 per cent. in 2008 to 28 per cent. in 2009.
21. Auditors’ Remuneration Year ended Year ended 18 Months ended 31 March 31 March 30 September 2007 2008 2009 ZAR ZAR ZAR Fees 147,000 414,084 180,720
22. Tax Paid Year ended Year ended 18 Months ended 31 March 31 March 30 September 2007 2008 2009 ZAR ZAR ZAR Balance at beginning of the period (2,575,158) (14,147,005) (51,934,544) Current tax for the period recognised in income statement (16,121,845) (91,865,281) (130,391,392) Balance at end of the period 14,147,005 51,934,544 12,657,610 (4,549,998) (54,077,742) (169,668,326)
231 23. Dividends Paid Year ended Year ended 18 Months ended 31 March 31 March 30 September 2007 2008 2009 ZAR ZAR ZAR Declared and paid on ordinary shares: Final dividend for 2007: ZAR3,803.01 per share (3,803,013) Final dividend for 2008: ZAR32,709.56 per share (32,709,560) Final dividend for 2009: ZAR216,724.45 per share (216,724,455) (3,803,013) (32,709,560) (216,724,455)
24. Related Parties Relationships Ultimate holding company Ruukki SA (Pty) Limited Members of key management J F Oosthuizen, J Basson, N C Machingawuta, J P Havia
Year ended Year ended 18 Months ended 31 March 31 March 30 September 2007 2008 2009 ZAR ZAR ZAR Compensation to employees, directors and other key management Post-employment benefits — — 419,025 Other short-term benefits 725,511 409,689 732,436
25. Directors’ Emoluments Year ended Year ended 18 Months ended 31 March 31 March 30 September 2007 2008 2009 ZAR ZAR ZAR Executive – For services as directors 1,471,121 3,328,768 9,753,486
26. Transition to IFRS For all periods presented up to and including 30 September 2009, the combined financial statements were prepared in accordance with IFRS except for the effects of the combination described in Note 1.
27. Risk Management The company’s principal financial liabilities comprise accounts payable, bank loans and loans from shareholders. The main purpose of these financial instruments is to manage short term cash flow and raise finance for the company’s capital expenditure program. The company has various financial assets such as accounts receivable and cash and short term deposits, which arise directly from operations. The main risks that could adversely affect the company’s financial assets, liabilities or future cash flows are commodity prices, cash flow interest risk, foreign currency risk, liquidity risk and credit risk. These risks are summarised below. The summary below also includes a sensitivity analysis that is intended to illustrate the sensitivity to changes in market variables on the company’s financial instruments and show the impact on profit or loss and shareholders equity where applicable. Financial instruments affected by market risk include bank loans, overdrafts, accounts receivable, accounts payable, accrued liabilities and other interest bearing borrowings. The sensitivity analysis has been prepared for periods ended 30 September 2009, 31 March 2008 and 31 March 2007 using the amounts of debt and other financial assets and liabilities held as at those balance sheet dates.
232 Liquidity risk The company’s risk to liquidity is a result of the funds available to cover future commitments. Cash flow forecasts are prepared and adequate utilized borrowing facilities are monitored. The information below summarises the maturity profile of the company’s profile as at 30 September 2009, 31 March 2008 and 31 March 2007 based on contractual undiscounted payments. On demand 1 year 2 to 5 years Total ZAR ZAR ZAR ZAR Period ended 30 September 2009 Interest bearing loans and borrowings — 7,981,003 1,957,887 9,938,890 Accounts payable and accrued liabilities 60,086,188 — — 60,086,188 60,086,188 7,981,003 1,957,887 70,025,078 Year ended 31 March 2008 Interest bearing loans and borrowings 17,624,971 16,487,709 24,677,146 58,789,826 Accounts payable and accrued liabilities 120,265,373 — — 120,265,373 137,890,344 16,487,709 24,677,146 179,055,199 Year ended 31 March 2007 Interest bearing loans and borrowings 43,868,420 10,725,187 21,087,748 75,681,355 Accounts payable and accrued liabilities 64,839,960 — — 64,839,960 108,708,380 10,725,187 21,087,748 140,521,315
Set out below is a comparison by class of the carrying amount and fair value of the group’s financial instruments that are carried in the financial statements.
Carrying amount Fair value 2007 2008 2009 2007 2008 2009 ZAR ZAR ZAR ZAR ZAR ZAR Financial assets Trade and other receivables 54,519,562 119,284,216 49,510,319 54,519,562 119,284,216 49,510,319 Loan and other receivables — 3,010,195 3,010,195 — 3,010,195 3,010,195 Loans receivable 2,096,028 2,253,705 — 2,096,028 2,253,705 — Cash and short term deposits 12,297,261 112,716,425 55,741,068 12,297,261 112,716,425 55,741,068 Financial liabilities Finance lease obligation 156,828 3,613,011 4,272,365 156,828 3,613,011 4,272,365 Other financial liabilities — 16,455,010 3,708,638 — 16,455,010 3,708,638 Trade and other payables 49,652,883 67,100,520 46,897,394 49,652,883 67,100,520 46,897,394 Provisions 62,756,627 70,580,246 83,897,394 62,756,627 70,580,246 83,897,394
Past due but not impaired Neither past due < 30 30 – 60 61 – 90 91 – 120 Total nor impaired days days days days ZAR ZAR ZAR ZAR ZAR ZAR Trade and other receivables 2009 49,510,319 39,350,193 10,085,302 — — 74,824 2008 119,284,216 80,601,698 38,678,273 — — 4,245 2007 54,519,562 42,960,284 4,261,322 7,505 7,290,451 — Other financial assets 2009 3,010,195 — — — — 3,010,195 2008 3,010,195 — — — — 3,010,195 2007 2,095,028 — — — — 2,095,028 Credit risk Credit risk consists mainly of cash deposits, cash equivalents and trade debtors. The company only deposits cash with major banks with high quality credit standing and limits exposure to any one counter-party. The company only trades with recognized creditworthy third parties. Management evaluates credit risk relating to customers on an ongoing basis and credit guarantee insurance is purchased when deemed appropriate.
233 Capital risk management The company manages its capital to ensure that the company will be able to continue as a going concern while maximizing the return to stakeholders through the optimisation of the debt and equity balance. The company’s overall strategy remains unchanged from 2008. The capital structure of the company consists of debt which includes borrowings, cash and cash equivalents and equity comprising issued capital, reserves and retained earnings. Gearing ratio The company’s directors review the capital structure on an annual basis. As part of this review, the directors consider the cost of capital and the risks associated with each class of capital. The gearing ratio of the company is determined as the proportion of net debt to equity. The target debt equity ratio is 60 per cent. equity and 40 per cent. debt. 31 March 31 March 30 September 2007 2008 2009 ZAR ZAR ZAR Interest bearing borrowings 73,616,954 57,129,541 9,938,890 Cash and cash equivalents 11,104,874 112,716,425 55,741,068 Net debt 65,512,080 (55,586,884) (45,802,178) Equity 7,411,380 184,523,167 244,944,521 Debt equity percentage 871% (29.22%) (18.70%) Foreign exchange risk The company operates internationally and is exposed to foreign exchange risk arising from USD currency exposures. Currently there are no foreign exchange hedge programs in place. At balance date the financial instruments exposed to movements in South African Rand/USD are as follows: 2007 2008 2009 $’000 $’000 $’000 Cash and cash equivalents — 6 2,515 Trade and other receivables 4,814 14,384 5,542 4,814 14,390 8,057
The following table summarises the sensitivity of financial instruments held at balance date to movements in the exchange rate of the South African Rand to the US Dollar. The South African Rand instruments have been assessed using the sensitivities indicated in the table. Impact on profit/equity – Pre-tax gain/(loss) 2007 2008 2009 ZAR’000 ZAR’000 ZAR’000 Judgements of reasonable possible movements ZAR/USD +5% 1,790 5,651 3,046 ZAR/USD -5% (1,790) (5,651) (3,046) Commodity price risk The company’s revenues are exposed to commodity price fluctuations, in particular movements in prices on Nickel, Chrome and Silico Manganese. The company does not hedge commodity prices. The company’s financial instruments as at balance date in relation to commodity prices are fixed in terms of the contract pricing formula and are not exposed to risk.
234 Interest rate risk Interest rate risk is the risk that the company’s financial position will be adversely affected by movements in interest rates. The company’s main interest rate risk arises from loans with interest charges based on the prime lending rate as determined by ABSA Bank Ltd. The company currently does not engage in any hedging or derivative transactions to manage interest rate risk. In conjunction with external advice, management consideration is given on a regular basis to alternative financing structures with a view to optimising the company’s funding structure. The financial instruments exposed to movements in variable interest rates are as follows: 2007 2008 2009 ZAR’000 ZAR’000 ZAR’000 Financial assets Cash and cash equivalents 4,163 109,140 32,500 Trade and other receivables 4,814 14,390 8,057 Financial liabilities Interest bearing liabilities 31,942 57,474 9,939 The following table summarises the sensitivity of the financial instruments held at balance sheet date. Impact on profit/equity – Pre-tax gain/(loss) 2007 2008 2009 ZAR’000 ZAR’000 ZAR’000 Judgements of reasonable possible movements Cash Increase +100bps 42 1,091 325 Decrease -100bps (42) (1,091) (325) Interest bearing liabilities Increase +100bps (319) (575) (100) Decrease -100bps 319 575 100
28. Going Concern The combined financial statements have been prepared on the basis of accounting policies applicable to a going concern. This basis presumes that funds will be available to finance future operations and that the realisation of assets and settlement of liabilities, contingent obligations and commitments will occur in the ordinary course of business.
29. Subsequent Events No material event or circumstance has occurred since the balance sheet date which requires adjustment or further disclosure in the financial statements.
235 Section C – Historical financial information on Junnikkala Oy
The Directors 30 June 2010 Ruukki Group Plc (the “Company”) Keilasatama 5 FI-01250 Espoo Finland
Dear Sirs
Junnikkala Ltd We report on the financial information set out in section B of Part VIII of the prospectus dated 30 June 2010 of Ruukki Group Plc (the “Prospectus”). This financial information has been prepared for inclusion in the Prospectus on the basis of the accounting policies set out in note 2. This report is required by item 20.1 of Annex I of the Commission Regulation (EC) 809/2004 and is given for the purpose of complying with that item and for no other purpose. Save for any responsibility under applicable law to investors purchasing ordinary shares of Ruukki Group Plc in reliance on this report, we do not assume any responsibility and will not accept any liability to any other person for any loss suffered by any such other person as a result of, arising out of, or in connection with this report or our statement, required by and given solely for the purposes of complying with item 23.1 of Annex I of Commission Regulation (EC) 809/2004 and item 10.3 of Annex III of Commission Regulation EC 809/2004 consenting to its inclusion in the prospectus.
Responsibilities The Directors of Ruukki Group Plc are responsible for preparing the financial information in accordance with International Financial Reporting Standards as adopted by the European Union. It is our responsibility to form an opinion as to whether the financial information gives a true and fair view, for the purposes of the prospectus, and to report our opinion to you.
Basis of opinion We conducted our work in accordance with Standards for Investment Reporting issued by the Auditing Practices Board in the United Kingdom. Our work included an assessment of evidence relevant to the amounts and disclosures in the financial information. It also included an assessment of significant estimates and judgments made by those responsible for the preparation of the financial information and whether the accounting policies are appropriate to the entity’s circumstances, consistently applied and adequately disclosed. We planned and performed our work so as to obtain all the information and explanations which we considered necessary in order to provide us with sufficient evidence to give reasonable assurance that the financial information is free from material misstatement whether caused by fraud or other irregularity or error. Our work has not been carried out in accordance with auditing or other standards and practices generally accepted in other jurisdictions and accordingly should not be relied upon as if it had been carried out in accordance with those standards and practices.
Opinion In our opinion, the financial information gives, for the purposes of the prospectus dated 30 June 2010, a true and fair view of the state of affairs of Junnikkala Ltd and its subsidiaries as at the dates stated and of its profits, cash flows and changes in equity for the periods then ended in accordance with International Financial Reporting Standards as adopted by the European Union.
236 Declaration For the purposes of Commission Regulation (EC) 809/2004, we are responsible for this report as part of the prospectus and declare that we have taken all reasonable care to ensure that the information contained in this report is, to the best of our knowledge, in accordance with the facts and contains no omission likely to affect its import. This declaration is included in the prospectus in compliance with item 1.2 of Annex I and item 1.2 of Annex III of Commission Regulation (EC) 809/2004.
Yours faithfully
Ernst & Young LLP London 30 June 2010
237 The information in respect of Junnikkala in this Section C of this Part VIII is presented in Euros and in accordance with IFRS.
JUNNIKKALA GROUP CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Income Statement for the years ended 31 December 2008 and 31 December 2007 Year ended 31 December Notes 2007 2008 €’000 €’000 Revenue 42,063 41,715 Other operating income 4 385 98 Changes in inventories of finished goods and work in progress 2,446 (1,770) Raw materials and consumables used and external subcontract services (33,971) (33,721) Employee benefit expenses 5 (4,021) (4,249) Depreciation and amortisation and impairment 6 (1,693) (7,117) Other operating expenses (855) (1,207) Operating profit/(loss) 4,353 (6,251) Finance income 7 13 41 Finance costs 8 (593) (1,055) Profit/(loss) before taxes 3,773 (7,265) Income taxes 9 (926) 1,627 Profit/(loss) for the period/comprehensive income 2,847 (5,638) Attributable to: Owners of the parent 2,759 (5,638) Non-controlling interest 88 — 2,847 (5,638)
238 Consolidated Balance Sheet as at 31 December 2008 and as at 31 December 2007 As at 31 December Notes 2007 2008 €’000 €’000 ASSETS Non-current assets Property, plant and equipment 10 17,815 27,540 Intangible assets 11 47 — Other intangible assets 11 97 180 Emission rights 15 795 532 Other financial assets 58 59 Deferred tax assets 12 — 118 18,812 28,429 Current assets Inventories 13 7,312 7,155 Trade and other receivables 14 3,820 5,710 Cash and cash equivalents 16 152 45 11,284 12,910 Total assets 30,095 41,338 EQUITY AND LIABILITIES Equity attributable owners to the parent Share capital 161 161 Share premium 21 23 — Paid-up unrestricted equity reserve 21 — 5,650 Retained earnings 10,665 4,532 10,849 10,343 Non-controlling interest 386 — Total equity 11,236 10,343 Non-current liabilities Deferred tax liabilities 17 1,400 332 Other non-current liabilities 18 7,892 13,423 9,291 13,755 Current liabilities Trade and other payables 19 5,220 8,571 Other current liabilities 20 4,348 8,669 9,568 17,240 Total liabilities 18,859 30,995 Total equity and liabilities 30,095 41,338
239 Consolidated Cash Flow Statement for the years ended 31 December 2008 and 31 December 2007 Year ended 31 December Notes 2007 2008 €’000 €’000 Cash flows from operating activities Profit before taxes 3,773 (7,265) Finance income (13) (41) Finance cost 593 1,717 Depreciation, amortisation and impairment losses 1,693 7,117 (Increase)/decrease in inventories (1,270) 1,976 (Increase)/decrease in trade and other receivables 633 101 (Decrease)/increase in trade and other liabilities (1,528) 1,013 Interests paid (593) (1,582) Interests received 13 41 Income taxes paid (848) — Net cash from operating activities 2,454 3,077 Cash flows from investing activities Acquisition of subsidiaries, net of cash acquired 3 — (1,532) Purchase of property, plant and equipment (2,487) (13,507) Net cash used in investing activities (2,487) (15,039) Cash flows from financing activities Dividends paid (335) — Proceeds from share issue — 5,627 Change in short-term borrowings (264) 4,321 Proceed from long-term borrowings 2,924 4,506 Repayment of long-term borrowings (2,298) (2,599) Net cash used in financing activities 27 11,855 Net (decrease)/increase in cash and cash equivalents (6) (107) Cash and cash equivalents at 1 January 158 152 Cash and cash equivalents at 31 December 16 152 45
240 Consolidated Statement of Changes in Equity for the years ended 31 December 2008 and 31 December 2007 Year ended 31 December Share premium/ paid up Non- Share unrestricted Retained controlling Capital equity reserve earnings Total interest Total €’000 €’000 €’000 €’000 €’000 €’000 Balance at 1 January 2007 161 23 8,242 8,426 298 8,724 Dividend distribution — — (335) (335) — (335) Total comprehensive income — — 2,758 2,758 88 2,846 Balance at 31 December 2007 161 23 10,665 10,849 386 11,235 Balance at 1 January 2008 161 23 10,665 10,849 386 11,235 Dividend distribution — — (881) (881) — (881) Minority acquired — — 386 386 (386) — Share issue — 5,627 — 5,627 — 5,627 Total comprehensive income — — (5,638) (5,638) — (5,638) Balance at 31 December 2008 161 5,650 4,532 10,343 — 10,343
241 Notes to the Consolidated Financial Statements
1. Business activities Junnikkala Oy, in English Junnikkala Ltd, is a Finnish limited liability company organised under the laws of Finland and domiciled in Kalajoki, Finland. The company’s registered address is Sahantie 1, FI-85100 Kalajoki, Finland. The ultimate parent company of Junnikkala Group (“The Group”) is Ruukki Group Plc, which shares are listed on the OMX Nordic Exchange Helsinki. In these financial statements, the denomination “Oy” has been translated to Ltd for each company name. Junnikkala Group’s business activities comprise sawmill activities and the production of wood products to be used primarily in construction. Junnikkala Group operates mainly in the Finnish market and approximately 70 per cent. of the total revenue was generated in the Finnish market and export represented 30 per cent. of the total revenue. This consolidated financial information was authorised for issue by the Board of Directors on 30 June 2010.
2. Accounting policies Basis of preparation These consolidated financial statements of Junnikkala Group have been prepared in accordance with the International Financial Reporting Standards (IFRS) issued by the International Accounting Standards Board (IASB) and interpretations of the International Financial Reporting Interpretations Committee (IFRIC). In the Finnish Accounting Act and the regulations issued on the basis thereof, International Financial Reporting Standards refer to the standards and their interpretations that have been approved for application within the EU in accordance with the procedure prescribed in the EU regulation (EC) 1606/2002. The accounting policies that follow set out those policies which have been applied in preparing the financial statements for the year ended 31 December 2008. All the figures in the consolidated financial statements are given in EUR thousands. The financial information given in this financial statement is generally given to the nearest whole number, the nearest decimal place or the nearest thousand. Therefore, the sum of numbers may not exactly conform to the total figures given. Due to the fact that Junnikkala Group does not have any items to be recognised in the statement of comprehensive income no such statement has been included. Changes in accounting policies The accounting policies adopted in the preparation of the financial statements are consistent with those of the previous financial year except for the adoption of the new standards and interpretation that became effective in 2009. They did not have a material impact on this financial information. As part of these new standards, the Group adopted IAS 23R, which requires capitalisation of borrowing costs that are directly attributable to the acquisition, construction or production of a qualifying asset. The previous policy was to expense borrowing costs as they were incurred. The revised standard may be applied from the effective date, ie 1 January 2009, or from an earlier date. The Group elected not to apply IAS 23R from an earlier date. Thus, its adoption did not have an impact on this financial information. Consolidation principles The consolidated financial statements include the parent company Junnikkala Ltd and its subsidiaries Pyyn Saha ja Höyläämo Ltd and Juneropt Ltd to the date they were merged with Junnikkala Ltd. Subsidiaries refer to companies in which the Group has control. The Group gains control of a company when it holds more than half of the voting rights, or otherwise exercises control. The existence of potential voting rights has been taken into account in assessing the requirements for control in cases where the instruments entitling their holder to potential voting rights can be exercised at the time of assessment. Control refers to the right to govern the financial and operating policies of an enterprise so as to obtain benefits from its activities.
242 Acquired subsidiaries are consolidated from the time when the Group gained control, and divested subsidiaries until the time when control ceased. All intra-group balances and transactions, including unrealised profits and losses, are eliminated when the consolidated financial statements are prepared. Distribution of profits between parent company owners and minorities is shown in the income statement, and the share of equity attributable to non-controlling interests is shown as a separate item in the balance sheet. The share of accumulated losses attributable to minority interests is recorded in the financial statements up to a maximum of the amount of the investment. Translation of foreign currency items Figures in the consolidated financial statements are presented in EUR, which is the functional and presentation currency of the Group’s parent company, Junnikkala Ltd. The functional and presentation currency of all Group subsidiaries is the Euro. Transactions in foreign currencies have been recorded at the functional currency using the exchange rate prevailing at the date of the transaction. Monetary items denominated in foreign currencies have been translated into the functional currency using the exchange rates prevailing at the balance sheet date. Exchange rate gains and losses are included in the corresponding items above operating profit. Non-monetary asset acquisitions measured at historical cost in a foreign currency are translated into the functional currency using the exchange rate prevailing on the dates of the initial transactions. Hedge accounting has not been applied to forward contracts used for hedging purposes. Reporting by segment Junnikkala Ltd operates in one segment, being sawmills. As a result it does not present any additional segment information. Further, Junnikkala Ltd is not a listed company and therefore is not required to present segment information. Operating profit IAS 1 Presentation of financial statements does not define the concept of operating profit. Junnikkala Ltd follows the Ruukki Group definition as follows: Operating profit is the net amount derived by adding to revenue other operating income, less purchase costs adjusted with the change in inventories of finished goods and work in progress and expenses from work performed by the enterprise and capitalised, less costs from employee benefits, depreciation, and impairment losses, and other expenses. All other income statement items are excluded from operating profit. Translation differences arising from operational transactions with third parties are included in operating profit; otherwise they are recorded under financial items. Earnings per share Earnings per share information is required for listed companies. Junnikkala Ltd is not a listed company and therefore it does not present earnings per share information. Income recognition principles Income from the sale of goods is recognised once the substantial risks and benefits associated with ownership have been transferred to the buyer. Income from services is recognised after the service has been provided. Financial income and expenses Interest income and expense is recognised using the effective yield method, and dividends are recognised when the right to dividends is established. Unrealised changes in value of items measured at fair value are recognised in the income statement. Employee benefits All pension arrangements in Junnikkala Group are classified as defined contribution plans. The Group companies do not have any defined benefit plans. Payments for defined contribution plans are recorded in the income statement for the relevant period. The Group does not have any share based payment arrangements.
243 Impairment On each balance sheet date, Junnikkala Ltd makes an assessment of whether there are any indications of asset impairment. If such indications exist, the recoverable amount of the asset is estimated. In addition, goodwill is assessed annually for its recoverable amount regardless of whether there are any signs of impairment. Impairment is examined at the cash-generating unit level; in other words, the lowest level of entity that is primarily independent of other entities and whose cash flows can be separated from other cash flows. Impairment related to associates and other assets are tested on a company/asset basis. The recoverable amount is the fair value of an asset less divestment cost, or the higher value in use. Value in use means the present value of estimated future cash flows expected to arise from the asset or cash-generating unit. Value in use is forecast on the basis of circumstances and expectations at the time of testing. The discount rate takes into account the time value of money as well as the special risks involved for each asset, different industry-specific capital structures in different lines of business, and the investors’ return expectations for similar investments, in addition to the specific risks related to these particular businesses. An impairment loss is recorded when the carrying amount of an asset is greater than its recoverable amount. Impairment losses are recorded in the income statement. If the impairment loss involves a cash-flow generating entity, it is allocated first to reduce the goodwill of the entity and subsequently to reduce other assets of the entity. An impairment loss is reversed if a change has occurred in circumstances and the recoverable amount of the asset has changed since the impairment loss was recognised. However, the reversal must not cause the adjusted value to be higher than the carrying amount without the recognition of the impairment loss. An impairment loss recognised for goodwill is not reversed in any circumstances. The most recent goodwill impairment test was performed at 30 September 2008. Provisions Provisions are recognised when the Group has a present (legal or constructive) obligation as a result of a past event, it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation and a reliable estimate can be made of the amount of the obligation. Where the Group expects some or all of a provision to be reimbursed, for example under an insurance contract, the reimbursement is recognised as a separate asset but only when the reimbursement is virtually certain. The expense relating to any provision is presented in the income statement net of any reimbursement. If the effect of the time value of money is material, provisions are discounted using a current pre-tax rate that reflects, where appropriate, the risks specific to the liability. Where discounting is used, the increase in the provision due to the passage of time is recognised as a finance cost. Income taxes Tax expenses in the income statement consist of the tax based on taxable income for the year and deferred taxes. Taxes based on taxable income for the year are calculated using the applicable tax rates. Taxes are adjusted with any taxes arising from previous years. Deferred taxes have been calculated for all temporary differences between the carrying amount and taxable amount. No deferred taxes have been recorded for goodwill impairment. Deferred taxes have been calculated using the tax rates prescribed by the balance sheet date. Deferred tax assets arising from taxable losses carried forward have been recognised up to the amount for which there is likely to be taxable income in the future, and against which the temporary difference can be used. Tangible assets Tangible assets have been measured at original acquisition cost less accumulated depreciation and impairment losses. If a tangible asset item consists of several parts with different useful lives, a component approach is applied. In this case, expenses from material component replacements are capitalised. Heavy production machinery contains components with different useful lives, and thus a component approach is applied. Material component replacements and overhauls are capitalised.
244 Lighter machinery’s and other intangible items’ repair and maintenance are recognised as expense when occurred. Interest expenses are activated as part of the tangible asset’s value if and when the Group acquires or constructs assets that satisfy the required terms and conditions. Assets are depreciated over their useful lives using the straight-line method. Land areas are not depreciated. The estimated useful lives of assets are as follows: Buildings 15–25 years Machinery and equipment 3–15 years Other tangible assets 5–10 years The residual value of assets and their useful life are reviewed in connection with each financial statement and if necessary, they will be adjusted to reflect the changes that have occurred in the expected financial benefit. The sales gains or losses arising from the decommissioning or divestment of tangible assets are included in other operating income or expenses. Public subsidies Public subsidies for the acquisition of tangible assets have been recorded as a deduction of the acquisition cost. The subsidies are recognised as income indirectly in the form of smaller depreciation amounts over the useful life of the asset. Intangible assets Goodwill and intangible assets identified at acquisitions Goodwill represents the portion of acquisition cost that exceeds the Group’s share of the fair value at the time of acquisition of the net assets of a company acquired after 1 January 2004. Goodwill arising from previous business combinations represents the carrying amount under the previous accounting standards, which has been used as the deemed cost. Acquisitions made after 1 January 2007 have been recorded in compliance with IFRS 3, which states that the acquired identifiable assets, liabilities, and contingent liabilities are measured initially by the acquirer at their fair values on the acquisition date. Goodwill represents the portion of a business combination cost that exceeds the Group’s share of the fair value of the identifiable assets, liabilities and contingent liabilities acquired and is not amortised. To the extent that the net fair value of an acquired entity’s identifiable assets, liabilities and contingent liabilities is greater than the cost of the business combination, a gain is recognised immediately in the income statement. After initial acquisition, goodwill is stated at cost less any accumulated impairment losses. Identifiable intangible assets associated with customers, marketing, technology, or intellectual property rights are recorded separated from goodwill in all acquisitions. As market prices do not exist for these intangible assets, their fair value of separately identifiable intangible assets is measured on acquisition based on cash flow models using reasonable assumptions. Emission rights Junnikkala has received emission rights without compensation. The Group has no operational use for the emission rights and the intention is to sell them. The emission rights have been classified as intangible assets measured at fair value; the receipt of the rights, their subsequent fair value adjustment and the sale gain or loss are recognised as other operating income of the income statement. Other intangible assets Other intangible assets are initially recognised on the balance sheet at cost when the costs can be reliably determined and it is probable that the expected financial benefits of these assets will be reaped by the Group. Other intangible assets mainly relate to IT software utilised as support to Group’s business operations. Amortisation periods are as follows: Computer software 3–5 years Other intangible rights 3–5 years Customer relationships 3–5 years Trademarks 10 years
245 Inventories Inventories are measured at acquisition cost or a lower probable net realisable value. Acquisition costs are determined using the average cost method. The cost of finished goods and work in progress comprises raw materials, direct labour expenses, other direct expenses and an appropriate share of fixed and variable production overheads based on the normal capacity of the production facilities. In ordinary operations, the net realisable value is the estimated selling price that is obtainable, less the estimated costs incurred in completing the product and the selling expenses. Financial assets and liabilities Financial assets are initially classified based on the purpose for which the financial asset was acquired. Financial assets may be classified at fair value through profit and loss; loans and receivables; held-to- maturity investments; or as available-for-sale financial assets, as appropriate. The classification of financial assets is determined on initial acquisition and, where appropriate, evaluates this designation at each financial year end. Financial assets are initially recorded at fair value, being the transaction price plus, in the case of financial assets not at fair value through profit and loss, directly attributable acquisition costs. The acquisition and disposal of financial assets are recorded on the transaction dates. Financial assets at fair value through profit and loss are classified in this category if they are held for trading or otherwise designated as such on acquisition. Financial assets are classified as held for trading if they are acquired for sale in the short term. Generally, a financial asset can only be designated at fair value through profit and loss if the designation reduces or eliminates in inconsistency in its treatment or measurement that would otherwise exist, or is a part of a group of financial assets which are managed and their performance assessed on a fair value basis in accordance with a documented risk management strategy. Derivative contracts are measured at fair value in the income statement. The Group does not apply hedge accounting. Financial assets at fair value through profit and loss are carried in the balance sheet at fair value with gains or losses recognised in profit or loss. Held-to-maturity investments include non-derivative financial assets that involve fixed or easily defined payments, that mature on a specified date, and that the Group has the intention and ability to hold to maturity. These investments are carried at amortised cost using the effective interest method. Gains and losses are recognised in income when the investments are derecognised or impaired, as well as through the amortisation process. Investments intended to be held for an undefined period are not held in this classification. Loans and other receivables are non-derivative financial assets that involve fixed or easily defined payments, that are not quoted on active markets, and that the company does not hold for trading purposes. These investments are carried at amortised cost using the effective interest method if the time value of money is not significant. Gains and losses are recognised in income when the investments are derecognised or impaired, as well as through the amortisation process. Available for sale assets include non-derivative financial assets that could be disposed of immediately without restrictions or assets that cannot be categorised in groups mentioned above. After initial recognition, these assets are measured at fair value with gains or losses recorded as a separate component of equity until the investment is derecognised or impaired, at which time the cumulative gain or loss is recorded in the income statement. Cash and cash equivalents consist of cash funds, bank deposits available for withdrawal on demand, and other highly liquid short-term investments that are measured at fair value on the balance sheet date. Items classified as financial assets mature not later than in three months from the date of acquisition. Financial liabilities may be long-term or short-term liabilities, and they may be interest-bearing or interest-free. All financial liabilities are initially measured at fair value and carried at amortised cost, with the exception of derivative financial liabilities which are carried at fair value through profit and loss. As the amount of the equity component has been determined as being insignificant, the convertible bond amounting to €400,000 has been accounted for as a liability in the financial statements.
246 Borrowing costs All borrowing costs are recognised as an expense in the period in which they are incurred, As from 1 January 2009, borrowing cost must be capitalised as part of the cost of an asset to the extent they are directly attributable to the acquisition, construction or production of a qualifying asset. A qualifying asset is an asset which necessarily takes a substantial period of time to get ready for its intended use. Any fees related to loans and borrowings are recognised as part of transaction costs. Non-current liabilities are measured at amortised cost using the effective interest method. Lease agreements (the Group as the lessee) Leases of tangible assets where the Group possesses a material portion of the risks and benefits of ownership are classified as financial leases. An asset acquired through a financial lease agreement is recorded in the balance sheet at the fair value of the leased object at the beginning of the lease period, or at a lower current value of minimum lease. An asset obtained through a finance lease is depreciated over the useful life of the asset or the lease term, whichever is shorter. The leases payable are divided into financial expenses and loan repayment during the lease term so that the interest rate for the remaining loan is roughly the same each financial year. Leasing obligations are included in interest-bearing liabilities. Lease agreements in which the risks and benefits typical of ownership remain with the lessor are classified as other leases. Leases paid under other lease agreements are recognised as expenses in the income statement on a straight-line basis over the lease term. Accounting policies requiring management discretion and key uncertainty factors for estimates The preparation of the financial statements in accordance with IFRS requires the management to make estimates, assumptions, and forecasts regarding the future. Future developments may deviate significantly from the assumptions made if changes occur in the business environment and/or business operations. In addition, the management is required to use its discretion in the application of the financial statements’ preparation principles. The most significant situations when management uses judgement and makes estimates are when it decides on the following: • useful life, and thus total depreciation/amortisation periods, for different categories of intangible and tangible non-current assets, • recoverable amount for different categories of intangible and tangible non-current assets. The recoverable amounts of cash-generating units have been determined by means of calculations based on value in use. Preparation of these calculations requires the use of estimates to predict future developments. Future cash flow forecasts are made for a five-year period, after which the cash flow growth rate is, assumed to be zero. The forecasts used in the testing are based on the budgets and projections of the operative units, excluding any expansionary capital expenditures and rearrangements. The discount rates applied in impairment testing requires discretion, such as estimating the risk premiums and average capital structure for each cash-generating unit. Based in these impairment procedures, the Group recognized impairment losses of €4,112,000 of which €3,578,000 relate to tangible assets and €534,000 to intangible assets (Refer to Note 10 and 11). Those impairment losses may reverse in the future if the recoverable amount increases. • probability of future taxable profits against which tax deductible temporary differences can be utilised thus giving rise to recognition of deferred tax assets, • net realisable value of inventories, • fair value (collectable amount) of trade receivables. The individual companies in Junnikkala Group make assessments of their trade receivables based on known facts, previous experience, and foreseeable future events; therefore, the information includes estimates made by the management of the companies in question. • amount of cost provisions, and • presentation of contingent assets and/or liabilities in the disclosures of the financial statement.
247 3. Business Combinations On 22 January 2008, Ruukki Group acquired control over Junnikkala Group and – through Junnikkala Group – over Pyyn Saha ja Höyläämö Ltd (Pyyn Saha) through a series of steps: • Ruukki Yhtiöt Ltd (wholly owned subsidiary of Ruukki Group Plc) acquired 35 per cent. ownership of Junnikkala Group. • Junnikkala Group issued new shares to Ruukki Yhtiöt Ltd, which increased in Ruukki Yhtiöt Ltd’s ownership in Junnikkala Group to 51.02 per cent. • At the same time one shareholder (30 per cent. ownership in Pyyn Sahaja Höyläämö Ltd) in Pyyn Sahaja Höyläämö Ltd entered into a share exchange agreement with Junnikkala Ltd. In this share exchange agreement Junnikkala Ltd issued 47 new A shares and 16 B shares as a consideration to this individual shareholder. The value of these new shares is determined based on corresponding cash consideration that other owners of the acquiree received. Therefore 30 per cent. ownership in Pyyn Sahaja Höyläämö Ltd represents a value of €660,000. • Other shareholders in Pyyn Saha (representing 70 per cent. ownership in Pyyn Saha ja Höyläämö Ltd) sold their ownership to Junnikkala Ltd for cash consideration amounting to €1,540,000. For consolidated Junnikkala Group purposes it is therefore assumed that Junnikkala Group has acquired control over Pyyn Saha as of 22 January 2008. Purchase price allocation Purchase price allocation of Pyyn Saha ja Höyläämö Ltd in this consolidated Junnikkala Group financial information is prepared applying similar assumptions as were used in the purchase price allocation of the Junnikkala acquisition in Ruukki Yhtiöt Ltd. In the Ruukki Yhtiöt acquisition of both Junnikkala Group and Pyyn Sahaja Höyläämö Ltd there were identified the following assets that had potentially a fair value that differed from the carrying amount in the acquiree’s balance sheet: • Customer relationships • Assembled workforce • Backlog of orders • Brand • Technology • Property, plant and equipment • Inventory Customer relationships Customer relationships are identified as an intangible asset that qualifies for recognition. Both Junnikkala Group and Pyyn Saha ja Höyläämö Ltd had customer contracts in force at the date of acquisition. The duration of customer contracts was estimated to be three years based on earlier experience of both companies. Customer relationship was originally valued as a single intangible asset that included the value of customer relationships of both Junnikkala Group and Pyyn Sahaja Höyläämö Ltd. At this stage the valuation of customer relationships of Pyyn Saha ja Höyläämö Ltd is based on that original valuation and an assumption is made that Pyyn Saha ja Höyläämö Ltd represents a certain percentage of the original valuation. The method of defining the original fair value of customer relationships was based on multi period excess earnings.
248 Assembled workforce IFRS 3 does not allow recognition of assembled workforce as a separate intangible asset. However, the value of assembled workforce has to be determined to be taken into account as one component in valuation of customer relationships i.e. customer relationships is the residual after charge for all other contributory assets including assembled workforce has been deducted. Backlog of orders The total amount of backlog of orders including both companies was relatively small, therefore no value for backlog of orders is recognised in Junnikkala Group related to acquisition of Pyyn Saha ja Höyläämö Ltd. Inventory The inventory value for finished goods is defined using profit split method and it is calculated separately for Pyyn Saha ja Höyläämö Ltd amounting to €402,000. Brand Brand of Pyyn Saha ja Höyläämö Ltd is a small family brand thus it has been concluded that the value of Pyyn Saha ja Höyläämö Ltd brand has only insignificant stand alone value for any acquirer and therefore no intangible assets related to Pyyn Saha ja Höyläämö Ltd brand is recognised. Technology Pyyn Saha ja Höyläämö Ltd did not have such technology at the acquisition date that would qualify for separate recognition as an intangible asset. Property, plant and equipment The management of Junnikkala Ltd has concluded that the carrying value Pyyn Saha ja Höyläämö Ltd’s property, plant and equipment reflect also the fair value of these assets thus no valuation adjustment is needed. The acquisition generated €10,000 goodwill, which was based on synergies expected to be gained, e.g. from wood procurement, cooperation in export markets and potentially from rationalization measures in administration to be taken in the future. If this acquisition had taken place with a corresponding holding already on 1 January 2008, it would have changed the consolidated figures of Junnikkala Group for the accounting period 1 January – 31 December 2008 as follows: consolidated revenue would have increased by about €478,000 and consolidated net profit would have increased by about €4,000. Pyyn Saha ja Höyläämö Ltd has not prepared any interim financial statements per 31 December 2007. Therefore above revenue and net income have been defined by assuming pro rata accumulation of both revenue and net income for Pyyn Saha ja Höyläämö Ltd during the period 1 October 2007 until 31 January 2008.
249 The following assets and liabilities were recognised relating to the acquisition: Fair value Fair value Book value at at acquisition adjustments acquisition €’000 €’000 €’000 Intangible assets Customer relationships 653 (653) — Tangible assets Land and water 226 — 226 Buildings and constructions 966 — 966 Machinery and equipment 2,586 — 2,586 Other tangible assets 342 — 342 Financial assets 1 — 1 Current assets Inventories 2,855 (402) 2,453 Non-interest bearing receivables 1,046 — 1,046 Cash and cash equivalents 8 — 8 Total assets 8,683 (1,055) 7,628 Deferred tax liabilities 485 (274) 211 Other non-current liabilities 3,624 — 3,624 Current liabilities 2,338 — 2,338 Total liabilities 6,446 (274) 6,172 Net assets 2,237 Acquisition cost 2,246 Net assets 2,237 Goodwill 10 Consideration: Cash paid 1,540 Transaction costs 46 Shares 660 Total consideration 2,246
4. Other operating income 2007 2008 €’000 €’000 Rental income 22 22 Other 363 76 Total 385 98
5. Employee benefits 2007 2008 €’000 €’000 Wages and salaries 3,113 3,305 Pension expenses (defined contribution plans) 569 573 Other social costs 339 371 Total 4,021 4,249
250 6. Depreciation, amortisation and impairment 2007 2008 €’000 €’000 Buildings 400 396 Machinery & equipment 1,194 1,390 Other tangible assets 63 63 Intangible assets 35 261 Impairment losses 5,007 Total 1,693 7,117
7. Finance income 2007 2008 €’000 €’000 Interest income 12 22 Dividend income 1 2 Foreign exchange gains 17 Total 13 41
8. Finance costs 2007 2008 €’000 €’000 Interest costs (593) (952) Foreign exchange losses — (87) Other finance costs — (16) Total (593) (1,055)
9. Income taxes 2007 2008 €’000 €’000 Current tax (expense)/benefit (887) 134 Change in deferred taxes (39) 1,493 Total (926) 1,627
Income taxes reconciliation 2007 2008 €’000 €’000 Profit before tax 3,773 (7,265) Income tax at 26 % statutory tax rate (981) 1,889 Effect of deferred tax assets not recognised — (219) Other differences 55 (43) Total adjustments 55 (262) Taxes in the income statement (926) 1,627
251 10. Property, plant and equipment Land and Buildings & Machinery & Other water structures equipment tangible assets Total €’000 €’000 €’000 €’000 €’000 Cost at 1 January 2007 724 8,294 20,458 825 30,301 Additions — 245 2,260 82 2,587 Disposals — — (213) — (213) Other movements — — — — — Cost at 31 December 2007 724 8,539 22,505 907 32,675 Accumulated depreciation at 1 January 2007 — 2,813 9,960 503 13,276 Additions — 400 1,194 63 1,657 Disposals — — (76) — (76) Other movements — — — — — Accumulated depreciation at 31 December 2007 — 3,213 11,078 566 14,857 Book value at 1 January 2007 724 5,481 10,498 322 17,025 Book value at 31 December 2007 724 5,325 11,426 340 17,815 Cost at 1 January 2008 724 8,539 22,505 906 32,674 Additions — 2,779 8,649 81 11,509 Acquisition 226 966 2,586 342 4,120 Disposals — — — — — Other movements — — 417 — 417 Cost at 31 December 2008 950 12,284 34,157 1,329 48,720 Accumulated depreciation at 1 January 2008 — 3,214 11,079 567 14,860 Additions — 396 1,390 63 1,849 Disposals — — — — — Impairment 101 1,003 3,289 79 4,472 Other movements — — — — — Accumulated depreciation at 31 December 2008 101 4,613 15,758 709 21,181 Book value at 1 January 2008 724 5,325 11,426 340 17,814 Book value at 31 December 2008 849 7,671 18,399 621 27,540 The Group performed impairment testing of its sawmill business in September and December, 2008. As a result of these tests, impairment was identified, and write-downs were recorded. Some of these write-downs considered the assets of the Junnikkala Group. The impacts of these write-downs are presented in note 6, Depreciation, Amortization and Impairment and in notes 10 and 11, Property, Plant and Equipment and Intangible assets, respectively.
252 11. Intangible assets Other Customer Goodwill intangibles relationships Total €’000 €’000 €’000 €’000 Cost at 1 January 2007 47 609 — 656 Increase — 39 — 39 Other changes — — — — Cost at 31 December 2007 47 648 — 695 Accumulated depreciation at 1 January 2007 — 515 — 515 Increase — 35 — 35 Other changes — — — — Accumulated depreciation at 31 December 2007 — 551 — 551 Book value at 1 January 2007 47 94 — 141 Book value at 31 December 2007 47 97 — 144 Cost at 1 January 2008 47 648 — 695 Increase — 169 — 169 Acquisitions 10 — 653 663 Other changes — — — — Cost at 31 December 2008 57 817 653 1,527 Accumulated depreciation at 1 January 2008 — 551 — 551 Increase — 62 199 261 Impairment 57 24 454 535 Other changes — — — — Accumulated depreciation at 31 December 2008 57 637 653 1,347 Book value at 1 January 2008 47 97 — 144 Book value at 31 December 2008 — 180 — 180 Ruukki Group performed impairment testing of its sawmill business in September and December, 2008. As a result of these tests, impairment was identified, and write-downs were recorded. Some of these write-downs considered the assets of the Junnikkala Group. The impacts of these write-downs are presented in note 6, Depreciation, Amortization and Impairment and in notes 10 and 11, Property, Plant and Equipment and Intangible assets, respectively.
12. Deferred tax assets 2007 2008 €’000 €’000 Temporary deductible difference in inventories — 118 Other temporary deductible differences — — Total — 118
13. Inventories 2007 2008 €’000 €’000 Goods and supplies 1,266 2,269 Finished products 4,923 4,577 Prepayments 1,122 309 Total 7,312 7,154
253 14. Trade receivables and other current receivables 2007 2008 €’000 €’000 Trade receivables 3,390 4,909 Prepaid expenses and accrued income 430 800 Total 3,820 5,709
15. Emission rights 2007 2008 €’000 €’000 Fair value at Jan 1 586 794 Sales proceeds during the year — (166) Fair value changes 208 (95) Total 794 532
16. Cash and cash equivalents 2007 2008 €’000 €’000 Cash and bank balances 152 45 Total 152 45
17. Deferred tax liability 2007 2008 €’000 €’000 Depreciation difference 1,145 180 Other timing differences 48 14 Emission rights 207 138 Total 1,400 332
18. Interest-bearing debt 2007 2008 €’000 €’000 Non-current Bank loans 7,492 13,423 Subordinated loans 400 — Total 7,892 13,423
19. Trade payables and other liabilities 2007 2008 €’000 €’000 Current Trade payables 2,851 5,963 Accrued expenses 1,844 1,237 Other liabilities 524 1,371 Total 5,220 8,571
254 20. Other current liabilities 2007 2008 €’000 €’000 Bank loans 4,348 8,669 Total 4,348 8,669
21. Share capital The equity reserves are described below: Share premium Related to the old Finnish Companies Act, the Company has share premium reserve in relation to old share issues, where the premium in excess of the par value of the shares subscribed has been recognised in share premium reserve. Paid-up unrestricted equity reserve Paid-up unrestricted equity reserve comprises other equity investments and subscription price of shares to the extent that it is not recognised in share capital based on a specific decision.
22. Capital and risk management Capital management It should be noted that there has not been any defined principles concerning management of capital at Junnikkala Group level. Junnikkala Ltd’s ultimate parent company Ruukki Group Plc has defined capital management principles at the ultimate parent company level. The Board of Directors of Ruukki Group Plc (a parent company of Junnikkala Ltd) has defined the principles concerning management of capital at Ruukki Group Plc level as follows: • the Group has a conservative approach to managing the Group’s debt/equity ratio; • return on capital employed will be optimised in all businesses; • cash flow generation is emphasised in all operations; and • cash reserves and financing capacity are supervised and administered in a centralised and conservative manner. There is a shareholders agreement dated 22 January 2008 between Ruukki Yhtiöt Ltd (subsidiary of the ultimate parent company Ruukki Group Plc) and minority shareholders in Junnikkala Ltd. According to this shareholders agreement none of the shareholders in Junnikkala Ltd are responsible to commit further financing to Junnikkala Ltd. Shareholders are not responsible to provide any securities or collateral to cover Junnikkala Ltd’s liabilities. It is also agreed in this shareholders agreement that subsequent financing shall be arranged by unsecured loans or if needed by using Junnikkala’s own securities. In the shareholders agreement it is also agreed that in any potential issuance of new shares or share options or similar rights, owners have a right to subscribe shares or share options or similar rights so that original ownership percentages remain. Dividend The annual shareholders meeting approved the proposed dividend amounting to €881,000. This dividend is deducted from retained earnings, but it has not yet been paid at the balance sheet date 31 December 2008. In 2007, the dividend declared and paid was €335,000.
255 23. Management of financial risks In its normal operations, the Junnikkala Group is exposed to various financial risks. Junnikkala Ltd has applied risk management procedures that are defined at the ultimate parent company level i.e. Ruukki Group level. The financial risk management issues described below are those that are relevant only at the Junnikkala level. Ruukki Group has defined that the objective of Group risk management is to minimise the adverse effects of the changes in the financial markets on the Group’s result. The main financial risks are foreign exchange rate, interest rate, liquidity and credit risks. The general risk management principles are determined by Ruukki Group Plc’s Board of Directors and monitored by its audit committee; the management of the business segments are responsible for their implementation. The Group has not, for the time being, had a centralised Group risk management organisation. When analysing risks the Group’s financial and operational information is utilized, and the Group has not used tools for risk measurement e.g. VaR (Value at Risk). The Group’s operations expose the Group and its business units to the following market risks: (i) foreign exchange rate risk; (ii) interest rate risk; (iii) credit risk; (iv) liquidity risk; and (v) commodity risks. (i) Foreign exchange rate risk Junnikkala Ltd exports from Finland to various countries. Junnikkala Group’s export activities represent approximately 30 per cent. of the total net sales. Exports from Finland may create an exposure in foreign currencies to Junnikkala Group. All significant expenses in Junnikkala Group are based on Euros thus there is no significant currency risk that relates to trade payables. Junnikkala does not have any foreign operations thus there is no translation risk. However, to manage the currency risk, the Group sometimes uses currency futures contracts. Sensitivity analysis compared with the actual currency rates 31 December 2007 The effect on the income statement as a result of a change in currency rates compared with the actual rates at 31 December is as follows: JPY USD GBP €’000 €’000 €’000 20% strengthening — 90 169 15% strengthening — 63 119 10% strengthening — 40 75 5% strengthening — 19 36 0% no change — — — -5% weakening — (17) (32) -10% weakening — (33) (62) -15% weakening — (47) (88) -20% weakening — (60) (113)
Note: Positive numbers represent an increase in income and negative numbers represent a decrease.
256 Sensitivity analysis compared with the actual currency rates 31 December 2008 The effect on the income statement as a result of a change in currency rates compared with the actual rates at 31 December is as follows: JPY USD GBP €’000 €’000 €’000 20% strengthening (11) 157 72 15% strengthening (7) 111 51 10% strengthening (5) 70 32 5% strengthening (2) 33 15 0% no change — — - -5% weakening 2 (30) (14) -10% weakening 4 (57) (26) -15% weakening 6 (82) (37) -20% weakening 7 (104) (48)
Note: Positive numbers represent an increase in income and negative numbers represent a decrease.
Main Assumptions: • The impacts of changes in currencies other than the Japanese yen, the US dollar and British pound are not considered significant to the Group and have not been included in the above analysis. (ii) Interest rate risk The Junnikkala Group is exposed to interest rate risk when the Group companies take loans or make other financing agreements. In addition, the changes in interest rates can influence the profitability of investments or the changes can alter the fair values of Group assets via the IFRS impairment tests. The Group also aims to match the loan maturities with the businesses’ needs and to have the maturities spread over various periods, whereby the Group’s interest rate risks are somewhat diversified. Floating rate financing is mainly tied to 3–12 months Euribor interest rates, the changes of which will then influence the Group’s total financing cost and cash flows. One component that affects the used weighted average cost of capital is the market interest rate and the changes in it. Any changes in the impairment tests’ outcome can change the Group’s financial result and assets’ value on the Group balance sheet. Sensitivity analysis compared with actual interest rates at 31 December 2007 The effect on the income statement as a result of a change in currency rates compared with the actual rates at 31 December is as follows: Change in average interest rate Interest income Interest expense Net effect €’000 €’000 €’000 -2.00% (3) 238 235 -1.50% (2) 178 176 -1.00% (2) 119 117 -0.50% (1) 59 58 0.00% — — — 0.50% 1 (59) (58) 1.00% 2 (119) (117) 1.50% 2 (178) (176) 2.00% 3 (238) (235)
Note: Positive numbers represent an increase in income and negative numbers represent a decrease.
257 Sensitivity analysis compared with actual interest rates at 31 December 2008 The effect on the income statement as a result of a change in currency rates compared with the actual rates at 31 December is as follows: Change in average interest rate Interest income Interest expense Net effect €’000 €’000 €’000 -2.00% (1) 383 382 -1.50% (1) 287 286 -1.00% — 192 192 -0.50% — 96 96 0.00% — — — 0.50% — (96) (96) 1.00% — (192) (192) 1.50% 1 (287) (286) 2.00% 1 (383) (382)
Note: Positive numbers represent an increase in income and negative numbers represent a decrease.
Main assumptions: • interest rates for deposits and loans change simultaneously as market rates change, however the interest rate of fixed rate deposits and loans remains remain unchanged; • the balance of loans and deposits is assumed to remain unchanged the whole year (compared with the balance sheet 31 December 2008); and • the interest rates of deposits and loans in different currencies change simultaneously as market rates change, and the changes are parallel. (iii) Credit risk Credit risk can be realised when the counterparties in commercial, financial or other agreements cannot meet their obligations and thus cause financial damage to the Group. Junnikkala Group applies the ultimate parent company Ruukki Group’s operational policies that define the creditworthiness requirements for customers and for counterparties in financial and derivate transactions, as well as the principles followed when investing cash and other liquid assets. In all the major sales agreements, the counterparty’s creditworthiness information is checked. Due to the general economic downturn that started in the second half of 2008, credit risk has increased; however, so far, the Group has not faced any major losses as a result. The Sawmill Business segment’s major market segment is the domestic house building industry. Changes in demand in this market area can considerably affect the segment’s profitability if no other customers from other segments can be found to replace the lost sales. In its commercial operation, the Junnikkala Group does not have any substantial concentrations of credit risk. In addition, the Group only sells with credit to those companies that have good creditworthiness, which are monitored on an ongoing basis through long standing relationships. The aging of trade receivables on the balance sheet date 2007 2008 €’000 €’000 Not past due 2,125 4,411 Past due 0-30 days 1,202 362 Past due 31-60 days 18 77 Past due 61-90 days 40 2 Past due more than 90 days 5 24 Impaired — 33 Total 3,390 4,909
258 (iv) Liquidity risk The Junnikkala Group applies policies defined by the ultimate parent company Ruukki Group Plc. The Group constantly assesses and monitors the investment and working capital needs and financing so that the Group has enough liquidity to serve and finance the operations and to pay back loans. The availability and flexibility of financing are targeted to be guaranteed by using multiple financial institutions in the financing and financial instruments, and to agree on financial limit arrangements. Cash flow forecasts on both incoming and outgoing cash flows are taken into account when the Group companies make decisions on liquidity management and investments as well as when they plan short-term and long-term financing needs. In addition, if necessary, the owners of Junnikkala Group will take appropriate action to ensure its liquidity. As a result of the significant deterioration in global economic conditions from late 2008, the Group breached their debt covenants in January 2010. A waiver has been signed on the 26 April 2010 in relation to this breach. Ruukki will invest €2,500,000 in a convertible note that would double the amount of shares in the company. Therefore, the Group’s liquidity position in the short term is considered to be adequate to ensure the Group’s obligations can be met as and when they fall due. If liquidity risks were realised, the group would incur overdue interest expenses and may suffer economic consequences as a result of a deterioration in relationships with goods and services suppliers. Specifically, the pricing and other terms for input goods and services and for financing could be affected. The maturity distribution of the Group debt at the balance sheet date Contractual 6 months More than cash flows or less 6-12 months 1-2 years 2-5 years 5 years €’000 €’000 €’000 €’000 €’000 €’000 Financial liabilities Secured bank loans 11,196 1,262 1,384 1,041 6,717 792 Convertible loans 528 528 — — — — Trade and other payables 6,845 6,842 — — — 3 Bank overdraft 2,323 22 2,301 — — — Total 31 December 2007 20,892 8,654 3,685 1,041 6,717 795
Contractual 6 months More than cash flows or less 6-12 months 1-2 years 2-5 years 5 years €’000 €’000 €’000 €’000 €’000 €’000 Financial liabilities Secured bank loans 23,892 2,886 2,940 6,715 9,324 2,027 Trade and other payables 8,624 7,491 — 1,130 — 3 Bank overdraft 3,688 54 57 94 283 3,200 Total 31 December 2008 36,204 10,431 2,997 7,939 9,607 5,230
(v) Commodity risks The Group is exposed to price risks on various output and input products, materials and commodities. Also, securing the availability of raw materials, without any major discontinuation, is essential to the industrial processes. In the sawmill business the price risks on input materials and commodities cannot be managed by pricing policies so that changes in input materials and commodities could be moved into sales prices.
259 The Group’s sawmills are exposed to the availability, quality and price fluctuations in raw materials and commodities. To diminish these risks, the Group’s business units try to enter into long-term agreements with known counterparties. The Junnikkala Group’s has increased the relative importance of its own procurement of logs. For the most part, as it is not possible or economically feasible to hedge commodity price risks in the Group’s operations with derivative contracts, the Group does not have any commodity derivate contracts in place as of 31 December 2008.
24. Related party transactions List of subsidiaries Junnikkala Ltd had following subsidiaries at the end of year 2008: Pyyn Liikekiinteistöt Ltd 100% Subsidiaries that have been merged during 2008 include Juneropt Ltd and Pyyn Saha ja Höyläämö Ltd. Ownership in these subsidiaries was 100 per cent. at the date of merger. Junnikkala Ltd had following subsidiaries at the end of year 2007: Juneropt Ltd 75% Management remuneration 2007 2008 €’000 €’000 Short-term benefits 200 230
25. Guarantees and contingent liabilities 2007 2008 €’000 €’000 Liabilities secured by mortgages Financial liabilities 5,389 15,040 Real estate mortgage 6,300 10,033 Corporate mortgage 4,000 11,446 Carrying amount of pledged shares 44 44 Total 10,344 21,523 Hire-purchase contract 1,483 7,113 Contingent liabilities and other commitments Operational lease liabilities Less than one year 9 92 More than one year 14 292 Total 23 384 Other commitments on behalf of Group Companies 3,595 2,745 Other commitments Commitments relating to acquisitions of forest. Value-added taxes – repayment obligation Building year 2005 1/5 101 Building year 2006 2/5 30 Building year 2007 3/5 73 Building year 2008 9/10 462 666
260 26. Subsequent events No material event or circumstances requires adjustment or further disclosure in the financial statements except for the fact that Junnikkala Ltd, has a number of debt agreements where there are financial covenants tied to, e.g, the profitability and capital structure of Junnikkala. At the end of the financial year 2009, those covenants were not yet breached; however, due to tight liquidity, Junnikkala Ltd has during the first quarter 2010 not been able to make all the repayments of capital to the financial institutions, and hence was in breach of its financing agreements (see note 23). In order to correct the situation, Ruukki has given a loan of €2,500,000 to Junnikkala Ltd as convertible bond, and the banking syndicate have postponed certain debt repayments by seven months starting from 1 January 2010, in effect extending the loan duration by seven months. The banks have on the 26 April 2010 by signing the contract with Junnikkala Ltd confirmed that Junnikkala was not in breach with any of the loan covenants. In addition, in 2009 Ruukki Group impairment testing did not highlight any requirement to further impair Junnikkala’s assets.
261 Section D – Historical financial information on EWW
Independent auditor’s report To Elektrowerk Weisweiler GmbH, Eschweiler-Weisweiler, Germany and Ruukki Group Plc, Espoo, Finland We have audited the accompanying financial statements of Elektrowerk Weisweiler GmbH, Eschweiler-Weisweiler, Germany (“EWW”), which comprise the statements of financial position as of December 31, 2007, and December 31, 2008, and the statements of comprehensive income, statements of changes in equity and cash flow statements for the years then ended and summaries of significant accounting policies and other explanatory notes. Management’s responsibility for the financial statements Management of EWW and the Directors of Ruukki Group Plc, Espoo, Finland are responsible for the preparation and fair presentation of these financial statements in accordance with International Financial Reporting Standards, as adopted by the EU. This responsibility includes: designing, implementing and maintaining internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error; selecting and applying appropriate accounting policies; and making accounting estimates that are reasonable in the circumstances. Auditor’s responsibility Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with International Standards on Auditing. Those Standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance whether the financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor’s judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity’s preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. Opinion In our opinion, the accompanying financial statements give a true and fair view of the financial position of EWW as of December 31, 2007, and December 31, 2008, and of its financial performance and its cash flows for the years then ended in accordance with International Financial Reporting Standards, as adopted by the EU. Cologne May 21, 2010
PricewaterhouseCoopers Aktiengesellschaft Wirtschaftsprüfungsgesellschaft Thomas Husemeyer ppa. Christian Dennler Wirtschaftsprüfer Wirtschaftsprüfer
262 The information in respect of EWW in this Section D of this Part VIII is presented in Euros and in accordance with IFRS.
SEPARATE FINANCIAL STATEMENTS OF ELEKTROWERK WEISWEILER GMBH FOR THE FINANCIAL YEARS 2007 AND 2008
Statements of Comprehensive Income Note 1.1.-31.12.2007 1.1.-31.12.2008 €’000 €’000 Revenue 3 57,235 74,498 Other operating income 4 1,767 1,403 Changes in inventories of finished goods and work in progress (6,193) (5,761) Raw materials and consumables used 5 (34,926) (52,744) Employee benefits expense 5 (8,093) (8,441) Depreciation and amortisation 5 (206) (136) Other operating expenses 6 (7,207) (6,270) Operating profit/loss 2,377 2,549 Finance income 81 329 Finance cost (216) (156) Impairment on investment 10 (1,545) — Finance result 7 (1,680) 173 Profit/loss before taxes 697 2,722 Income taxes 17 (1,059) (1,667) Profit/loss for the period/comprehensive income (362) 1,055
263 Statements of Financial Position Note 01.01.2007 31.12.2007 31.12.2008 €’000 €’000 €’000 ASSETS Non-current assets Property, plant and equipment 8 1,496 1,509 1,498 Intangible assets 9 4 7 31 Investment in subsidiary 10 2,145 — — Held-to-maturity financial assets 20 610 601 601 Deferred tax assets 17 1,242 1,166 1,205 5,497 3,283 3,335 Current assets Inventories 11 17,836 15,285 1,796 Trade and other receivables 12 5,705 10,127 18,400 Cash and cash equivalents 13 139 244 352 23,680 25,656 20,548 Assets held for sale 14 — 600 — Total assets 29,177 29,539 23,883 EQUITY AND LIABILITIES Share capital 100 100 100 Share premium 400 400 400 Retained earnings 6,024 5,156 6,211 Total equity 15 6,524 5,656 6,711 Non-current liabilities Pension liabilities 16 11,147 11,153 11,112 Other provisions 18 2,400 2,715 2,899 13,547 13,868 14,011 Current liabilities Trade and other payables 19 5,189 7,090 2,419 Provisions 18 107 25 60 Current tax liabilities 1,153 2,136 682 Interest-bearing debt 20 2,657 764 — 9,106 10,015 3,161 Total liabilities 22,653 23,883 17,172 Total equity and liabilities 29,177 29,539 23,883
264 Statements of Cash Flows Note 1.1.-31.12.2007 1.1.-31.12.2008 €’000 €’000 Operating activities Profit/(loss) for the period (362) 1,055 Adjustments to profit or loss: Non-cash items Depreciation and amortisation and impairment 8,9,10 1,760 136 Finance income and expense 126 (96) Income taxes 17 1,059 1,667 Gain or loss from sale of non-current assets — (10) Working capital changes Changes in trade receivables and other receivables (4,422) 7,024 Change in inventories 2,551 13,489 Change in trade payables and other debt 1,901 (4,671) Change in provisions 16,18 239 179 Interests paid (2) (18) Interests received 71 31 Income taxes paid — (3,160) Other changes (212) (202) Net cash from operating activities 2,709 15,424 Investing activities Capital expenditures on non-current assets (204) (172) Disposals of non-current assets — 19 Disposals of investment in subsidiary 14 — 600 Loan to Kermas Ltd. 22 — (15,000) Net cash used in investing activities (204) (14,553) Financing activities Dividends paid (507) — Repayment of borrowings (1,893) (763) Net cash used in financing activities (2,400) (763) Change in cash and cash equivalents 105 108 Cash at beginning of period 139 244 Cash at end of period 244 352 Change in the balance sheet 105 108
265 Statements of Changes in Equity
Share Share Retained Total capital premium earnings equity €’000 €’000 €’000 €’000 Equity at 1 January 2007 100 400 6,024 6,524 Loss for the period 1-12/2007 (362) (362) Dividend distribution (507) (507) Equity at 31 December 2007 100 400 5,156 5,656 Profit for the period 1-12/2008 1,055 1,055 Equity at 31 December 2008 100 400 6,211 6,711
For more details refer to Note 15.
266 Notes to the financial statements
1. Company information Elektrowerk Weisweiler GmbH, Eschweiler/Germany (“EWW” or “the Company”), is a non-listed company registered in company register with the number HR B 12240, Aachen/Germany. It has a history going back to 1917. The Company is today a world leader in the production of special grades of low carbon ferrochrome. It uses a sophisticated process with chrome ore from mines in Turkey as raw material, which is high in chromium and very low in undesirable impurities. This enables EWW to sell finished products of particularly high quality. In the period covered by these financial statements the operations of the Company changed significantly. Effective 1 March 2008, EWW and RCS Trading Malta Ltd, Floriana/Malta (RCS Ltd), entered into a toll manufacturing agreement (“the Agreement”). EWW committed to manufacture low carbon ferrochrome as a toll manufacturer from chrome ore provided by RCS and other raw materials on a cost-plus basis. As part of that move towards a new business model EWW sold almost all its inventories at book value to RCS Ltd. The Agreement initially had a term of one year with automatic extension if not cancelled with defined notice. On 29 October 2008 the Agreement was amended, thereby extending the initial term to five years. Further extensions are possible. At the time the Agreement was concluded RCS Ltd was a 100 per cent. owned subsidiary of Kermas Ltd. Effective 29 October 2008, Kermas sold its investment in RCS Ltd to Ruukki Company Plc, Oy, as part of a larger transaction. Thus, since November 2008, most of the Company’s business is carried out with RCS Ltd, now a subsidiary of Ruukki Company Plc, Oy. 100 per cent. of EWW’s share capital is owned by Kermas Limited, Tortola, British Virgin Islands, which is also a major shareholder of Ruukki Company Plc, Finland (29 per cent.). However, the Company has been consolidated into the Ruukki Company from the beginning of November 2008 based on SIC 12 principles and a comprehensive view of the facts and circumstances, which indicate that control exists. Therefore, the Ruukki Group Plc, Finland is considered the ultimate parent entity for IFRS purposes.
2. Accounting principles 2.1 Basis of Preparation These financial statements of Elektrowerk Weisweiler GmbH have been prepared in accordance with the International Financial Reporting Standards (IFRS) and in conformity with the International Accounting Standards (IAS) and IFRS standards as well as the Standing Interpretations Committee (SIC) and International Financial Reporting Interpretation Committee (IFRIC) interpretations, as adopted in the EU and being in force on 31 December 2009 (together the “IFRS”). These financial statements are the first financial statements prepared by EWW and Ruukki Group Plc, Finland, under IFRS for the financial years 2008 and 2007. They are presented on a voluntary basis, in addition to the individual financial statements which EWW is required to prepare under German accounting rules and principles (German GAAP), only for the purposes of the listing of Ruukki Group Plc. Note 2.2 provides a description of the effects of transitioning from German GAAP to IFRS. Until mid of 2008, the Company owned 100 per cent. of Turk Maadin Sirketi A.S., Istanbul/Turkey (“TMS”). EWW does not prepare consolidated financial statements because it is included in the consolidated financial statements of Ruukki Group Plc, Oy, since October 2008. Therefore, these financial statements represent the separate financial statements of EWW as defined in IAS 27 (2006). The interest held in TMS is shown as an investment in subsidiary and is not consolidated. EWW and Ruukki Group Plc, Finland, have chosen to measure that investment at cost in accordance with paragraph 37 of IAS 27.
267 Based on the above the following standards and interpretations that became effective on 1 January 2009 are applied: • IAS 1 Presentation of Financial Statements (as revised 2007) IASB revised IAS 1 in 2007. The standard separates owner and non-owner changes in equity. The statement of changes in equity will include only details of transactions with owners, with non-owners changes in equity presented as a single line. In addition, the revised standard requires a statement of comprehensive income to be presented as either two statements (income statement and statement of comprehensive income) or as one statement. However, the Company does not have items to be reported as “other comprehensive income”. Therefore, only one statement is presented, where the profit or loss for the period equals the comprehensive income for the period. • IAS 23 Borrowing Costs (as amended in 2007) The IASB issued an amendment to IAS 23 in April 2007. The revised IAS 23 requires capitalization of borrowing costs that are directly attributable to the acquisition, construction or production of a qualifying asset. The policy under the previous version of the standard would have been to expense borrowing costs as they were incurred. In accordance with the transitional provisions of the amended IAS 23, the standard was adopted on a prospective basis. Therefore, borrowing cost are capitalized on qualifying assets with a commencement date on or after 1 January 2009. Thus, there was no effect on these financial statements and there are no projects in 2009 to which the amended standard would apply. • IFRS 8 Operating Segments The Company does not present segment information in accordance with IFRS 8 as the standard only applies to listed companies. The following standards and interpretations that became effective on 1 January 2009 were also adopted but did not have a material effect on the financial statements because the Company does not have the items addressed in those pronouncements: • Improvements to IFRSs (May 2008) • IFRS 2 Share-Based Payment (Amendments) – vesting conditions and cancellations • Amendments to IFRS 7 Financial Instruments: Disclosures • IFRIC 13 Customer Loyalty Programmes • IAS 32 Financial Instruments: Presentation and IAS 1 Presentation of Financial Statements – Puttable Financial Instruments and Obligations arising on Liquidation • Amendments to IFRIC 9 Remeasurement of Embedded Derivatives and IAS 39 Financial Instruments: Recognition and Measurement • IFRIC 14 IAS 19 – The Limit on a Defined Benefit Asset, Minimum Funding Requirements and their Interaction The following standards and interpretations that were issued by the International Accounting Standards Board (IASB) but were not yet effective by the time these financial statements were authorized for issuance are not yet applied: • Improvements to IFRS (April 2009) • IFRS 3R Business Combination and IAS 27R Consolidated and Separate Financial Statements • IAS 39 Financial Instruments: Recognition and Measurement – Eligible Hedged Items • IAS 24 Related Parties (Amendments)
268 • IFRS 2 Share-Based Payment (Amendments) – Group Cash-Settled Share-based Payment Transactions • IFRIC 12 Service Concession Arrangements • IFRIC 15 Agreements for the Construction of Real Estate • IFRIC 16 Hedges of a Net Investment in a Foreign Operation • IFRIC 17 Distribution on Non-cash Assets to Owners • IFRIC 18 Transfers of Assets from Customers • IFRIC 19 Extinguishing Financial Liabilities with Equity Instruments • IFRS 9 Financial Instruments • Amendments to IFRIC 14 Prepayments of a Minimum Funding Requirement • Amendments to IAS 32 Classification of Rights Issues Those standards will not have a material impact on the financial statements of EWW. In particular, the revision to IAS 27 does not change the basis for presenting separate financial statements. The financial statements have been prepared on the basis of cost, unless otherwise explicitly stated. All the figures in the financial statements are given in EUR thousands. The statement of comprehensive income is presented using the nature-of-expense format. EWW’s and Ruukki Group’s Plc, Finland, management resolved on 20 May 2010 that these financial statements are authorised for issue. 2.2 Transition to IFRS These are the first financial statements which the Company presents under IFRS. EWW and Ruukki Group Plc, Finland, applied IFRS 1 First-time adoption of International Financial Reporting Standards (as issued in November 2008) in making the transition from German accounting rules and principles (“German GAAP”) to IFRS, with 1 January 2007 as the date of transition to IFRS. IFRS 1 requires that all IFRS standards and interpretations that are effective for the first IFRS separate financial statements for the year ended 31 December 2008, be applied consistently and retrospectively for all financial periods. For the purposes of these financial statements the IFRS accounting policies applied are consistent with the standards effective at the end of 31 December 2009, as further described in the notes. IFRS 1 provides exemptions and exceptions to the general principle of retrospective application of the IFRS accounting policies. The Company did not avail itself of any of those specific provisions including the amendment to IFRS 1 and IAS 27 (Cost of an Investment in a Subsidiary, Jointly Controlled Entity or Associate). Changes in presentation of the financial statements The presentation of the financial statements has been modified to comply with the requirements of IAS 1 Presentation of Financial Statements (as revised 2007). These changes primarily include: • Unlike German GAAP, IFRS requires the balance sheet to be classified into current and non-current items, both for assets and liabilities. An item is classified as current if management expects it to be realised or settled within twelve months after the balance sheet date. This impacts in particular the presentation of provisions other than pension provisions. • IAS 1 requires current and deferred tax assets and liabilities to be presented separately in the balance sheet. Deferred tax items must be presented as non-current. • EWW has a number of major spare parts that the Company intends to use over a longer period. While they are presented as inventories for German GAAP, IFRS requires their presentation as part of property, plant and equipment.
269 • IFRS has specific requirements for the presentation and measurement of assets or disposal groups which are in the process of being disposed of. If certain conditions are met, those assets must be presented separately in the balance sheet as assets (and/or liabilities) held for sale. EWW and Ruukki Group Plc, Finland, applied these requirements to its investment in TMS. • IFRS requires not just the presentation of an income statement but the presentation of a statement of comprehensive income, with an income statement as either an integral part of it or as a separate statement. However, the Company does not have items to be reported as “other comprehensive income”. Therefore, only one statement is presented, where the profit or loss for the period equals the comprehensive income for the period. • Under German GAAP, some liabilities are presented as provisions even though the timing and amount of the future outflow can be determined with a high degree of accuracy. For IFRS such items are no longer presented as provisions but are considered “accruals”, which are includes in trade and other payables. • When provisions other than pension provisions are discounted under IFRS, the increase in the provision due to the passage of time (also referred to as “unwinding of discount”) must be presented as finance cost. However, the interest cost component arising from pension obligations measured in accordance with IFRS (IAS 19) is presented as part of employee benefits expenses, i.e. in operating profit or loss. • Under German GAAP, taxes other than income taxes are presented separately below profit before taxes. This is not permitted by IFRS. Therefore, they were included in operating profit as other operating expense. • Under IFRS the primary financial statements also include a statement of cash flows and a statement of changes in equity, which are not required under German GAAP for non-listed companies. Reconciliation of equity and profit or loss for the period Reconciliation of equity from German GAAP to IFRS Note 01.01.2007 31.12.2007 31.12.2008 €’000 €’000 €’000 Equity under German GAAP 6,900 6,307 6,748 Pension provisions a (3,854) (3,806) (3,624) Environmental provision b 829 1,064 665 Provisions not permitted by IFRS c 1,288 770 1,643 Trade receivables d 72 155 74 Inventories e 47 — — Deferred taxes assets f 1,242 1,166 1,205 Total adjustments (376) (651) (37) Equity under IFRS 6,524 5,656 6,711
Reconciliation of profit or loss for the period from German GAAP to IFRS Note 2007 2008 €’000 €’000 Profit or loss for the period under German GAAP (86) 441 Pension provisions a 48 182 Environmental provision b 235 (399) Provisions not permitted by IFRS c (519) 873 Trade receivables d 83 (81) Inventories e (46) — Deferred taxes f (77) 39 Total adjustments (276) 614 Profit or loss for the period under IFRS (362) 1,055
270 a. Pension provisions Pension provisions are measured differently for IFRS than for German GAAP. German GAAP uses a tax driven measurement approach whereas the measurement under IFRS is based on IAS 19. The latter standard requires the pension provision to be measured using the projected unit credit method. The key parameters used may change from one reporting date to next. The so-called “corridor method” for the recognition of actuarial gains and losses has been adopted. Under this method, actuarial gains or losses will be recognised only if they exceed a corridor of 10 per cent. around the higher amount of defined benefit obligation and plan assets as defined in IAS 19. If that corridor is not exceeded the actuarial gains and losses are not recognised as part of the pension provision recognised in the balance sheet. The Company had a sufficient basis for determining the amount of the pension liability as of 1 January 2007 based on the corridor approach, so it did not avail itself of the exemption provided by IFRS 1 to record the total funded status as pension liability. Some of the Company’s pension obligations are covered by an employee benefit fund (so-called “Unterstützungskasse”). Under German GAAP, the obligations covered by that fund are not reported as obligations of the Company in the balance sheet but rather all contributions into that fund are recognised as expense when incurred. For IFRS, the funded obligations are reported as part of the Company’s defined benefit obligation and its share of the assets of the fund qualify as plan assets, which are measured at fair value and set off against the related pension obligation in the balance sheet at each reporting date. Correspondingly, the expense related to the funded obligations, net of the expected return on plan assets, is recognised in the income statement as part of employee benefits expense. For more details on pensions and similar obligations refer to Note 16. b. Environmental provision Under German GAAP, EWW recognised a provision in connection with the environmental obligations resulting from the slag pit Atzenau. Since the related environmental measures will be performed by 2018, the provision is long-term in nature. IFRS requires a long-term other provision to be discounted to its present value at the reporting date. The discount rate has to be determined as a risk-free rate consistent with the term of the liability and is reviewed at each reporting date and therefore may change depending on capital markets developments. The discount factors used to measure the provision were 3.0 per cent. (31 December 2008), 4.4 per cent. (31 December 2007) and 4.0 per cent. (1 January 2007). They were derived from long-term German government bonds. c. Provisions not permitted by IFRS While under German GAAP certain provisions may be recognized even if no external obligation exists, IFRS requires such obligation to exist. Therefore, provisions that did not meet the requirements of IFRS had to be reversed. Accordingly, the use of the provision as recorded for German GAAP, is presented as expense for IFRS purposes. d. Trade receivables German GAAP permits that a general valuation allowance is recorded on trade receivables. Such general allowance is not permitted by IFRS (IAS 39) and therefore had to be reversed. e. Inventories Under German GAAP inventories may be impaired if the price of repurchasing relevant materials has decreased at balance sheet date. IFRS (IAS 2) requires a write-off on inventories only if the net realisable value, i.e. the selling price of the inventories less any cost to completion, is lower than the carrying amount of the inventories.
271 f. Deferred taxes Under the approach for deferred taxes in German GAAP, no deferred taxes had to be recognised. Under IFRS deferred taxes have been recognised for all taxable temporary differences and in the case of deductible temporary differences to the extent that it is probable that taxable profit will be available against which the deductible temporary difference can be utilised. For more details on deferred taxes refer to Note 17. 2.3 Operating profit IAS 1 Presentation of financial statements does not define the concept of operating profit. EWW and Ruukki Group Plc, Finland, have defined it as follows: Operating profit is the net amount derived by adding to revenue other operating income, less purchase costs adjusted with the change in inventories of finished goods and work in progress and expenses from work performed by the enterprise and capitalized, less costs from employee benefits, depreciation and amortisation, and other operating expenses. All other income statement items are excluded from operating profit. Translation differences arising from operational transactions with third parties are included in operating profit (as either other operating income or expense). 2.4 Income recognition principles 2.4.1 Goods sold and services provided Income from the sale of goods is recognised once the substantial risks and benefits associated with ownership have been transferred to the buyer. Income from services is recognised after the service has been provided. In February 2008, the Company entered into a toll manufacturing agreement. Therefore, revenue represents amounts billed under the terms of this agreement on a cost-plus basis for manufacturing services. Up to February 2008, the Company had sold its own finished products. 2.4.2 Financial income and expenses Interest income and expense is recognised using the effective interest method, and dividends are recognised when the right for dividends is established. The unwinding of the discount for provisions is also presented as finance expense. 2.5 Employee benefits 2.5.1 Pension liabilities The Company operates several defined benefit pension plans. The obligations relating to those plans have been measured by actuarial calculations. The pension scheme is accounted for by recognising a provision on the balance sheet. The benefits granted are partly funded. The obligation to provide benefits under the terms of the defined benefit plans is determined separately for each plan using the projected unit credit method. Actuarial gains and losses are recognised as income or expense when the net cumulative unrecognised actuarial gains or losses for each individual plan at the end of the previous reporting period exceeded 10 per cent. of the higher of the defined benefit obligation and the fair value of plan assets at that date. These gains or losses are recognised over the expected average remaining working lives of the employees participating in the plans. The defined benefit asset or liability comprises the present value of the defined benefit obligation (using a discount rate based on high quality corporate bonds), less unrecognised actuarial gains or losses, past service costs not yet recognised and less the fair value of plan assets out of which the obligations are to be settled. Plan assets are assets held by a long- term employee benefit fund. The assets are not available to the creditors of the Company nor can they be paid directly to the Company unless in the latter case the assets are returned to the reporting entity to reimburse it for employee benefits already paid. Fair value is
272 based on market price information and in the case of quoted securities it is the published bid price. The value of any pension asset recognised is limited to the sum of any past service costs not yet recognised and the present value of any economic benefits available in the form of refunds from the plan or reductions in the future contributions to the plan. As part of its transition to IFRS, the EWW and Ruukki Group Plc, Finland, elected not to recognise the full amount of the defined benefit obligation as of 1 January 2007. 2.6 Impairment On each balance sheet date, the EWW and Ruukki Group Plc, Finland, make an assessment of whether there are any indications of asset impairment. If such indications exist, the recoverable amount of the asset is estimated. Impairment is reviewed at the cash-generating unit level; in other words, the lowest level of asset grouping that is primarily independent of other assets and whose cash flows can be separated from other cash flows. The recoverable amount is the fair value of an asset less costs to sell, or the higher value in use. Value in use means the present value of estimated future cash flows expected to arise from the asset or cash-generating unit. Value in use is forecast on the basis of circumstances and expectations at the time of testing. The discount rate takes into account the time value of money as well as the special risks involved for each asset, different industry-specific capital structures in different lines of business, and the investors’ return expectations for similar investments, in addition to the specific risks related to these particular businesses. An impairment loss is recorded when the carrying amount of an asset (or a cash-generating unit) is greater than its recoverable amount. Impairment losses are recorded in the income statement. If the impairment loss involves a cash-generating unit, it is allocated to the assets in that unit on a pro rata basis but not below the recoverable amount of the individual asset. An impairment loss is reversed if a change has occurred in circumstances and the recoverable amount of the asset has changed since the impairment loss was recognised. However, the reversal must not cause the adjusted value to be higher than the carrying amount without the recognition of the impairment loss. Upon transition to IFRS no additional impairment had to be recorded. 2.7 Provisions Provisions are recognised when the Company has a present obligation (legal or constructive) as a result of a past event, it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation and a reliable estimate can be made of the amount of the obligation. Where the Company expects some or all of a provision to be reimbursed, for example under an insurance contract, the reimbursement is recognised as a separate asset but only when the reimbursement is virtually certain. The expense relating to any provision is presented in the income statement net of any reimbursement. If the effect of the time value of money is material, provisions are discounted using a current pretax rate that reflects, where appropriate, the risks specific to the liability. Where discounting is used, the increase in the provision due to the passage of time is recognised as a finance cost. 2.8 Income taxes Tax expenses in the income statement consist of the tax based on taxable income for the year and deferred taxes. Taxes based on taxable income for the year are calculated using the applicable tax rates. Taxes are adjusted for any taxes arising from previous years. Deferred taxes have been calculated for all temporary differences between the carrying amount and taxable amount. Deferred taxes have been calculated using the tax rates enacted or substantially enacted at the balance sheet date. Deferred tax assets arising from taxable losses carried forward have been recognised up to the amount for which there is likely to be taxable income in the future, and against which the temporary difference can be used. 2.9 Tangible assets Tangible assets have been measured at original acquisition cost less accumulated depreciation and impairment losses. If a tangible asset item consists of several parts with different useful lives, a components approach is applied. In this case, expenses from material component replacements
273 are capitalised. Heavy production machinery contains components with different useful lives, and thus a component approach is applied. Material component replacements and overhauls are capitalised. Lighter machinery’s and other intangible items’ repair and maintenance are recognised as expense as incurred. Tangible assets are depreciated over their useful lives using the straight-line method. Land is not depreciated. The estimated useful lives of assets are as follows: Buildings 10 – 50 years Machinery and equipment 5 – 20 years Other tangible assets 3 – 10 years 2.10 Intangible assets Intangible assets are initially recognised on the balance sheet at cost when the costs can be reliably determined and it is probable that the expected financial benefits of those assets will be reaped by the Company. The intangible assets of EWW mainly relate to IT software utilised as support to the Company’s business operations, which is amortised over a period of 3–5 years. 2.11 Inventories Inventories are measured at acquisition cost or a lower net realisable value. Acquisition costs are determined using the average cost method. The cost of finished goods and work in progress comprises raw materials, direct labour expenses, other direct expenses, and an appropriate share of fixed and variable production overheads based on the normal capacity of the production facilities. In ordinary operations, the net realisable value is the estimated selling price that is obtainable, less the estimated costs incurred in completing the product and the selling expenses. 2.12 Financial assets and liabilities 2.12.1Financial assets Initial recognition and measurement Financial assets within the scope of IAS 39 are classified as financial assets at fair value through profit or loss, loans and receivables, held-to-maturity investments, available-for- sale financial assets, or as derivatives designated as hedging instruments in an effective hedge, as appropriate. The Company determines the classification of its financial assets at initial recognition. All financial assets are recognised initially at fair value plus, in the case of investments not at fair value through profit or loss, directly attributable transaction costs. Purchases or sales of financial assets that require delivery of assets within a time frame established by regulation or convention in the marketplace (regular way trades) are recognised on the trade date, i.e. the date that the Company commits to purchase or sell the asset. The Company’s financial assets include cash and short-term deposits, trade and other receivables, loan and other receivables categorized as loans and receivables and unquoted financial instruments categorized as held-to-maturity investments. The Company does not have derivative financial instruments nor has it designated any financial assets upon initial recognition as at fair value through profit or loss nor has it any available-for-sale financial assets. Subsequent measurement The subsequent measurement of financial assets depends on their classification as follows: Financial assets at fair value through profit or loss Financial assets at fair value through profit or loss include financial assets held for trading and financial assets designated upon initial recognition at fair value through profit or loss. The Company does not have financial assets at fair value through profit or loss.
274 Loans and receivables Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. After initial measurement, such financial assets are subsequently measured at amortised cost using the effective interest rate method (EIR), less impairment. Amortised cost is calculated by taking into account any discount or premium on acquisition and fee or costs that are an integral part of the EIR. The EIR amortisation is included in finance income in the income statement. The losses arising from impairment are recognised in the income statement in finance costs. Held-to-maturity investments Non-derivative financial assets with fixed or determinable payments and fixed maturities are classified as held-to maturity when the Company has the positive intention and ability to hold it to maturity. After initial measurement, held-to maturity investments are measured at amortised cost using the effective interest method, less impairment. Amortised cost is calculated by taking into account any discount or premium on acquisition and fee or costs that are an integral part of the EIR. The EIR amortisation is included in finance income in the income statement. The losses arising from impairment are recognised in the income statement in finance costs. Available-for-sale financial investments Available-for-sale financial investments include equity and debt securities which are neither classified as held for trading nor designated at fair value through profit or loss. After initial measurement, available-for-sale financial investments are subsequently measured at fair value with unrealised gains or losses recognised as other comprehensive income in the available-for-sale reserve until the investment is derecognised. The Company does not have available-for-sale financial instruments. Derecognition A financial asset (or, where applicable a part of a financial asset or part of a Company of similar financial assets) is derecognised when: • the rights to receive cash flows from the asset have expired; • the Company has transferred its rights to receive cash flows from the asset or has assumed an obligation to pay the received cash flows in full without material delay to a third party under a ‘pass-through’ arrangement; and either (a) the Company has transferred substantially all the risks and rewards of the asset; or (b) the Company has neither transferred nor retained substantially all the risks and rewards of the asset, but has transferred control of the asset. 2.12.2Financial liabilities Presentation principles Liabilities are classified as either current or non-current, and they include both interest bearing and interest-free liabilities. Interest bearing liabilities include liabilities that either include a contractual interest component, or are discounted to reflect the fair value of the liability. Initial recognition and measurement Financial liabilities within the scope of IAS 39 are classified as financial liabilities at fair value through profit or loss, loans and borrowings, or as derivatives designated as hedging instruments in an effective hedge, as appropriate. The Company determines the classification of its financial liabilities at initial recognition. All financial liabilities are recognised initially at fair value and in the case of loans and borrowings, plus directly attributable transaction costs. The Company’s financial liabilities include trade and other payables, bank overdrafts and loans and borrowings, all categorized as financial liabilities at amortised cost.
275 Subsequent measurement The measurement of financial liabilities depends on their classification as follows: Financial liabilities at fair value through profit or loss Financial liabilities at fair value through profit or loss includes financial liabilities held for trading and financial liabilities designated upon initial recognition as at fair value through profit or loss. The Company does not have derivative financial instruments nor has it designated any financial liabilities upon initial recognition as at fair value through profit or loss. Loans and borrowings After initial recognition, interest bearing loans and borrowings are subsequently measured at amortised cost using the effective interest rate method. Gains and losses are recognised in the income statement when the liabilities are derecognised as well as through the effective interest rate method (EIR) amortisation process. Amortised cost is calculated by taking into account any discount or premium on acquisition and fee or costs that are an integral part of the EIR. The EIR amortisation is included in finance cost in the income statement. Derecognition A financial liability is derecognised when the obligation under the liability is discharged or cancelled or expires. When an existing financial liability is replaced by another from the same lender on substantially different terms, or the terms of an existing liability are substantially modified, such an exchange or modification is treated as a derecognition of the original liability and the recognition of a new liability, and the difference in the respective carrying amounts is recognised in the income statement. Derivative financial instruments and hedge accounting Derivative contracts are measured at fair value in the income statement. The Company does not have derivatives and does not apply hedge accounting. 2.13 Interest costs Interest costs are recognised as an expense in the period in which they are incurred. Arrangement fees linked to loan commitments are entered as transaction costs. Non-current liabilities are valued at amortised cost using the effective interest method. 2.14 Non-current assets held for sale and discontinued operations The standard IFRS 5 requires that an entity must classify a non-current asset or a disposal of a group of as assets as held for sale if the carrying amounts are recovered primarily from the sale of the item rather than from its continued use. In this case, the asset or the disposal group must be available for immediate sale in its present condition under general and standard terms for the sale for such assets and the sale must be highly probable. At the end of the financial year 2007, the Company was in advanced negotiations about the disposal of its investment in TMS. That investment, which was transferred to the buyers in 2008, has been presented on the Company’s balance sheet at 31 December 2007 as asset held for sale. 2.15 Foreign currency translation The Company’s separate financial statements are presented in Euros, which is the Company’s functional currency. That is the currency of the primary economic environment in which EWW operates. Transactions in foreign currencies (e.g. US dollar) are initially recorded at the functional currency prevailing at the date of the transaction. Receivables and payables denominated in foreign currencies are retranslated at the functional currency spot rate of exchange ruling at the balance sheet date. All differences are taken to the income statement, either in operating income or expense.
276 2.16 Accounting policies requiring management discretion and key uncertainty factors for estimates The preparation of the Company’s financial statements requires management to make judgments, estimates and assumptions that affect the reported amounts of revenues, expenses, assets and liabilities, and the disclosure of contingent liabilities, at the reporting date. However, uncertainty about these assumptions and estimates could result in outcomes that require a material adjustment to the carrying amount of the asset or liability affected in future periods. Judgments The most significant judgment made in the process of applying the Company’s accounting policies relates to the presentation of the investment in TMS as asset held for sale as of 31 December 2007. This was on an evaluation of the state of negotiation about the disposal at that date. Estimates and assumptions The key assumptions concerning the future and other key sources of estimation uncertainty at the balance sheet date, that are significant of causing a material adjustment to the carrying amount of assets and liabilities within the next financial year are discussed below. Impairment of investment in TMS In 2007, EWW and Ruukki Group Plc, Finland, reviewed the recoverability of the investment in TMS and finally reduced the carrying amount to its estimated fair value less cost to sell in light of the ongoing negotiations. The fair value was determined based on the equity value of that subsidiary (refer to Note 22). Environmental provision related to slag pit Atzenau The Company has a right to use Atzenau, a former open cast quarzit mine, as pit for slag resulting from its production process. As a result of that activity EWW is obligated to engage in certain environmental measures. Those measures are specified in an official decree and approved by the relevant mining authority. Key input factors in the measurement of that environmental provision are the estimates of EWW and Ruukki Group Plc, Finland, on the timing of the related measures and the cost involved and as well as the appropriate discount rate. The measures are currently planned to be performed in 2018. The amounts involved were determined based on an external expert’s report. Due to this extended period of time, the provision needs to be discounted at an appropriate rate, which is a risk-free rate. That discount rate was derived from government bonds with appropriate terms. As of 31 December 2008 the discount rate amounted to 3.0 per cent. (31 December 2007: 4.4 per cent.; 1 January 2007: 4.0 per cent.). Also refer to note 18.
3. Revenue 2007 2008 €’000 €’000 Manufacturing contracts 56,438 22,385 Rendering of services 376 23,827 Sale of goods 421 28,286 Total 57,235 74,498
Since November 2008, revenue is mainly generated with RCS Ltd. The increase in the revenue from sale of goods is primarily due to the sale of most of the Company’s inventory to RCS Ltd in connection with the change to a toll manufacturing operation.
277 4. Other operating income 2007 2008 €’000 €’000 Foreign currency gains 614 1,014 Gain on disposal of various assets 315 146 Insurance compensations 336 — Other 502 243 Total 1,767 1,403
Other includes a variety of individually insignificant items.
5. Expenses by nature Raw materials and consumables used 2007 2008 €’000 €’000 Raw materials and merchandise 32,044 48,987 Purchased services 2,882 3,757 Total 34,926 52,744
The increase in 2008 is primarily due to the sale of almost all inventories to RCS Ltd. Employee benefits expense 2007 2008 €’000 €’000 Salaries and wages 5,494 5,747 Pensions, defined contribution plans 525 510 Pensions, defined benefit plans 786 804 Other employee related costs 1,288 1,380 Total 8,093 8,441
Expense related to defined contribution plans reflects the employer’s payments to the state-run pay-as- you go pension scheme. Pension expense for defined benefit plans includes the additional pension cost to be recognised for the period, including interest expense, as well as the expected return on plan assets. For more details on defined benefit plans refer to Note 16. Other employee related costs include a variety of benefits and cost, eg vacation pay and early retirement. Depreciation and amortization 2007 2008 €’000 €’000 Depreciation/amortisation by asset category Intangible assets 7 9 Property, plant and equipment 199 127 Total 206 136
For further details refer to Note 8 and 9.
278 6. Other operating expense 2007 2008 €’000 €’000 Slag removal cost 405 1,845 Repair and maintenance 1,854 955 Freight 2,065 524 Foreign currency losses 522 843 Insurance 441 399 Other 1,920 1,704 Total 7,207 6,270
Slag removal cost include the ongoing cost of removing slag arising from EWW’s production process as well as the changes in the provision related to the slag pit Atzenau (other than unwinding of discount). Other includes a variety of individually insignificant items.
7. Finance result 2007 2008 €’000 €’000 Finance income Interest income 81 329 Finance cost Interest expense 152 79 Unwinding of discount 55 77 Other 9— 216 156 Impairment on investment 1,545 — Total (1,680) 173
Interest income for 2008 includes accrued interest of €298,000 on the loan to Kermas Ltd. For details on the impairment on investment, refer to Note 10.
279 8. Property, plant and equipment Land and Buildings Machinery Other similar and and tangible property constructions equipment assets Total €’000 €’000 €’000 €’000 €’000 Balance at 1.1.2008 553 7,152 42,643 973 51,321 Additions — — 92 47 139 Reclassification — (289) 288 1 — Disposals — — (15) (9) (24) Balance at 31.12.2008 553 6,863 43,008 1,012 51,436 Accumulated depreciation 01.01.2008 — 6,777 42,215 820 49,812 Depreciation charge for the period — 12 65 50 127 Reclassification — (80) 80 — — Disposals — — — 1 1 Accumulated depreciation at 31.12.2008 — 6,709 42,360 869 49,938 Carrying amount at 1.1.2008 553 375 428 153 1,509 Carrying amount at 31.12.2008 553 154 648 143 1,498 Balance at 1.1.2007 553 7,152 42,589 846 51,140 Additions — — 54 158 212 Disposals — — — (31) (31) Balance at 31.12.2007 553 7,152 42,643 973 51,321 Accumulated depreciation at 01.01.2007 — 6,748 42,088 808 49,644 Depreciation charge for the period — 29 127 43 199 Disposals — — — (31) (31) Accumulated depreciation at 31.12.2007 — 6,777 42,215 820 49,812 Carrying amount at 1.1.2007 553 404 501 38 1,496 Carrying amount at 31.12.2007 553 375 428 153 1,509
9. Intangible Assets Intangible assets €’000 Balance at 1.1.2008 546 Additions 33 Balance at 31.12.2008 579 Accumulated amortisation at 01.01.2008 539 Amortisation charge for the period 9 Accumulated amortisation at 31.12.2008 548 Carrying amount at 1.1.2008 7 Carrying amount at 31.12.2008 31 Balance at 1.1.2007 537 Additions 9 Balance at 31.12.2007 546 Accumulated amortisation at 01.01.2007 533 Amortisation charge for the period 6 Accumulated amortisation at 31.12.2007 539 Carrying amount at 1.1.2007 4 Carrying amount at 31.12.2007 7
280 10. Investment in subsidiary This item included the investment in Turk Maadin Sirketi A.S. (TMS). The investment is carried at cost. In 2007, EWW and Ruukki Group Plc, Finland, reviewed the recoverability of the investment in TMS. Since the investee incurred significant operating losses during the current and prior periods, the Company took an impairment of €1,545,000 on the investment, reducing its carrying amount to the estimated fair value of €600,000. In addition, EWW began negotiations about the disposal of its investment in TMS to its shareholder Kermas Ltd, which were so advanced by the end of the financial year 2007 that the disposal was probable. The investment was thus presented as of 31 December 2007 as asset held for sale under IFRS 5 at its estimated fair value less cost to sell, which amounted to €600,000. The investment was actually sold in June 2008 and fully paid in cash.
11. Inventories 01.01.2007 31.12.2007 31.12.2008 €’000 €’000 €’000 Materials and supplies 5,399 9,040 1,312 Finished products 12,437 6,245 484 17,836 15,285 1,796
In 2008, inventories decreased significantly due to their sale in connection with the change to a toll manufacturing operation. Due to the change to a toll manufacturing operation inventories with a carrying amount of €11,800,000 have been sold to RCS. No write-offs needed to be recognised in 2007 and 2008.
12. Trade and other receivables 01.01.2007 31.12.2007 31.12.2008 €’000 €’000 €’000 Trade receivables 5,401 8,691 2,529 thereof from related parties (Kermas) 370 52 — thereof from RCS Ltd (related party since October 2008) (1,505) 2,333 Loan receivables from Kermas Ltd — — 15,298 Other receivables 304 1,436 573 Total 5,705 10,127 18,400
Other receivables mainly contain energy tax and insurance claims. In 2007, this item included VAT claims of €825,000. The Company did not record a valuation reserve on its receivables due to most of them being protected by the German export protection scheme Hermes. Based on the past experience of the Company, no valuation allowances had to be recorded on receivables from unrelated parties. No valuation allowance is recorded on receivables from related parties. For terms and conditions relating to related party receivables, refer to Note. Based on the Company’s past experience with its shareholder and with RCS Ltd, there is no indication that any balances outstanding may not be recoverable. The loan receivable from Kermas Ltd includes accrued interest of €298,000. Trade and other receivables are due within twelve months, therefore their fair value approximates the carrying amount.
281 Maturity schedule Overdue but not impaired Between 31 Between 61 Between 91 Not due 30 days and 60 days and 90 days and 120 days >120 days Total €’000 €’000 €’000 €’000 €’000 1.1.2007 Trade receivables 3,637 524 500 77 208 455 5,401 Other receivables 304 — — — — — 304 5,705 31.12.2007 Trade receivables 6,400 1,589 655 38 — 9 8,691 Other receivables 1,436 — — — — — 1,436 10,127 31.12.2008 Trade receivables 2,086 91 152 200 — — 2,529 Loan receivables from Kermas 15,000 52 50 65 55 76 15,298 Other receivables 573 — — — — — 573 18,400
13. Cash and cash equivalents Cash and cash equivalents represent liquid funds at bank.
14. Assets held for sale At 31 December 2007, the investment in TMS was classified as asset held for sale (refer to Note 10).
15. Issued capital and reserves The Company has share capital of €100,000, which is fully paid. The share capital is 100 per cent. owned by Kermas Ltd. The share premium represents additional amounts paid in by the shareholder. This part of equity may only be distributed subject to restrictive German legal requirements. Retained earnings represent the accumulated profits or losses of the Company. They also include the effects of transitioning to IFRS (refer to Note 2.2). In 2007, a dividend of €506,970.85 was paid to Kermas Ltd. for the financial year 2006. The amount of the dividend is based on the German GAAP financial statements. No dividends were declared for the financial years 2007 and 2008.
16. Pension and similar obligations Defined benefit plan The Company has two defined benefit plans which are final salary plans. The first plan was closed in December 1992 and the second plan was put in place five years later, based on a works council agreement as of 1 January 1997. The portion of the benefit obligations arising after 1997 is funded through contributions to a multi employer fund (so-called “Unterstützungskasse”) operated by an insurance company. For the purposes of IFRS, the portion of the assets in the fund attributable to EWW qualifies as plan assets and therefore is netted against the related pension obligations in the balance sheet.
282 Pensions obligation 01.01.2007 31.12.2007 31.12.2008 €’000 €’000 €’000 Presented value of defined benefit obligation (DBO) 14,111 12,824 13,082 Fair value of plan assets 2,022 2,438 2,660 12,089 10,386 10,422 Unrecognised actuarial gains (losses) (942) 767 690 Net liability 11,147 11,153 11,112
Movements in defined benefit obligation 01.01.2007 31.12.2007 31.12.2008 €’000 €’000 €’000 DBO at 1 Jan 15,058 14,111 12,824 Benefits paid by the plan 488 525 548 Current service costs 268 254 217 Interest expense 593 638 715 Transfers — 5 — Actuarial (gains) losses (1,320) (1,659) (126) Closing Balance 31.12 14,111 12,824 13,082
Movements in the fair value of plan assets 01.01.2007 31.12.2007 31.12.2008 €’000 €’000 €’000 Fair value of the plan assets at 1 Jan 1,383 2,022 2,438 Expected return on plan assets 74 106 128 Benefits paid by the plan 35 45 51 Actuarial (gains) losses (363) (50) 199 Contributions paid into the plan 237 305 344 Closing Balance 31.12 2,022 2,438 2,660
The fund invests in a variety of securities which belong to the category other. Expense recognized in profit or loss 31.12.2007 31.12.2008 €’000 €’000 Current service cost 254 217 Interest cost 638 715 Expected return on plan assets (106) (128) 786 804
The expense related to the Company’s pension obligation is included in employee benefit expense. Principal actuarial assumptions 01.01.2007 31.12.2007 31.12.2008 €’000 €’000 €’000 Discount rate 4.60% 5.70% 5.85% Expected return on plan assets 5.00% 5.00% 5.00% Expected rate of salary increase 2.50% 3.00% 3.00% Inflation 2.00% 2.00% 2.25%
The discount rate is determined on the basis of high-quality German corporate bonds with an appropriate term.
283 The expected return on plan assets was determined based on information about returns on life insurance companies. The actual return on plan assets in 2008 was -2.9 per cent. (2007:+7.7 per cent.). Expected salary and inflation reflect management’s expectation of the increase in salaries and prices in the long-term. The biometrical assumptions are based on the mortality tables “Richttafeln 2005 G”. All assumptions were developed with the support of external advice by actuaries. Historical information 01.01.2007 31.12.2007 31.12.2008 €’000 €’000 €’000 Unfunded DBO 9,666 8,784 8,961 Funded DBO 4,445 4,040 4,121 Total DBO (14,111) (12,824) (13,082) Fair value of plan assets 2,022 2,438 2,660 Funded Status (12,089) (10,386) (10,422) Experience adjustments on plan liabilities — 185 (172) Experience adjustments on plan assets — (49) 198
The expected contribution to the fund for 2009 (2008) is €372,000 (€344,000). Defined contribution plans In line with its obligations as employer, the Company made payments into the state-run pay-as-you-go pension scheme in Germany. Since EWW does not have any obligations beyond the required payments, the state pension scheme is considered a defined contribution plan under IFRS. Payments are expensed as incurred and amounted to €510,000 (2007: €525,000). Average number of employees The average number of employees during the period was 115 (2007: 118).
17. Income taxes In 2007, in Germany, a uniform corporate tax rate of 25 per cent. and a solidarity surcharge of 5.5 per cent. thereon were effective. In addition to corporate income tax, income generated in Germany is subject to a trade tax that varies depending on the municipality in which the company is located. That later trade tax was deductible in determining the basis for corporate income taxes. This results in a combined tax rate of 39.4 per cent. In 2007, the German Tax Reform was enacted which, among other things, reduced the corporate income tax to 15 per cent. and eliminated the deductibility of trade tax. This resulted in a new combined tax rate of 30.8 per cent. The new tax provisions became effective in 2008. Deferred tax assets and liabilities recognised in these financial statements are measured using the tax rates applicable for the period in which the asset or liability is realised or settled, which are enacted or substantively enacted at the balance sheet date. Thus deferred taxes as of 1 January 2007 were calculated using the rate of 39.4 per cent. However, for 31 December 2007 the newly enacted rates were applied, giving rise to a change in deferred tax items, while the old tax regime still applied to current taxes. For 2008, the new tax rates apply to both current and deferred taxes.
284 The major components of income tax expense for the years ended 31 December 2008 and 2007 are: Consolidated Income Statement 2007 2008 €’000 €’000 Current income tax Income tax for the period 980 1,311 Income tax for previous years 2 395 Deferred tax Relating to origination and reversal of temporary differences 77 (39) Income tax reported in the income statement 1,059 1,667
A reconciliation between tax expense and the product of accounting profit multiplied by the applicable tax rate in Germany for 2008 and 2007 is as follows: 2007 2008 €’000 €’000 Profit before taxes 697 2,722 Combined statutory tax rate 39.4% 30.8% Income tax calculated at income tax rate 275 838 Tax exempt income —— Tax effect of non-deductible impairment on investment 609 — Tax deductible contribution to U-Kasse (120) (113) Income tax for previous year 2 523 Change in tax rates 291 — Non-tax deductible expenses 74 285 Other effects (71) 134 Total adjustments 785 829 Income tax recognised 1,059 1,667
Deferred tax relates to the following asset and liability categories: 01.01.2007 31.12.2007 31.12.2008 €’000 €’000 €’000 Deferred tax assets Property, plant and equipment 28 15 20 Inventories 199 175 170 Trade and other receivables 24 0 0 Other financial assets 0 0 7 Pension liabilities 1,521 1,174 1,118 Balance 1,772 1,364 1,315 Deferred tax liabilities Trade and other receivables — 24 — Other provisions/accruals 530 174 110 Balance 530 198 110 Offset of deferred tax assets and liabilities Net deferred tax asset 1,242 1,166 1,205
The temporary differences underlying the above deferred tax assets and deferred tax liabilities reflect accounting differences between the tax base and IFRS. The Company does not have tax loss carry forwards. Deferred tax assets and deferred tax liabilities are offset if EWW has a legal right to set off current tax assets against current tax liabilities and the deferred tax items relate to income taxes levied by the same taxation authority.
285 18. Other provisions Environmental provisions Other Total €’000 €’000 €’000 Balance at 1.1.2008 1,758 982 2,740 Additions 41 173 214 Amounts used (278) (131) (409) Unwinding of discount and change of rates 414 — 414 Balance at 31.12.2008 1,935 1,024 2,959 Balance at 1.1.2007 1,380 1,127 2,507 Additions 247 135 382 Reversals — (109) (109) Amounts used — (171) (171) Unwinding of discount and change of rates 131 — 131 Balance at 31.12.2007 1,758 982 2,740
01.01.2007 31.12.2007 31.12.2008 €’000 €’000 €’000 Long-term provision 2,400 2,715 2,899 Short-term provisions 107 25 60 Total 2,507 2,740 2,959
Environmental provision The Company has a right to use Atzenau, a former open cast quarzit mine, as pit for slag resulting from its production process. As a result of that activity EWW is obligated to engage in certain environmental measures. Those measures are specified in an official decree of the relevant mining authority. The measures are currently planned to be performed in 2018. The amounts involved were determined based on an external expert’s report. Due to this extended period of time, the provision needs to be discounted at an appropriate rate, which is a risk-free rate. That discount rate was derived from government bonds with appropriate terms. As of 31 December 2008 the discount rate amounted to 3.0 per cent. (2007: 4.4 per cent.; 1 January 2007: 4.0 per cent.). The unwinding of the discount is presented as finance cost. The official decree also required a performance bond, i.e. a surety by a bank in the nominal amount of €500,000 that certain obligations under the decree will be fulfilled. EWW, in turn, pledged certain fixed-income securities to the bank (refer to Note 20). Other provisions Other provisions include a variety of obligations, including provisions for obligations to employees (early retirement obligations, long-service benefits) and to external third parties.
19. Trade and other payables 01.01.2007 31.12.2007 31.12.2008 €’000 €’000 €’000 Current Trade payables 4,013 6,424 1,646 Accrued expenses 864 459 207 Other liabilities 312 207 566 Total 5,189 7,090 2,419
Trade and other payables are primarily due within 3 months after the balance sheet date.
286 20. Financial instruments Held-to-maturity financial assets Held-to-maturity financial assets include government bonds (2008: €488,000; 2007: €488,000; 1 January 2007: €497,000) which are pledged as security in connection with the environmental provisions for the slag pit in Atzenau (refer to Note 18). The item also includes an amount for a pledged security deposit due to a legal requirement to secure the deferred compensation for EWW’s early retirement obligations in the case of bankruptcy (2008: €113,000; 2007: €113,000; 1 January 2007: €113,000). Interest-bearing financial instruments 31.12.2007 31.12.2007 31.12.2008 €’000 €’000 €’000 Current Bank loans 2,657 764 — Total 2,657 764 —
Comparison by class of the carrying amounts and fair value of the Company’s financial instruments that are carried in the financial statements:
Carrying amount Fair value 01.01.2007 31.12.2007 31.12.2008 01.01.2007 31.12.2007 31.12.2008 €’000 €’000 €’000 €’000 €’000 €’000 Financial assets Trade and other receivables 5,693 10,116 18,388 5,693 10,116 18,388 Held-to-maturity financial assets 610 601 601 610 601 601 Cash and cash equivalents 139 244 352 139 244 352 Total 6,442 10,961 19,341 6,442 10,961 19,341 Financial liabilities Trade and other payables 4,325 6,631 2,212 4,325 6,631 2,212 Bank overdraft 2,657 764 — 2,657 764 — Total 6,982 7,395 2,212 6,982 7,395 2,212
21. Financial instruments and financial risk management Credit risks Until February 2008, ie before the tolling agreement was signed, the Company sold its finished products to domestic and foreign customers, primarily in the Americas (eg US, Panama). Due to the nature of the product, the group of potential customers is limited and such customers often belong to large groups. EWW only sold to customers of good standing. There were no concentrations on any one customer. New customers are only accepted after sufficient information about their creditworthiness has been obtained. In addition, transactions were hedged by the German Hermes export protection scheme, covering 70 per cent. of the carrying amount of the protected receivable. As for the balance, there is no past experience of any significant impairment losses related to its receivables. Since March 2008, as a result of the tolling agreement, RCS Ltd is by far the most significant customer of the Company. Due to the limited time the model is operating, coverage by Hermes is currently not available. No valuation allowance is recorded on receivables from Kermas group or from Ruukki subsidiaries. There are no indications that the amounts due might not be recoverable. Foreign currency risks Until October 2008, the Company was exposed to foreign currency risk through its purchase of raw materials (eg from TMS) and the sale of finished products partly in US Dollar. These transactions were actively monitored by management with a view to reducing the Company’s exposure to foreign currency risk to the extent possible.
287 Since March 2008 a significant portion of business is carried with RCS Ltd. While initially denominated in USD, the revenue is now generated in Euro, thus reducing the Company’s exposure to changes in foreign exchange rates. The Company does not use derivatives to hedge against foreign currency risks. Liquidity risks The Company has a strong operating cash flow which allowed it to reduce bank financing significantly. Until 2008, the Company had an overdraft facility of €4,500,000 carrying interest of 8 per cent. since 2007, which was guaranteed by its shareholder. As a result, the management of EWW is confident that EWW would be able to obtain bank financing if needed. The Company is actively monitoring its cash needs. Therefore, it believes that the liquidity position was always sufficient to meet the cash needs of the Company over a foreseeable future. Capital Management EWW has an equity ratio of 28 per cent. (2007: 19 per cent.; 1 January 2007: 22 per cent.). If pension liabilities are included as they represent long-term debt, the capital ratio of these components increases to 75 per cent. (2007: 57 per cent.; 1 January 2007: 61 per cent.). There are no specific guidelines for the management of EWW’s capital. In 2007 and 2008 EWW pursued the objective of reducing borrowings from banks to nil. Therefore, the Company is no longer subject to financial covenants.
22. Related party disclosures The related parties of EWW include primarily: • Kermas Ltd as the single shareholder of the entity and any of the subsidiaries belonging to the Kermas group. • Since October 2008, Ruukki Company Plc and all of its subsidiaries (“Ruukki group”). The most important of them being RCS Ltd. • The key management personnel of EWW. Transactions with Kermas In April 2008 Kermas Ltd and EWW entered into a share purchase agreement. Thereby EWW sold its shares of TMS for a purchase price of €600,000 to Kermas Ltd in June 2008. In June 2008 EWW and Kermas Ltd entered into a loan agreement under which EWW granted Kermas a loan of €10,000,000 with a term of 31 December 2008 and at an interest of 5 per cent. This loan agreement was subsequently amended. End of 2008, interest rate was amended to 4 per cent. and EWW granted an additional loan of €5,000,000, taking the entire loan to €15,000,000. The loan was to be repaid on 31 December 2009. In 2008, interest income of €298,000 arose and was accrued. Transactions with Ruukki Group In October 2008, the Company entered into a toll manufacturing agreement with RCS Ltd. Manufacturing services are provided on a cost-plus basis (5 per cent.). Balances at year-end For details on receivables with either Kermas group or Ruukki group, refer to Note 12. Key management personnel The key management personnel of the Company includes: • Jürgen Schalamon (engineer) • Christoph Schneider (economist)
288 Management compensation amounts to €412,000 (2007: €398,000). It includes short-term benefits of €333,000 (2007: €337,000) and post-employment benefits of €79,000 (2007: €61,000).
23. Subsequent events In 2009, the loan extended to Kermas Ltd was partly repaid (€5,000,000) and the repayment of the remaining balance of €10,000,000 has been further extended. Eschweiler, 20 May 2010 The management of Elektrowerke Weisweiler GmbH, Eschweiler.
Dipl. Oec. Univ. Christoph Schneider, General Manager
The management of Ruukki Group Plc, Finland.
Dr Jelena Manojlovic, Director Terence McConnachie, Director
289 PART IX PRO FORMA FINANCIAL INFORMATION
Unaudited pro forma income statement of Ruukki The following unaudited pro forma income statement of Ruukki for the year ended 31 December 2009 is prepared to illustrate the effect on Ruukki’s consolidated profit and loss for the period during which the acquisition of Mogale and the disposal of the Tervola Group took place, as if the acquisition and disposal had taken place on 1 January 2009. The pro forma information is based on the consolidated income statement of Ruukki for the twelve months ended 31 December 2009 extracted without material adjustment from the consolidated financial statements of the Company for the twelve months ended 31 December 2009 adjusted for the results of Mogale for the period 1 January 2009 to 31 May 2009 and the elimination of the results of Tervola Group for the year ended 31 December 2009. It has been prepared on the basis set out in the notes below for illustrative purposes only. Due to its nature, the pro forma financial information addresses a hypothetical situation and, therefore, does not represent Ruukki’s actual financial position or results.
Adjustments Eliminations and Tervola adjustments Group(1) Mogale(2) Adjustments Group(4) Tervola Pro forma 1-12/2009 1-5/2009 to Mogale(3) 1-12/2009 Group(5) Group(6) €’000 €’000 €’000 €’000 €’000 €’000 Revenue 193,359 10,541 — (11,986) 970 192,884 Other operating income 7,587 — — (23) — 7,564 Change in inventories of finished goods and work in progress (17,495) — — 50 — (17,445) Raw materials and consumables used (115,255) (10,890) — 8,608 (970) (118,506) Employee benefits expense (28,230 ) — (1,007) 850 — (28,387) Depreciation and amortisation (26,960) (605) (2,247) 390 448 (28,974) Other operating expenses (20,611) (339) (666) 905 — (20,711) Impairment (17,020) ————(17,020) Items related to associates (core) 6———— 6 Operating profit / (loss) (24,617) (1,293) (3,920) (1,204) 448 (30,588) Finance income 5,871 216 — (48) — 6,039 Finance cost (9,306) — — 7 — (9,299) Items related to associates (non core) (284) ————(284) Sundry expenses — (8,366) 8,366 — — — Profit/ (loss) before taxes (28,336) (9,443) 4,446 (1,245) 448 (34,132) Income taxes 5,609 488 911 337 (116) 7,229 Profit/ (loss) for the period (22,727) (8,955) 5,357 (908) 332 (26,903) Profit / (loss) attributable to: equity shareholders (19,744) (7,603) 4,548 (908) 332 (23,377) minority shareholders(7) (2,983) (1,352) 809 — — (3,526) (22,727) (8,955) 5,357 (908) 332 (26,903)
Notes: (1) The income statement information of the Group for the twelve months period ended 31 December 2009 has been extracted without material adjustment from the audited consolidated financial statements of the Company for the twelve months ended 31 December 2009.
(2) The adjustments recognise the unaudited results of the Mogale Group for the period 1 January 2009 to 31 May 2009, reflecting Ruukki’s ownership of Mogale as if it had been acquired and consolidated from 1 January 2009 into the Group. These results have been calculated using Mogale’s local management accounts during that period.
(3) Further adjustments need to be made to Mogale’s IFRS management accounts prior to consolidation into the Group results. The adjustments comprise: (i) €1,007,000 representing the Mogale Management Trust charge expense allocation; (ii) €2,247,000
290 representing amortisation of intangible assets in relation to purchase price allocation comprising €315,000 for machinery and equipment (amortised over 11 years), €876,000 for technology (amortised over 15 years) and €1,056,000 for customer relationships (amortised over 5 years) ; (iii) reclassification of €666,000 of sundry expenses into other operating expenses in line with the presentation in the 2009 Group financial statements; (iv) eliminating €7,700,000 of sundry operating expenses representing the environmental provision charge already included in the balance sheet provisions at 31 May 2009; and (v) €911,000 to reflect the tax effect of adjustments (i) to (iv) above..
(4) The adjustments recognise the results of the disposal of the Tervola Group which completed on 31 December 2009, reflecting the Group without the inclusion of the results of the Tervola Group from 1 January 2009. These results have been calculated using the audited IFRS accounts of the companies. No gain or loss was recognised on disposal of the Tervola Group and therefore no adjustment has been made to the pro forma.
(5) The eliminations and adjustments column comprises eliminations which had already been eliminated for the purpose of the 2009 Group consolidated accounts which are to be added back once the Tervola Group results are subtracted from the consolidated accounts.
(6) The Pro forma column represents the Group results plus the Mogale 1-5/2009 results plus the Mogale adjustments, minus the Tervola Group results plus the Tervola Group eliminations and adjustments.
(7) The profit/(loss) attributable to minority shareholders represents 15.1 per cent. of the Mogale profit/(loss) for the period.
Additional notes:
(i) The effect on operating profit of the Mogale acquisition presented above is €5.2 million, whereas the effect presented in the “Business Combinations” note of the 2009 financial statements is €4.4 million. The difference is due to (i) Mogale having sundry expenses of €0.7 million which are presented below EBIT which have been adjusted in the pro forma information above to comply with the presentation adopted by the Company and (ii) differences in exchange rates amounting to €0.2 million.
(ii) The effect on net profit of the Mogale acquisition presented above is a loss of €3.6 million, whereas the effect presented in the “Business Combinations” note of the 2009 financial statements is a loss of €3.8 million. The difference is due to differences in exchange rates amounting to €0.2 million.
291 Accountant’s Report on the unaudited pro forma financial information To the Board of Directors of Ruukki Group Plc
We report on the unaudited pro forma financial information set out on pages 290 to 291 of the Ruukki Group Plc’s Prospectus, which has been prepared, for illustrative purposes only, to provide information about how the described transaction might have affected the financial information presented if it had occurred at the date presented in the pro forma information. Save for any responsibility under applicable law to investors purchasing ordinary shares of Ruukki Group Plc in reliance on this report, to the fullest extent permitted by law we do not assume any responsibility to any other person for any loss suffered by any such other person as a result of, arising out of, or in connection with this report or our statement, required by and given solely for the purposes of complying with item 23.1 of Annex I of Commission Regulation EC 809/2004 and item 10.3 of Annex III of Commission Regulation EC 809/2004, consenting to its inclusion in the Prospectus. It is the responsibility solely of the directors of Ruukki Group Plc to prepare the pro forma financial information in accordance with the commission regulation (EC) No 809/2004. It is our responsibility to form an opinion based on our work as required by the commission regulation, on the pro forma financial information and to report our opinion to you. The pro forma financial information is based on the Ruukki Group Plc’s financial statements and the Report of the Board of Directors audited by us, and in our report on the Ruukki Group Annual Report 2009 dated 31 March 2010 we expressed as our opinion that the financial statements and the report of the Board of Directors give a true and fair view of the financial performance and financial position of the company in accordance with the laws and regulations governing the preparation of the financial statements and the report of the Board of Directors in Finland and that the information in the report of the Board of Directors is consistent with the information in the financial statements. We conducted our work in accordance with the practice statement “Auditor’s reporting on pro forma financial information” issued by the Finnish Institute of Authorised Public Accountants. Our work consisted primarily of comparing the unadjusted financial information presented in the pro forma financial information with the corresponding financial statements of Ruukki Group Plc, considering the adjustments based on the supporting source documents and discussing the pro forma financial information with the directors of Ruukki Group Plc. We have not performed an audit and, accordingly we do not express an audit opinion. In our opinion: • the pro forma financial information has been compiled on the basis stated on pages 290 to 291 of the Prospectus; and • such basis is consistent with the accounting policies of the Ruukki Group Plc in all material respects. Helsinki 30 June 2010 Ernst & Young Oy, Authorised Public Accountant Firm
Tomi Englund, Authorised Public Accountant
292 PART X DETAILS OF ADMISSION
1. Admission 1.1 Background and rationale The Directors expect Admission of the Ordinary Shares to the Official List to enhance the Group’s profile and status in the markets in which it operates. They also expect Admission to benefit the Shareholders by providing them with increased liquidity in their Ordinary Shares. The Directors believe that Admission will assist the Group’s ability to pursue strategic mergers and acquisitions, alliances, and other forms of co-operation with leading international minerals business customers, suppliers and other companies. Moreover, the Directors believe that Admission will give Ruukki direct and indirect access to additional international institutional investors and financiers, providing the Group with opportunities to enlarge its shareholder base. The Directors also expect Admission to positively contribute to the Group’s growth by enabling it in the future to access equity, debt or funding opportunities that may not otherwise be possible, feasible or open to the Group. 1.2 Process and consequences UK – London Stock Exchange Applications have been made to the UK FSA and to the London Stock Exchange for the Company’s Ordinary Shares (being 247,982,000 Ordinary Shares as at 30 June 2010, the latest practicable date prior to the publication of this document), to be admitted to the premium segment of the Official List of the UK FSA and to trading on the London Stock Exchange’s main market for listed securities respectively. Admission to the Official List, together with admission to the London Stock Exchange’s main market for listed securities, constitutes admission to official listing on a regulated market. The Ordinary Shares are currently admitted to trading on the stock exchange list of the Helsinki Stock Exchange, which is a regulated market. It is expected that Admission will become effective and that dealings on the London Stock Exchange in the Ordinary Shares will commence at 8.00 a.m. (London time) on or around 16 July 2010. No application has been, or is currently intended to be, made for such Ordinary Shares to be admitted to listing or dealt with on any other stock exchange. No new Ordinary Shares are being issued by the Company as part of or in connection with Admission. Upon Admission, dealings in the Company’s Ordinary Shares on the London Stock Exchange will be able to take place in the CREST system and as more particularly described in paragraph 2 of this Part X. The Company’s Ordinary Shares will continue to be listed on the Helsinki Stock Exchange in accordance with the rules of that exchange. The Ordinary Shares will be quoted and traded on the London Stock Exchange in Sterling. Subsequent to Admission, the Company will, in addition to the Finnish Securities Markets Act and other rules and regulations of the Finnish FSA, be subject to certain provisions of the Listing Rules and the Disclosure and Transparency Rules. The Company is applying for a “premium listing” under the Listing Rules. There are however, a number of differences between the provisions which will be applicable to the Company as an overseas company with a “premium listing” and those applicable to a company incorporated in the UK with a “premium listing” including certain aspects which are not applicable due to the country of incorporation and certain aspects which are not applicable because the Company is subject to Finnish rules and regulations.
293 Finland – Helsinki Stock Exchange At the date of this document, the Ordinary Shares are admitted to trading on the stock exchange list of the Helsinki Stock Exchange, which is a regulated market. The Finnish FSA is responsible for monitoring and supervising the securities markets in Finland. The principal statute governing the securities market is the Finnish Securities Markets Act, which contains regulations with respect to company and shareholder disclosure obligations, admission to listing and trading of listed securities, public tender offers and insider dealing, among other things. The Finnish FSA and the Helsinki Stock Exchange have issued more detailed regulations based on the Finnish Securities Markets Act. The Finnish FSA and the Helsinki Stock Exchange respectively monitor compliance with these regulations. The Finnish Securities Markets Act sets out the minimum disclosure requirements for companies listed, or applying to list, on the Helsinki Stock Exchange or for companies making a public offering of securities in Finland. An issuer of securities subject to public trading is obliged to regularly provide financial information on the company and disclose without undue delay all such matters and decisions that have a material impact on the value of the relevant security. Information disclosed on matters having material impact on the value of the security shall be sufficient to enable investors to make a sound evaluation of the security and the issuer. The breach of disclosure requirements, the misuse of privileged or inside information and market manipulation is criminalised by the Finnish Penal Code (19.12.1889/38, as amended). Inside information refers to all information that has not been made public and that would be likely to have an effect on the value of publicly traded securities and certain other securities defined by law. A listed company is obliged to maintain an insider register in respect of insiders as defined by law. Insiders must declare their holdings of securities issued by a company and any changes in these holdings in the register. Information declared in the insider register is public. Details in the register must be published for public viewing on the listed company’s website. Following Admission, the Company will remain listed on the Helsinki Stock Exchange and subject to Finnish securities markets regulation. The Ordinary Shares are, and following Admission will continue to be, quoted and traded on the Helsinki Stock Exchange in Euro. Takeover regulation The Takeover Directive applies to all companies governed by the laws of an EEA member state of which all or some securities are admitted to trading on a regulated market in one or more member states. While the Company continues to have its registered office in Finland and remains listed on the Helsinki Stock Exchange, the Finnish FSA will have sole jurisdiction in respect of public takeover bids for the Company and the UK Takeover Code will not apply. Following Admission, in the event that the Company de-lists from the Helsinki Stock Exchange, a dual regulation regime will apply. The laws of the EEA member state in which a company has its registered office determine what percentage of the voting rights in that company is regarded as conferring control over the company and the method of calculation of such percentage as well as employee information and company law matters. As the Company is incorporated under the laws of Finland, it is subject to Finnish law and the Finnish FSA would be the supervisory authority with regard to these issues. However, as the Ordinary Shares would still be admitted to the Official List, there would be dual jurisdiction and the UK Takeover Panel would also have jurisdiction in respect of public takeover bids for the Company. The UK Takeover Code would apply to the Company in respect of consideration and procedural matters.
2. Crest and Depositary Interests 2.1 General CREST is a paperless system allowing securities to be transferred from one person’s CREST account to another without the need to use share certificates or written instruments of transfer. Securities issued by non-UK companies, such as the Company, however, cannot be held or
294 transferred in the CREST system. As a result, the Company has arranged for the Depositary to issue Depositary Interests to allow trading and settlement in respect of the underlying Ordinary Shares in CREST. The Ordinary Shares will not themselves be admitted to CREST. The Depository Interests will be created pursuant to and issued on the terms of the Deed Poll to be executed by the Depository prior to Admission in favour of the holders of the Depository Interests from time to time. Ordinary Shares to be represented by Depositary Interests will be transferred to an account of the Depository or nominated Custodian which will hold them as nominee for the Depositary which will in turn hold its interest in the underlying Ordinary Shares on trust for holders of Depositary Interests. The Depositary will issue dematerialised Depository Interests representing entitlements to interests in the underlying Ordinary Shares. Depository Interests can then be traded and settled within the CREST system in the same way as any other CREST securities. Each Depository Interest will be treated as one Ordinary Share for the purposes of determining, for example, eligibility for any dividends and share subscription rights. The Depository Interests will have the same security code (ISIN) as the underlying Ordinary Shares and will not require a separate admission to the Official List or to trading on the London Stock Exchange’s main market for listed securities. The Ordinary Shares are registered with ISIN number FI0009800098. Application has been made for the Depository Interests to be admitted to CREST with effect from Admission. Prospective holders of Depositary Interests should note that they will have no contractual rights in respect of the underlying Ordinary Shares or the Depositary Interests representing them against Euroclear UK & Ireland or its subsidiaries. 2.2 The Deed Poll The Depositary Interests will be created pursuant to and issued on the terms of a deed poll to be executed by the Depositary on or around 1 July 2010 in favour of the holders of the Depositary Interests from time to time (the “Deed Poll”). The terms of the Deed Poll are summarised below. The Deed Poll will be available for inspection as set out in paragraph 20 of Part XII. The Depositary will hold (itself or through its nominated custodian) as bare trustee, the underlying securities issued by the Company and all and any rights and other securities, property and cash attributable to the underlying securities pertaining to the Depositary Interests for the benefit of the holders of the relevant Depositary Interests. Holders of Depositary Interests warrant, inter alia, that the securities in the Company transferred or issued to the Custodian on behalf of the Depositary/Custodian are free and clear of all liens, charges, encumbrances or third party interests and that such transfers or issues are not in contravention of the Company’s constitutional documents or any contractual obligation, law or regulation. The Depositary and any Custodian must pass on to holders of Depositary Interests and, so far as they are reasonably able or permitted by applicable law, exercise on behalf of holders of Depositary Interests all rights and entitlements received or to which they are entitled in respect of the underlying securities which are capable of being passed on or exercised. Rights and entitlements to cash distributions, to information, to make choices and elections and to call for, attend and vote at meetings shall, subject to the Deed Poll, be passed on in the form in which they are received together with amendments and additional documentation necessary to effect such passing-on, or, as the case may be, exercised in accordance with the Deed Poll. The Depositary will be entitled to cancel Depositary Interests and withdraw the underlying securities in certain circumstances including where a holder of Depositary Interests has failed to perform any obligation under the Deed Poll or any other agreement or instrument with respect to the Depositary Interests.
295 The Deed Poll contains provisions excluding and limiting the Depositary’s liability. For example, the Depositary shall not be liable to any holder of Depositary Interests or any other person for liabilities in connection with the performance or non-performance of obligations under the Deed Poll or otherwise except as may result from its negligence or wilful default or fraud or that of any person for whom it is vicariously liable, provided that the Depositary shall not be liable for the negligence, wilful default or fraud of any Custodian or agent which is not a member of its group unless it has failed to exercise reasonable care in the appointment and continued use and supervision of such Custodian or agent. Furthermore, the Depositary’s liability to a holder of Depositary Interests will be limited to the lesser of: (a) the value of the shares and other deposited property properly attributable to the Depositary Interests to which the liability relates; and (b) that proportion of £10 million which corresponds to the portion which the amount the Depositary would otherwise be liable to pay to the holder of Depositary Interests bears to the aggregate of the amounts the Depositary would otherwise be liable to pay to all such holders in respect of the same act, omission or event or, if there are no such other amounts, £10 million. The Depositary is entitled to charge holders of Depositary Interests fees and expenses as notified from time to time for the provision of its services under the Deed Poll. If and to the extent that stamp duty reserve tax is not payable on agreements to transfer Depository Interests, it is the responsibility of the holder of the Depository Interest to ensure that Depository Interests acquired or disposed of in CREST are exempt. If stamp duty reserve tax is payable, the holder of Depository Interests must notify Euroclear UK & Ireland and the Depository and must pay to Euroclear UK & Ireland any stamp duty reserve tax and interest, charges or penalties thereon and indemnify the Depository in respect thereof. Each holder of Depositary Interests is liable to indemnify the Depositary and any Custodian (and their agents, officers and employees) against all liabilities arising from or incurred in connection with, or arising from any act related to, the Deed Poll so far as they relate to the property held for the account of Depositary Interests held by that holder, other than those resulting from the wilful default, negligence or fraud of the Depositary, or the Custodian or any agent if such Custodian or agent is a member of the Depositary’s group or if, not being a member of the same group, the Depositary shall have failed to exercise reasonable care in the appointment and continued use and supervision of such Custodian or agent. The Depositary may terminate the Deed Poll by giving not less than 30 days’ notice. During such notice period holders may cancel their Depositary Interests and withdraw their deposited property and, if any Depositary Interests remain outstanding after termination, the Depositary must, among other things, deliver the deposited property in respect of the Depositary Interests to the relevant holders of Depositary Interests or, at its discretion substitute CREST depository interests for the Depository Interests or sell all or part of such deposited property. It shall, as soon as reasonably practicable, deliver the net proceeds of any such sale, after deducting any sums due to the Depositary, together with any other cash held by it under the Deed Poll pro rata to holders of Depositary Interests in respect of their Depositary Interests. The Depositary or the Custodian may require from any holder information as to the capacity in which Depositary Interests are owned or held and the identity of any other person with any interest of any kind in such Depositary Interests or the underlying securities in the Company and holders are bound to provide such information requested. Furthermore, to the extent that, inter alia, the Company’s constitutional documents require disclosure to the Company of, or limitations in relation to, beneficial or other ownership of, or interests of any kind whatsoever in the Company’s securities, the holders of Depositary Interests are to comply with such provisions and with the Company’s instructions with respect thereto.
296 Each holder of Depositary Interests who is a Finnish national represents and warrants that it is only holding Depositary Interests for so long as is necessary to achieve a transfer of the relevant Deposited Property (as defined in the Deed Poll) held by the Depositary or its Custodian to it or from it to the Depositary or its Custodian and undertakes to take all necessary steps in order to achieve this. 2.3 Depositary Agreement The terms of the depositary agreement to be entered into between the Company and the Depositary on or around 1 July 2010 (the “Depositary Agreement”) under which the Company appoints the Depositary to constitute and issue from time to time, upon the terms of the Deed Poll (summarised above), Depositary Interests representing interests in Ordinary Shares issued by the Company and to provide certain other services in connection with such Depositary Interests with a view to facilitating the indirect holding by participants in CREST are summarised below. The Depositary agrees that it will comply, and will procure that certain other persons to comply, with the terms of the Deed Poll and that it and they will perform their obligations in good faith and with reasonable skill and care. The Depositary assumes certain specific obligations including, for example, to arrange for the Depositary Interests to be admitted to CREST as participating securities and to provide copies of and access to, the register of Depositary Interests. The Company agrees to provide such assistance, information and documentation in English or accompanied by an English translation to the Depositary as is reasonably required by the Depositary for the purposes of performing its duties, responsibilities and obligations under the Deed Poll and the Depositary Agreement. In particular, the Company is to supply the Depositary with all documents it sends to its shareholders so that the Depositary can distribute the same to all holders of Depositary Interests. However, holders of Depositary Interests should note that in common with most Finnish listed companies, the Company currently does not send hard copies of documents to shareholders, but makes such documents and information available by publishing them on its website, in a national newspaper and/or in a stock exchange release. The Depositary Agreement sets out the procedures to be followed where the Company is to pay or make a dividend or other distribution. The Company also agrees that it will provide the Depositary with all reasonable assistance in dealing with any custodian of the Ordinary Shares in Finland and shall notify the Depositary of any corporate actions, company meetings and similar events in sufficient time for the Depositary and any custodian to put in place arrangements to deal with such events. (See also paragraph 2.4 below.) Each party is to indemnify the other, and each of its subsidiaries and subsidiary undertakings, against claims made against any of them by any holder of Depositary Interests or any person having any direct or indirect interest in any such Depositary Interests or the underlying securities which arises out of any breach or alleged breach of the terms of the Deed Poll or any trust declared or arising thereunder. The aggregate liability of the Depositary is limited to the lesser of £1,000,000 and an amount equal to ten times the total annual fee payable to the Depositary under the Depositary Agreement. The Depositary Agreement is to remain in force for a minimum period of three years with successive automatic renewals for further periods of one year, unless otherwise terminated in accordance with its terms. The Company may terminate the appointment of the Depositary if an Event of Default (as defined in the Depositary Agreement) occurs in relation to the Depositary or if it commits an irremediable material breach of the Depositary Agreement or the Deed Poll or any other material breach which is not remedied within 30 days. The Depositary has the same termination rights in respect of Events of Default (as defined in the Depositary Agreement) occurring or any breach by the Company. Either of the parties may terminate the Depositary’s appointment by giving not less than 45 days’ written notice (although in the case of the Company, such notice not to expire before the end of the initial three year period or any successive one year
297 period). If the appointment is terminated on an Event of Default (as defined in the Depositary Agreement) or breach, the Depositary must within 14 days serve notice to terminate the Deed Poll on all holders of Depositary Interests. The Depository shall not, without the prior consent of the Company (which consent is not to be unreasonably withheld or delayed), assign, transfer or declare a trust of the benefit of the performance of all or any of its obligations under the Depositary Agreement, nor any benefit arising under or out of the Depositary Agreement. However, the Depository may subcontract or delegate the performance of all or any of its duties, obligations or responsibilities under the Depositary Agreement or the Deed Poll to any person which is (and for so long as it remains) a member of the Depositary’s Group, provided that such arrangements shall not affect the liability of the Depository to the Company under the Depositary Agreement. The Company is to pay certain fees and charges including an annual fee, a fee based on the number of Depositary Interests held, the number of transfers of Depositary Interests and the number of transfers of Ordinary Shares into and/or out of the Depositary. The Depositary is also entitled to recover reasonable out of pocket fees and expenses. 2.4 Voting and attending meetings As holders of Depositary Interests will not be the legal owners of the underlying Ordinary Shares, they may not be able to enforce or exercise certain of the rights afforded to the legal owners of the Ordinary Shares under, inter alia, Finnish company law and the Company’s Articles of Association in the same way as the legal holders of Ordinary Shares. For example, a holder of Depositary Interests may not exercise any administrative rights attached to the underlying shares, such as the right to attend and vote at Shareholders’ meetings of the Company without first registering as a holder of the underlying Ordinary Shares. A holder of Depositary Interests wishing to exercise the right to attend and vote at shareholder meetings of the Company must seek a temporary entry in the shareholder register. The Depositary shall arrange for the holder of Depositary Interests representing the underlying Ordinary Shares to be notified for a temporary entry in the shareholder register not later than the date set out in the notice to convene the meeting which date shall be subsequent to the record date of the relevant shareholders’ meeting. A holder of Depositary Interests notified for a temporary entry in the shareholder register shall be deemed to have enrolled to the meeting and no further enrolment is required. Prior to any annual or extraordinary general meeting of shareholders, holders of Depositary Interests will be contacted by the Company (or by the Depositary on its behalf) either individually or by publishing an announcement through a Regulated Information Service provider in the UK and invited to seek such a temporary registration in order to enable them to attend and vote at the relevant meeting. In common with most Finnish listed companies, the Company currently does not send hard copies of notices of general meetings to its shareholders but sends notifications by publication in a national newspaper and publishing a stock exchange release. Following admission any announcement made on the Helsinki Stock Exchange will also be released through a Regulated Information Service provider in the UK. By seeking temporary registrations for voting purposes, holders of Depositary Interests will be agreeing to place their Depositary Interests holdings into escrow (thereby delaying settlement of any trades in respect of the Depositary Interests put into escrow) from the deadline for receipt of instructions (at which point the instructions received will be reconciled against the Depositary Interests register) until the Finnish record date for the annual or extraordinary general meeting of shareholders. As at the date of this document, it is anticipated that in order to give voting instructions to the Custodian, holders of Depositary Interests will need to give voting instructions to the Depositary at least ten working days prior to the relevant meeting.
298 PART XI TAXATION
1. UK Tax Considerations The following statements are intended as a general guide only to current UK tax legislation and published practice of HM Revenue & Customs in each case as at the date of this document, both of which are subject to change at any time, possibly with retrospective effect. The statements relate only to Shareholders (and holders of Depositary Interests) who are resident (and in the case of individuals, ordinarily resident and domiciled) in the UK for tax purposes (except where otherwise stated) and who hold their Ordinary Shares (or Depositary Interests) beneficially as investments. These statements are not intended to be, nor should they be considered to be, legal or tax advice to any particular holder and may not apply to certain holders, such as dealers in securities, insurance companies and collective investment schemes, and holders who have (or are deemed to have) acquired their Ordinary Shares or Depositary Interests by virtue of an office or employment. Any investor who is in doubt as to their tax position regarding the acquisition, ownership or disposal of their Ordinary Shares (or Depository Interests), or who may be affected by the tax laws of other jurisdictions should consult their own independent tax advisers with respect to the tax consequences applicable to their particular circumstances. 1.1 Taxation of dividends Individual Shareholders Individual holders of Ordinary Shares will, in general, be subject to UK income tax on the gross amount of any dividend paid on the Ordinary Shares, rather than on the amount actually received net of any Finnish withholding tax. An individual will generally be chargeable to UK income tax on any dividend paid on the shares at the dividend ordinary rate (currently 10 per cent.) or, to the extent that the amount of the gross dividend when treated as the top slice of his or her income exceeds the threshold for higher rate tax, at the dividend upper rate (currently 32.5 per cent.). With effect from 6 April 2010, a new rate of income tax (the “additional rate”) has been introduced for individuals with taxable income over £150,000. For UK resident individual shareholders subject to the additional rate, dividends are liable to income tax at a rate of 42.5 per cent of the gross dividend to the extent that the gross dividend when treated as the top slice of the shareholder’s income falls above the £150,000 threshold. Finnish withholding tax withheld from the payment of a dividend may in certain circumstances be available as a credit against the income tax payable by an individual shareholder in respect of the dividend but such relief is limited to the amount of foreign tax paid or the amount of UK tax payable, whichever is lower. Individuals who are beneficially entitled to less than 10 per cent. of the Company’s issued share capital are treated as receiving a non-refundable tax credit equal to one ninth of the dividend (grossed up for any overseas tax). This is equal to 10 per cent. of the dividend plus the tax credit. Individuals who are beneficially entitled to more than 10 per cent. of the Company’s issued share capital are similarly treated as receiving a non-refundable tax credit equal to one ninth of the dividend provided that the company is resident (and only resident) in qualifying territory (of which Finland is one) and the dividend paid to the UK resident individual is not paid as part of a tax avoidance scheme. The effect of the tax credit in each case is that a starting or basic rate taxpayer will pay no further UK income tax on the dividend and a higher rate taxpayer will pay further income tax of 22.5 per cent of the dividend and the tax credit (which is also equal to 25 per cent. of the cash dividend received). Taxpayers subject to the additional rate will pay further income tax of 32.5 per cent of the dividend and tax credit (which is also equal to 36 1/9 per cent. of the cash dividend received).
299 Corporate Shareholders Subject to anti-avoidance rules and the satisfaction of certain conditions, UK tax resident shareholders who are within the charge to UK corporation tax will in general not be subject to corporation tax on dividends paid by the Company and such Shareholders will not be able to claim repayment of Finnish withholding tax attaching to the dividends. 1.2 Stamp duty/stamp duty reserve tax No charge to UK stamp duty will arise in relation to the transfer of the Ordinary Shares provided that all instruments effecting or evidencing the transfer (or all matters or things done in relation to the transfer) are executed and retained outside the United Kingdom and no matter or actions are performed in the United Kingdom in relation to the transfer. As interests represented by the Depositary Interests will be transferred electronically without an instrument, no charge to UK stamp duty should arise in relation to the transfer of the Depositary Interests. No charge to UK stamp duty reserve tax will arise in respect of an agreement to transfer shares, provided that the shares are not registered in any register kept in the UK by or on behalf of the Company and are not paired with shares issued by a company incorporated in the UK. No UK stamp duty reserve tax will not be payable on agreements to transfer Depositary Interests within CREST provided that (a) the Company is not centrally managed and controlled in the United Kingdom and (b) the shares are not registered in a register kept in the United Kingdom by or on behalf of the Company. 1.3 Taxation of capital gains A disposal or deemed disposal of Ordinary Shares or Depositary Interests by a holder who is resident or ordinarily resident in the United Kingdom may give rise to a chargeable gain or allowable loss for the purposes of UK taxation or chargeable gains. In the case of a holder, which is a company, an indexation allowance can be used to reduce or eliminate a chargeable gain, but not generate or increase an allowable loss. In the case of a holder who is an individual, indexation allowance is not available and chargeable gains are generally currently liable to capital gains tax at the rate of up to 28 per cent. A UK resident holder who is an individual is entitled to an annual exemption from UK tax on chargeable gains currently up to £10,100 (in the 2010/2011 tax year).
2. Finnish Tax Considerations The following statements are intended as a general guide only to current Finnish income and transfer tax legislation and published practice of Finnish tax authorities in each case as at the date of this document, both of which are subject to change at any time, possibly with retrospective effect. The statements relate only to Shareholders (and holders of Depositary Interests) who are not resident in Finland for tax purposes. These statements are not intended to be, nor should they be considered to be, legal or tax advice to any particular holder. The following does not address tax consequences applicable to Shareholders that may be subject to special tax rules. Such Shareholders include, among others, general or limited partnerships. 2.1 Capital gains and losses Shareholders (or holders of Depositary Interests) that are not resident in Finland for tax purposes are not subject to Finnish tax on capital gains realised in the transfer of the Ordinary Shares (or Depositary Interests) unless the transfer relates to business carried on in Finland (a permanent establishment). 2.2 Dividend income In general, on a dividend paid by a Finnish company to a non-resident shareholder (or holder of a Depositary Interest) the Finnish company is obliged to withhold tax when paying the dividend. The withholding tax rate applicable to dividends is 28 per cent. The withholding tax may be reduced or removed on the basis of tax treaties.
300 Finland has entered into tax treaties with a number of countries pursuant to which the withholding tax rate is reduced on dividends paid to persons entitled to the benefits under such treaties. For example, in the case of the tax treaties with the following countries, Finnish withholding tax rates regarding portfolio shares are generally reduced to the percentages given: Austria: 10 per cent; Belgium: 15 per cent.; Canada: 15 per cent.; Denmark: 15 per cent.; France: zero per cent.; Germany: 15 per cent.; Ireland: zero per cent.; Italy: 15 per cent.; Japan: 15 per cent.; the Netherlands: 15 per cent.; Norway: 15 per cent.; Spain: 15 per cent.; Sweden: 15 per cent.; Switzerland: 10 per cent.; the United Kingdom: zero per cent.; and the United States: 15 per cent. This list is not exhaustive. A further reduction in the withholding tax rate is usually available to corporate shareholders for distributions on qualifying holdings (usually direct ownership of at least ten per cent. of the capital of the distributing company). The benefit of reduced withholding rates will only be available where the person beneficially entitled to the dividend has provided to the company or, as the case may be, the account operator its name, address, and, in the case of individuals his/her date of birth and his/her social security number. A recipient company must also provide its business identity code/registration number. However, no withholding tax is levied on dividends paid to corporate entities that reside in the European Union (as defined in Article 2 of the EC Directive 90/435/EEC) and who directly hold at least 10 per cent. of the capital of the dividend distributing Finnish company. Withholding tax is not levied on dividends paid to a non-resident corporate entity corresponding to a corporate entity defined in Section 33 d Subsection 4 of the Finnish Income Tax Act or Section 6 a of the Finnish Business Income Tax Act and which would be tax-exempt according to these provisions if paid to a similar Finnish resident corporate entity. The withholding tax is levied at the rate of 19.5 per cent. if the shares in the distributing company belong to the investment assets of the recipient corporate entity or if the recipient corporate entity is a non-listed company which directly holds less than 10 per cent. of the capital of the dividend distributing company. As a prerequisite for the above exemption or 19.5 per cent. rate, the recipient must have its registered office within the EEA. It is also required that mutual assistance between Finland and the state in which the recipient corporate entity is registered is organised in tax matters in accordance with the EC Directive 77/799/EEC or a treaty concerning executive and mutual assistance. Furthermore, it is provided that, according to a document provided by the recipient corporate entity and based on the applicable tax treaty, withholding tax cannot be credited entirely in the state in which the recipient corporate entity is resident for tax purposes. Where shares in a Finnish company are held through a nominee account, the Finnish distributing company pays the dividends to the nominee account managed by the custodian, who then delivers the dividend payment to the beneficial owner. If the dividend receiver holding the shares through a nominee account is a resident in a tax treaty country and the payer of the dividend has diligently ensured that the recipient is resident in a state with which Finland has a tax treaty, the withholding tax rate from the dividend is the tax rate set forth in the relevant tax treaty, provided that such rate is not less than 15 per cent. If the tax rate set forth in the tax treaty is less than 15 per cent. or the recipient should be entitled to a lower withholding tax rate based on Finnish laws, an application may be submitted for the refund of the excess withholding tax. The 15 per cent. withholding tax requires that the foreign custodian intermediary is registered in the Finnish tax authorities’ register and that it is resident in a country that Finland has a tax treaty with. In addition, the foreign custodian intermediary has to have an agreement with the Finnish account operator with regard to the custody of the shares. In such agreement, the foreign custodian intermediary shall, among others, commit to report the dividend receiver’s residential country to the account operator and provide additional information to the tax authorities, if needed. If these provisions are not fulfilled, the 28 per cent. withholding tax will be withheld on the nominee account’s dividends. 2.3 Finnish transfer tax Generally, there is no Finnish transfer tax on transfers or sales of shares of a Finnish company made against a fixed price in case the shares are admitted to trading in a regulated stock exchange such as the Helsinki Stock Exchange or the London Stock Exchange. This exemption requires that a securities broker, as defined in the Finnish Securities Markets Act, is brokering or acting as a
301 party to the transaction or that the transferee has been approved as a trading party in the market where the transfer is executed. Certain separately defined transfers, such as those relating to equity investments or distribution of funds or to redemption of minority shares under the Finnish Companies Act, are not covered by the exemption. If the transfer or sale of shares does not fulfil the above criteria of exemption, a transfer tax of 1.6 per cent. of the sale price is payable by the purchaser. However, if neither the buyer nor the seller is tax resident in Finland nor a Finnish branch or office of a foreign credit institution, investment firm or fund management company, the transfer of shares will be exempt from Finnish transfer tax. No transfer tax is collected if the amount of the tax is less than €10.
302 PART XII ADDITIONAL INFORMATION
1. Responsibility The Company and the Directors, whose names appear on page 29 of this document, accept responsibility for the information contained in this document. To the best of the knowledge and belief of the Company and the Directors (who have taken all reasonable care to ensure that such is the case), the information contained in this document is in accordance with the facts and does not omit anything likely to affect the import of such information.
2. Incorporation, Current Listing and Domicile The Company was incorporated as a limited partnership through a partnership agreement dated 31 December 1984, and its incorporation was registered on the Finnish Trade Register on 7 November 1985. The Company changed its legal form into a limited company in 1987 and then into a public limited company in 1997. It was listed on the Helsinki Stock Exchange in 1990. In 2003, through a share swap the Company obtained control in a company named Ruukki Group Oy and the Company changed its own name to Ruukki Group Oyj (in Finnish) and Ruukki Group Plc (in English). The Company’s previous names have been “Panostusinvestointi Ky”, “Balsanor Oy”, “Balsanor Oyj” and “A Company Finland Oyj”. The principal legislation under which the Company operates and under which the Company’s Ordinary Shares were created is the Finnish Companies Act and the regulations made thereunder. The Ordinary Shares of the Company are currently admitted to public trading on the stock exchange list of the Helsinki Stock Exchange and are quoted under the “mid cap” segment in the industrials sector. The trading symbol is RUG1V. Ruukki is domiciled and headquartered in Espoo, Finland. The Ordinary Shares are registered in a book-entry securities system, the register for which is maintained by the Euroclear Finland whose address is Urho Kekkosen katu 5C, FI-00101 Helsinki, Finland.
3. Share Capital 3.1 Issued share capital As at 28 June 2010 being the latest practicable date prior to the publication of this document, the Company’s fully paid up share capital amounted to €23,642,049.60 and the total number of issued Ordinary Shares was 247,982,000. The Ordinary Shares have no par value. As at 28 June 2010 being the latest practicable date prior to the publication of this document, 8,740,895 Ordinary Shares (amounting to approximately 3.52 per cent. of the issued shares) were held by or on behalf the Group as treasury shares. In late June 2010 225,000 Ordinary Shares have been subscribed by exercise of options under Series A of the I/2005 option scheme; 30 June 2010 being the final date of the exercise period for such options. However as at 28 June 2010 (being the latest practicable date prior to the publication this document) the 225,000 Ordinary Shares in respect of such subscriptions had not been issued and the Company currently expects that such Ordinary Shares will be issued following Admission. 3.2 Changes in share capital prior to Admission On 1 January 2007 the registered number of Ordinary Shares was 135,963,737. On 13 February 2007 3,652,000 Ordinary Shares were issued upon the conversion of convertible bonds. On 3 May 2007 598,285 Ordinary Shares were issued to settle earn out payments relating to the 2006 financial year for prior acquisitions. On 19 June 2007, a further 20,000 Ordinary Shares were issued upon the conversion of convertible bonds. On 29 June 2007 the Company issued 130,000,000 Ordinary Shares as part of a capital raising. A further 19,500,000 Ordinary Shares were issued on 18 July 2007 after the Company elected to exercise the
303 over-allotment option granted to it. The Company also issued 300,000 new Ordinary Shares to its then Chief Executive Officer on 6 July 2007. On 31 December 2007 the registered number of Ordinary Shares was 290,034,022. Between 5 November 2008 and 27 November 2008, the Company acquired 10,000,000 Ordinary Shares, based on the authorisation of the annual general meeting held on 31 March 2008. These shares were held in treasury. A further authorisation to acquire up to 19,000,000 Ordinary Shares was granted on 28 October 2008 and further share buy backs occurred between 29 December 2008 30 January 2009, with the shares again initially being held in treasury. On 31 December 2008 the registered number of Ordinary Shares, including those held in treasury, was 290,034,022. On 17 February 2009, 29,000,000 Ordinary Shares held as treasury shares (amounting to approximately 9.999 per cent. of the Company’s share capital at such time) which had been purchased through the buy back program were cancelled by a resolution of the Board. Following such cancellation the Company had 261,034,022 issued Ordinary Shares. In October 2009, the Board transferred to Thomas Hoyer 52,083 Ordinary Shares, then held as treasury shares, as part of his incentive package as the Managing Director of the house building and wood processing business. A further authorisation was given by the Extraordinary General Meeting on 24 February 2009 for the Company to acquire a maximum of 26,000,000 Ordinary Shares for a period of one year. Based on the authorisation, share buy-backs commenced on 5 March 2009. As at 31 December 2009 21,840,000 Ordinary Shares had been acquired based on this authorisation (amounting to approximately 8.37 per cent. of the share capital at that time). A further 5,000 Ordinary Shares were acquired in February 2010. On 2 February 2010, 13,052,022 Ordinary Shares held as treasury shares were cancelled by a resolution of the Board. Following such cancellation the Company held 8,740,895 Ordinary Shares. As at 28 June 2010 (being the latest practicable date prior to the publication of this document) the Group still held 8,740,895 Ordinary Shares in treasury (amounting to approximately 3.52 per cent of the current share capital). There are no convertible securities, exchangeable securities or securities with warrants in the Company. Details of the share options and share option rights issued by the Company are set out in paragraphs 8 and 10.3 of this Part XII. 3.3 Current authorisations At the Annual General Meeting on 21 April 2010 the Board was authorised to issue Ordinary Shares, options or other rights entitling holders to Ordinary Shares for in aggregate up to 100,000,000 new Ordinary Shares or Ordinary Shares owned by the Company as treasury shares (amounting to approximately 40.33 per cent. of the share capital at the date of such resolution). The authorisation contains the right for the Board to decide to derogate from shareholders’ pre-emptive right to share subscription provided that there is a weighty financial reason for that derogation as defined in Finnish Companies Act, or, in case of a share issue without payment, there is an especially weighty reason for the same, both for the Company and having regard to the interests of all Shareholders in the Company as defined in Finnish Companies Act. (See further paragraph 4 of this Part XII for a summary of certain provisions regarding shareholder rights and company management in Finland.) The authorisation replaces all previous authorisations and it is valid for two years from 21 April 2010. The Board was also authorised to acquire up to a maximum of 10,000,000 Ordinary Shares with the funds from the Company’s unrestricted shareholders’equity, provided that the total number of own shares which the Group has in its possession or as a pledge, does not exceed one tenth of all Ordinary Shares. The authorisation covers acquisitions on the Helsinki Stock Exchange and also off market purchases.
304 Other than with respect to such authority and the options and option rights described elsewhere in this document, there are no acquisition rights or obligations in relation to the issue of shares in the capital of the Company or an undertaking to increase the capital of the Company. 3.4 Rights attaching to shares Rights attaching to the Ordinary Shares are summarised in paragraph 4 of this Part XII below. No commissions, discounts, brokerages or other special terms have been granted in respect of the issue of any share capital of the Company.
4. Summary of Provisions Regarding Shareholder Rights and Company Management in Finland The following is a summary of certain provisions of Finnish company law relating to shareholders’ rights in, and the management of, Finnish companies. The summary is not, and is not intended to be, an exhaustive or definitive guide to Finnish law and it does not include (among other things) descriptions of certain provisions which are the same as or substantially similar to the position under English company law. Where appropriate, certain provisions of the Company’s Articles of Association are referred to, rather than referring to a default position under Finnish law which would be subject to a company’s articles of association. The summary should, however, be read in conjunction with the summary of the provisions of the Company’s Articles of Association below in paragraph 5 of this Part XII as certain provisions set out therein are not repeated in this paragraph 4. 4.1 Shareholder pre-emptive rights Under the Finnish Companies Act, existing shareholders have pre-emptive rights to subscribe for shares, option warrants and other special rights defined in the Finnish Companies Act entitling shareholders to new shares in proportion to their shareholding. Finnish companies may disapply such pre-emption rights in respect of a specific proposed issue of securities or a sale of treasury shares, or in respect of an authorisation for the board to issue securities or sell treasury shares by a resolution approved by at least two-thirds of all votes cast and all shares represented at a general meeting of shareholders. If such a resolution has been passed, the shareholders’ pre-emptive subscription rights may be deviated from if such deviation is justified by “weighty financial reasons” from the perspective of the company in question. A directed issue (ie a non-pre-emptive issue) may also be carried out as a gratuitous share issue if “especially weighty financial reasons” exist for such a share issue on the part of the company in question and its shareholders and such a resolution approved by the requisite two-thirds majority has been passed. The shareholders may either decide upon the directed issue (ie non-pre-emptive issue) directly or may authorise the board to approve the issue within such limits as the shareholder’s resolution may prescribe; in both cases the two-thirds majority described above is required. The concept of “weighty financial reasons” is not defined in the Finnish Companies Act or otherwise under Finnish law. However, as an example, if the rationale behind the share issue were to be to attempt to stabilise shareholdings in favour of a particular shareholder, that would not be regarded as a “weighty financial reason”. The Ordinary Shares in the Company are incorporated in the centralised book-entry system administered by Euroclear Finland Ltd. Under the Finnish Companies Act, the right to receive shares is vested in the person to whom the share belongs at the record date referred to in the decision to issue shares. The acquirer of a share in the book-entry system has no right to exercise shareholder rights in a company before it has been entered in the shareholder register which is held in the book-entry system. Pursuant to the Finnish Act on Book-Entry System (17.5.1991/826 as amended), Ordinary Shares registered in the name of a nominee do not entitle the beneficial owner to exercise shareholders’ rights vis-à-vis the Company other than the rights to withdraw funds, to convert or exchange the book-entry and to participate in an issue of shares or other book entries. 4.2 General meetings of shareholders Pursuant to the Articles of Association of the Company, the annual general meeting of Shareholders shall be held annually on a date determined by the Board within a period of six months from the end of the financial period. In addition to Espoo, Finland where the Company is domiciled, the annual general meeting may also be held in the cities of Helsinki, Oulu, Oulunsalo or Vantaa in Finland. 305 The annual accounts consisting of the income statement, the balance sheet, and the annual report and the auditor’s report shall be presented at an annual general meeting of shareholders. The Articles of Association also set out certain matters which shall be decided upon at the annual general meeting of Shareholders (see paragraph 5.9 of this Part XII). In addition, an extra ordinary general meeting shall be held if an auditor or shareholders with a total of one tenth of all shares so demand in writing in order for a given matter to be dealt with. Under the Finnish Companies Act, a shareholder may submit a written request to the company’s board of directors to include on the agenda for the next shareholders’ meeting any matter that may properly be considered by the shareholders. In the case of a listed company, the request shall be deemed to have been given in due time if it has been notified to the board of directors at the latest four weeks prior to the submission of the notice to convene the meeting. The term “listed company” includes a company listed on certain EEA stock exchanges including the Helsinki Stock Exchange and the London Stock Exchange. According to a combination of the Company’s Articles of Association and the Finnish Companies Act, a notice to the general meetings of Shareholders must be sent to the Shareholders not sooner than two months and not later than three weeks prior to the meeting and nine days prior to the record date of the meeting. The invitation must be sent by registered mail to the addresses notified by the Shareholders in the Company’s shareholder register or in any other verifiable manner or by publication thereof in at least one national newspaper of the Board’s choice. In common with most Finnish listed companies, the Company currently does not send hard copies of notices of general meetings to its shareholders but sends notifications by publication in a national newspaper and publishing a stock exchange release. Following admission any announcement made on the Helsinki Stock Exchange will also be released through a Regulated Information Service provider in the UK. A Shareholder who wishes to attend a general meeting of Shareholders must be listed as a Shareholder in the Company’s shareholder register maintained by Euroclear Finland at least eight working days before the general meeting of Shareholders, or as a beneficial owner of nominee-registered Ordinary Shares temporarily entered in the Company’s Shareholders’register at the latest on the date announced in the notice to convene the meeting, which date shall be subsequent to the record date of the meeting. The Depositary has advised that it is anticipated that in order to give voting instructions to the Custodian, holders of Depositary Interests will need to give voting instructions to the Depositary at least ten working days prior to the meeting. In order to participate in a general meeting of Shareholders, a Shareholder must notify the Company of his or her intention to attend the meeting no later than on the date mentioned in the notice of meeting, which may not be earlier than ten days before the general meeting of Shareholders. Temporary registration of a nominee-registered Shareholder shall be considered a notice of attendance by that Shareholder to the general meeting of Shareholders. There are no quorum requirements for the general meetings of Shareholders under the Finnish Companies Act or in the Company’s Articles of Association. 4.3 Voting rights As the Articles of Association of the Company do not contain exceptions, one share in the Company shall carry one vote in all matters dealt with by the general meeting. A Shareholder may attend and vote at a general meeting of shareholders in person, by proxy or through an authorised representative. Separate representatives may be appointed as regards shares which are held on separate securities accounts. At a general meeting of shareholders, resolutions generally require the approval of the majority of the votes cast. However, certain resolutions, such as amending the articles of association, issuing shares in deviation of the existing shareholders’ pre-emptive subscription rights and, in certain cases, a resolution regarding a merger or liquidation of the company, require a qualified majority of two-thirds of the votes cast and of the shares (and in certain cases, a qualified majority
306 within each of the share classes) represented at a general meeting of shareholders. Further, a publicly listed company may, provided it has a “weighty financial reason” to do so, resolve (with a majority of two-thirds) upon combining shares resulting in the redemption of a given portion of the shares of all shareholders. 4.4 Dividends and other distribution of funds Prevailing practice in Finland is to pay dividends annually after the board of directors of a company has proposed the distribution of dividends and a general meeting of shareholders has adopted the company’s financial statements and resolved on the amount of any dividends to be paid. Alternatively, the distribution of dividends may, according to the Finnish Companies Act, be based on the adopted financial statements prepared for that purpose before the end of the financial year. A general meeting of shareholders may also authorise the board of directors to resolve on the distribution of dividends for a period ending no later than the start of the next annual general meeting. Other than in the limited circumstances described below, a general meeting of shareholders may not resolve to distribute dividends in an amount exceeding that proposed by the board of directors. However, under the Finnish Companies Act and irrespective of the proposal by the board of directors, shareholders who hold at least one-tenth of all shares in a company may request at the annual general meeting of shareholders (before resolution on the use of profits is made) that, within the determined amount of distributable funds, the minimum of one-half of the financial year’s profit less any funds to remain undistributed pursuant to any provisions in the articles of association is distributed as dividends. Distribution of dividends on the demand of shareholders must not exceed the amount equivalent to eight per cent. of a company’s total shareholders’equity. The amount of dividends may not be in excess of distributable funds in the latest adopted financial statements of a company subtracted with the funds to remain undistributed pursuant to any provisions in the articles of association. The amount of dividends that may be distributed is at all times subject to the company remaining solvent after the distribution of dividends. Consequently, funds from a company shall not be distributed if it is known, or should be known, at the time of the distribution decision that the company is insolvent or that the distribution will cause the insolvency of the company. Under the Finnish book-entry securities system, dividends are paid by account transfers to the accounts of the shareholders appearing in the register. The right to claim dividends usually expires three years from the due date for the dividend payment. 4.5 Return of capital On a winding up or other return of capital, the shareholders are entitled pari passu amongst themselves, in proportion to the number of shares held by them and to the amounts paid up or credited as paid up thereon, to share in the whole of any surplus assets of the company remaining after the discharge of its liabilities. 4.6 Treasury shares Under the Finnish Companies Act, a company may acquire its own shares. Decisions on the acquisition of a company’s own shares must be made by the general meeting of shareholders. In a public limited company, the decision shall be made by a qualified majority of not less than two thirds of the votes cast and of the shares represented. A general meeting of shareholders may also authorise the board of directors for a fixed period of time, which cannot exceed 18 months, to decide on the purchase of the company’s own shares, using unrestricted equity. A general meeting of shareholders may resolve on the directed purchase of the company’s own shares, in which case shares are not purchased from shareholders in proportion to their shareholdings. A directed purchase is subject to there being “weighty financial reasons” for this on the part of the company. A public limited liability company may neither directly, nor indirectly through its subsidiaries, hold more than ten per cent. of its own shares.
307 4.7 Transfer of shares Upon a sale of shares in the Finnish book-entry securities system, the relevant shares are transferred from the seller’s book-entry account to the buyer’s book-entry account as an account transfer. The sale is registered as an advance transaction until settlement and the payment for the shares, after which the buyer will automatically be registered in the shareholder register of the relevant company. Where the shares are nominee-registered, a sale of shares does not require any entries in the Finnish book-entry securities system unless the nominee account holder is changed as a result of the sale. The Company’s Articles of Association do not contain any redemption or consent clauses preventing the free transferability of the Ordinary Shares. 4.8 Redemption obligation Under the Finnish Companies Act, a shareholder who holds shares representing more than 90 per cent of all the shares in a company and of the votes conferred by the shares is entitled to redeem the remaining shares in such company from other shareholders at fair market value. The Finnish Companies Act provides detailed provisions for the calculation of this threshold of shares and votes. In addition, a shareholder whose shares may be redeemed is entitled to request from the majority shareholder a redemption of the shares held in that company by the majority shareholder. If this threshold is reached, the company is obliged to register the fact forthwith with the Finnish Trade Register. The Redemption Board of the Central Chamber of Commerce would then appoint the requisite number of arbitrators to resolve any disputes related to the redemption and the redemption price. An ombudsman would be appointed to represent the interests of minority shareholders and the redemption price determined on the basis of the fair market value in respect of the period of time preceding the initiation of the arbitral proceedings. The Finnish Securities Markets Act imposes obligations on shareholders in certain circumstances (including a shareholder moving from below to above either 30 per cent. or 50 per cent. of the voting rights in a company) to launch a mandatory takeover bid to redeem all other shares and securities giving rise to an entitlement to shares in that company. There are a number of differences between the provisions of the Finnish Securities Markets Act and the UK Takeover Code. 4.9 Restrictions on foreign ownership Restrictions on foreign ownership of Finnish companies were abolished as such as of 1 January 1993. However, under the Act on the Control of Foreigners’ Acquisition of Finnish Companies of 1992 (1612/1992, as amended) (the “Control Act”), clearance by the Finnish Ministry of Employment and the Economy or the Ministry of Defence is required if a foreign person or entity, other than a person or entity from another member state of the European Economic Area or the Organization for Economic Co-operation and Development (the “OECD”), or a Finnish entity controlled by one or more such foreign persons or entities were to acquire a holding of one-third or more of the voting rights of a company. The Control Act is applicable to companies (i) with more than 1,000 employees during the current or preceding financial year; (ii) with net sales exceeding €168.2 million according to its latest approved financial statements; or (iii) with total assets exceeding €168.2 million according to its latest approved financial statements. The Ministry of Employment and the Economy or the Ministry of Defence could refuse clearance where the acquisition would jeopardise important national interests, in which case the matter is referred to the Finnish Government. 4.10 Foreign exchange control Shares of a Finnish company may be purchased by non-residents of Finland without any separate Finnish exchange control consent. Non-residents may receive dividends without separate Finnish exchange control consent, but a company distributing a dividend is liable to withhold the withholding tax from the assets being transferred from Finland unless there is an applicable exemption in a tax treaty eliminating double taxation. Shares of a Finnish company may be sold in Finland by non-residents, and the proceeds of such sale may be transferred out of Finland in any convertible currency. There are no Finnish exchange control regulations applying to the sale of shares of a Finnish company to other non-residents.
308 4.11 Other minority shareholder rights recognised by the Finnish company law Certain other rights belonging to minority shareholders are summarised below. A matter pertaining to the approval of annual accounts and the use of profit in an annual general meeting of shareholders shall be postponed and referred to a continuation meeting if such request is presented by shareholders representing at least one-tenth of all the shares in a company. Each shareholder is entitled to present questions to the directors at a general meeting of shareholders and receive information on circumstances that may affect the evaluation of a matter dealt with by the meeting. If annual accounts of the company are considered at the meeting, the right to receive information also applies to more general information on the financial position of the company, including, for example, the relationship of the company with other companies within the same group of companies. However, the directors must not disclose information if such disclosure would cause essential harm to the company. If the question of a shareholder can only be answered on the basis of information not available at the meeting, the answer must be provided in writing within two weeks. The answer shall be delivered to the shareholder asking the question and to other shareholders requesting the same. A special examiner may be appointed by the authorities to review a company’s accounting and management functions if a proposal by a shareholder to such effect has been supported by shareholders holding at least one tenth of all shares or at least one third of the shares represented at the general meeting. In a public limited liability company that has several classes of shares the proposal requires support by at least one tenth of all shares in one of the share classes or at least one third of the shares in one of the share classes represented at the general meeting. A general meeting of shareholders shall make the decision as to whether to approve a merger in the case of the non-surviving company on a legal merger (other than a subsidiary merger) A general meeting of shareholders shall make the decision as to whether to approve a demerger in the case of the original parent company on a legal demerger (which for a Finnish company requires all or part of the original parent company to be demerged into one or more recipient companies). Generally the decision on a legal merger for the surviving company and the decision on a legal demerger for a recipient company shall be made by the board of directors. However, shareholders in a surviving/recipient company must be notified and, if shareholders with at least one twentieth (1/20) of the shares in the company so request, the decision to approve the merger/demerger shall be made by the general meeting of that company. In a subsidiary merger, the decision may be made by the board of directors of the merging company. A shareholder in the merging company, and a shareholder in the demerging company, may at the general meeting that is to decide on the merger/demerger demand that his or her shares or demerger consideration respectively be redeemed; the shareholder shall be reserved an opportunity to make this demand before the decision on the merger/demerger is made. A shareholder who demands redemption shall vote against the merger/demerger decision. A shareholder may object to a decision by the general meeting by bringing an action against the company where: (i) the procedural provisions of the Finnish Companies Act or the articles of association have been breached and the breach may have had an effect on the contents of the decision or otherwise on the rights of a shareholder; or (ii) the decision is otherwise contrary to the Finnish Companies Act or the articles of association. The action of objection shall be brought within three months of the decision. If no action has been brought in time, the decision shall be deemed valid. One or several shareholders have the right to bring an action in their own name for the collection of damages to a company under provisions of the Finnish Companies Act regarding the liability of the management, liability of shareholders and liability of the chairperson of the general meeting as well as the provision of the Audit Act (459/2007, as amended) regarding the liability of the auditor, if it is probable at the time of filing of the action that the company will not make a claim for damages and: (i) the claimants hold at least one tenth of all shares at that time; or (ii) it is proven that the non-enforcement of the claim for damages would be contrary to the principle of equal treatment, as referred to in the Finnish Companies Act.
309 4.12 Disclosure of interests in shares Under Finnish law, the minimum threshold for disclosure of shareholdings in a Finnish publicly listed company is five per cent. 4.13 Changing the rights of shareholders Shareholder rights in Finnish limited liability companies are mainly based on the provisions of the Finnish Companies Act and the articles of association of a company. Under Finnish law, proposals to amend the articles of association must be supported by two thirds of the vote, as well as of the shares represented, at a general meeting of shareholders. Certain resolutions which would affect the rights of the shareholders are subject to the consent of all shareholders, or should the amendment apply to certain shareholders only, in addition to the applicable majority requirement, the consent of the shareholders that would be affected by the resolution. 4.14 Management of a Finnish limited liability company A Finnish limited liability company is managed by its board of directors and, if elected, the Managing Director and the Supervisory Board. The Company has a Managing Director (although it generally uses the title “Chief Executive Officer” for its Managing Director) but not a Supervisory Board. 4.15 Board of directors Under the Finnish Companies Act, the board of directors shall oversee the administration of a company and the appropriate organisation of its operations. The board of directors is responsible for ensuring appropriate arrangements are in place with regard to the control of a company’s accounts and finances. 4.15.1 Number and domicile of directors According to the Company’s Articles of Association the Board must consist of at least three and no more than nine ordinary members. Under the Finnish Companies Act, at least one of the board members must be the resident of an EEA country unless the National Board of Patents and Registration of Finland has granted an exception from such requirement. 4.15.2 Dismissal of board members Under the Finnish Companies Act, a member of the board of directors may be dismissed ahead of term by the party who appointed the member. A member appointed by a person with special appointment rights may be dismissed by the general meeting, if the articles of association have been amended so that the special right of appointment no longer applies. The Company’s Articles of Association do not contain such special rights. 4.15.3Decision-making Under the Finnish Companies Act, a company’s board of directors is obliged always to act in the company’s interests and in such a way that its acts or measures are not likely to produce unjustified benefit to any shareholder or third party. Decisions must be taken by majority vote and, in the case of a tie the chairman has the casting vote. In the event of there being a tie in the election of a chairman of the board of directors, the decision is made by drawing lots. A director is prevented from considering and voting on a matter concerning a contract between himself/herself and the company. A director is also prevented from considering and voting on a matter concerning a contract between the company and a third party if that director, or a person connected to the director, may derive a significant benefit from the matter and that benefit may be contrary to the interests of the company. However, a director is not necessarily considered to have a conflict of interest as a result of being employed by or being a director of another company with whom the company is dealing and whose interests may be contrary to the interests of the first company. This requirement applies to all actions of the company, including corporate transactions and litigation. It is recommended, for good corporate governance, that directors do not vote in certain circumstances where strictly they are not prohibited from voting, such as certain takeover situations.
310 4.16 Managing director Under the Finnish Companies Act, a company’s managing director must be appointed by the board of directors. The managing director has the right to resign and the board of directors shall have the right to dismiss the managing director from the post. The managing director is responsible for overseeing the executive management of the company in accordance with the instructions and orders given by the board of directors. The managing director must ensure that the accounts of the company are in compliance with the law and that its financial affairs have been arranged in a reliable manner. The managing director must supply the board of directors with the information necessary for the performance of its duties. 4.17 Takeover bids Pursuant to the Finnish Securities Markets Act, a shareholder holding more than three-tenths of the voting rights carried by the shares of a company after the share of the company has been admitted to public trading shall launch a takeover bid for all the remaining shares and securities entitling the holder to receive shares issued by the company. A mandatory takeover bid shall also be launched if the interest of a shareholder, as a result of other than a mandatory bid, exceeds one half if the voting rights carried by the shares of the company after the shares of the company have been admitted to public trading. The Finnish Securities Markets Act contains presumptions which shall be considered as a starting point for determination of fair price to be offered for share in the mandatory takeover bid. Primarily, the starting point in determining the fair price to be offered for the shares is the highest price paid by the offeror in the period of six months preceding the obligation to launch the bid. In the absence of such price the starting point for determining the fair price is an average trading price weighted with trading volumes for the three preceding months. A minority shareholder is not obliged to sell shares to the offeror pursuant to a mandatory takeover bid under the Finnish Securities Markets Act as opposed to when shares are redeemed under the provisions of the Finnish Companies Act. Other than the relevant rules contained in the Finnish Companies Act, no other rules exist in the Company’s constitutional documents concerning mandatory takeover bids, squeeze-outs and sell-out rules. There have been no third party takeover bids for the Company or members of the Group during the last financial year and current year and the Company is not aware of any pending third party takeover bids for the Company or members of the Group.
5. Articles of Association The Articles of Association are available for inspection on the Company’s website www.ruukkigroup.fi and at the address specified in paragraph 20 of this Part XII. According to the Finnish Companies Act, the mandatory provisions to be included in a company’s articles of association are the trade name, domicile and line of business of the company. All other provisions are optional. The Finnish Companies Act contains presumed provisions which will apply if not otherwise provided for in the articles of association. In consequence and as a matter of custom, Finnish companies typically have much shorter articles of association than English companies. The Articles of Association, which were last amended on 21 April 2010, contain provisions to the following effect: 5.1 Business name and domicile of the Company The business name of the Company is Ruukki Group Oyj. The Company’s business name in English is Ruukki Group Plc. The company is domiciled in Espoo, Finland. 5.2 Line of business The Company is the parent company of a diversified group of companies and is a long-term owner of the companies it owns. The Company’s objective is to develop the companies it owns by acting through the board of directors or other bodies, by acting as an adviser or financer, or by supporting the entrepreneurship in other ways. The Company may, in lines of business separately
311 chosen by its board of directors, be engaged in business activities directly or indirectly through the companies it owns. The Company, or companies in its ownership, may conduct business operations in Finland and abroad. The Company may also conduct its business under auxiliary business names. 5.3 Book-entry securities system The Ordinary Shares are registered in a book-entry securities system. 5.4 Board of directors The Board must be composed of at least three and no more than nine ordinary members. A Director’s term of office shall expire at the end of the first annual general meeting of Shareholders following his/her election. 5.5 Managing director The Company has a managing director, who is appointed and discharged by the Board. 5.6 Auditors The Company shall have one ordinary auditor and one deputy auditor. Should an audit firm authorised by the Central Chamber of Commerce be elected as the ordinary auditor, no deputy auditor need be elected. The term of the auditor shall expire at the end of the first annual general meeting of shareholders following its election. 5.7 Authority to represent the Company The Company shall be represented by the managing director and the chairperson of the Board, each having sole authority to represent the Company. The Board may give a right to represent the Company solely or jointly to other named persons. 5.8 Notice to convene a meeting Notice of a general meeting of Shareholders shall be served on the Shareholders no earlier than two months and no later than twenty one days prior to the meeting but at least nine days prior to the record date of the meeting by registered post mailed to the addresses reported by the Shareholders to the Company’s shareholder register or in some other documented manner or by publishing the notice of the meeting in at least one newspaper with nationwide circulation in Finland selected by the Board of Directors. Aside from Espoo, where the Company’s registered office is located, the annual general meeting may also be held in Helsinki, Oulu, Oulunsalo or Vantaa, Finland. 5.9 Annual general meeting The annual general meeting shall be held annually on a date determined by the Board within a period of six months from the end of the previous financial period. In addition to Espoo, where the Company is domiciled, the annual general meeting may also be held in Helsinki, Oulu, Oulunsalo or Vantaa. At the meeting: 5.9.1 the annual accounts (consisting of the income statement, the balance sheet and the annual report) and the auditor’s report shall be presented; 5.9.2 the following shall be decided upon: (a) approval of the income statement and the balance sheet; (b) any measures occasioned by the profit or loss shown by the approved balance sheet; (c) grant of discharge to the Directors and the Chief Executive Officer; (d) remuneration of the Board; and (e) the number of members of the Board; 5.9.3 the members of the Board and the auditors and deputy auditors shall be elected; and 5.9.4 any other matters included in the notice to convene the meeting shall be discussed.
312 5.10 Accounting period The accounting period of the Company is a calendar year. 5.11 Preliminary enrolment In order to participate in the general meeting of Shareholders, Shareholders must so inform the Company before the end of the registration period stated in the notice of the general meeting of Shareholders, which cannot be earlier than ten days before the meeting. The Articles of Association do not make specific reference to holders of Depositary Interests and potential investors should note that holders of Depositary Interests have different rights to holders of Ordinary Shares as regards participation at general meetings, as described in paragraph 2.4 of Part X. 5.12 Arbitration clause Any dispute related to company law between the Company, on the one hand, and a member of the Board, the managing director, an auditor, or a Shareholder, on the other hand, shall be settled in an arbitration procedure in accordance with the provisions of the Finnish Arbitration Proceedings Act. The arbitration tribunal shall consist of one (1) arbitrator appointed by the Arbitration Institute of the Finnish Central Chamber of Commerce. The arbitral tribunal shall render its award within four (4) months of the date on which it is established.
6. Directors’ and Senior Managers’ interests 6.1 Other directorships Save as set out below, none of the Directors and Senior Managers have been a member of the administrative, management or supervisory bodies of any company or a partner of any partnership at any time in the previous five years (other than the Company and subsidiaries of the Company of which those persons are or have also been directors): Current directorships and Past directorships and partnerships held Name partnerships in the previous five years Directors Jelena Manojlovic n/a KDM Associates Kermas
Philip Baum n/a AACMED Holdings (Pty) Limited (in voluntary liquidation) Amzim Holdings Limited Anglo American Corporation (Central Africa) Limited Anglo American Corporation Zimbabwe Limited Anglo American Farms Investment Holdings Limited Anglo American Farms Limited Anglo American Group Employee Shareholder Nominees Limited Anglo American SA Finance Limited Anglo American South Africa Limited Anglo Corporate Enterprises (Pty) Limited Anglo Ferrous Metals Marketing Limited Anglo Operations (Australia) Pty Ltd Anglo Operations Limited Anglo Platinum Limited Anglo South Africa (Pty) Limited
313 Current directorships and Past directorships and partnerships held Name partnerships in the previous five years Directors Anglo South Africa Capital (Pty) Limited Anglo Ventures (SA) (Pty) Limited Business Partners Limited Exxaro Resources Limited (previously Kumba Resources Limited) Hulamin Limited (previously Hulett Aluminium (Pty) Limited) Iron Duke Pyrites (Pvt) Limited JOBCO (Section 21 Company – Operating as Business Trust) Kumba Iron Ore Limited Kumba Resources Limited (now Exxaro Resources) LLX Minas-Rio S.A. Longboat Limited Manakin Investments B.V. Mbulwa Estate Limited Mbulwa Estate Limited Minerals and Energy Education & Training Institute Orient Ocean Holdings Limited RIL Limited Samancor Limited Samancor Manganese (Proprietary) Limited Tenon Investment Holdings (Pty) Limited Tongaat Hulett Limited (previously The Tongaat-Hulett Group Limited) Unki Mines (Pvt) Limited Vergelegen Wine Estate(Pty) Limited Vergelegen Wines (Proprietary) Limited Zimbabwe Alloys Limited
Paul Everard New World Resources NV n/a
Markku Kankaala JSH Real Estate Oy KOY Iin Kauppakeskus Maanrakennus R Jussila Oy Kärkkäinen Express Oy Melvi Oy Suomen Sälepuu Oy Norecap Oy PM Ruukki Oy Ruka Top Oy
Terence McConnachie Alumicor Intellectual Property Annie Malan Media Solutions Alumicor Maritzburg Great Australian Resources South Africa Alumicor SA Holdings Merafe Chrome and Alloys Danyland Mining SA Merafe Ferrochrome and Mining Dwyka Resources SA Merafe Resources Hacra Mining and Exploration Micromin Company Sylvania Metals Sylvania Minerals
314 Current directorships and Past directorships and partnerships held Name partnerships in the previous five years Directors Kyan Assets Mining Corporation SA Nduzi Real Estate Projects Summer Sun Trading 210 Sylvania Mining Sylvania Resources Limited Sylvania South Africa
Chris Pointon Greendown Consulting BHP Billiton Limited Cerro Matoso SA Minera Las Cenizas SA European Nickel Plc GRD Limited Holmwood Partners Ltd
Barry Rourke 3Legs Resources plc Cadogan Petroleum Plc Croydon Business Limited Castleford Mining Croydon Economic Columbus Acquisitions Corp. Development Company Threshold Housing Limited Threshold Support New World Resources NV Surrey and Borders Partnership NHS Trust Senior Managers Alwyn Smit Basel Trust Corporation; Cedef S.A. Decillion Management Pty Ltd Cedef Assets Limited Decillion A.G. Decillion Limited Decillion Capital Pty Ltd Decillion Fund Management Pty Ltd Decillion Holdings BV Decillion Securities Pty Ltd Decillion Securities S.A.
Danko Koncar Chrome Holding Limited Samancor Chrome Limited Kermas Samchrome Limited
Alistair Ruiters Accor Voucher and Card Samancor Chrome Limited Services (Pty) Ltd Azlo (Pty) Ltd Carinacron (Pty) Ltd Dextra Holdings (Pty) Ltd Duikerskrans Resources (Pty) Ltd Ehlobo Capital (Pty) Ltd Ehlobo Group (Pty) Ltd Ehlobo Holdings (Pty) Ltd Ehlobo Health Care (Pty) Ltd Ehlobo Metals (Pty) Ltd Ehlobo Resources (Pty) Ltd Ehlobo Voucher Services (Pty) Ltd
315 Current directorships and Past directorships and partnerships held Name partnerships in the previous five years Gootspa Investments (Pty) Ltd Jaquan Capital Management (Pty) Ltd Karibo Coal (Pty) Ltd Lihlobo Corporate Services (Pty) Ltd Metmar Limited Midnight Storm Investments 403 (Pty) Ltd Nulane Investments 165 (Pty) Ltd Paardekloof Resources (Pty) Ltd PGR 3 Investments (Pty) Ltd PGR Manganese (Pty) Ltd Polkadots Properties 93 (Pty) Ltd Sediko Capital Africa (Pty) Ltd Sediko Holdings (Pty) Ltd Selemo Strategic (Pty) Ltd Umcebo Holdings (Pty) Ltd Umcebo Mining (Pty) Ltd Veremo Holdings (Pty) Ltd Veremo Industries (Pty) Ltd Veremo Minerals (Pty) Ltd Veremo Mining (Pty) Ltd Wholesome Africa Trading (Pty) Ltd
Thomas Hoyer Helsinki Capital Partners n/a Advisory Oy Helsinki Capital Partners Oy Helsinki Capital Partners Fund Management Company Oy
Ilona Halla Tekes, Process Team Ernst & Young Oy Kustannus Oy Tase Balans Ab Aldata Solution Oyj
6.2 Directors’ and Senior Managers’ remuneration and benefits The salaries and fees for the directors and senior managers in 2009 are set out below. In 2009, the compensation of the members of the Board was €7,500 per month for the Chairperson and €5,000 per month for the other directors. The total management remuneration, for the directors and the persons considered to be senior managers in 2009, including option expenses and similar share based expenses in 2009 (under IAS 24.16) was €1,355,000 plus Finnish statutory pension contributions (TyeL) of €237,000. This figure does not include the remuneration or pensions contributions for Ilona Halla and Alistair Ruiters. Their remuneration is set out below. The Group made Finnish statutory pension contributions (TyeL) of less than €1,000 on behalf of Ilona Halla but did not make any pensions or similar contributions on behalf of Alistair Ruiters in 2009. Accruals based and unpaid salaries and fees for the Directors and Senior Management, mainly relating to bonus accruals for the Group’s Chief Executive Officer and a subsidiary’s Chief
316 Executive Officer amounted to €265,000 at 31 December 2009. The total remuneration includes a total of €991,000 IFRS-2 based options expenses and other similar share based expenses of which €637,000 relate to Alwyn Smit and expenses of €354,000 relate to the Group’s previous Deputy Chief Executive Officers Antti Kivimaa and Jukka Havia. Salaries Fees €’000 €’000 Current Directors Jelena Manojlovic, Board member, Chairperson from 17 June 2009 (1) —75 Philip Baum, appointed as Board member from 21 April 2010 (2) —— Paul Everard, appointed as Board member from 21 April 2010 (2) —— Markku Kankaala, Board member during 2009 (2) (3) —66 Terence McConnachie, Board member during 2009 (1) 60 Chris Pointon, appointed as Board member from 21 April 2010 (2) —— Barry Rourke, appointed as Board member from 21 April 2010 (2) —— Current Senior Managers Alwyn Smit, CEO, Board member during 2009 and until 21 April 2010, Chairman until 17 June 2009 (1) 458 75 Danko Koncar, CEO Minerals processing businesses from 4 November 2009 (1) —— Alistair Ruiters, CEO Ruukki South Africa from 4 November 2009 (2) 30 — Thomas Hoyer, CEO house building and wood processing businesses from 1 October 2009, Board member in 2009 and until 21 April 2010, (2)(4) 74 60 Ilona Halla (2) 15 — Other persons being directors and/or senior managers for all or part of 2009 Jukka Havia, Deputy CEO in 2009 and until 15 April 2010 (1) 243 — Esa Hukkanen, Board member until 7 May 2009 (1) 32 20 Antti Kivimaa, Deputy CEO until 30 September 2009 (1) 123 — Total (2) 974 356
Notes
(1) audited (2) unaudited (3) The figure of €60,000 disclosed in the 2009 audited consolidated financial statements comprised his fees as Director of the Company. He also received a further €6,000 as Chairman of Junnikkala. (4) Thomas Hoyer’s salary was incorrectly stated in 2009 audited consolidated financial statements as €150,000.
6.3 Directors’ and Senior Managers’ service contracts Directors Each of the Directors is a non-executive director and currently does not have a service contract with the Company. The 2010 Annual General Meeting resolved that the Chairperson of the Board shall be paid €7,500 per month, the new Board members (Philip Baum, Paul Everard, Chris Pointon and Barry Rourke) €6,500 per month and the continuing Board members (Markku Kankaala and Terence McConnachie) €5,000 per month. In addition, those members of the Board that are members of the Audit Committee shall be paid for their work on the Audit Committee as follows: the committee chairman €1,000 per committee meeting and other members €500 per committee meeting. For any other committees, the chairman shall be paid €600 per committee meeting and other members shall be paid €300 per committee meeting. The term of office of each of the Directors ends at the end of the 2011 annual general meeting. The Directors are not entitled to any additional benefits upon termination of their appointment.
317 Each of the Directors has been granted subscription rights in respect of either 250,000 or 200,000 Ordinary Shares, which will be issued free of charge, in the circumstances described in and subject to the conditions described in paragraph 6.5.3 of this Part XII. Alwyn Smit Alwyn Smit has a service contract with the Company which was entered into in April 2010 with retrospective effect from 11 September 2008. The contract provides for a fixed monthly gross salary of €30,000 and an annual bonus based on targets set by the Board and capped at a maximum of 24 months’ salary. The bonus for 2010 has been tied to the following three indicators by the Board in April 2010: (i) realised 2010 EBITDA of the Group on a 12 point scale between the 2009 performance and the 2010 budget (50 per cent.); (ii) share price performance on a five point scale between the closing price on 31 December 2009 and a price €0.50 above that price (20 per cent.); and (iii) the success of projects of the Company including the London listing process and financial reporting procedures (30 per cent.). The Company is also obliged to pay a further €84,518 per annum directly to service providers nominated by Alwyn Smit for the provision of pensions, life insurance and other benefits or directly to Alwyn Smit to cover such services and benefits. The Company is obliged to provide pensions coverage equal to the level he would receive under the Finnish TyeL system for a Finnish citizen residing in Finland. The Company is obliged to arrange for insurance cover at a level to cover the exercise of the 2,900,000 options granted under the I/2008 option scheme, as well as travel and other insurance. The agreement also contains a non-compete clause in which Alwyn Smit agrees not to participate in any activity directly or indirectly competing with that of the Company or which otherwise is contrary to its reasonable business interests for the duration of the service contract and for six months following termination thereof. The notice period for termination is six months for notice by the Company and three months for notice by Alwyn Smit. Alwyn Smit is entitled to pay and the continuation of contractual benefits during the notice period but no additional benefits upon termination. Save for the continuation of pay and contractual benefits during the notice period and the entitlement of Alwyn Smit to transfer relevant insurances to himself, his service contract does not provide for any additional benefits upon termination. If Alwyn Smit resigns on his own initiative, the Company may cancel any options granted under the I/2008 option scheme for which the exercise period has not begun. Danko Koncar Danko Koncar has a service contract with Ruukki Holdings Ltd, the holding company for the minerals processing business segment, which was entered into on 30 June 2010, with effect from contract date of 4 November 2009, which provides for a fixed monthly gross salary of €25,000, and an annual bonus based on targets set by the Board of Directors of Ruukki and capped at 24 months’ salary. The bonus for 2010 is based on the 2010 EBITDA of the minerals processing business segment on a 24 point scale between the 2009 performance and the 2010 budget. Danko Koncar is entitled to customary benefits including pensions benefits in accordance with mandatory provisions of applicable law, occupational health care and travel and other insurances. The agreement also contains a non-compete clause in which Danko Koncar agrees not to participate in any activity directly or indirectly competing with that of Ruukki Holdings Ltd or which otherwise is contrary to its reasonable business interests for the duration of the service contract and for six months following termination thereof, without the prior written approval of the Board of Directors of Ruukki. The notice period for termination is six months for notice by the company and three months for notice by Danko Koncar. Save for the continuation of pay and contractual benefits during the notice period and the entitlement of Danko Koncar to transfer relevant insurances to himself, his service contract does not provide for any additional benefits upon termination. Danko Koncar’s service contract also contains certain provisions to reflect the terms of the Relationship Agreement (see paragraph 10.5 of Part XII). Alistair Ruiters Alistair Ruiters has a service contract with Ruukki South Africa (Proprietary) Limited which was entered into on 26 January 2010 with effect from 1 January 2010 which provides for a fixed annual remuneration package with a total cost to Ruukki South Africa (Proprietary) Limited of
318 ZAR 2.5 million per annum and to participate in any bonus scheme applicable from time to time, the details of which will be determined by the board of Ruukki South Africa (Proprietary) Limited. Ruukki South Africa (Proprietary) Limited is obliged to reimburse Alistair Ruiters for the capital cost and certain running costs for a vehicle to be made available by him for use on company business and certain other customary benefits. The agreement contains a non-compete clause in which Alistair Ruiters agrees not to carry on or be interested or engaged in or concerned with any company in certain prescribed areas or carrying on relevant activities for the duration of the service contract and for six months following termination thereof. The notice period is six months notice by either party. Save for continuation of pay and contractual benefits during the notice period the service contract does not provide for any additional benefits upon termination. Thomas Hoyer Thomas Hoyer has a service contract with Ruukki Yhiöt Oy which was entered into in July 2009, with effect from 1 October 2009, which provides for a fixed monthly gross salary of €25,000 and an annual bonus based on targets set by the Board and capped at 24 months’ salary. The bonus criteria for 2010 is based on the 2010 EBITDA of the house building and wood processing business meeting a minimum target on a 24 point scale starting at €6.0 million. The contract also provides for a signing bonus of €100,000 which was paid by the transfer of treasury shares. Mr Hoyer is entitled to customary benefits including pensions benefits in accordance with mandatory provisions of Finnish law (TyeL), a company car, occupational health care, travel and other insurances and luncheon vouchers. The agreement also contains a non-compete clause in which Thomas Hoyer agrees not to participate in any activity directly or indirectly competing with that of Ruukki Yhiöt or which otherwise is contrary to its reasonable business interests for the duration of the service contract and for six months following termination thereof. The notice period for termination is six months for notice by the Company and three months for notice by Thomas Hoyer. Save for continuation of pay and contractual benefits during the notice period and the entitlement of Thomas Hoyer to transfer relevant insurances to himself, his service contract does not provide for any additional benefits upon termination. Thomas Hoyer has been granted options in respect of 1.0 per cent. of the shares of Ruukki Yhiöt Oy. The subscription period for half the options is from 1 April 2011 and for the other half from 1 October 2012, in each case ending on 31 December 2015. The option price is based on an enterprise value of €67 million for Ruukki Yhiöt. Should Mr Hoyer’s employment with Ruukki Yhiöt Oy terminate prior to the commencement of the option period, Ruukki Yhiöt Oy may unilaterally cancel the options. Ilona Halla Ilona Halla has a service contract with the Company which was entered into on 17 February 2010 which provides for a fixed monthly gross salary of €16,000, a vacation bonus of 50 per cent. of salary for the duration of five weeks annual vacation and an annual bonus based on targets set by the Board and capped at 12 months’ salary. The bonus criteria for 2010 have been tied to the following three indicators by the Board in April 2010, (i) realised 2010 EBITDA of the Group on a 5 point scale between the 2009 performance and the 2010 budget (40 per cent.); (ii) external financial reporting of the Group for the interim reports and annual report (40 per cent.); and (iii) the implementation of internal management reporting procedures appropriate to a Company listed in London and the implementation of IFRS reporting and 12 month rolling forecasting by subsidiaries (20 per cent.). Ms Halla is entitled to customary benefits including pensions benefits in accordance with mandatory provisions of Finnish law (TyeL), occupational health care, travel and other insurances and luncheon vouchers. The agreement also contains a non-compete clause in favour of the Company for six months following termination. The notice period for termination is six months for notice by either party. In addition to continuation of pay and contractual benefits during the notice period and the entitlement to transfer relevant insurances to herself, the Company would be obliged to pay a further six month’s salary in addition to the normal salary for the notice period of Ilona Halla if the Company terminates Ilona Halla’s service contract. In the event of Ilona Halla’s death the severance pay is payable to her estate.
319 6.4 Shareholdings The following table sets out the Ordinary Shares held by the Directors and Senior Managers as at 28 June 2010 (being the latest practicable date prior to publication of this document). Percentage of voting rights in Director/Senior Manager Number of Ordinary Shares respect of shareholding Jelena Manojlovic and Danko Koncar (1) 70,766,500 28.52 Philip Baum — — Paul Everard — — Markku Kankaala (2) 8,471,785 3.42 Terence McConnachie — — Chris Pointon — — Barry Rourke — — Alwyn Smit (3) 1,905,000 0.77 Alistair Ruiters — — Thomas Hoyer (4) 52,083 0.02 Ilona Halla — — Total 81,195,368 32.74
Notes (1) The interest of Jelena Manojlovic and Danko Koncar, who are married to each other, comprises their indirect interest in the 70,766,500 Ordinary Shares held by Kermas, a company of which, Danko Koncar is a director and which is controlled by Danko Koncar’s cousin (2) The interest of Markku Kankaala includes 24,500 Ordinary Shares owned by his wife. (3) The interest of Alwyn Smit comprises the 1,905,000 share held by a trust of which Alwyn Smit and his immediate family members are beneficiaries. (4) The 52,803 Ordinary Shares are subject to a lock up arrangement under the terms of Mr Hoyer’s service contract until 1 October 2011.
6.5 Share options and subscription rights The interests of the Directors and Senior Managers in options over Ordinary Shares under the I/2005 option scheme, the I/2008 option scheme, the I/2005 option scheme and the I/2010 subscription rights as at 28 June 2010 (being the latest practicable date prior to publication of this document) are set out in the following tables: 6.5.1 I/2005 option scheme None of the current Directors and Senior Managers has any interest over Ordinary Shares through the I/2005 option scheme. 6.5.2 I/2008 option scheme Current Director/Senior Number of Share price at exercise Manager Date of grant options date of grant (€) price (€) Exercise period Alwyn Smit 28 October 2008 1,450,000 1.26 2.22 1 Oct 2009-31 Dec 2015 Alwyn Smit 28 October 2008 1,450,000 1.26 2.22 1 Oct 2010-31 Dec 2015 6.5.3 I/2010 subscription rights under the share issue resolutions of the 2010 annual general meeting and the Board meeting of 1 June 2010 Jelena Manojlovic, Philip Baum, Paul Everard, Chris Pointon and Barry Rourke each have the right to receive 150,000 Ordinary Shares, subject to entering into a lock up agreement in respect of those shares. Markku Kankaala and Terence McConnachie each have the right to receive 100,000 Ordinary Shares, subject to entering into a lock up agreement in respect of those shares. If issued, these shares will be subject to a three year lock up from the date of subscription/transfer. Should the Director’s term of office end prior to the end of the first, second or third year following the date of subscription/transfer all, two thirds and one third of the Ordinary Shares respectively may be redeemed free of charge by the Company.
320 Each of the Directors has the right to receive a further 50,000 Ordinary Shares if he or she is still a Director after the second annual general meeting of the company following the 2010 annual general meeting. If issued, these shares will be subject to a three year lock up from the date of subscription/transfer. If issued prior to the third annual general meeting following the 2010 annual general meeting and the director’s term of office ends prior to that date one third of these shares will be redeemable by the Company free of charge. Each of the Directors has the right to receive a further 50,000 Ordinary Shares if he or she is still a Director after the third annual general meeting of the company following the 2010 annual general meeting. If issued, these shares will be subject to a three year lock up from the date of subscription/transfer. The subscription period for all Ordinary Shares in the I/2010 subscription right ends on 21 April 2015. The maximum number of Ordinary Shares which may be subscribed under the I/2010 subscription right is 1,650,000. Of these, subscription rights in respect of 250,000 Ordinary Shares were granted by the Board on 1 June 2010 pursuant to the general authorisation in respect of 100,000,000 Ordinary Shares, options or other rights referred to in paragraph 3.3 of this Part XII, on the same terms as the subscription right for the other 1,400,000 Ordinary Shares specifically approved by Shareholders at the 2010 annual general meeting. No subscription price is payable by a Director exercising the subscription right. Ruukki estimates that the cost of the share based payments, which will be split unevenly over three years, will be approximately €2.5 million. 6.5.4 Other option rights Jelena Manojlovic and Danko Koncar are also indirectly interested in up to 73,170,731 Ordinary Shares due to Danko Koncar’s role as a director of Kermas, which has 73,170,731 option rights, which will become exercisable at a price of €2.30 (as adjusted for dividends and distributions since November 2008 and as at the date of this document such adjusted price being €2.22) should there be a profit share in relation to the earn out relating to the acquisition of the European minerals processing business. See also paragraph 10.3 of this Part XII of this document. 6.6 Confirmations Save as set out below, none of the Directors or Senior Managers has at any time in the last five years: 6.6.1 had any convictions in relation to fraudulent offences; or 6.6.2 been a member of the administrative, management, or supervisory body of a company or partner in a partnership associated with any bankruptcies, receiverships or liquidations; or 6.6.3 been subject of any official public incrimination and/or sanctions by statutory or regulatory authorities (including designated professional bodies); or 6.6.4 been disqualified by a court from acting as a member of the administrative, management or supervisory bodies of an issuer or from acting in the management or conduct of the affairs of any issuer. Markku Kankaala was a director of Incap Furniture Oy until May 2008. Incap Furniture Oy is a former subsidiary of the Company and is currently an associate of the Company. Incap Furniture Oy is currently subject to the Finnish corporate restructuring process. Other than Jelena Manojlovic and Danko Koncar (who are married to each other) there are no family relationships between any of the Directors and/or the Senior Managers. Dr Koncar has informed the Company that, in 1977, he was convicted by the District Court of Zagreb of the former Socialist Federal Republic of Yugoslavia on charges related to foreign currency conversion offences during his employment at SOUR Jugoturbina. He served a prison sentence. The trial was conducted against the backdrop of a political struggle in the Socialist Federal Republic of Yugoslavia. Dr Koncar has always maintained that he was innocent of the
321 charges, the case against him was politically motivated and was improperly convicted. Furthermore, SOUR Jugoturbina declared at his trial that the company incurred no damage as a result of any actions by Dr Koncar. Upon his release from prison, Dr Koncar was immediately re-hired by SOUR Jugoturbina. The Directors do not consider that Dr Koncar’s activities in the Socialist Federal Republic of Yugoslavia or his conviction are relevant to his suitability to act as a senior manager and/or director of the Company. 6.7 Conflicts of interest Save as set out below no Director or Senior Manager has any potential conflicts of interest between his or her duties to the Company and his or her private interests and or other duties. Danko Koncar is a director of Kermas and his cousin owns 99.0 per cent. of the shares in Kermas. Jelena Manojlovic is married to Danko Koncar. The relationship between the Company, Danko Koncar and Kermas is governed by the Relationship Agreement summarised in paragraph 10.5 of this Part XII. Markku Kankaala is the owner of Ruka Top Oy, a company which from time to time provides accommodation services to the Group. Alwyn Smit and other members of his family are indirectly beneficial shareholders in a company which provides transport services in South Africa, including to Mogale. The other shareholder in that business is one of the vendors who sold Mogale Alloys to the Group. 6.8 Director appointment arrangements No arrangement or understanding exists with major Shareholders, customers, suppliers or others, pursuant to which any Director or Senior Manager was selected as a member of the administrative, management or supervisory bodies or member of senior management. 6.9 Restriction on disposal of Ordinary Shares Other than in connection with the Lock-up Agreement referred to in paragraph 10.3 of this Part XII, the lock up agreements in respect of the Ordinary Shares to be issued and/or transferred from treasury pursuant to the I/2010 subscription right as described in paragraph and 6.5 of this Part XII and the lock up arrangement in respect of Thomas Hoyer’s shares described in paragraph 6.4 of this Part XII no restrictions have been agreed by any Director or Senior Manager on the disposal within a certain period of time of their holdings in the Ordinary Shares.
7. Employees The details of the number of employees employed by the Group in the years ended 31 December 2007, 2008 and 2009 are set out in the table below. Average personnel by business area for the year ended 31 December: 2007 2008 2009 Minerals 0 69 517 Wood processing and house building 226 306 295 House building 120 113 88 Sawmills (1) 106 151 158 Pallets (1) included above 42 49 Group management and HQ 7 8 9 Other operations 47 35 3 Discontinued operations 587 495 0 Total 866 913 824
Note (1) The 2007 figures on the line entitled “sawmills” represents the sawmills business and the pallets business together.
322 Personnel by business area as at 31 December: 2007 2008 2009 Minerals 0 404 629 Wood processing and house building 230 301 253 House building 118 99 91 Sawmills (1) 112 150 116 Pallets (1) included above 52 46 Group management and HQ 7 8 9 Other operations 46 8 2 Discontinued operations 675 0 0 Total 958 721 893
Note (1) The 2007 figures on the line entitled “sawmills” represents the sawmills business and the pallets business together.
With regard to the house building business, in addition to the employees employed by the Group, a significant number of the workers who assist in the construction of the houses at the construction sites are employed by sub-contractors of the house building business. Accordingly, such workers are not employees of the Group but rather employees of its sub-contractors. The employees of EWW are also not included in these figures. Employees in the minerals processing business in 2008 were located in Turkey and Malta and in 2009 in these countries and South Africa. Employees in the house building and wood processing business were all located in Finland. Most employees in group management, headquarters, other operations and discontinued operations were based in Finland.
8. Employee share schemes The Company has two share option schemes which were approved in 2005 and 2008 respectively, as well as a subscription right scheme which was approved at the 2010 annual general meeting, details of which are set out below. 8.1 Option scheme I/2005 The I/2005 option scheme (approved in the general meeting on 8 December 2005) entitles the option holders to subscribe for a maximum of 2,700,000 Ordinary Shares in the Company. The rights were granted to senior management and other key employees of the Group at the relevant time, as decided by the Board from time to time. The Board was also permitted to grant options to other persons having contractual relationships with the Group but did not do so. The option scheme is now closed and no further options can be issued under it. The share subscription period is staggered through the period of 1 July 2007 – 30 June 2015 for various option tranches denoted with different letters, and the subscription price range is currently €0.32 to €0.72 (subject to further dividend and capital redemption adjustments). The whole paid subscription price shall be entered in the paid-up unrestricted equity fund. Under this option scheme a total of 1,075,000 options (representing about 0.40 per cent. of the registered number of shares) have been issued to current or previous key personnel of the Group, consisting of 225,000 A-, B-, C- and D- options each and 175,000 E-options. So far none of these options has been exercised. 8.2 Option scheme I/2008 The I/2008 option scheme (approved at the general meeting decision on 28 October 2008) entitles the Company’s Chief Executive Officer, Alwyn Smit, to subscribe for a maximum of 2,900,000 Ordinary Shares. The share subscription period for 1,450,000 share options commenced on 1 October 2009 and with the period for the remaining 1,450,000 commencing on 1 October 2010. The subscription period ends on 31 December 2015. The share subscription price for share
323 options is currently €2.22 per share (although it is subject to further dividend and capital redemption adjustments). The whole paid subscription price shall be entered in the paid-up unrestricted equity fund. 8.3 I/2010 subscription rights Up to 1,650,000 Ordinary Shares may be subscribed by the Directors under the terms of the I/2010 subscription rights. Further details of the I/2010 subscription rights are set out in paragraph 6.5.3 of this Part XII. 8.4 Further details of options issued The main terms of the I/2005 and I/2008 option arrangements are detailed in the following table.
Share option plan/series I/2008 I/2008 E-I/2005 D-I/2005 C-I/2005 B-I/2005 A-I/2005 Nature of the plan Share options Share options Share options Share options Share options Share options Share options issued issued issued issued issued issued issued Grant date 28 Oct 2008 28 Oct 2008 6 Aug 2009 28 Oct 2008 17 Oct 2007 14 Aug 2006 14 Dec 2005 Number of options 1,450,000 1,450,000 175,000 225,000 225,000 225,000 225,000 Exercise period 1 Oct 2010 – 1 Oct 2009 – 1 Jul 2011 – 1 Jul 2010 – 1 Jul 2009 – 1 Jul 2008 – 1 Jul 2007 – 31 Dec 2015 31 Dec 2015 30 Jun 2014 30 Jun 2013 30 Jun 2012 30 Jun 2011 30 Jun 2010 Current exercise price €2.22 €2.22 €0.72 €0.62 €0.52 €0.42 €0.32 Share price at grant date €1.26 €1.26 €1.75 €1.26 €2.86 €0.69 €0.63 Option life (years) 5.3 5.3 3.0 3.0 3.0 3.0 3.0 Expected volatility 66% 66% 46% 66% 44% 89% 130% Expected option life at grant date (years) 5.3 years 5.3 years 4.9 years 4.7 years 4.7 years 4.9 years 4.5 years Risk free rate 4.33% 4.33% 3.66% 4.33% 4.10% 3.65% 2.79% Expected dividend yield 3.17% 3.17% 0.00% 3.17% 1.40% 2.20% 0.00% Fair value at grant date €0.33 €0.33 €1.20 €0.77 €2.17 €0.53 €0.54 All such options have been treated according to the principles set forth in the IFRS2 Share-based Payments standard. Share options will expire if not redeemed as agreed in the terms of the options. Options are forfeited if the option holder leaves the Company prior to the effective date of the options. All options will be satisfied in shares. Options are valued using the Black & Scholes model. In late June 2010 225,000 Ordinary Shares have been subscribed by exercise of options under Series A of the I/2005 option scheme are expected to be subscribed by exercise of the remaining options under Series A of the 30 June 2010 being the final date of the exercise period for such options. However as at 28 June 2010 (being the latest practicable date prior to the publication this document) the 225,000 Ordinary Shares in respect of such subscriptions had not been issued and the Company currently expects that such Ordinary Shares will be issued following Admission.
9. Major shareholders As at 28 June 2010 (being the last practicable date prior to the publication this document) in as far as is known to the Company, the name of each person who, directly or indirectly, is interested in five per cent. or more of the existing share capital of the Company (being the minimum threshold for notification of an interest in shares of a publicly listed company under Finnish law), and the amount of such person’s interest is as follows: Name of Shareholder Number of Ordinary Shares Percentage of issued share capital Kermas Limited 70,766,500 28.54 Atkey Limited (1) 51,176,401 20.64 Hanwa Company Limited 30,000,000 12.10 Nordea Bank Finland (nominee registered) 22,620,511 9.12 Evli Pankki Oyj (nominee registered) (1)(2) 21,052,500 8.50 Note: (1) In aggregate, Atkey Limited and Aida Djakov hold 67,288,901 Ordinary Shares representing 27.11 per cent. of the issued share capital. (2) Of the Ordinary Shares held by Evli Pankki Oyj, 16,052,500 Ordinary Shares representing 6.47 per cent. of the issued share capital are held for Aida Djakov.
Save as disclosed in this paragraph 9 above, the Directors are not aware of any interest which will represent an interest in the Company’s share capital or voting rights which is notifiable under Finnish law.
324 In addition to the shares it currently holds, Kermas has been granted share option rights which may entitle it to receive further Ordinary Shares. Further details of the share option rights are set out in paragraph 10.3 of Part XIII of this document. The Company has entered into the Relationship Agreement with Kermas (as more fully described below in paragraph 10.5 of this Part XII). Should Kermas become entitled to receive further Ordinary Shares in accordance with the option rights it holds, such additional Ordinary Shares may increase its holding to above 30 per cent. of the then issued Ordinary Shares. If Kermas does not dispose of some of its interest in Ordinary Shares it may then be required to make a mandatory takeover bid for all remaining Ordinary Shares and other securities entitling the holder to receive Ordinary Shares (see paragraph 4.17 of this Part XII), which could result in Kermas acquiring control of the Company. Save as disclosed above, as at 29 June 2010 (being the latest practicable date prior to the publication of this document) the Company is not aware of any person or persons who directly or indirectly, jointly or severally, exercise control over the Company, nor is it aware of any arrangements, the operation of which may at a subsequent date result in a change of control of the Company. There are no differences between the voting rights enjoyed by the Shareholders disclosed in the table above in this paragraph 9 and those enjoyed by any other holder of the Ordinary Shares.
10. Material contracts The following comprises a summary of each material contract, other than contracts entered into in the ordinary course of business, to which the Company or any member of the Group is a party, for the two years immediately preceding the date of publication of this document and a summary of any other contract (not being a contract entered into in the ordinary course of business) entered into by any member of the Group which contains any provisions under which any member of the Group has any obligation or entitlement which is material to the Group as at the date of this document: 10.1 Sponsor’s Agreement On 30 June 2010, the Company, each of the Directors, Alwyn Smit, Danko Koncar, Thomas Hoyer and Ilona Halla entered into a sponsor’s agreement with Ernst & Young LLP, in which it has appointed Ernst & Young LLP as sponsor in connection with its applications for Admission. Irrespective of whether or not Admission occurs or the Sponsor’s Agreement is terminated, the Company is obliged to pay, or cause to be paid all costs, charges fees and expenses of, in connection with or incidental to Admission including but not limited to: all listing and admission fees; all printing, public relations and advertising expenses, courier, postage and telecommunications expenses; its own legal, accountancy, valuation, actuarial, insurance, environmental and other professional fees, disbursements and expenses; out of pocket expenses incurred by Ernst & Young LLP (including, the fees and expenses of Ernst & Young LLP’s legal and other professional advisers); the fees and expenses of the Depositary (including legal costs); and all other costs and expenses incurred by the Company in connection with Admission, the publication of the Prospectus and any supplement or amendment thereto. The obligations of Ernst & Young LLP under the Sponsor’s Agreement are subject to certain conditions, including conditions relating to the approval and passporting of the Prospectus, conditions relating to Admission, the Depositary having entered into the Deed Poll; and all the conditions to the admission of the Depositary Interests to CREST having been satisfied prior to Admission. In addition, Ernst & Young LLP may terminate the Sponsor’s Agreement, but only prior to Admission. The Company has given certain representations, warranties and indemnities to Ernst & Young LLP in the Sponsor’s Agreement. The liabilities of the Company in respect of such representations, warranties and indemnities are uncapped as to time and amount. The Directors and the Senior Managers who are party to the Sponsor’s Agreement have given certain representations and warranties to Ernst & Young LLP in the Sponsor’s Agreement. The aggregate liability of each of the Directors and the Senior Managers who are party to the Sponsor’s
325 Agreement in respect of such representations, warranties and indemnities or any other provision of the Sponsor’s Agreement is capped at two times the Director’s or Senior Executive’s annual remuneration from the Group, including any bonus, but unlimited in time. 10.2 Deed Poll and Depositary Agreement See paragraphs 2.2 and 2.3 of Part X. 10.3 Master purchase agreement in relation to TMS, RCS and EWW On 9 October 2008, the Company entered into a master purchase agreement with Kermas (the “MPA”) pursuant to which (inter alia): (i) the Group acquired approximately 98.74 per cent. of the shares in TMS (the “TMS Shares”) and 100 per cent. of the shares in RCS (the “RCS Shares”); and (ii) RCS entered into an amended toll manufacturing agreement with EWW in relation to the further processing of RCS products at EWW’s ferrochrome smelting and productions operations in Weisweiler, Germany (the “Amended Toll Manufacturing Agreement”, which is summarised below). Following the completion of the transaction, the Company’s interest in TMS was amended from 98.75 per cent. to 98.74 per cent. The consideration payable for the acquisition comprised (i) €80.0 million paid in cash on the closing of the acquisition in October 2008 and (ii) earn-out consideration pursuant to a profit and loss sharing arrangement, under which Kermas is entitled to receive a 50 per cent. share of any profit (“Profit Share”) and obliged to pay a 50 per cent. share of any loss (“Loss Share”) based on the combined net profit or loss of RCS and the TMS group assessed separately each year for each of the calendar years 2009, 2010, 2011, 2012 and 2013 (the “Profit Share Period”). The Profit Share is capped at €150 million aggregated across the five year period. The Profit Share is not paid in cash, but by the issue of Ordinary Shares in the Company. Under the MPA, a total of 73,170,731 option rights (the “Option Rights”) (each Option Right being an entitlement to one share in the Company) were granted, potentially entitling Kermas to subscribe for up to 73,170,731 shares in the Company at a price of €2.30 per share subject to adjustments for dividends and distributions (the “Subscription Price”). If there is no Profit Share, then the Option Rights are not exercisable, and Kermas has no entitlement to subscribe for any shares in the Company. Any Loss Share is payable in cash as a reduction to the purchase price. The fair value of the shares has been determined to be €1.28 per share based on the market price of the Ordinary Shares on 28 October 2008, being the date of the general meeting of Shareholders which approved the acquisition. The Group’s preliminary calculation of the earn out liability payable in 2010, in respect of 2009, which was recorded as a short term liability in its 2009 financial statements was €2.9 million. The Group estimates that Kermas will be entitled to subscribe for 2,232,470 Ordinary Shares, based on an adjusted strike price of €2.22 (due to the capital distributions of €0.04 approved at the 2009 and 2010 annual general meetings). However, the final figure has not been approved by the Company’s Board of Directors or agreed with Kermas and is also subject to confirmation by the Company’s auditors. For a period of 24 months from the date of the closing of the transaction in October 2008, the Company has the irrevocable and unilateral right to sell the TMS Shares held by it to Kermas and Kermas is obliged to purchase and receive such shares (the “Put Option”). The Put Option was granted to the Company as it was unable to verify all necessary information relating to TMS in its due diligence prior to signing the MPA. Other than with respect to the Put Option (which is in respect of the TMS Shares only), the Company cannot sell or transfer the TMS Shares or the RCS Shares without the prior consent of Kermas prior to the expiry of the last profit share period, being the end of the 2013 calendar year. Kermas gave certain customary taxation, environmental, health and safety, property, operational and other warranties to the Company on an indemnity basis. Other than with respect to pre-closing taxation and environmental liabilities, the warranties given by Kermas are capped at €60 million. Lock-up Agreement Pursuant to the MPA, Kermas entered into a lock-up commitment with regard to (i) the 15 million shares in the Company that it undertook to acquire within 10 business days of the closing of the transaction and (ii) the shares in the Company which it held prior to that time (the “Lock-up 326 Agreement”). Pursuant to the terms of the Lock-up Agreement, Kermas is not entitled to (inter alia) sell, transfer or dispose of such shares for a period of five years from the closing of the transaction, save that Kermas is entitled to tender all of its shares in the Company in connection with any tender offer made for the Company. If Kermas does not comply with its obligations under the Lock-up Agreement, the Company is not obliged to accept a subscription or deliver the subscription shares in relation to the Option Rights until Kermas does so comply. Management Agreement In view of the Group’s inexperience in the mineral/mining sectors prior to the transaction, the Company and Kermas entered into a management agreement under which Kermas agreed to manage the businesses of RCS and TMS until 31 December 2013, at which time Kermas will transfer the relevant know-how and expertise to the Company in order to enable it to independently manage the businesses of RCS and TMS. The management services to be provided by Kermas include the provision of know-how and assistance in relation to the operations and businesses of RCS and TMS and in order to minimize the costs associated with the toll manufacturing operations of EWW. Kermas will provide all employees or directors of Kermas as are required for the provision of the management services, including, at a minimum, Dr Danko Koncar and Mr Jürgen Schalomon. Kermas also has the right to appoint an observer to the board of RCS or TMS who will be entitled to participate in board meetings but will have no voting rights. Other than with regard to Kermas’ reasonable costs or expenses incurred in providing the management services, there is no management fee payable to Kermas. EWW Amended Toll Manufacturing Agreement Pursuant to the MPA, the toll manufacturing agreement entered into by RCS and EWW on 27 February 2008 (the “Original Toll Manufacturing Agreement”) was amended on 29 October 2008 (the “Amended Toll Manufacturing Agreement”). These agreements govern the provision by EWW of high-quality low carbon and ultra low carbon ferrochrome products for RCS and the provision by RCS (at its own expense) of the raw materials required for EWW to fulfil its manufacturing obligations. The Original Toll Manufacturing Agreement had an initial one year term followed by subsequent rolling one year terms terminable by either party on six months’ notice. The Amended Toll Manufacturing Agreement will apply for a period of five years until 27 February 2013 (the “Initial Term”) after which time it will continue for a further five years (the “Secondary Term”) unless terminated by RCS (by giving at least six months’ notice prior to the end of the Initial Term). After the Initial Term or (if applicable) the Secondary Term, either party may terminate the Amended Toll Manufacturing Agreement by giving at least twelve months’ notice. The tolling fee payable by RCS to EWW is based on the manufacturing production costs plus a 5 per cent profit margin. The Company has accrued the benefits from and controlled the business of EWW and, in fact, has been able to govern the financial and operating policies of EWW primarily as a result of a toll manufacturing agreement between EWW and RCS, the Company’s subsidiary. As a result, the Company has incorporated the financial statements of EWW in its consolidated financial statements for the financial years ended 31 December 2008 and 31 December 2009 and will include EWW in its consolidated financial statements for the financial period ended 31 December 2010. EWW Call Option In order to safeguard the rights and interests of the Company under the MPA, the Company secured an undertaking from Kermas that it would waive its right to transfer its shares in EWW (a wholly owned subsidiary of Kermas) until 31 December 2013. Thereafter, until 31 March 2014, the Company will have a call option over the EWW shares. If the Company does not exercise its call option within that three month period, thereafter it has a 5 year right of first refusal in relation to the EWW shares. The prior written consent of the Company to the disposal of any part or the whole of the EWW shares by Kermas is required (not to be unreasonably withheld in relation to transfers to affiliated companies). If either Kermas or the Company breaches any provision of the call option agreement, then notwithstanding any compensatory damage or other claims, that party will be subject to a contractual penalty of €10 million per breach and relinquishment of the continued relationship. 327 The Company has taken the view that, in fact, it has been able to exercise its call option to acquire EWW at any time. Kermas and the Company have also formally agreed on 3 June 2010 that the call option can be executed by the Company at any time. 10.4 Acquisition agreement in relation to Mogale Under the terms of an agreement entered into on 25 May 2009 between Ruukki South Africa (Proprietary) Limited (“Ruukki SA”), Johan Frederik Oosthuizen, Metmar Limited, Gujo Investments (Proprietary) Limited, Corocapital Limited, Isak Carel Pienaar, the Trustees for the time being of the Ferguson Family Trust, Sebeso Benefication (Proprietary) Limited, Leswikeng Minerals & Energy (Proprietary) Limited and Mogale (the parties other than Ruukki SA and Mogale being the “Mogale Vendors”), Ruukki SA acquired a 84.9 per cent. stake in Mogale (the “Mogale Acquisition Agreement”). The total purchase price was originally ZAR 1,850 million, plus ZAR 150 million payable to a trust established for Mogale management incentives. Of the purchase price, ZAR 1,125 million and half the ZAR 150 million management incentive was paid in cash at closing of the transaction on 28 May 2009 (the aggregate ZAR 1,200 million being approximately €103.7 million at €/ZAR 11.58). The balance of the purchase price (ZAR 725 million plus ZAR 75 million), plus interest thereon, was to be paid in cash over a period of five years from closing of the transaction, of which the second, unconditional, tranche of tranche of ZAR 200 million was due in May 2010. The Group paid ZAR 12 million (approximately €1.1 million) in 2009 and ZAR 187 million (approximately €19.2 million at €/ZAR 9.73) on 27 May 2010*. The remaining ZAR 600 million conditional payment (including the further ZAR 75 million incentive payment) (approximately €61.7 million at €/ZAR 9.73) is conditional upon Mogale receiving certain operational permits and licences with respect to its furnaces. (See also paragraph 14.3 of this Part XII.) The Mogale vendors have informed the Group that they consider that the ZAR 12 million paid in 2009 cannot be counted towards the ZAR 200 million payment due in May 2010. The Group therefore expects to pay the Mogale vendors a further ZAR 13 million (approximately €1.3 million at €/ZAR 9.73) in July 2010. The Mogale Vendors gave Ruukki SA customary warranties (on an indemnity basis) in relation to title, taxation, litigation, health and safety, contracts, property, environment and other matters. At the time of negotiation of the Mogale Acquisition Agreement, it transpired from an environmental report prepared by Golder Associates Africa (Proprietary) Limited (the “Golder Report”), that Mogale potentially had liabilities as a result of non-compliance with South African environmental law relating to the operations conducted by Mogale. The Mogale Vendors were only willing to provide Ruukki SA with warranties in relation to its compliance with South African environmental law if such warranties were qualified with reference to the contents of the Golder Report. As this was not acceptable to Ruukki SA, subsequent to the closing of the transaction, Kermas indemnified the Mogale Vendors against any potential claim which Ruukki SA may institute against the Mogale Vendors as a result of any non-compliance with its environmental law obligations in South Africa. To this end, the Mogale Vendors, Ruukki SA and Kermas entered into an amendment and indemnity agreement on 2 November 2009 (the “Indemnity Agreement”) in terms of which Indemnity Agreement, inter alia, Kermas provides Ruukki SA with warranties in relation to Mogale’s environmental liabilities and indemnifies Ruukki SA against any loss or liability which Ruukki SA may suffer as a result of Mogale not having complied with any environmental laws in South Africa. The Indemnity Agreement applies retrospectively from the effective date under the Mogale Acquisition Agreement. See also paragraph 14.3 of this Part XII in relation to the potential dispute with the Mogale vendors regarding certain payments under the Mogale Acquisition Agreement. 10.5 Relationship Agreement The Company has entered into a relationship agreement with its major shareholder Kermas and Danko Koncar and Kermas’ majority shareholder (who is Danko Koncar’s cousin) dated 30 June 2010 in order to regulate the relationship between the parties thereto (the “Relationship Agreement”).
* Source: management accounts, unaudited, in respect of second tranche payments in 2009 and 2010.
328 The Company has recently called an extraordinary general meeting to be held on 11 August 2010 at which it is proposed that Danko Koncar is appointed as an executive director of the Company, in the role of “Director Responsible for New Business”. If appointed to that role, Danko Koncar will be responsible for pursuing business opportunities and has agreed to present all discovered business opportunities in the minerals sector to the Company. The Company will decide whether any such business opportunity should be pursued by the Company. If the Company decides not to pursue any opportunity presented to it by Danko Koncar, Kermas will be entitled to develop the opportunity independently of the Company. In the event that Kermas decides to sell all or any part of its interests in any of its assets, the Company will have a right of first offer and a right to match any other offer in relation to such interests. Following Admission, Kermas has also agreed not to engage in any business which wholly or partly competes with any business carried on by the Group and not to undertake any new or independent projects or businesses unless such projects have been rejected by the Company after being presented to the Company by Danko Koncar. Kermas has also agreed that subject to the provisions of the relationship agreement, all transactions between the Group and the Kermas Group (as defined in the Relationship Agreement) will be entered into on arm’s length terms and on a normal commercial basis and to abstain from voting in any shareholder resolution which may be required in relation to any related party transaction between the Group and the Kermas Group. Kermas’ majority shareholder has agreed to exercise the rights and powers attaching to her shares in Kermas to procure that Kermas complies with its obligations under the Relationship Agreement. Danko Koncar has also agreed that for so long as he is employed by the Group he shall operate in this position solely in the interest and to the benefit of the Company. He has agreed that he shall disqualify himself from voting at any meeting of the Board of Directors where the Kermas Group has or may have a direct or indirect interest which conflicts or which possibly may conflict with the interests of the Group. 10.6 Mintek Licence Mintek, Mogale and PGR 17 Investments (Proprietary) Limited (“PGR 17”) entered into a licence agreement on 14 July 2004 (the “Mintek Licence”) pursuant to which Mintek granted Mogale a non-exclusive and non transferable licence to use certain intellectual property relating to techniques and processes pertaining to the production and recovery of metals from stainless steel plant wastes developed by Mintek (the “Intellectual Property”). Under the Mintek Licence, Mogale has the right to use the Intellectual Property and the benefit of related technical assistance to be provided by Mintek for so long as Mogale leases, owns or operates the 40 MVA direct current plasma arc furnace situated at Samancor’s Palmiet Ferrochrome plant. Mintek has the right to purchase any additional know-how Mogale discovers or develops deriving from the Intellectual Property (“Additional Know-how”) on the cessation of business or on the winding up of the affairs of Mogale. Mogale made a one-off payment to Mintek of ZAR 9.375 million exclusive of VAT for the right to use the Intellectual Property split into three payments over the three year period to 31 January 2007. The proprietary rights in and to the Intellectual Property are vested in Mintek, however the proprietary rights in and to any Additional Know-how will be vested in the party who discovers or develops the Additional Know-how. Mogale has the right to use any Additional Know-how developed by Mintek subject to the terms and conditions of the Mintek Licence with no obligation to pay any additional licence fees. The Mintek Licence was amended on 30 January 2007. Pursuant to the amended Mintek Licence, Mogale had the right to use the Intellectual Property on an exclusive basis for a period of three years until 1 December 2009. As that period has now ended, Mogale has the right to use the Intellectual Property on a non-exclusive basis once again.
329 10.7 Acquisition agreement and shareholders’ agreement in relation to Junnikkala Oy On 19 January 2008, Ruukki Yhtiöt Oy entered into a share purchase agreement with a Finnish individual Mr. Heikki Junnikkala pursuant to which Ruukki Yhtiöt Oy acquired 400 shares in a Finnish saw mill company, Junnikkala Oy, for a purchase price of €4,200,000. Further, on 22 January 2008, Junnikkala Oy entered into a share purchase agreement with certain Finnish individuals concerning 100 per cent. of the shares in another Finnish saw mill company, Pyyn Saha ja Höyläämö Oy, for an aggregate purchase price of €2,199,999 (of which €659,999 was paid in the form of shares in Junnikkala Oy). In connection with the aforesaid acquisitions, on 22 January 2008, Ruukki Yhtiöt Oy entered into a shareholders’ agreement concerning Junnikkala Oy (the “SHA”) with the remaining individuals of the Junnikkala family and Mr. Janne Pyy, one of the sellers of Pyyn Saha ja Höyläämö Oy. Pursuant to the SHA, Junnikkala Oy resolved on a directed share issue to, inter alia, Ruukki Yhtiöt Oy allowing Ruukki Yhtiöt Oy to subscribe to 449 new shares in Junnikkala Oy for an aggregate subscription price of €4,990,000. Following the completion of the directed share issue, Ruukki Yhtiöt Oy’s ownership interest in Junnikkala Oy reached approximately 51 per cent. The parties of the SHA have agreed on a call option with regard to the remaining 48.98 per cent. of the shares in Junnikkala Oy. According to the call option, Ruukki Yhtiöt Oy has the right to require and correspondingly the minority shareholders (members of the Junnikkala family and Mr. Janne Pyyn) have the obligation to sell their shares to Ruukki Yhtiöt Oy. The call option period starts two weeks after the completion of the 2010 financial statements and ends two weeks after the completion of the 2012 financial statements. The call option exercise price equals EUR €10,000 per share adjusted with the change in the net asset value of Junnikkala Oy at exercise compared to 31 December 2007. For the purposes of determining the call option exercise price, the net asset value at 31 December 2007 shall also include the funds raised by the directed share issue in January 2008 pursuant to the SHA. The aggregate number of shares held by the minority shareholders is 863. The parties also agreed a put option entitling the minority shareholders to require and obliging Ruukki Yhtiöt Oy to purchase the shares held by the minority shareholders on terms equivalent to those in the call option. However, pursuant to the SHA the put option shall terminate if there is a material adverse change in the business of Junnikkala Oy compared to the financial goals agreed upon by the parties in the business plan. Following worse than expected performance, Ruukki Yhtiöt Oy terminated the put option in December 2009. The call option remains exercisable. In case the call (or put) option has not been exercised by the termination of the exercise period (in 2012), the parties of the SHA have granted each other a drag-along right according to which the remaining shareholders are required to sell their equity securities in case a third party acting in good faith has made a purchase offer on the equity securities of Junnikkala Oy and the holders of two thirds of all of the equity securities of the company have accepted the offer. Further, following the termination of the call (and put) option period, if one of the parties of the SHA is negotiating the sale of its shares with a third party, such selling shareholder shall procure that the remaining shareholders are entitled simultaneously to sell their an equivalent pro rata proportion of their equity securities to such third party purchaser with the same terms and conditions (tag-along right). 10.8 Sale agreement for the disposal of Lappipaneli’s sawmill assets The Company’s subsidiary Lappipaneli Oy entered into an agreement dated 2 November 2009 with Pölkky Oy, Pölkky Metsä Kmo Oy and Kitkawood Oy for the disposal of its sawmill assets at Kuusamo. The purchase price was €14.6 million payable in instalments in late 2009 and April 2010. Inventories and other non-fixed assets were transferred in November 2009, while the fixed assets (such as real estate, machinery and equipment) were leased to the purchasers following the sale and then transferred to them in April 2010 and the remaining loans agreed to be transferred as part of the sale were transferred in May 2010. It is agreed that they will be transferred but technical execution is not yet completed. The rights and liabilities in respect of the claim for the hedging losses were not transferred and remain with the Group (see further paragraph 14.1 of this Part XII).
330 10.9 Sale agreement for the disposal of the shares in Tervola The Company’s subsidiary, Ruukki Yhtiöt Oy, entered into an agreement dated 20 November 2009 with Tervola to sell its 91.42 per cent. stake in Tervola in a management buyout. Under the terms of the agreement, Tervola acquired the shares owned by Ruukki Yhtiöt Oy as part of a directed acquisition of its own shares. In conjunction with the transaction, the call option agreement between Ruukki Yhtiöt Oy and the minority shareholders in Tervola was dissolved. The effect of the transaction was to leave the minority shareholders Hannu Vuokila ja Kalervo Vuokila as the owners of Tervola. The effective transfer date for the shares was 31 December 2009. The consideration payable to Ruukki Yhtiöt Oy was approximately €4.1 million which was paid in cash in December 2009. 10.10 Standby facility agreement with Kermas See paragraph 9.2 of Part VII
11. Significant Subsidiaries The Company is the parent company of the Group. The following table contains a list of the Company’s significant subsidiary companies operating in the minerals and wood processing businesses: Country of Percentage holding Name of subsidiary incorporation (direct or indirect) Business area Ruukki Holdings Ltd Malta 100% Holding company, minerals Processing RCS(1) Malta 100% Minerals processing TMS Turkey 98.74% Minerals processing TH Ören Madencilik Tao Turkey 73.08% Minerals processing Metal ve Maden ic ve Turkey 97.76% Minerals processing Dis Pazarlama Tic Ltd, Sti Intermetal Turkey 99.00% Minerals processing Ruukki Suisse SA Switzerland 100% Minerals processing Ruukki South Africa (Pty) Ltd South Africa 100% Holding company, minerals processing Dezzo Trading 184 South Africa 100% Holding company, minerals (Proprietary) Limited processing PGR 17 Investments South Africa 100% Holding company, minerals (Proprietary) Limited processing PGR Manganese (Proprietary) South Africa 49.00% Holding company, minerals Limited(2) processing Mogale(2) South Africa 84.90% Minerals processing Pohjolan Design-Talo Oy Finland 100% House building Nivaelement Oy Finland 100% House building RG Design-Talotekniikka Oy Finland 70.10% House building Kirkkonummen Finland 100% House building Kiinteistösijoitus Oy Storms Villa Oy Finland 100% House building Storms Gård Oy Finland 100% House building Ruukki Yhtiöt Oy(3) Finland 100% Holding company wood processing, sawmills Ruukki Invest Oy Finland 100% Wood processing, sawmills Ruukki Wood Oy Finland 100% Holding company wood processing, sawmills Utawood Oy Finland 96.70% Wood processing, sawmills Junnikkala Oy(4) Finland 51.02% Wood processing, sawmills Ruukki Harvest Oy Finland 100% Wood processing, sawmills Ruukki Sawmill Oy Finland 100% Wood processing, sawmills Lappipaneli Oy Finland 100% Wood processing, sawmills Oplax Oy Finland 100% Wood processing, pallets
331 Notes: (1) The Group has a put option over all of the shares of TMS, as further described in paragraph 10.3 of this Part XII. (2) 4.9 per cent. of the Company’s effective interest in Mogale is held indirectly through its 49.00 per cent. interest in PGR Manganese (Proprietary) Limited which owns 10.00 per cent. of Mogale. The remaining 80 per cent. interest is held by wholly owned subsidiaries. (3) The Group has granted a call option over 1.00 per cent. of the shares in Ruukki Yhtiöt Oy to Thomas Hoyer, as further described in paragraph 6.3 of this Part XII. (4) The Group has a call option to acquire the remaining shares in Junnikkala, as further described in paragraph 10.7 of this Part XII. (5) Although EWW is consolidated into the group’s consolidated accounts, as described in the accounting policies in the 2009 consolidated financial statements, it is not included in the above table as the group does not currently own, directly or indirectly, any shares in EWW. The Group also has a call option to acquire all the shares in EWW, as further described in paragraph 10.3 of this Part XII.
12. Material Property Interests The below table sets out the details of the Group’s material property interests: Business Area Property/Properties Description/Purpose of use Owned/rented General Ruukki Espoo, main office Office Rented London Office Rented Minerals Ruukki, South Africa Pretoria Office Rented Mogale West Rand, Gauteng Production facilities Owned RCS Valletta Office Rented TMS Istanbul Office/Business Centre Owned Mugla, Fethiye district Gocek Residential land Owned Mugla, Fethiye district Residential land Owned Eskisehir, Mihaliccik district, Buildings Owned Kavak village Eskisehir, Mihaliccik district, Mining area Owned Kavak village Eskisehir, Mihaliccik district, Logistics and rail Owned Sazak village transportation Denizli, Beyagaç Uzunoluk Buildings and fields Owned House building Pohjolan Design-Talo Oy Oulunsalo Office Rented Nivalement Oy Nivala Production facility Rented Sawmills Ruukki Yhtiot Oy Espoo (in the parent Office Rented company’s premises) Junnikkala Oy Kalajoki Production facilities Owned storage areas, and offices Kalajoki Storage areas Rented Oulainen Production facilities Owned and office Pallets Oplax Oy Tornio Production facilities, Owned storage areas, offices
Oulu Production facilities, Rented storage areas, offices Kemi Production facilities Rented Rovaniemi Production facilities Rented
332 13. Related Party Transactions The Group has entered into a number of related party transactions each year since 1 January 2007. Save as disclosed below and/or as disclosed in the information in the related party transactions notes to the accounts in the annual reports and accounts of the Group for the years ended 31 December 2007, 31 December 2008 and 31 December 2009, included in Part VIII and/or incorporated by reference into this document, as applicable, for each of the financial years ended 31 December 2007, 31 December 2008 and 31 December 2009, and during the period between 1 January 2010 and 29 June 2010 (being the latest practicable date prior to publication of this document), the Company entered into no related party transactions which for these purposes are those set out in the standards adopted according to the Regulation (CE) No 1606/2002) with any related party. 13.1 Year ended 31 December 2007 Ruukki issued 598,285 Ordinary Shares at no cost in 2007 to the previous vendors of Lappipaneli Oy in relation to earn out liabilities for the year ended 31 December 2006. The Group paid approximately €0.8 million in earn out payments to the previous vendors of Tervola. Further details of these and other related party transactions entered into in the year ended 31 December 2007 are set out in the financial information set out in the related party transactions notes to the consolidated financial statements of the Group for the year ended 31 December 2007 which are incorporated by reference into this document. 13.2 Year ended 31 December 2008 The Group purchased the Southern European minerals processing business from Kermas in October 2008. Further details of the transaction documents are set out in paragraph 10.3 of Part XII of this document. The Group acquired the remaining 9.9 per cent. of the shares in Pohojolan Design-Talo Oy, the parent company of the Group’s house building business for approximately €6.1 million from the then chief executive officer of that business, of which €4.2 million was paid in 2008. The Group paid approximately €0.4 million in earn out payments to the previous vendors of Tervola. Further details of these and other related party transactions entered into in the year ended 31 December 2008 are set out in the financial information set out in the related party transactions notes to the consolidated financial statements of the Group for the year ended 31 December 2008 which are incorporated by reference into this document. Mrs Aida Djakov, who is a significant shareholder of Ruukki, was a director of RCS when it was acquired by the Group in November 2008. She was paid €10,000 per month in November and December for her services as a board member of RCS. This disclosure was not included in the 2008 financial statements. 13.3 Year ended 31 December 2009 The Company paid approximately €2.0 million in earn out and deferred purchase consideration payments comprising: (i) €0.7 million to related parties (Leswikeng Minerals & Energy Proprietary Limited, Sebeso Benefication Proprietary Limited and Johan Oosthuizen) out of a total of approximately ZAR 12 million or approximately €1.1 million paid to all the Mogale vendors in respect of deferred consideration in 2009 relating to the acquisition of Mogale, (ii) €0.2 million in cash to the former chief executive officer of the house building business and a further €0.9 million in fixed deferred consideration and (iii) €0.2 million to the previous vendors of Tervola. Kermas committed itself in October 2009 to grant to Ruukki South Africa (Pty) Ltd a pledge of part of Kermas’ holding of Ordinary Shares in relation to the environment liabilities of Mogale for an amount corresponding to 5 per cent. of the issued Ordinary Shares. The Group sold its 91.42 per cent. stake in Tervola in a management buyout for approximately €4.1 million. Further details are set out in paragraph 10.9 of this Part XII.
333 Further details of these and other related party transactions entered into in the year ended 31 December 2009 are set out in the financial information set out in the related party transactions notes to the consolidated financial statements of the Group for the year ended 31 December 2009 which are included in Part VIII and incorporated by reference into this document. Mrs Aida Djakov, who is a significant shareholder of Ruukki, was a director of RCS throughout 2009. She was paid €10,000 per month for her services as a board member of RCS. This disclosure was not included in the 2009 financial statements. 13.4 2010 year to date The Company entered into a standby facility agreement with Kermas as described in paragraph 9.2 of Part VII of this document in May 2010 and entered into a supplemental agreement in relation to the facility agreement on 30 June 2010. The Group acquired a 99.00 per cent. stake in Intermetal, comprising 98.75 per cent. from Ms. Güldal Seyda Caglayan, TMS’s managing director, and a further 0.25 per cent. from Ms. Solmaz Celiktas, in February for €0.3 million. The house building business has entered into sales contracts with employees and other stakeholders in the first quarter of 2010 for nine houses to be delivered in 2010 and 2011 for a total value of €1.3 million including VAT. Further such sales contracts were entered into in the second quarter. The Group paid the remaining ZAR 187 million in respect of the second, unconditional, tranche of ZAR 200 million (approximately €19.2 million at €/ZAR 9.73) to the Mogale vendors on 27 May 2010 of which approximately ZAR 119 million (approximately €12.2 million) was to related parties (Leswikeng Minerals & Energy Proprietary Limited, Sebeso Benefication Proprietary Limited and Johan Oosthuizen)*. Mrs Aida Djakov, who is a significant shareholder of Ruukki, was a director of RCS until April 2010 and is currently an employee of RCS. She was paid €10,000 per month for her services as a board member of RCS from January until April 2010 and from May 2010 has been paid €10,000 per month for her services as an employee. Danko Koncar, who is a director of Kermas which is a significant shareholder of Ruukki, entered into a service contract with the Company on 30 June 2010. Further details are set out in paragraph 6.3 of this Part XII.
14. Litigation and Potential Disputes Subject to the matters disclosed below, there are no and have not, since the date 12 months prior to the date of the document, been any governmental, legal or arbitration proceedings (including any such proceedings which are pending or threatened of which the Company is aware) which may have, or have had in the recent past, significant effects on the Company and/or the Group’s financial position or profitability and the Group is not currently engaged (whether as claimant or respondent) in any material litigation and there are no material claim against the Company. 14.1 Hedging losses One of the Group’s subsidiaries, Lappipaneli Oy, suffered losses in relation to currency hedging transactions in 2008 and 2009. On 7 July 2009, Lappipaneli Oy filed an action for damages at District Court of Helsinki against Sampo Pankki Oyj, which is part of the Danske Bank group, in relation to these losses. The claim for damages is approximately €6 million, plus interest and costs. The proceedings of the Helsinki District Court in this matter are ongoing.
* Source: management accounts, unaudited.
334 14.2 Use of the “Ruukki” name During November and December 2009, Rautaruukki Oyj initiated legal proceedings against the Group in the District Court of Helsinki, the Helsinki City Court and the Cantonal Civil Court of Lausanne, Switzerland in relation the use of the name “Ruukki” by the Group and the infringement of Rautaruukki Oyj’s rights thereto. In the cancellation claim against the company name “Ruukki Wood Oy” based on non-use in the Helsinki City Court, no monetary compensation has been claimed (other than for legal costs). The Group filed a response to this claim on 17 February 2010 and the written part of the proceedings is continuing. The cancellation/infringement proceedings raised in the Helsinki City Court involve a claim for compensation of over €17 million. The Group filed a response to this claim on 15 April 2010. No compensation claim has been made with respect to the cancellation proceedings raised in the Cantonal Civil Court of Lausanne, Switzerland, however, a claim for a conditional fine has been made in order to substantiate the cancellation and non-use claim. The Group filed a response to this claim on 9 April 2010. In addition, Rautaruukki Oyj raised an objection against the Group with regard to the use of the name “Ruukki” with the Companies Register in South Africa in December 2009. The South African Companies Register failed to request a response from the Group to this objection and consequently decided that Ruukki South Africa (Pty) Ltd must change its name. The Group has lodged an appeal to this decision on 22 April 2010 and will continue to have the right to use its current name until the final decision has been received from the South African authorities. In previous proceedings between the Group and Rautaruukki Oyj in 2004 to 2007, which the Group had brought to try to obtain exclusive use of the “Ruukki” name, the Helsinki Court of Appeal and the Market Court ruled that the word “Ruukki” was a word in common use in the Finnish language and that the Group had not been able to establish sufficient connection between itself and the word “Ruukki”. The courts therefore declined to grant the Group exclusive right to use the name “Ruukki”. The Group has subsequently become aware that Rautaruukki Oyj has registered rights to the “Ruukki” name in various countries globally. The Group was not informed of these registrations at the time although Rautaruukki Oyj was aware of the Group’s pre-existing use of the “Ruukki” name. The Group believes that the information provided by Rautaruukki Oyj in some or all of these registrations was incorrect and/or misleading and intends to challenge some or all of them. The Group filed on 14 April 2010 invalidation actions against eight Community Trademarks in the name of Rautaruukki Oyj, which include the element “Ruukki”. The Group has also filed on 15 April 2010 an invalidation action against three Finnish trademark registrations in the name of Rautaruukki Oyj, which include the element “Ruukki”. Further, the Group has sent cease and desist letters to Rautaruukki Oyj in more than 25 jurisdictions as regards to Rautaruukki Oyj’s trademark registrations, which include the element “Ruukki”. 14.3 Mogale licences and purchase price payments The total purchase price for the Group’s 84.9 per cent. stake in Mogale included ZAR 600 million (ZAR 525 million to the vendors and ZAR 75 million to the management incentive trust) which is conditional upon Mogale obtaining all licences and permits to operate its furnaces. Although Mogale has various permits and licences required to operate its furnaces, the Group’s position is that it does not have yet all permits required to satisfy the aforementioned payment condition in the sale and purchase agreement. If all the licences have been obtained, the deferred consideration will no longer be conditional and will also be interest bearing from the date at which all licences had been obtained, or if obtained prior to 31 December 2009, from the completion date in May 2009. The Mogale vendors have previously informed the Group that they consider that all relevant licences had been obtained prior to 31 December 2009. In late June 2010 they restated their opinion and demanded the payment of the remainder of the ZAR 600 million conditional deferred purchase price. However, the Group’s position is that the aforementioned payment condition in the sale and purchase agreement has not yet been satisfied, and that accordingly that it is not obliged to make such payment.
* Source: management accounts, unaudited, in respect of second tranche payments in 2009 and 2010.
335 The purchase price also included ZAR 200 million which was payable in May 2010. The Group had previously paid approximately ZAR 12 million (approximately €1.1 million) in 2009, which the vendors had claimed was due, prior to the Group realising that Mogale did not have certain permits. The Group then paid a further ZAR 187 million (approximately €19.2 million at €/ZAR 9.73) on 27 May 2010*. However, the Mogale vendors have informed the Group that they consider that the previous payments cannot be offset against the ZAR 200 million payment due in May 2010. The Group therefore expects to pay the Mogale vendors a further ZAR 13 million (approximately €1.3 million at €/ZAR 9.73) in July 2010. See also paragraph 10.4 of this Part XII.
15. Auditors The Company’s current auditors are Ernst & Young Oy (Authorised Public Accountants) of Elienlinaukio 5, 00100 Helsinki, Finland, which are authorised as public accountants by the Finnish Central Chamber of Commerce. Ernst & Young Oy has issued an unqualified audit opinion in respect of the consolidated IFRS financial statements of the Company and the parent company unconsolidated financial statements of the Company for the twelve month period ended 31December 2009. Ernst & Young Oy were appointed as auditors at the Company’s annual general meeting on 7 May 2009. The reason for the change in auditors was not material. For the financial year ended 31 December 2007 and 31 December 2008 and until the annual general meeting on 7 May 2009, the Company’s auditors were KPMG Oy Ab (Authorised Public Accountants) of PO Box 1037, 00101 Helsinki, Finland, and Mr Reino Tikkanen (Authorised Public Accountant) of c/o KPMG Oy Ab, PO Box 1037, 00101 Helsinki, Finland. Mr Reino Tikkanen is authorised as a public accountant and KPMG Oy Ab as a public accountant company by the Finnish Central Chamber of Commerce. KPMG Oy Ab and Mr Reino Tikkanen have issued unqualified audit opinions in respect of the consolidated IFRS financial statements of the Company and the parent company unconsolidated financial statements of the Company for each of the financial years ended 31 December 2007 and 31 December 2008. During this period, Mr Reino Tikkanen was a partner at KPMG Oy Ab. Prior to the 2009 annual general meeting, the Company’s Articles of Association required it to have a minimum of one auditor and one deputy auditor and in order to comply with this requirement, the Company had elected two auditors for the period from 1 January 2007 to 7 May 2009; however, at that meeting the Articles were amended. The amended Articles require the Company to have a minimum of one ordinary auditor and a deputy auditor. However, should the Company elect an audit firm authorised by the Finnish Central Chamber of Commerce as its ordinary auditor, the amended Articles permit the Company not to elect a deputy auditor in addition to its ordinary auditor.
16. Costs and Expenses The total costs and expenses payable by the Company in connection with Admission are estimated to be approximately €6.6 million.
17. Working Capital The Company is of the opinion that, taking into account the bank and other facilities available to the Group, the working capital available to the Group is sufficient for its present requirements, which is for at least the next twelve months from the date of publication of this document.
18. No Significant Change There has been no significant change in the financial or trading position of the Company since 31 March 2010, being the date to which the last unaudited interim financial information has been published (see section A of Part VIII “Historical Financial Information”).
336 19. Consents Ernst & Young Oy of Elielinaukio 5, 00100 Helsinki, Finland, has given and not withdrawn its written consent to the inclusion in this document of its report set out in Part IX of this document and the references thereto in the form and content in which it is included and has authorised the contents of its report for the purposes of paragraph 23.1 of Annex I and paragraph 10.3 of Annex III of European Commission Regulation (EC) No. 809/2004. Ernst & Young LLP of 1 More London Place, London SE1 2AF, United Kingdom has given and not withdrawn its written consent to the inclusion in this document of its reports set out in sections B and C of Part VIII of this document and the references thereto in the form and content in which they are included and has authorised the contents of its reports for the purposes of paragraph 23.1 of Annex I and paragraph 10.3 of Annex III of European Commission Regulation (EC) No. 809/2004. PricewaterhouseCoopers Aktiengesellschaft Wirtschaftsprüfungsgesellschaft of Konrad-Adenauer-Ufer 11 50668, Cologne, Germany has given and not withdrawn its written consent to the inclusion in this document of its report set out in section D of Part VIII of this document and the references thereto in the form and content in which it is included and has authorised the contents of its report for the purposes of paragraph 23.1 of Annex I and paragraph 10.3 of Annex III of European Commission Regulation (EC) No. 809/2004.
20. Documents Available for Inspection Copies of the following documents will be available for inspection at the offices of the Company at Keilasatama 5, 02150 Espoo, Finland and the offices of Herbert Smith LLP, Exchange House, Primrose Street, London, EC2A 2HS, United Kingdom during normal business hours on Monday to Friday each week (public holidays excepted) for a period from and including the date of publication of this document until the date of Admission: 20.1 the Articles of Association; 20.2 the annual reports and accounts of the Company for the years ended 31 December 2007, 31 December 2008 and 31 December 2009 including the information incorporated by reference (see Part XIII); 20.3 the interim report of the Company for the three month period ended 31 March 2010 including the information incorporated by reference (see Part XIII); 20.4 the reports from Ernst & Young LLP which are set out in Sections B and C of Part VIII of this document; 20.5 the report from Ernst & Young Oy which is set out in Part IX of this document; 20.6 the report from PricewaterhouseCoopers Aktiengesellschaft Wirtschaftsprüfungsgesellschaft which is set out in section D of Part VIII of this document; 20.7 the Deed Poll; 20.8 the consent letters referred to in paragraph 19 of this Part XII; and 20.9 this document and the Finnish language translation of the summary of this document.
This document is dated 30 June 2010.
337 PART XIII RELEVANT DOCUMENTATION AND INCORPORATION BY REFERENCE
The annual reports and accounts of the Company, for the financial years ended 31 December 2007, 31 December 2008 and 31 December 2009 and the interim report for the three month period ended 31 March 2010 contain information which is incorporated by reference into this Prospectus. Any statement contained in a document which is incorporated by reference herein shall be deemed to be modified or superseded for the purpose of this Prospectus to the extent that a statement contained herein (or in a later document which is incorporated by reference herein) modifies or supersedes such earlier statement (whether expressly, by implication or otherwise). Any statement so modified or superseded shall not be deemed, except as so modified or superseded, to constitute part of this Prospectus. Where the documents incorporated by reference themselves incorporate information by reference, such information does not form part of this Prospectus. The list below sets out the information which is incorporated by reference into this Prospectus. The other parts of these documents are provided for information only and are not incorporated by reference into this Prospectus. Document Section Pages Annual report and accounts of the Company for Board of Directors’ report 10-36 the financial year ended 31 December 2007 Consolidated income statement 38 Consolidated balance sheet 39 Consolidated cash flow statement 40 Changes in shareholders’ equity 41 Notes to the consolidated financial statements 42-111 Parent company unconsolidated financial statements 113-132 Signatures to the financial statements and report of the Board of Directors 133 Auditors’ note 133 Auditors’ report (translation) 134 Annual report and accounts of the Company for Board of Directors’ report 12-32 the financial year ended 31 December 2008 Consolidated income statement 34 Consolidated balance sheet 35 Consolidated cash flow statement 36 Changes in shareholders’ equity 37 Notes to the consolidated financial statements 38-109 Parent company unconsolidated financial statements 111-124 Signatures to the financial statements and report of the Board of Directors 125 Auditors’ note 125 Auditors’ report (translation) 126 Annual report and accounts of the Company for Board of Directors’ report 10-39 the financial year ended 31 December 2009 Consolidated income statement(1) 41 Consolidated balance sheet(1) 42 Consolidated cash flow statement(1) 43 Changes in shareholders’ equity(1) 44 Notes to the consolidated financial statements(1) 134-136 Parent company’s unconsolidated financial statements 137 Signatures to the financial statements and report of the Board of Directors(1) 137 Auditors’ note(1) 137 Auditors’ report (translation)(1) 138 Interim report of the Company for Interim report narrative 8-17 the three month period ended 31 March 2010 Financial development by segment 18-19 Consolidated income statement 20 Consolidated statement of financial position 21 Consolidated statement of cash flows 23 Consolidated statement of changes in equity 24 Other key indicators 25 Acquisitions and divestments 26 Accounting policies 27 Other notes to interim report 28 Note: (1) These sections of the annual report and accounts of the Company are also set out in full in Section A of Part VIII. 338 PART XIV DEFINITIONS
The following definitions shall apply throughout this document unless the context requires otherwise. Any definitions set out in any Section of Part VIII (Historical Financial Information) shall take precedence over these definitions in that Section of Part VIII, but shall not apply in any other Section of Part VIII or any other part of this document.: “Admission” the admission of the Ordinary Shares to the premium segment of the Official List and to trading on the London Stock Exchange’s main market for listed securities and Admission becoming effective means it becoming effective in accordance with paragraph 3.2.7 of the Listing Rules and the Admission and Disclosure Standards; the requirements contained in the publication “Admission and “Admission and Disclosure Disclosure Standards” dated 1 October 2008 containing, among Standards” other things, the admission requirements to be observed by companies seeking admission to trading on the London Stock Exchange’s main market for listed securities; “Articles of Association” the articles of association of the Company; or “Articles”
“BEE” black economic empowerment; “Board” or “Directors” the board of Directors of the Company; “Central Chamber of Commerce” Finnish Central Chamber of Commerce (in Finnish: Keskuskauppakamari); “CINL” CREST International Nominees Limited, a subsidiary of Euroclear UK & Ireland; “Company” or “Ruukki” Ruukki Group Plc, a public limited company incorporated in Finland with business identity code 0618181-8 and trade register number 360.572; “Control Act” Act on the Control of Foreigners’ Acquisition of Finnish Companies of 1992 (1612/1992, as amended); “CREST” the system of paperless settlement of trades in securities and the holding of uncertificated securities operated by Euroclear UK & Ireland in accordance with the Uncertificated Securities Regulations; “Custodian” any custodian or custodians or any nominee of any such custodian as may from time to time be appointed by the Depositary under the terms of the Deed Poll; “Deed Poll” a deed poll to be executed by the Depository in favour of the holders of Depository Interests from time to time, further details of which are set out in paragraph 2.2 of Part X; “Depositary” Capita IRG Trustees Limited; “Depositary Agreement” the agreement to be entered into between the Depositary and the Company, further details of which are set out in paragraph 2.3 of Part X;
339 “Depositary Interests” or “DIs” the dematerialised depository interests in respect of the underlying Ordinary Shares issued or to be issued by the Depository; “Directors” the directors of the Company whose names appear in paragraph 1.1 of Part VI of this document; “Disclosure and Transparency the disclosure and transparency rules of the UK FSA; Rules” “EBITDA” earnings before interest, tax, depreciation and amortisation; “EEA State” a state which is a contracting party to the agreement on the European Economic Area signed on 2 May 1992, as it has effect for the time being; “EU” the European Union; “Euroclear Finland” Euroclear Finland Ltd, the operator of the Company’s book-entry securities system; “Euroclear UK & Ireland” Euroclear UK & Ireland Limited, the operator of CREST; “Finland” the Republic of Finland; “EWW” Elektrowerk-Weisweiler GmbH, a company incorporated in Germany with whom the Group has a long term toll manufacturing arrangement; “Finnish Accounting Act” the Finnish Accounting Act (1336/1997), as amended; “Finnish Companies Act” the Finnish Companies Act (624/2006), as amended; “Finnish Corporate the Finnish Corporate Governance Code 2008 for listed Governance Code” companies, which came into effect on 1 January 2009; “Finnish FSA” Finnish Financial Supervisory Authority (in Finnish: Finanssivalvonta) acting in its capacity as the competent authority for, among other things, listing and takeovers in Finland under the Finnish Securities Markets Act; “Finnish Securities Markets Act” the Finnish Securities Markets Act (495/1989), as amended; “Finnish Trade Register” the public register containing information on trading entities maintained by the National Board of Patents and Registration of Finland; “FSMA” the Financial Services and Markets Act 2000 (as amended); “Group” Ruukki and its subsidiary undertakings (as defined in the Finnish Companies Act); “Helsinki Stock Exchange” NASDAQ OMX Helsinki Oy; “Historical Financial Information” the historical financial information for the Group set out in Part VIII of this document; “I/2005” the Company’s share option scheme approved at a general meeting on 8 December 2005, further details of which are included in paragraph 8 of Part XII; “I/2008” the Company’s share option scheme approved at a general meeting on 28 October 2008, further details of which are included in paragraph 8 of Part XII;
340 “I/2010” the Company’s share option scheme approved at a its annual general meeting on 21 April 2010, further details of which are included in paragraph 8 of Part XII; “Intermetal” Intermetal Madencilik ve Ticaret A.S. “IFRS” International Financial Reporting Standards as adopted by the EU; “ISIN” International Security Identification Number; “Junnikkala” Junnikkala Oy, a company incorporated in Finland operating in the Group’s wood processing business; “Kermas” Kermas Limited, a company incorporated in the British Virgin Islands with registration number 504889, with interests in the minerals sector and being a major Shareholder of Ruukki; “Listing Rules” the listing rules made by the UKLA pursuant to Part VI of FSMA; “London Stock Exchange” London Stock Exchange plc; “Mintek” Mintek, a statutory body existing in terms of section 2(1) of the South African Mineral Technology Act, Act No 30 of 1989 as amended; “Model Code” the Model Code published by the UKLA at Annex 1 of Listing Rule 9 of the Listing Rules; “Mogale” Mogale Alloys (Proprietary) Limited, a company incorporated in South Africa with registration number 2002/015207/07 and involved in the Group’s minerals business; “MVA” mega volt ampere; “OECD” Organization for Economic Co-operation and Development; “Official List” the Official List of the UK FSA; “Ordinary Shares” the ordinary shares of no par value each in the capital of the Company and/or where the context requires the Depositary Interests; “Ruukki” the Company or the Group as the context may require; “Prospectus Directive” Directive of the European Parliament and of the Council 2003/71/EC; “RCS” RCS Limited, a company incorporated in Malta with registration number C43287 and involved in the Group’s minerals business; “Relationship Agreement” the relationship agreement between the Company, Kermas and Dr Koncar dated 30 June 2010, as described in paragraph 10.5 of Part XII of this document; “Securities Act” the United States Securities Act of 1933 (as amended); “Senior Managers” the member of the Group’s executive management committee comprised of those persons listed in paragraph 1.2 of Part VI of this document; “Shareholders” holders of Ordinary Shares;
341 “Takeover Directive” EU Directive 2004/25/EC on takeover bids; “Tervola” Tervolan Saha ja Hoyläämö Oy Group, a former subsidiary of the Group in its wood processing and house building segment; “Tervola Group” Tervola and its subsidiary undertakings (as defined in the Finnish Companies Act); “TMS” Turk Maadin Sirketi A.S, a company incorporated in Turkey with registration number 2996 and involved in the Group’s minerals business; “Trustee” Capita IRG Trustees Limited; “UK Combined Code” the UK Combined Code on Corporate Governance issued by the Financial Reporting Council in June 2008; “UK FSA” the UK Financial Services Authority acting in its capacity as the competent authority for listing in the UK for the purposes of Part VI of the FSMA; “UK Listing Authority” or the UK Listing Authority, being the UK FSA acting as the “UKLA” competent authority for the purposes of Part VI of the FSMA; “UK Takeover Code” the UK City Code on Takeovers and Mergers issued from time to time by or on behalf of the UK Takeover Panel; “UK Takeover Panel” The UK Panel on Takeovers and Mergers, being the issuer and administrator of the UK Takeover Code and the designated authority for the UK in respect of certain regulatory functions pursuant to the Takeover Directive; “Uncertificated Securities the Uncertificated Securities Regulations 2001 (SI 2001/3755); Regulations” “United Kingdom” or “UK” the United Kingdom of Great Britain and Northern Ireland; “United States” or “US” the United States of America, its territories and possessions, any state of the United States of America, the District of Columbia; “VAT” or “Value Added Tax” value added tax; and “Website” www.ruukkigroup.fi, the Group’s public website. For the purpose of this document, references to one gender include the other gender.
342 Millnet Financial (8599-01)