A Global Leader
2019 Annual Report and Accounts Who we are Strategic report One of the world’s leading mineral 02 2019 highlights fertilizer producers 04 Global EuroChem 10 Joint Chairmen’s statement Our Mission 12 CEO’s Q&A To improve the quality of life 14 Market overview of the growing world population 18 Stakeholder engagement by helping to grow healthy, 20 Business model affordable food in harmony 22 Our strategy Financial review A Global with the environment 26 30 Product portfolio Our vision for 2025 32 Performance review 48 Sustainability review Leader To become the safest, most profitable, fastest-growing and 66 Risk management most attractive fertilizer company 2019 was a landmark year for EuroChem. Governance in the world We became one of the world’s four largest 72 Board of Directors 74 Corporate Governance fertilizer producers by revenue – a vital step 80 Audit Committee towards achieving our ambition of becoming Strategy Committee global market leader by 2025. 82 84 Nomination and Remuneration Committee We are already transforming into a truly global business: strengthening Financial statements our global advantage across all three nutrient Independent Auditors’ Report 87 groups, extending our distribution 92 Consolidated Statement of Financial Position on a global scale and expanding 93 Consolidated Statement of Profit or Loss our global customer reach. 94 Consolidated Statement of Comprehensive Income 95 Consolidated Statement of Cash Flows 96 Consolidated Statement of Changes in Equity 97 Notes to the Consolidated Financial Statements Visit our website for more information www.eurochemgroup.com 2019 Highlights Strategic Report Corporate Governance Financial Statements Facing the future with confidence
Strong results Our competitive advantage We have delivered strong full-year results despite subdued Full vertical integration – from extracting raw pricing in global fertilizer markets. Our business model allows materials to customer delivery – gives us unrivalled us to deliver high performance at almost any point of the control over the value chain to strengthen our commodity industry cycle. position in every market.
Sales (US$ mn) EBITDA (US$ mn) Global Fertilizer Producers by Revenue1 (US$ bn)
6,184 1,517 1,547 Nutrien 20.02 5,577 4,866 4,375 1,133 1,130 Yara 12.94 Mosaic 8.91 + % + % EuroChem 6.18 11 2 OCP 5.49 2016 2017 2018 2019 YoY 2016 2017 2018 2019 YoY ICL 5.27 CF Industries 4.59 Sales (KMT) Free cash flow (US$ mn) K+S 4.45 297 PhosAgro 3.83 23,624 OCI 3.03 21,354 21,476 21,978 Uralkali 2.78
2016 2017 2018 2019
+7% -94 2016 2017 2018 2019 -169 YoY -189 1. Last 12 months, based on each company’s filings as of 31 December 2019
Key milestones New CEO Expansion in Brazil 18 years from New Chairman Petter Østbø joined as In June, a new fertilizer foundation MMT Samir Brikho was appointed Chairman of the Group’s new CEO in June blending plant opened at EuroChem marked the 18th 1 the Board of Directors at EuroChem from st US$ MN 2019. He has a proven track the Group’s majority- anniversary of its foundation Potash test production January 1 , 2020. Samir has held senior 700 record in the global fertilizer owned subsidiary management positions at Asea, ABB with the ramp-up of potash In September, the Group achieved Eurobond issue industry and his experience will be Fertilizantes Tocantins, Power Generation and Alstom, and served test production, making it one a new milestone, having produced invaluable as EuroChem seeks signalling continued as Chief Executive at Amec from 2006 EuroChem’s transaction was the of just three global players with 1 MMT of potash in test mode to enhance its market positions expansion by EuroChem to 2016. He has also twice served as the largest among non-investment its own production capacity at the Usolskiy potash project since internationally and grows to in South America. Chair of the World Economic Forum’s grade issuers from Russia in all three primary nutrients. its launch in 2018. since June 2017. become the market leader. Engineering and Construction Board. March April June August September December American Plant Food New ammonia terminal In line with the Group’s strategy in Estonia RUB BN KMT to expand its global footprint Rouble52 bond issues 791 The Group opened a new ammonia Ammonia produced since in the Americas, EuroChem storage and transshipment facility Between April and August 2019, EuroChem Northwest launch signed a multi-year agreement in in Sillamäe in November. The the Group was an active player in September 2019 with American terminal provides greater logistics In June 2019, EuroChem officially opened its US$0.9 bn ammonia the domestic public debt capital Plant Food for the supply of capacity, especially for ammonia plant, EuroChem Northwest, in Kingisepp, Russia. The facility has market and placed four rouble various fertilizers to its blending exports from Kingisepp. an annual design capacity of 1 million tonnes (1 MMT), ensuring bonds for RUB52 bn. business in the United States. full self-sufficiency in ammonia for the Group.
2 www.eurochemgroup.com EuroChem 2019 Annual Report and Accounts 3 Strategic Report Corporate Governance Financial Statements
N P K
Global Nitrogen Phosphorus Potassium
Global Urea Cash Global DAP Cash Global MOP Cash advantage Cost Curve Cost Curve Cost Curve We are one of just three companies Phosphorit Lifosa Usolskiy VolgaKali
worldwide with direct access to raw NevAzot NAK materials in all nutrient groups. Full vertical integration together with easy access to natural gas, and self-sufficiency in ammonia and potash, give us
a unique cost advantage 1st quartile on Global 1st-2nd quartile on One of the cheapest over competitors. Urea Cash Cost Global DAP Cash MOP producers Curve Cost Curve globally
Sales breakdown by nutrient
2019 2019 2019 8% 2018 2018 2018 5%
42% 50% 8% 42% 42% 53% 50%
FOR DETAILS SEE OUR BUSINESS MODEL ON PAGES 20 AND 21
4 www.eurochemgroup.com EuroChem 2019 Annual Report and Accounts 5 Strategic Report Corporate Governance Financial Statements
Global fertilizer Global ranking market share in 2019 by revenue 2.8% #4
Year-on-year Products sold increase in sales by the Group Global +11% >100
34 New ammonia storage 01 and transshipment New ammonia scale facility at Sillamäe, facility launched at Estonia, with annual 35 10 Kingisepp, Russia, ammonia transshipment 29 produced 791 KMT 09 05 03 As we expand our production capacity and capacity of 1 MMT 36 08 26 in 2019 07 20 32 02 25 11 extend our world-class distribution coverage, we 21 28 04 19 22 24 33 27 06 are continuously growing the product range and 18 14 23 A new fertilizer blending 30 volumes we bring to market. As a result, we’re plant opened in Brazil 15 12 constantly meeting more of the needs of more 13 (Araguari, Minas Gerais) with production capacity Usolskiy and more farmers across the world. of 6 KMT/day and storage potash deposit of 100 KMT ramped up output, 31 producing 1.1 MMT 16 in 2019
17
Mining Fertilizers Sales Logistics
01 Kovdorskiy GOK 05 Novomoskovskiy Azot 13 Mexico 21 Switzerland (Global HQ) 29 Russia 33 Tuapse 02 EuroChem VolgaKaliy 06 Nevinnomysskiy Azot 14 US (Tulsa) 22 Italy 30 China 34 Murmansk 03 EuroChem Usolskiy 07 EuroChem Antwerpen 15 US (Tampa) 23 Greece 31 Singapore 35 Sillamäe 04 EuroChem Fertilizers 08 Lifosa 16 Brazil 24 Serbia 32 Poland 36 EuroChem Antwerpen jetty 09 Phosphorit 17 Argentina 25 Hungary 10 EuroChem Northwest 18 Spain 26 Belarus 11 EuroChem-BMU 19 France 27 Bulgaria FOR DETAILS FOR DETAILS FOR DETAILS 12 EuroChem Migao 20 Germany 28 Moldova SEE MINING DIVISION SEE FERTILIZERS DIVISION SEE COMMERCIAL DIVISION PERFORMANCE REVIEW PERFORMANCE REVIEW PERFORMANCE REVIEW ON PAGE 32 ON PAGE 38 ON PAGE 42
MINING DIVISION FERTILIZERS DIVISION COMMERCIAL DIVISION LOGISTICS REVIEW, REVIEW, PAGE 32 REVIEW, PAGE 38 REVIEW, PAGE 42 PAGE 47
6 www.eurochemgroup.com EuroChem 2019 Annual Report and Accounts 7 LISTENING TO Global THE VOICE OF OUR reach CUSTOMERS We work closely with farmers in key agricultural regions around the world to better understand their needs, to share best practice in fertilizer application, and to ensure we deliver the right product to the right crop at the right time.
Sales by region (US$ bn)
+2% +32% 1.63 1.60 1.52 +18% 1.15 1.06 1.06 0.99 +17% 0.84 0.53 0.62 0.26 0.26 0.13 0.10 2018 2019 2018 2019 2018 2019 2018 2019 2018 2019 2018 2019 Europe Latin Russia North Asia CIS Africa America America Pacific
FOR DETAILS SEE SUSTAINABILITY REVIEW ON PAGE 48
8 www.eurochemgroup.com Q: How can EuroChem’s ENTEC®26 help with ecological challenges? A: The greatest challenge for Swiss farmers will be to meet new environmental targets. There is a growing focus on the relationship between production and ecology. ENTEC®26 helps us cut nitrous oxide emissions while increasing crop yields significantly. Our purchases are supported by the KliK Foundation, a climate protection foundation which ® Markus Kempf FERTILIZER PRODUCT MANAGER AT OMYA, subsidises ENTEC 26 due to SWITZERLAND its environmental benefits. Q: Why are EuroChem’s sulphur-containing fertilizers important for vegetable growing in your region? A: Sulphur is an indispensable nutrient for all crops, but especially for cabbage and the onion family. In our region, the production of vegetables with leaves is dominant. A good sulphur supply to the plant ensures a darker leaf colour and thus a better outer and inner appearance. This is important as it enables us to achieve the optimum market price. Improved air quality means sulphur inputs have dropped significantly in recent years. In addition, there is relatively little organic fertilization in the vegetable industry of our region, so the use of sulphur in vegetable production will become increasingly important in future.
Lothar Rebholz WATER PROTECTION ADVISER, GERMANY Q: Can you tell us about your experience of using EuroChem fertilizers? A: We’ve been using ENTEC® since 2007 as it delivers more nitrogen over time and allows us to work more efficiently. It also brings some notable environmental benefits, such as lower nitrogen leaching, which we really care about. We use it to grow potatoes and a range of other vegetables, including salad leaves, cabbages, courgettes and celery.
Fredy Umbricht MANAGER, WINE AND VEGETABLE PRODUCER, SWITZERLAND Q: How long have you been using ENTEC® fertilizer? A: We have used ENTEC® successfully for about 20 years. We find that it is particularly efficient on light, leaching soils, where it reduces nitrogen losses. This is important in irrigation areas used for intensive vegetable farming. We use ENTEC® Perfect NPK fertilizer to supply the nutrient demand for many vegetable crops and have also found that ENTEC® products are ideal for other blends.
Patrick Mauer PRODUCTION MANAGER AT KESSLER-WEISS GBR, GERMANY Q: How do the seasons affect nutrient application and plant growth? A: They are obviously very significant. On a big farm with different crops we need to monitor weather conditions very carefully. Knowing how crops’ nutrient needs change means we can decide on the appropriate balance between N, P and K application to achieve the required crop yield. We value a supplier who can provide us with specific blends tailored to our needs on our farm, and who can also offer different business solutions.
Mauro Sergio Lopos Guimares GENERAL MANAGER OF A COFFEE FARM AT ARAGUARI, BRAZIL Q: What do you think will be the biggest challenge for vegetable growers in the coming years? A: The greatest challenges for vegetable growers are the latest regulations with nitrogen and phosphate upper limits and also regional reductions in water protection areas. We are prepared for these challenges with a high-performance fertilizer system, using EuroChem’s fertilizers.
Alexander Bress SALES MANAGER, MAURER PARAT GMBH, GERMANY
Joint Chairmen’s statement Strategic Report Corporate Governance Financial Statements
2019 milestones 2019 was a landmark year for EuroChem, highlighting what an exciting and rewarding time it is to be involved in the global fertilizer industry. Marked above all by our arrival Our updated strategy places as a top-four global producer of fertilizers Trials in 2019 showed great promise by revenue, this was a year in which we us in a strengthened continued to transform the Group. Most for our next-generation products, and important of all, we launched our updated competitive position for strategy, designed to take us towards our we look to the future with confidence and declared goal of global market leadership the years ahead. by 2025. anticipation. We also achieved numerous production milestones, with highlights including significant international expansion and the successful launch of our new ammonia plant at Kingisepp. In another highlight, we expanded potash production at Usolskiy and began deliveries to customers all round the world. In addition, growing recognition of our Commercial direction Our people Our new CEO achievements across a range of parameters We also made excellent progress during Of course, all these achievements have Turning to the Board, the Group welcomed – from our export excellence to the quality 2019 in expanding the Group’s presence been made possible by a single unifying Petter Østbø as CEO when he joined of our corporate reporting – saw us receive in markets on almost every continent, as factor: the pride and professionalism of EuroChem in June from Yara, where his a number of awards and plaudits during the geographic spread of our sales shows our 27,000-strong workforce, for which senior management roles included that of the year. In short, today’s EuroChem is a (see page 7). This is due in no small part we are profoundly grateful. Executive Vice President with responsibility dynamic force in the international fertilizer to a major review of our organisational for production at almost 30 separate However, we know that we are not yet industry, making its mark as a global structure. By restructuring and realigning industrial sites. Petter’s extensive where we want or need to be in terms of producer across all three primary nutrient many of our business activities into a single background in our industry and his employee safety, and we are redoubling groups – nitrogen, phosphates and potash. Commercial Division, we have significantly expertise in strategy consulting and our efforts in this area. improved our approach to market, improving productivity will be a major asset However, the year was not without its streamlining business processes and to EuroChem as we plot our future course. challenges. Along with other companies We have introduced several important increasing our operational effectiveness. initiatives, such as our Working Safely at in our industry, we faced the financial, Finally, we would like together to praise Height programme and much enhanced environmental, security and production Our focus for the year ahead is to continue our employees for their great dedication to training for all employees, but we must risks that come with being in a highly this process. We aim to ensure that bringing EuroChem’s ambitions to reality. go further. The nature of our industrial competitive commodity industry. It was EuroChem is optimally placed to respond We thank each and every one of them. and production sites demands nothing to address and mitigate these challenges to the fast-changing business environment less than a robust, professional safety Alexander Landia that we developed our updated strategy, and to continue our quest to become our culture – and we are doing everything CHAIRMAN OF THE BOARD placing us in a strengthened competitive industry’s safest, most value-creating and we can to ensure a safe workplace for all FROM APRIL 2015 TO DECEMBER 2019 position for the years ahead. fastest-growing company. our employees and those of our contractors. With increased scale and market presence Respect for the environment With this in mind, we introduced several comes greater responsibility. We recognise further major improvements during 2019. We have a vital role to play in ensuring the that we must do more to limit our New Key Performance Indicators (KPIs) will future wellbeing of people, communities environmental footprint – not only through help us identify near-misses and account and nations across the planet. As the our own operations, but also in how we for all recordable incidents, whether or not world’s population continues to expand, influence the impact of our customers they result in an injury. Learning from such the pressure on farmers to produce ever around the world. We therefore continue to situations will help us make EuroChem more food from the same land resources work on creating new, highly efficient a safer place to work. The Board also A dynamic will increase. At EuroChem, we are playing fertilizers that require less water to be expanded its oversight of risk mitigation our part in helping farmers meet these effective and emit fewer greenhouse gases and project management during 2019, demands by using our leading portfolio of during use. Trials in 2019 showed great to include a renewed focus on safety and standard and premium fertilizers. Just as promise for our next-generation products, productivity. Above all, EuroChem’s new important, we are continuing to develop and and we look to the future with confidence corporate growth and productivity strategy produce increasingly efficient, specialist and anticipation. and effective products. We are extremely places safety at the heart of our efforts. force in the proud of the progress we continue to make in these areas.
Samir Brikho CHAIRMAN OF THE BOARD industry FROM JANUARY 2020
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Petter Østbø joined EuroChem To do this, we have set in motion what Finally, to achieve our ambition we must as CEO in June 2019, taking we call the EuroChem Business System. work together to become a high-performing over from CFO Kuzma Marchuk This looks at how we operate our learning organisation. We must train our production and support processes, employees at all levels, developing clear who served as Acting CEO from identifying improvements that, when career paths and internal succession plans September 2018 to May 2019. It is truly remarkable added together, spell out an annual margin to ensure that our brightest and best can The subsequent months have to think that in just improvement that potentially amounts to see progression opportunities. EuroChem seen a whirlwind of activity, several hundred million dollars. We piloted will deliver the best environment to develop including visits to every production over 18 years we this approach at two of our mines and one leaders, and we want to give our people an fertilizer plant during the third quarter of enjoyable and rewarding place to work. site, the development of a new have grown into 2019. By 2021, the EuroChem Business strategy based around safety, System will be a part of all our facilities Q: What acquisitions do you have productivity and growth, and a a company that and support processes. in mind? determination to make EuroChem can challenge the A: All low-cost, large-scale assets are the best-performing company in Q: What do you see as your greatest priorities at EuroChem? of interest. We have not completed any the global fertilizer sector. biggest and best acquisitions in the seven months since A: Three goals drive everything I do on a I arrived, but we have progressed with Q: What kind of year has it been in our sector. daily basis: safety, productivity and growth. our organic initiatives. We have taken the for you – and for EuroChem? learnings from our two world-class potash On safety, let me say this: my aim is mines and our world-leading ammonia A: I consider myself fortunate to have that no one should come home injured plant to put in place an internal capital joined a company with so many talented from working at EuroChem. We operate projects resource, which will improve our and dynamic colleagues, well-maintained open-pit and underground mines, factories capability to design, build and commission and upgraded facilities and mines, Kingisepp in June, which made a and terminals. These are inherently plants and mines. all supported by world-class significant contribution to our full-year hazardous environments. But no product business practices. results. And in terms of sales, we delivered is so important, and no plant so vital to Q: How would you characterise more product to more customers in more the company, that we would not sooner EuroChem’s short history has been one EuroChem under your leadership? countries around the world than in any stop a production line than see a single of continual growth, to the point where we year in EuroChem’s history. person injured. have become the fourth-largest company A: I want us to become a world-class organisation across the board. My focus is in the industry by revenue. Having said all that, we must recognise Every incident is a reminder that we can on improving safety, enhancing productivity that the fertilizer business is changing. and must do more to improve safety. I have It is truly remarkable to think that in through the EuroChem Business System As a company, we will not have the same therefore elevated the safety function to just over 18 years we have grown into a and using our capital projects organisation advantages in the period to come that report directly to me. In addition, as part of company that can challenge the biggest to systematically pursue growth through we have had during the last few years. the newly developed EuroChem Business and best in our sector. mergers and acquisitions or new builds. System, we will sharpen how we work with This is testament to the talent and drive of Q: What do you mean by these occupational and process safety. There We must ramp up our supply chain and the managers and leaders who have come past advantages? will be no shortcuts in our relentless sales capabilities in concert with these before me. drive to become a safer company. efforts. Our commercial team is working We are coming off close to two A: to extend our reach in the United States, There is a positive energy in the organisation, decades of high prices. We start 2020 As we aim to continue the growth that has Brazil and other large markets. It is also Petter Østbø one that feeds continued growth and with competitors reducing capacity and lifted us into the top four in our sector, we focused on improving our port and terminal CHIEF EXECUTIVE OFFICER constant improvement. I would like to prices having fallen to multi-year lows. have to make sure we are more proficient assets so we can transport our products to pay tribute to Kuzma and his team, whose Where historically there were large regional than our competitors at everything we do. our customers at the lowest cost and in a excellent work helped to pave the way for differences in gas prices, previously We will become more focused, more timely manner. And we will do all this with a smooth transition. high-cost regions are now benefiting from efficient – in short, more productive across the highest standards of compliance and the availability of abundant low-priced the board. However, when we talk about the business, respect for the environment. natural gas, mainly from the United States. it is clear to me that we are not where we As far as growth is concerned, we are So we can no longer count on historical Our strategy is ambitious, and to deliver on need to be in terms of occupational safety. actively studying opportunities to grow, advantages that have driven our business it we have to achieve some tough targets. Too many colleagues were injured working both organically and through acquisitions. success. We have to take matters into However, I have a strong belief in the for EuroChem during 2019. I know that We are interested in low-cost, large-scale our own hands and improve productivity ability and commitment of my colleagues Safety, everyone in the Company agrees that producers with excellent distribution to ensure we remain profitable and to deliver. Above all, I have no doubt safety must improve. positions. fast-growing. whatsoever that this will enable the On the positive side, I am particularly In parallel, we will ensure that we have transformation of EuroChem into a pleased with several achievements from Q: What does this productivity world-class compliance throughout global leader. the year that are important milestones in look like? EuroChem. our growth story. For example, our potash Petter Østbø CHIEF EXECUTIVE OFFICER productivity, mine at Usolskiy produced in test mode A: Our plants are well run, but there is more than 1 million tonnes of product in always room for improvement. Looking at 2019. We also commissioned the practices across our assets, it is clear we EuroChem Northwest ammonia plant at can learn from ourselves as well as from our peers in the industry – and even from growth leaders in other industries.
12 www.eurochemgroup.com EuroChem 2019 Annual Report and Accounts 13 Market overview – Global trends Strategic Report Corporate Governance Financial Statements Robust industry fundamentals
Food security means that all people, at all times, have physical, social and economic access to sufficient, safe and nutritious food that meets their preferences and dietary needs for an active and healthy life.
World population growth Where consumption Driving demand Which in turn results in is concentrated in middle- growth remains for higher higher global fertilizer 1 and low-income countries 2 strongest 3 productivity 4 consumption Global population (bn) Forecast of daily protein intake Arable land per capita Global fertilizer consumption (MMT) per capita (g/day/person) 8.0 0. 250 in 2020 .0 + % World 7.7 2.0 1.9 200 +1.5% .0 0. High-income .0 1.3 0.1 150 countries 1,139 978 .0 0. .0 100 Middle-income 5.7 1.2 countries + % 2.0 0.2 + % 1.7 50 1.2 280 1.0 238 Low-income 102 115 0.8 0.7 0 0.1 0 countries 2000 2006 2012 2018 2024
Maize Rice Wheat 1961 1964 1967 1970 1973 1976 1979 1982 1985 1988 1991 1994 1997 2000 2003 2006 2009 2012 2015
N P K 2019 Addition by 2050 Average 2016-18 2028 Population bn people Arable land ha per capita Nitrogen Phosphorus Potassium Source: UN World Population Prospects Report, Source: OECD-FAO Agricultural Outlook for 2019-2028. UN Department % Economic and Social Affairs Source:Growth ratesOECD-FAO presented Agricultural in %, on Outlook a per annum for 2019-2028 basis Source: FAOSTAT Source: IFA
Global demand for food is fuelling demand This demonstrates the importance of The UN believes that just nine countries The growth of veganism in the developed slower than in the past, it is nonetheless Global fertilizer consumption for nitrogen-, phosphorus- and potassium- fertilizers in a world facing a wide range – India, Nigeria, the Democratic Republic world (veganism grew by 600 percent in significant. By 2030 food production will The global fertilizer industry is well based fertilizers. The United Nations of challenges, from population growth, of the Congo, Pakistan, Ethiopia, the the US between 2014 and 2017)6 will go be 23.2 percent higher than 15 years earlier. placed to meet the growing demand Farming and Agriculture Organization climate change and weather shocks to United Republic of Tanzania, the United some way towards balancing this trend. This places an increasing productivity for its products over the next five years. (UN FAO) predicts that demand will rise rising lifestyle expectations and loss States of America, Uganda and Indonesia However, while the rate of increase demand on land, at a time when land According to the UN FAO, it currently by 6.3 percent from 188,966 KMT in 2018 of farmland. – will be responsible for half of the world’s may appear impressive, those identifying is being taken out of food production and has the capacity to exceed demand for to 200,919 KMT by 2021. A number of population growth up to 20504. It is as vegan still only account for a small converted to buildings, infrastructure or nitrogen-, phosphorus- and potassium- factors, including population growth and Population growth therefore vital that production can be 8 proportion of the total population: the bio-fuels. In addition, as farming methods based fertilizers . This balance is predicted changing diets due to increasing prosperity assured in these regions, and fertilizers The world’s population is growing by more actual increase was from 1 percent to have become more intensive to meet to narrow by 2022 to 19.3 MMT, by which in emerging economies, continue to have will have an important role to play in this. than 200,000 every day and is expected 6 percent of the population. All this means demand, soil productivity has decreased, time EuroChem plans to have built a larger a positive effect on demand. Overall, this to reach 8.6 billion by 2030, 9.8 billion by that veganism needs to progress much leading to a decline in potential crop yields. share of this growing world market. spells an attractive outlook for our industry. Rising prosperity 2050 and 11.9 billion by 2100 (up from more to have a really meaningful impact 3 and consumption Fertilizers are essential in restoring Fertilizers are vital in enabling the world to 7.7 billion today) . A significant shortfall in on global production in the face of nutrients to depleted soils. We recognise achieve this widely accepted UN definition food availability and access is anticipated. We have passed a tipping point where developments in Asia and Africa. that better yields over the long term require of food security. According to one scientific more than half of the world’s population We believe that ever-improving fertilizers 5 more advanced products as well as journal, “evaluation of long-term studies could be considered middle class . Demand for will help farmers to ensure their soils retain improved management and application. has shown that the average percent of yield agricultural production vital nutrients and increase crop yields. With the great majority of this rise taking The fertilizer sector needs to work closely attributable to fertilizer inputs generally However, we also recognise that major place in emerging economies, dietary Global demand for food is expected to with experts from other industries to take ranged from about 40 to 60 percent in distribution challenges lie ahead to ensure habits are changing as people increasingly grow by 1.4 percent annually between a collective approach to challenges such temperate climates (USA and England), and that those countries with the fastest demand a sophisticated, protein-rich diet. 2015 and 20307. While this is slightly as pests, diseases and water stress. tended to be much higher in the tropic1, 2.” population growth can feed their people. This generally consists of high proportions of meat, poultry and dairy products, which are resource-intensive to produce. 1. W. M. Stewart and T. M. Roberts, Procedia Engineering 2. World Population Prospects: The 2017 Revision, the UN Department of Economic and Social Affairs 3. World Population Prospects: The 2017 Revision, the UN Department of Economic and Social Affairs 6. Top Trends in Prepared Foods 2017: Exploring trends in meat, fish and seafood; pasta, noodles and rice; prepared meals; savory deli food; soup; and 4. The Unprecedented Expansion of the Global Middle Class, H. Kharas, 2017 meat substitutes, GlobalData, 2017 5. Top Trends in Prepared Foods 2017: Exploring trends in meat, fish and seafood; pasta, noodles and rice; prepared meals; savory deli food; soup; and 7. http://www.fao.org/3/y3557e/y3557e06.htm meat substitutes, GlobalData, 2017 8. http://www.fao.org/3/ca6746en/CA6746EN.pdf
14 www.eurochemgroup.com EuroChem 2019 Annual Report and Accounts 15 Market overview – Industry fundamentals Strategic Report Corporate Governance Financial Statements Fertilizer market
developments Western and Central Europe Eastern Europe and Central Asia
Latin America and the Caribbean Weakening currencies in several importing countries, escalating trade North America tensions elsewhere and difficult weather conditions affected the global East Asia South Asia balance between supply and demand for fertilizers in 2019. Growth in West Asia demand for nitrogen fertilizers was modest, and there were slight Africa declines for phosphorus- and potassium-based products. Oceania
Demand Supply Market developments World fertilizer consumption Average market prices by region (US$/tonne)
Overall, the global use of nitrogen Little change is expected in global The gap between the supply and demand of Change 2% fertilizers grew by around 0.2 percent ammonia capacity over the next year, nitrogen-based fertilizers grew during 2019, 4% 2019 2018 y-o-y, % N 3% 11% Nitrogen during 2019 to 106.4 MMT N. Growth when we anticipate a marginal rise to as modest growth in usage did not match Ammonia was particularly strong in South East 182 MMT N in 2020. The output of newly the year’s increasing production. The market 6% (FOB, Black Sea) 233 286 -18% Asia, where a better-than-average commissioned plants in the CIS, India was influenced by several pressures, Prilled Urea monsoon encouraged farmers to use and Nigeria is likely to be balanced by including the first international resolution on 21% 9% (FOB, Yuzhniy) 239 251 -5% more fertilizers to support a good spring closures and restructuring programmes nitrogen management and a number of new AN harvest. Ukraine’s stabilising economy in Brazil, Trinidad, Kuwait, Romania and national schemes aimed at reducing 106 MMT N (FOB, Baltic) 186 188 -1% and increasing agricultural land in Russia particularly China, where environmental greenhouse gas emissions. Changes to EU drove market growth in the CIS and the controls are tightening. It is anticipated tariffs and lower natural gas prices in the US 13% Baltic states. Political concerns and dry that global urea capacity will rise to 213 and Europe also impacted the overall weather caused demand to fall in Latin MMT in 2020, from 208 MMT in 2019, business environment. In addition, China’s America, while stricter German legislation with new facilities coming on-stream urea exports more than doubled to 31% around the use of nitrogen affected sales in India, Nigeria and the CIS. significantly affect the trading landscape. in Western and Central Europe.
Significant regional variations The global capacity for phosphoric Demand for phosphate rock held steady during Change balanced out in 2019 to deliver a acid production is expected to be some 2019, and the production of phosphoric acid 4%2% 6% 2019 2018 y-o-y, % P 2% 4% Phosphorus year-on-year decrease in demand for 60.4 MMT P2O5 by 2020, around 1 percent and processed phosphates increased. We MAP phosphate nutrients of 0.3 percent. higher on average since 2018. Despite the believe the imbalance between supply and (FOB, Baltic) 339 413 -18% There was a strong growth story closure or mothballing of some facilities demand for phosphoric acid will continue 19% Phosphate Rock 11% across the Middle East, the CIS in the US and Canada, global processed in 2020, potentially reaching 3 MMT P2O5 – (FOB, Morocco) 89 90 -2% and Latin America, where Brazil in phosphate capacity is predicted to rise to up from 2.9 MMT P O in 2019 and 2018’s 2 5 Sulphur particular had an excellent harvest. around 48.3 MMT P O , fractionally up on 2.6 MMT P O . Drivers at play include 2 5 2 5 46 MMT P2O5 (FOB, Black Sea) 78 123 -37% But several factors, including the 2019’s 48.1 MMT P2O5. Countries including stricter regulation in Europe on managing impact of African swine fever and Morocco, Saudi Arabia and Egypt are phosphogypsum, formed as a by-product of trade tensions between the US and increasing phosphate capacity, while the production of fertilizer from phosphate rock, 17% China, created major uncertainties capacity expansion is also underway in and on the cadmium content of phosphate for other global agricultural markets, Russia, Brazil, India and Turkey. Some fertilizers. EuroChem’s phosphate rock is 34% driving significant declines in Europe, restructuring in China looks likely to fully compliant with the new cadmium limits. North America, Africa, South East Asia redress the balance, however. and Oceania.
Several factors have conspired to bring There was a marginal increase in global The supply-demand imbalance in the global Change about a projected 1.5 percent decrease potash capacity, which stood at 60 MMT potash market is set to grow during 2020 due to 1% 2%1% 8% 2019 2018 y-o-y, % K 8% Potassium in global potash demand, to around K2O during 2019. Faster progress was commissioning of new facilities, mainly in Russia 4% sMOP (FOB, 37 MMT K2O. These include escalating restricted by slow growth and even and Belarus, in 2018-2020. Baltic, spot) 265 256 3% trade tensions in the US and a sharp fall in contraction in some key consumer At the same time, MOP demand is expected to gMOP (CFR, fertilizer consumption in South East Asia, markets, leading to a marked slowdown be driven by growing import demand from South Brazil, spot- caused by lower palm oil prices and drought in imports, which in turn has caused a East Asia and Brazil after the slowdown by 1.5% 22% contract) 330 320 3% in both Malaysia and Thailand. However, number of producers to curtail supply. in 2019, while the global MOP trade is expected 37 MMT K2O sMOP (CFR, potash consumption has increased in other Looking ahead, however, a 5 percent to recover during 2020. South-East Asia, regions, including Africa where supportive increase in production capacity to 63 MMT spot-contract) 298 284 5% government intervention has played an K2O is expected during 2020, mainly As a result, the supply-demand imbalance is 40% important role. Demand has also grown driven by new capacity from Russia expected to increase by around 2.3 MMT in in Europe, Latin America and Oceania. and the CIS coming on-stream. 2020, pulling global utilisation rate to below 87%. 13% Note: IFA data, CRU, Fertecon
16 www.eurochemgroup.com EuroChem 2019 Annual Report and Accounts 17 Stakeholder engagement Strategic Report Corporate Governance Financial Statements Building long-term relationships
FOR MORE DETAILS ON STAKEHOLDER ENGAGEMENT Our global presence means we engage diligently with many SEE SUSTAINABILITY REPORT ON PAGE 48 organisations and people, from employees, customers and local communities, to governments and the media.
Key stakeholder groups Employees Investors Farmers Government Local Media and suppliers communities
Our focus areas • Recognising that we can and • Meeting all expectations • Provision of education and • Stimulating national and • Generation of long-term • Transparent and open must prevent any incident relating to our sustainability advice on environmentally local economic development, employment communications on the We recognise our responsibility to be a good corporate citizen, in which an employee, or ESG performance optimal practices which creates employment Economic development and Company’s performance particularly when it comes to caring for the environment, • contractor or member Delivering strong economic and techniques and generates wealth promotion of the benefits to and activities the communities where we operate and our own people. • of the public is injured performance as measured Collaboration on Production and social the region Inviting public dialogue This means making a positive contribution to society and • • • Ensuring safety at work and by a range of financial new products infrastructure development with members of working transparently and responsibly to create lasting • • Environmental aspects of delivering training on Health, indicators stakeholder groups benefits for all stakeholders. We follow international best • Working with suppliers to • Instituting environmental operations, their impact Safety and Environment practice. In managing the Group’s environmental footprint, • Maintaining a positive ensure timely delivery of controls that meet the and mitigation (HSE) policies and practices for instance, our focus is on ‘Best Available Technology’ reputation with customers, high-quality products needs of regional and/or • Support for educational, (BAT) and ISO 14001 Environmental Management Systems. • Attracting and retaining analysts, debt investors as needed local authorities health and physical Similarly, we ensure the health and safety of our people at highly skilled and and agencies • Building and strengthening infrastructure development each production facility as per best market practice, and the motivated people • Demonstrating proactive and our reputation among Board and senior management monitor Health, Safety and • Providing personal and ongoing engagement with farmers for high-quality, Environment (HSE) policy and performance closely. We aim professional development wider stakeholder groups environmentally to give our people every opportunity to fulfil their potential, opportunities responsible products through training, development, support and reward.
How we engage Our global and local HR teams As a privately owned company, We engage with farmers We allocate considerable We make significant Besides regular at each asset are facilitating our beneficiary shareholder directly and also through our resources in engagement with investments in the communities activities including results We are committed to building long-term relationships with all training courses and is actively involved in the partners, such as distributors. national, regional and local around our plants and facilities. announcements, annual our stakeholders, including employees, customers, residents development opportunities, business. The Group also We also provide a wide range governments. We carry out Engagement involves building report publication and living near our plants, government, media and others. In local providing mentoring and has access to public of advisory services in many public affairs work and discuss constructive relations with local public events, we engage communities, we engage and create value for individuals and undertaking performance financial markets. In 2019 countries via our network of industry issues with trade stakeholders, including other proactively with media groups, bringing economic benefits and social advantages reviews. We are transparent we successfully accessed agrocentres. We regularly bodies. We meet government employers, infrastructure offline and online. We through initiatives that support their sustainable development. with information, holding the Russian and international attend exhibitions, conferences representatives wherever we owners, residents, schools provide expert comments As well as creating employment, this means supporting the regular town hall meetings by debt markets several times, and other events, meeting with operate to ensure we meet the and others. Many plants run and analysis, publish construction of schools, healthcare facilities, water supplies C-level executives with reflecting our strong credit farmers, cooperatives, trade requirements for economic and site visits, open days and other media releases and and other infrastructure. We work transparently with all employees from various profile. We benefit from close bodies and other producer social development. In 2019 we events specifically targeted at attend conferences. stakeholders at many levels, from local community discussions businesses, where people can relationships with financial groups. We are available to helped promote Kovdor in the local residents, employees, We also host visits to to meetings with lawmakers, government officials and others. learn about ongoing projects market organisations, through answer farmers’ questions and Murmansk Region as the their friends, families and the key locations, inviting With farmers, we are developing advisory and added-value and the Company’s plans. regular briefings, one-to-one respond to requests at every ‘capital of Hyperborea’, wider public. These provide journalists to inspect information services through our network of agrocentres. Employees can also ask meetings, group events, opportunity, and we work hard turning it from a little-known opportunities for consultation, progress. EuroChem’s We work to keep our employees informed and engaged questions through dedicated detailed performance to understand and meet their town into a sought-after active participation and growing media profile is on sustainability matters, with a particular focus on safety, feedback channels that are updates, site visits and changing needs. tourist destination. responding to identified testament to the success through management briefings, family days and by implemented at scale. the annual report. needs for action. of the Company’s providing detailed information online. communications strategy.
How we respond • Health and safety • Openness and integrity • Farmer engagement through • National and local • Investment in sport, • Stakeholder knowledge Employee relations Investment agrocentres and distributors, investment levels health facilities, education and understanding of Identifying material issues helps us establish the • • exhibitions and conferences Feedback from provision, environmental Company strategy sustainability priorities for our business and stakeholders. • Diversity and equality • Financial performance • Delivery of ongoing advice government partners control, local charities and activities Internal stakeholders’ views are important, and external • Training and development • Strategy • and guidance, responding and cultural activities • Regular media calls perspectives provide additional context to our assessment • Remuneration and • Risk management • Social collaboration to requests • Regular payment of and briefings held of existing and emerging risks and opportunities. Engaging career development Reputation • taxes at the Group throughout the year with our stakeholders is both a driver and an outcome of our • Product launches and subsidiary level sustainability strategy. Key material issues are health and safety, product stewardship, climate change and the challenge of food security.
18 www.eurochemgroup.com EuroChem 2019 Annual Report and Accounts 19 Business model Strategic Report Corporate Governance Financial Statements Vertical integration creates maximum value
Our commitment to driving sustainable value creation is at the heart of everything we do. Along with economic success, we also work to uphold the highest standards of employee relations, safety, environmental stewardship and stakeholder engagement.
Our capital Our value chain Value created Natural resources Employees Our sustained growth and Feedstocks/ Our skilled and engaged Production Logistics Sales competitiveness are underpinned by resources workforce supports our our access to high-quality reserves growth. We provide attractive including potash and phosphate rock. careers with prospects for advancement through Human Ammonia (NH ) 3 nitrogen training and development. 3 N The skills and experience of our more fertilizer facilities than 27,000 dedicated employees – Investors wherever they work in the business – Our business model generates enhance our unique value proposition. 12.9 MMT investment opportunities across 100% self-sufficient nitrogen capacity our value chain, delivering Intellectual long-term financial stability The depth and breadth of our and sustainable returns. knowledge resources encompass all aspects of our business, from R&D to Farmers our internal systems and processes. Farmers are challenged to deliver increasing quantities Financial of food to sustain the world’s Our track record, robust financial growing population. We provide structure and prudent approach Apatite/phosphate 3 phosphate Maritime transshipment facilities >100 countries them with the products they allow us to access attractive rock P fertilizer plants in Russia, Estonia and Belgium sales distribution need to do this. financing options, helping Government secure our long-term growth. rail cars >7,000 We foster strong working Business 2 4.3 MMT >10,000 70% self-sufficient phosphate capacity MMT port capacity direct sales customers relationships with federal, Our business model comprises 12.8 regional and local authorities, production, processing and reinforcing our commitment port facilities alongside rail and to the economies in which shipping assets and a global we operate. distribution platform. Local communities Social We play an active part in our We build lasting relationships with local communities, investing stakeholders – including suppliers in local facilities to improve K2O resource base 2 potash mines and contractors – who meet our K people’s quality of life. high standards of integrity, health and safety. Media 1 8.2 MMT We share news of our self-sufficient potash capacity successes to highlight the value 100% we create and our commitment to sustainable business growth.
What makes us different Cost-effective All-nutrient Specialty products Corporate governance Vertical integration Global production Competitive feedstock Global distribution Low-cost raw materials, our EuroChem is one of just three Changing environmental and Our robust system of corporate Our business model delivers Our expanding global footprint We have access to high-quality Operating across key global portfolio of commodity and global fertilizer companies farming requirements mean governance ensures that cost-efficient and flexible means our production facilities natural resources for our markets, we are able to deliver premium products and our with capacity in all three that our proprietary advanced all aspects of our business production capacity, increases are located close to our industrial processes, which are the required volumes of international reach are primary nutrients: ammonia, and specialty fertilizers are an are conducted responsibly, our investment returns and sources of high-quality supported by a cost-efficient products on time to our driving us closer to our phosphates and potash. essential part of our portfolio. transparently and ethically. minimises our financial risks. raw material as well as logistics platform. customers all year round. goal of global leadership. our key markets.
1. After ramp-up of both phases at Usolskiy and VolgaKaliy 2. Up to 70% 20 www.eurochemgroup.com EuroChem 2019 Annual Report and Accounts 21 Strategic Report Corporate Governance Financial Statements
Our strategy Achieving our ambition
EuroChem will become the safest, most profitable, fastest- growing and most attractive fertilizer company in the world. We will do this by leveraging our competitive advantages of low-cost resources, global footprint, complete product portfolio, customer centricity and our inspired, highly talented people.
Our Mission At EuroChem, we improve the quality of life of the growing world population by helping farmers to grow healthy, affordable food in harmony with the environment
Strategic Targets 1 2 3 4 5 6
Safe work Developing Customer Increasing Rigorous Compliance Become the our people focus profitability capital Ensure world-class company with the Strengthen our Build further on our Increase our allocation compliance best occupational throughout position as a customer-centric profitability to Strengthen the and process safety high-performing culture. the highest level EuroChem. performance in the way we select and international learning in the industry. construct capital fertilizer industry organisation, by measured as Total projects to achieve providing purpose, higher net present Recordable Incidents building employees’ (TRI) and Loss of value (NPV) across capabilities, the portfolio. Primary Containment developing employee (LOPC) rates. career paths and a succession programme.
Usolskiy Potash Project, Russia Our new potash mine produced 1.1 MMT of MOP in 2019.
22 www.eurochemgroup.com EuroChem 2019 Annual Report and Accounts 23 Our strategy – continued Strategic Report Corporate Governance Financial Statements Strategic focus on safety, productivity and growth
FOR MORE DETAILS SEE RISK MANAGEMENT Our focus is on improving safety, productivity and on growing profitability across REVIEW ON PAGE 66 our business. We are committed to continuously improving our asset base and people, enabling them all to reach their full potential.
1 2 3 4 5 6 Safe Developing Customer Increasing Rigorous capital Compliance work our people focus profitability allocation
We will improve our occupational We are working to differentiate We will continue to differentiate We are steadily expanding our We aim to deploy capital better than We will take the lead in caring for and process safety, our productivity, EuroChem by developing leadership ourselves in the eyes of our customers sales logistics and trading capabilities anyone else to remain a fast-growing our host communities, reducing our our environmental footprint and the skills in everyone from the shop floor by having a complete product portfolio to support increased production. company, with a focus on acquiring environmental footprint and improving sustainability of our operations. to the Board room, and by attracting, and continuously improving our We will improve our digital capabilities low-cost, large-scale businesses our sustainability. Ambition developing and retaining the best dependability, product quality to stay ahead of the competition. or assets that complement our talent in our industry and beyond. and knowledge. organisation or provide us with new options and opportunities.
Total Recordable Employee Net Promoter EBITDA Net Present Compliance ranking
KPIs Incidents (TRI) rate engagement Score (NPS) Value (NPV)
Loss of Primary Production in line with Containment (LOPC) rate customer demand
Best occupational Focus on professional Customer-centricity Returns above the Realistic and World-class compliance and process safety development industry average conservative parameters of our in-house practices performance to improve NPV
• Climate change poses risks that may • EuroChem’s business may be • Changes in dietary • Exposure to cyclical and • Risks and uncertainties relating • Changes in government policies have a negative long-term impact. affected by shortages of skilled requirements and crop yields. competitive global and to existing and planned capital or legislation. • Health, safety, environmental and labour or labour disputes. • New technologies. domestic fertilizer markets. expenditure programmes. • Risks associated with licences, security risks. • Potential for delays in delivery. • Production curtailments, deficits of permits, certificates or other • Mining-related risks. raw materials and price fluctuations. authorisations.
Related risks • Exposure to credit, interest rate, foreign exchange and liquidity risks.
24 www.eurochemgroup.com EuroChem 2019 Annual Report and Accounts 25 Financial review Strategic Report Corporate Governance Financial Statements
The 2019 financial year was encouraging Sales and markets Nitrogen EBITDA growth for EuroChem as we began to see the We increased our fertilizer sales by 13 The market for ammonia was not always benefits of our recent investments in percent to 16 million metric tonnes (MMT) easy in 2019, with prices being affected Stable performance production and efficiency. Our vertically in 2019. Looking at this in monetary terms, by a low natural gas price environment integrated structure, growing diversification we also grew our sales by 13 percent to in Western Europe and heavy rains that + and operational agility helped us respond US$5 billion. While all segments contributed impacted application in North America. We % to changing demand and economic despite fertilizer to this increase, the best performer was succeeded in selling some 240,000 metric 2 conditions, which enabled us to grow potash, where sales rose by 75 percent as tonnes of ammonia to third parties from our sales in both value and volume terms. our new capacity at Usolskiy came online. our new plant at EuroChem Northwest in Kingisepp. Production at the new plant market turbulence Our results We also saw sales of nitrogen fertilizers surge by 11 percent, while those of totalled 791 KMT in 2019, and we aim to As of December 31, 2019, our consolidated phosphate and complex fertilizers run it at its full design capacity of 1 MMT FCF annual sales stood at US$6.2 billion – 11 climbed by 10 percent. Overall, in 2020. percent higher than in 2018. This pleasing these were positive results. Urea is the most important product in result was primarily driven by a 7 percent our nitrogen fertilizer portfolio. Despite increase in sales volumes, as well as a Potash subdued demand and a quiet application favourable pricing environment in the first US$ BN We improved our potash fertilizer sales season in both Europe and the Americas, half of the year for our main products, 0.3 to more than 1.1 MMT, nearly doubling we successfully grew our urea sales by which continued from 2018. their contribution to our total sales (from 16 percent during the year. As a result, The strength of our full-year performance 5 percent in 2018 to 9 percent in 2019). it represented 43 percent of total took EBITDA for 2019 to US$1.55 billion, We distributed our potash fertilizers across nitrogen sales in 2019. 2 percent higher than in 2018. Several the world, with most going to the Americas A further challenge came late in the year growth drivers were behind this outcome, where we are increasing our already strong when the European Union discontinued including improved sales and the benefits distribution capabilities to benefit from the a preliminary 34 percent anti-dumping of having our costs denominated in roubles region’s high margins. duty (an import duty charged in addition (this is because the average rouble/US This positive performance took place to normal Customs Duty) on EuroChem dollar exchange rate during 2019 stood at against a stable market background for urea ammonium nitrate (UAN) products 64.7, compared with 62.7 in 2018). potash prices, which rose on average by imported into Europe. The EU replaced We believe that EBITDA would have grown 3 percent during the year. The period was it with a fixed charge of 27.77 euros per more strongly in 2019 were it not for a dip not without its challenges, though. While tonne, resulting in a 43 percent decrease in fertilizer prices during the second half of the balance between supply and demand in the volume of UAN products we shipped Kuzma Marchuk the year. Despite this, our Group EBITDA was healthy during the first half of the year, to Europe. We managed to redirect the CHIEF FINANCIAL OFFICER margin was down by only two percentage stock build-ups in China led to a slight product to other markets in Russia and the points year-on-year, which we regard imbalance in the second half. However, Americas, successfully maintaining UAN as a positive outcome given the output reductions by several major sales as a proportion of total nitrogen market circumstances. producers partially offset this in the sales. Overall, we grew UAN sales in fourth quarter. volume terms by 4 percent year-on-year.
We saw a positive contribution to our top line of the new products from EuroChem Northwest and Usolskiy potash plant. For 2020 we’re well Net income (US$ mn) OCF/CAPEX1 (US$ mn) 1,018 placed to capture even higher margins. 1.3 1,111 0.9 950 538
2018 2019 2018 2019 2018 2019 OCF/CAPEX CAPEX (US$ mn) +89% -15% CAPEX
1. Operating cash flow to capital expenditure
26 www.eurochemgroup.com EuroChem 2019 Annual Report and Accounts 27 Financial review – continued Strategic Report Corporate Governance Financial Statements
Following the imposition of the new EU Iron ore Meanwhile, capital expenditure (capex) fell duties on Russian producers as well as Prices in the iron ore market were very by 15 percent in 2019 to US$950 million, those from the US and Trinidad, UAN buoyant during 2019. As a result, we saw which was partially financed with operating trade flows changed significantly. Despite a 16% rise in monetary terms despite a cash flow. The decrease in capex was this, we are confident that we are well 6% fall in sales volumes. Recognising the largely due to an easing in our investment positioned to work with our European opportunity, we reduced the proportion cycle, which followed two important customers this year, enabling us to of iron ore going to Russian domestic milestones for the Group. These were capture applicable margins. markets and redirected it to Asia, where the opening of our new ammonia plant, margins were higher. Prices have settled EuroChem Northwest (ECNW), at Phosphate in 2020 after the unsustainably high levels Kingisepp, which makes us fully self- The phosphates market, too, came under of 2019, and we expect levels to remain sufficient in ammonia production, and pressure during the year, due to planned stable during the first half of the year. the continuous ramp-up in production capacity increases and reduced demand in over the last 18 months of our Usolskiy the US, Latin America and Asia. Collectively, Our geographic focus Potash project. these factors led to a 12-year low in pricing, Our sales are spread across the world’s and our phosphate sales dropped 2 percent Debt portfolio most important agricultural regions. year-on-year. However, in the complex Despite a slight dip in the Russian market’s At the end of the year, EuroChem Group’s fertilizers segment, our NPK products contribution to total sales, together with net covenant debt stood at US$4.2 billion, proved less vulnerable to cyclical price Europe it remains EuroChem’s most with a net leverage ratio of 2.82 times. fluctuations. As a result, sales here rose important markets. We significantly grew This represented a 22 percent increase year-on-year by 16 percent in monetary our sales in the Americas during 2019 in our debt, which was primarily due to terms. We expect import demand to be thanks to our earlier investments in the the leveraged buy-back of a 10 percent strong in 2020 as indications suggest region’s distribution capabilities. As a minority stake held by our former CEO. that stocks, particularly in the US, are result, our sales to Latin America rose running low. The Group’s internal leverage ceiling year-on-year by nearly a third and stands at no more than 2.5 times net those to the US by 18 percent. debt to EBITDA. We have the confidence EuroChem to continue with a conservative financial Overall, our debt portfolio is well During the year, on the back of our stable Northwest, Russia Cash flow and capex policy. As long as market conditions diversified, comprising bank borrowing (50 financial performance, strong cost-curve Our cash flow improved significantly during remain supportive, we are happy to return percent of all our outstanding obligations), position and diversified product portfolio, Launched in June 2019. The US$1.2 billion that we generated to this leverage target, which we believe is bond issues (40 percent) and non-recourse all three international rating agencies 2019, our new 1 MMT/year from our operating activities represented a an achievable one. At the same time, our off-covenant project finance (10 percent). confirmed our credit ratings at the same plant gives us banking and bond covenants provide us level: BB- with a positive outlook by 21 percent increase over 2018. In addition, During the year, we successfully featured self-sufficiency with significant headroom, as best market Standard & Poor’s; Ba2 with a stable 2019’s positive free cash flow of US$297 on both the international and Russian debt in ammonia. practice allows a net debt to EBITDA ratio outlook by Moody’s; and BB stable million contrasted strongly with 2018’s capital markets. We carried out five bond of 3.5 times. by Fitch Ratings. negative level of US$94 million. issues during the year, which were highly oversubscribed. This has allowed us to Looking ahead build on the sound financial footing we enjoy in the eyes of investors. During the year ahead, we will focus on delivering our leadership strategy for growth, We also increased the share of public while ensuring that the safety of our people debt instruments in our debt portfolio remains at the top of our agenda. Growing by 6.8 percentage points, making our production by investing in highly efficient, investor base significantly more diverse. low-cost projects will continue to be In addition, we had the last available central to our strategy, and we will take disbursement from the non-recourse a careful and practical approach to project finance we put in place for ECNW, identifying expansion opportunities. our new ammonia plant in Kingisepp. As we diversify our product offering by We have started to amortise the loan, ramping up our potash projects during which does not mature until 2029. 2020 and the years beyond, we expect ECNW makes the Group fully self-sufficient our margins to increase. This will help in ammonia and also contributed to a 3.4 with cash flow generation and bring even percent year-on-year reduction in our better balance to our capital structure. Debt mix (as of December 31, 2019) raw material costs in 2019.
Syndicate/Bilateral/Bonds 20% 35% 45%
Short-term/Long-term 31% 69%
RUB/USD 26% 74%
Float/Fixed 28% 72%
Covenant/Off-covenant 90% 10%
28 www.eurochemgroup.com EuroChem 2019 Annual Report and Accounts 29 Product portfolio Strategic Report Corporate Governance Financial Statements From plant nutrition to industrial solutions
Our vertically integrated value chain provides us with Agricultural products one of the broadest offerings of plant nutrition products We produce high-quality nitrogen, phosphate, potash and complex globally, as well as the ability to manufacture a wide fertilizers. Our premium products are engineered to keep their range of industrial products. properties longer, guaranteeing an optimal supply of nutrients to plants throughout all their growth phases.
Premium plant nutrition Essential plant nutrition
Mining Industrial Other N-brands NP-brands NK-brands N Nitrogen products products sales
AN DAP AS coarse MAP AS fine ASN MOP granular CAN MOP standard 2% 33% UAN NP UAS NPK 10% Urea granular 2% 33% Urea prilled 8% 11% 8% Enhanced-efficiency fertilizers Complex fertilizers Water-soluble fertilizers 7% 4% Sales volumes by 2018 2019 The stabilized mineral Higher urea performance All nutrients in one granule. Water-soluble fertilizer 42% fertilizer for improved with urease inhibitor. The pioneering SOP- and products for effective product nitrogen efficiency. MOP-based homogeneous fertigation and foliar feeding. 40% compound fertilizer.
Industrial products Our vertically integrated business model yields more than just fertilizers. Throughout our production chain, our ability to synthesise industrial products adds depth, sustainability and value to our product portfolio.
Industrial products Mining Feed phosphates
Base organic Explosives Industrial HSE industrial Wood chemistry gases products processing
Acetic acid High-density Argon Caustic soda Melamine Iron ore Monocalcium Vinyl acetate ammonium Carbon Calcium Methanol Aluminium phosphate (MCP) Butyl acetate nitrate dioxide chloride Urea grade A fluoride Defluorinated feed Methyl Low-density Hydrochloric UAN 32 Baddeleyite phosphate (DFP) acetate ammonium acid K P nitrate Potassium Phosphorus Acetaldehyde Sodium Butanol hypochlorite Nitric acid Chlorine AdBlue®
30 www.eurochemgroup.com EuroChem 2019 Annual Report and Accounts 31 Performance review Strategic Report Corporate Governance Financial Statements Mining Division
Overview There were 22 lost time incidents during the year, half of which involved contractor The Group operates four mines, two of which are above-ground, employees. Our Lost Time Injury Frequency open-pit phosphate mines that support fertilizer production: Rate (LTIFR) was 0.85, below the Group KPI Kovdorskiy GOK in Russia and EuroChem-Fertilizers near Karatau of 0.94. in Kazakhstan. Iron ore and baddeleyite (a zirconium-based mineral) are also mined at Kovdorskiy as by-products of our Potash deposits phosphates operations there. Our other operational locations are underground potash mines: Usolskiy Usolskiy, near Berezniki in the Perm region of Russia (which The Usolskiy mine’s potash layer delivers an is gradually ramping up production), and VolgaKaliy, near to average potassium chloride (KCl) content of Kotelnikovo in the Volgograd region and close to the Black Sea. 30.8 percent. Studies show there is sufficient resource for more than 35 years of production. The Division includes three further assets: a large manufacturing We started mining in the first quarter of 2018 facility in Berezniki, which we use to make all types of ore- and are continuing to ramp it up as planned. Oleg Shiryaev handling equipment; a large and growing engineering institute HEAD OF THE MINING DIVISION The site has two completed shafts, one for in St. Petersburg, with laboratories and R&D capabilities; and a carrying ore to the surface and the other, joint-venture drilling company, which is designed exclusively to a cage shaft, for carrying people and expand our geological exploration and research. EuroChem also equipment. All the facilities for Phase 1 are has a licence to develop natural gas and gas condensate fields in now complete, commissioned and launched. the Astrakhan Oblast and the Saratov Oblast in Russia and oil in We are increasing Kazakhstan; as well as licences for exploration and potash mining Usolskiy reached an important milestone in development in Saratov Oblast in Russia. September 2019 with its first 1 million tonnes our potash mining (MMT) of potash production since the start of Our people: health and safety operations. The mine will continue to expand, operations to meet the Our top priority is to provide our employees and contractors with with another phase of surface beneficiation to working conditions that ensure their health and safety. However, be designed and constructed. To support this growing need among despite our efforts and the complex measures we have taken to expansion, we began sinking a third shaft farmers across the minimise potential for injuries, we sadly have to report one fatality during 2019, which will include a cage as that took place within the Mining Division during the year. This well as skips. Once completed, it will have world. We are also occurred when a driver died following a collision between two a full annual capacity of around 4.0 MMT. open pit trucks at the Kovdorskiy GOK mine. exploring a range of opportunities 2019 MOP produced 2020 MOP design capacity to become more self-sufficient MMT MMT 1.1 2.3 Usolskiy capex evolution (US$ bn) in phosphates.
0.5 3.2 0.4 2.3
Capex spent as of Dec 31, 2019 Phase 1 Phase 2 Total capex
Usolskiy projected capacity (MOP, MMT)
1+ 3.7-3.9+
0.4-0.6 2.3 Usolskiy Potash VolgaKaliy Potash Project, Russia Project, Russia Once completed, the Test production to assess site will have a product quality and grade Phase 1 Phase 1.1 Phase 2 Total capacity nameplate capacity began during 2019. of approximately 4.0 MMT per year.
32 www.eurochemgroup.com EuroChem 2019 Annual Report and Accounts 33 Performance review/Mining Division Strategic Report Corporate Governance Financial Statements
VolgaKaliy Potash Project, VolgaKaliy Potash capex Phosphate deposits We are continuing to develop our plans for Kovdorskiy GOK. This involves Russia The VolgaKaliy mine has an average Both our potash mines remain within their The Division has two operational open-pit investigating the best options for the We will begin a slow but steady KCl content of 39.5 percent and contains original targeted budgets: to date, we have phosphate mines. Production for the year long-term development of the mine, ramp-up of production in 2020. enough reserves to allow production to invested approximately US$5 billion across at Kovdorskiy totalled 5,566 KMT of iron including deepening the main pit while continue for more than 80 years. the two sites. ore, 6.3 KMT tonnes of baddeleyite upgrading the infrastructure. We are It is significantly deeper than other potash The development of the first phase at both (zirconium) and 2,316 KMT of apatite committed to investing in the future of mines in Russia, with one shaft reaching Usolskiy and VolgaKaliy is a key element of concentrate. EuroChem-Fertilizers in this site and to ensuring the supply of a depth of 1,147 metres. In 2015, water delivering our overall business plans and Kazakhstan, meanwhile, produced phosphate to our Fertilizers Division entered the initial cage shaft. After growth strategy. Our vision remains first to 542 KMT of phosphate ore. remains sustainable in the years ahead. remedial work and attempts during satisfy our own needs, being self-sufficient EuroChem-Fertilizers, meanwhile, is 2017 and 2018 to restart construction, in potash to produce complex fertilizers. used to produce phosphate and we carried out further investigations in We will also continue to grow in line with complex fertilizers. 2019 and installed additional deeper freeze the market, while maintaining our position holes to extend and strengthen the freeze as one of the world’s lowest-cost wall protecting the cage shaft. As the cage potash producers. shaft is not connected to the mine, this work does not cause any loss of reserves or negatively impact our overall project progress. The mine’s two other shafts are in service, fulfilling all our current cage and skip needs. VolgaKaliy capex evolution We started commissioning activities at VolgaKaliy in 2019 and carried out test runs in the fourth quarter of 2019. We have detailed plans to ramp up production slowly but steadily during 2020, once we have reached the potash production layer Capex spent as of Dec 31, 2019 underground and have all our mining machinery in place. Our two operational shafts will be capable US$ BN of hoisting up to 10 MMT of raw ore per 2.7 year, enough to meet our requirements during the first phase of production. We estimate that VolgaKaliy’s total annual Remaining capex for Phase 1 production capacity for the first phase of the project will be around 2.3 MMT of potash. Our development plan sets out the gradual escalation of the mine US$0.4 BN and surface activities through to 2025. Kovdorskiy GOK, Russia MOP projected capacity for Phase 1 Our open-pit phosphate mine also produces iron ore and baddeleyite 2.3 MMT MOP as by-products.
34 www.eurochemgroup.com EuroChem 2019 Annual Report and Accounts 35 Performance review/Mining Division Strategic Report Corporate Governance Financial Statements
Social responsibility Given the relatively remote locations of Investing in social infrastructure our mining facilities, successfully recruiting and retaining key personnel is a priority. Providing a pleasant living environment Meeting our employees’ expectations is central to attracting and retaining around training and professional development is therefore a key aspect the highly skilled employees we of our Corporate Social Responsibility (CSR) activities, and we make significant need at our plants. investments in planning and delivering programmes to attract and retain high-calibre people. Usolskiy • 11 houses and 410 apartments are under construction, We are also investing in facilities to and preparatory works for a kindergarten are underway give our employees an environment where they can enjoy living. We have committed • Budgeted future spending of US$61 million US$140 million across our two new mines to build 42 cottages, nine apartment Houses under Apartments houses, a kindergarten, a hotel and several hostels. These and other efforts construction associated with our education and cultural programmes have been crucial in enabling us to grow our workforce to more than 3,500 across both sites. 11 410 We also plan to invest an additional US$119 million in the social infrastructure Kindergarten Residual capex around our potash facilities between 2020 and 2025. 1 US$61 MN
VolgaKaliy Potash Project, VolgaKaliy Russia • Nine buildings providing 342 apartments have We are committed to improving been completed, plus 42 cottages, one kindergarten, the social infrastructure around a 30-room hotel, dormitory facilities for 200 people our sites. and an apartment-style dormitory with 60 apartments • A further 11 facilities in the Pemino-Cherny district provide Corporate Social accommodation for 1,300 people Responsibility • Two large apartment blocks with 117 and 90 flats in each are Meeting the under construction, as well as 29 cottages. Another building expectations of its key containing 107 apartments is at the bidding stage personnel is a priority for EuroChem. Cottages Apartments completed 42 342
Accommodation Residual for capex US$ MN people1,300 58
36 www.eurochemgroup.com EuroChem 2019 Annual Report and Accounts 37 Performance review Strategic Report Corporate Governance Financial Statements Fertilizers Division
Overview Our people: EuroChem EuroChem-BMU, Russia We make more than 100 products at professional development Northwest, Russia A major contributor to our successful our strategically sited manufacturing Improving career development and We produced growth in production of phosphate and blending facilities in Russia, Belgium, training is crucial to attracting and 0.8 MMT of ammonia and complex fertilizers. in 2019, delivering on Lithuania, Brazil and China. This geographic retaining talented individuals, so it is spread and our secure and sustainable a key business essential that we give our people every commitment. supply of raw materials ensure that our opportunity to excel in their careers. plants are among the most cost-efficient of their type in the world. One example of our activity in this area during the year was a programme to In 2019, EuroChem commissioned a new improve educational standards for process ammonia production plant, EuroChem operators in fertilizer production roles. To Northwest, in Kingisepp, Russia. The plant enable this, the focus at our onsite training has the largest single-train production centres is now on improving our training Alexander Tugolukov capacity in Europe of 1 MMT per year, capabilities and increasing our use of HEAD OF THE FERTILIZERS DIVISION ensuring self-sufficiency for EuroChem process simulators. in ammonia, an important component of its fertilizer production needs. Another example of our commitment to improved training was the launch Other milestones for the year included of the fourth edition of our production upgrading production equipment at several improvement programme, a specialist plants. These investments are helping us development tool to help frontline to minimise our environmental footprint, supervisors manage their teams’ skillsets. a major responsibility for all companies in the fertilizer industry. We also continued to improve staff In line with our recruitment. A joint project with strengthened focus on Our people: health and safety Novocherkassk Technical University, one of Southern Russia’s leading Elsewhere, we have begun to see the universities, enabled us to enrol safety, productivity and first results of the new Group strategy, 12 pupils from Zhanatas secondary especially in our improved and more growth, we continue schools. We expect them to join our effective approach to safety. We are operations in Kazakhstan once they investing in new safety processes, to modernise our have graduated in four years’ time. upgrading training and implementing production facilities measures to remind everyone about Record production levels how to work effectively and safely. to ensure the highest The Fertilizers Division manufactured In light of this renewed focus, it is with 26.5 MMT of core products during 2019, levels of operational particular sadness that we must report two 4.7 percent more than in 2018, in line with fatalities during the year in the Fertilizers our upward production trajectory. We also efficiency and employee Division. In one of these, a senior shift achieved record output of all the Division’s operator was fatally injured at our Antwerp products, from ammonia, urea and protection. facility. In the other, a foreman working ammonium nitrate to phosphate at Novomoskovsk died following an and specialist NPK fertilizers. electrical incident. Lifosa, Lithuania Improving operational A strategically These were two of 26 lost time incidents performance important part during the year, 21 involving company of our European employees and five affecting contractor We carried out several projects production network. employees. Even one such incident is too during the year to improve our operating many, and we are focused on reducing performance. These included establishing the risk of injury across all aspects of our new Operational Efficiency Department our operations. in Moscow, along with satellite offices ECNW capex & EBITDA (US$ mn) across our site network. We also carried Although our Lost Time Injury Frequency out assessments of our operational 54 Rate (LTIFR) was 0.78, below our internal performance at Nevinnomysskiy Azot ceiling of 0.94, we know we must do better 2015 2016 2017 2018 2019 in Russia and EuroChem Antwerpen and we are working hard to reduce this in Belgium. These and other projects figure further. will continue throughout 2020. -59 -116 -173
Capex -270 -286 EBITDA
38 www.eurochemgroup.com EuroChem 2019 Annual Report and Accounts 39 Performance review/Fertilizers Division Strategic Report Corporate Governance Financial Statements
Finance and administration discharged. This is helping to reduce the Environmental target environmental load on the nearby Luga We significantly improved the efficiency Following its approval in August 2019, River, contributing to Russia’s ability to of our back-office functions during 2019, the EUR19.45 million (US$22 million) meet its international treaty commitments. automating processes in many areas from installation of new chemical scrubbers budgeting and permanent cost controls We also introduced a new monitoring at Antwerp to cut emissions of dust to project and service management. system at ECNW that improves equipment and ammonia is now underway. This reliability by automatically controlling investment reflects our determination to We also upgraded and improved many maintenance intervals and alerting adopt Best Available Technologies (BAT) of our management procedures, including managers when routine safety and wherever they are needed in our bid to the one for closing our reporting period. EuroChem-BMU, equipment checks fall due. cut discharges and emissions. Russia We completed our first audit to improve business process efficiency at our Chinese Elsewhere, we carried out Also in Antwerp, we began the Our fertilizer plant is joint venture at EuroChem Migao, analysed construction of a major new facility ideally located, close to three improvement projects at our our transshipment port the tax risks we face and recorded Novomoskovsk plant. The first was to house the site’s technical functions, facility at Tuapse. phosphogypsum data at Phosphorit. a RUB 1.3 billion (US$20m) technical including environmental monitoring. At a upgrade of our Ammonia-2 shop, cost of EUR6.1 million (approximately Although these changes are not as increasing its capacity by 100 tonnes US$6.7 million), the new building is high-profile as those at our production a day to 635 KMT/year and significantly expected to open in March 2021. facilities, they all help to further improve reducing its consumption of natural gas. our operational efficiency and our ability to maximise plant capacity. The second was the modernisation of a UAN line, which will enable it to produce Development and construction 1,200 tonnes a day when it comes online To be market leaders, we must continuously in late 2021. The third project involves the invest in improving reliability, quality construction of a liquefied CO₂ installation. and cost-efficiency. This is an important part of our strategy to minimise environmental impact by We therefore carried out a wide range diverting and selling any greenhouse gases of improvements during 2019, both generated during ammonia production. upgrading our existing facilities and This initiative is designed to reduce the investing in new capacity. plant’s annual emissions by around 25 KMT. This included the launch of our new ammonia production facility at EuroChem Northwest (ECNW). At 1MMT/year, this plant has the largest annual production capacity of any comparable unit in Europe. ECNW is designed to minimise its impact on the local environment by using a closed-loop water system, which uses wastewater from our adjacent Phosphorit plant and ensures no effluent is
Nevinnomysskiy Azot, Russia The fourth-biggest nitrogen fertilizer plant in Russia, based in the country’s prime agricultural region.
40 www.eurochemgroup.com EuroChem 2019 Annual Report and Accounts 41 Performance review Strategic Report Corporate Governance Financial Statements Commercial Division
Overall Commercial Health and safety Regional highlights Division Performance In uncertain times, our vertical integration Russia and CIS In 2019, the production volume that our allows us to deliver the quality and Commercial Division sold and shipped rose reliability that give customers peace of We continue to see strong improvement by 7 percent over 2018’s total. Our full-year mind. This unique competitive advantage in these markets – Russia is already one fertilizer sales volumes totalled 16 MMT, up by has enabled us to reach a leading position of the world’s fastest-developing fertilizer 13 percent over the 14.1 MMT we sold in 2018. in our industry. Our commitment to markets, with a 5.7 percent compound Sales volumes for our mining products fell to continuous improvement, meanwhile, is annual growth rate. Even better market 5.6 MMT, 6 percent below 2018’s level. fuelling our aspirations for further growth. performances are evident in most other This also translates into an improved and CIS countries. Sales volumes of our industrial products rose more effective approach to safety, which by 8 percent to 2 MMT. We kept our plants is one of our core values. We are fully Russia has been the world’s biggest running in an oversupplied market and committed to achieving the best grain exporter since 2016, and it aims to Charlie Bendaña made this progress despite a volatile pricing increase grain production from the current CHIEF COMMERCIAL OFFICER occupational and process safety environment that put pressure on costs and performance in our industry. annual total of 100 MMT to 150 MMT in forced some of our competitors to close or five years. Cash crop segments continue reduce output. to grow strongly both in Russia and the CIS, which is driving demand for speciality Our ability to place our upstream production fertilizers, such as water-soluble products. in the market reflects the strength of our Our downstream global downstream global distribution and sales With 2019 sales growth of more than network. EuroChem is one of a very few global 12 percent in Russia, EuroChem currently distribution and sales network, fertilizer companies with its own production accounts for more than 20 percent of together with low production capacity in all three major nutrient groups – the national fertilizer market. It remains nitrogen, phosphate and potassium – as well as a leading distributor in many other costs, facilitates our ability a full portfolio of premium compound fertilizers. CIS countries. This is in addition to our mining products With our presence in local production, to place our products business, which includes iron ore concentrate, complemented by a well-balanced network phosphate rock, baddeleyite, aluminium of wholly owned distribution centres and on attractive terms in fluoride and many other industrial items independent outlets, we continue to that are in growing demand. markets worldwide. strengthen our market footprint. To manage increasing volumes, we have We aim to deepen our relationships with upgraded our risk-management capabilities and those end users who together account our planning and product-management systems. for more than 50 percent of our volumes. These are customers who range from individual farmers (those with estates Geography of sales (%) Sales volumes by provenance (KMT) of less than 1,000 ha) to medium-sized enterprises (1,000 to 20,000 ha) and agricultural holdings (more than 20,000 ha). In 2019 we opened our 12th proprietary Europe 26% distribution centre in Russia and became 2018 17,882 4,096 21,978 the first company in the country to start producing and selling inhibited UTEC® urea.
2019 18,791 4,833 23,624 Latin America 25% Own Third-party products Sales in Russia (KMT) Sales in CIS (KMT)
Sales volumes by product (KMT) 0.0 4724.8 9449.6 14174.4 18899.2 Russia 17% 1,063 1,056
2018 14,130 5,977 1,871 North America 16%
2019 15,984 5,622 2,018 Asia Pacific 262 261 10% Tuapse, Russia CIS 4% Investment in our Fertilizers Mining Other 2018 2019 2018 2019 Africa 2% Russian ports is a strategic priority for EuroChem.
42 www.eurochemgroup.com EuroChem 2019 Annual Report and Accounts 43 Performance review/Commercial Division Strategic Report Corporate Governance Financial Statements
EuroChem Europe We looked hard at how we’ve been Antwerpen, Our key achievement in Europe in 2019 operating in some important European Belgium was to strengthen our market position. markets during 2019. As a result, we State-of-the-art We achieved this despite challenging identified some alternative approaches infrastructure for conditions, increasingly strict environmental which we believe make sense in Turkey, production and international regulations, adverse weather in many parts Spain, Hungary and Poland. We sold our Turkish sales operation to the Dr. Tarsa distribution of the continent and the introduction of of fertilizers. anti-dumping duties on sales of urea Company, a long-established expert in ammonium nitrate (UAN). A provisional the distribution and marketing of premium anti-dumping duty on UAN of 34 percent fertilizers. The agreement included a imposed in April 2019 was later reduced long-term supply deal for EuroChem’s to 27.7 euros per tonne, a change that premium NPK fertilizer and water-soluble improved our position across the region. products. We also decided to sell our 50 percent share in a Spanish producer Working closely with our wholesale of liquid fertilizer products. These steps customers helped us increase sales will allow us to refocus effort on growing and gain market share in our traditional our portfolio of core premium NPK and Western European markets. These water-soluble products. In Hungary, included Germany, the Benelux countries we changed our sales model to focus and France, which all experienced a on larger wholesale customers. In 2020, reduction in consumption levels due to we are opening a new local sales office stricter environmental regulation and in Poland, Europe’s third-largest fertilizer exceptionally wet weather. Southern market, to give us better access across European markets were also hit by the country and to neighbouring territories. adverse weather during the peak We will continue to work closely with our consumption season. Despite this, large wholesale customers in Poland. we managed to maintain sales of our We restructured our local sales premium NPK fertilizers, largely thanks organisation in Germany to fit to the continued appeal of our strong with our future commercial plans. ENTEC® product range. We also improved our position in water-soluble products, Our comprehensive product portfolio expanding our portfolio and increasing places us well to meet the future needs sales of fertilizers from our production of our customers across all European facility in Lithuania. Our growth in Eastern markets. We welcome the introduction European markets continued, and we of stricter environmental regulations in all achieved good sales increases across all markets, as we are a leader in developing the major nutrients. Eastern Europe was a and marketing a range of advanced, particularly important market for the early enhanced-efficiency products. We will sales of potassium chloride (MOP) from continue to develop even better products our Usolskiy mine, which started in this area, and are planning several production in 2018. product launches in the near future.
Sillamäe, Estonia The port’s proximity to Kingisepp makes this an ideal transshipment facility for ammonia and other liquid cargo.
44 www.eurochemgroup.com EuroChem 2019 Annual Report and Accounts 45 Performance review/Commercial Division Strategic Report Corporate Governance Financial Statements
South America North America our 2019 growth plans and achieved our Gaining a firm foothold in Latin America 2019 was a year of continued planned budgeted volumes. This success was due was a major feature of our recent global growth and consolidation in North to the range of distribution channels open expansion efforts, and sales to the region America. In October 2019, Bentrei and to us and our leading logistics service, in 2019 were boosted chiefly by the EuroChem USA were officially merged into which is expanding thanks to the Group’s Brazilian assets. one entity called EuroChem North America exceptional value that our BenTrei Corp. We targeted growth of 28 percent subsidiary offers. Logistics Brazil has the greatest untapped potential for the region in 2019, with anticipated for arable land among any of the world’s We plan to expand in other coastal areas Logistics has a vital role at EuroChem, thanks sales of 3.38 MMT, up from 2.64 MMT main commodity producers, and therefore to support production and place our to supply chain operations that meet our own in 2018. presents a significant opportunity. product more widely across North America. and our customers’ needs. Its services include Following its acquisition in 2016, the We concluded a long-term commercial transport, buying and delivering raw materials Asia integration of Fertilizantes Tocantins (FTO) partnership agreement with American Plant and finished goods, freight forwarding and went ahead in line with expectations. Food in Houston, Texas. This deal covers Asia is one of the world’s leading markets other related activities. Having our own logistics Its contribution to the business has been our core MOP/MAP/GUREA products for NPK products and potash fertilizers. operation not only gives us a significant cost significant, enabling us to increase both and will represent a 2020 sales volume The addition of MOP to the EuroChem advantage. It also makes us more competitive profitability and market share in the country. of approximately 0.4 MMT. It will also product portfolio marks another milestone and flexible, able to provide a range of different provide access for deep-water vessels in the development of our business products within the timeframes customers require. FTO’s production has grown to more at a state-of-the-art storage facility on capabilities in the region. With our first than 2.5 MMT, representing a 37 percent We continued to expand our logistics the coast of the Gulf of Mexico, giving MOP shipments reaching China and year-on-year increase, with sales growing infrastructure in 2019. As part of this, we opened us 91 KMT of capacity. South East Asia in 2019, EuroChem is in all regions. The higher productivity now firmly on the way to becoming a a new terminal for ammonia at Sillamäe, Estonia, achieved following the opening of new EuroChem has three more key deep-water leading supplier here. in November 2019. This followed the earlier launch blending units (at Sinop and Catalâo) was access points on the US East Coast of our EuroChem Northwest ammonia plant, which particularly important. Another highlight (at Fairless Hills, Wilmington and Tampa). Our Nitrophoska® NPKs combine all is less than 50 km away in Kingisepp, Russia. was the launch of a new plant in Araguari, This gives us a competitive advantage as nutrients in a single granule, with a lower With the gradual development of both our which will support additional growth it perfectly complements our approach of acidifying effect than ammonium sulphate potash projects, construction of the Ust-Luga in 2020. using a single shipment to carry multiple or urea-based fertilizers. New blends of Bulk Terminal on the Baltic Sea has resumed. products. This reduces costs for EuroChem fertilizer are popular with farmers who are It should go live in 2022-2023 with a planned and lowers risk for our customers, working to develop their land and improve annual capacity of up to 7 MMT. With our maximising the profits we make on yields to grow more food for Asia’s rapidly expanding potash production, we continue to our own products and the third-party increasing population. upgrade our logistics facilities to provide the best volumes we trade. EuroChem’s Nitrophoska® Horse and Lion possible service to customers around the world. During 2019, our US distribution activities Brands are well known in Asian markets, faced significant hurdles after our most where our strategy has been largely productive warehouse on the Arkansas focused on sales of premium fertilizers, river in Oklahoma became inaccessible as well as a wide range of industrial and for five months due to flooding. A leased mining products. warehouse at Fort Smith was also flooded, The Group has two sales offices in China and our Northern Region experienced and Singapore, and we expect that the delays to river operations of more than region will continue to be a significant three months. Despite all this, we met destination for our potash-based fertilizer products. In 2019, the Asia-Pacific region accounted for 6 percent of Sales in Latin America Sales in North America Group fertilizer sales. Port facilities Own railway (MMT) (MMT) km 1,522 8 356 1,154 991 842 Railcars Port capacity MMT 2018 2019 2018 2019 7,100 12.8 Fertilizantes Tocantins, Brazil Our growing footprint + % + % in Brazil reflects 32 18 substantial capital investment at FTO.
46 www.eurochemgroup.com EuroChem 2019 Annual Report and Accounts 47 Sustainability review – CEO/Chairman introduction Strategic Report Corporate Governance Financial Statements
This involves effort, commitment and This is important work. For example, investment in R&D, BAT, education and the correct use of an EEF can reduce by training, reporting, stakeholder engagement 80% the escape of nitrous oxide, a notable and more. It requires a culture of continuous greenhouse gas. In this and other ways, improvement, adopting best practice EEFs can help farmers worldwide achieve wherever we see it – internally, from better crop yields while meeting recruits, peers and world-class increasingly stringent regulation. A culture of companies from other industries. During 2019, we ran 120 field trials in We must improve before our safety record close to 20 countries to test our EEFs matches our aspirations. We experienced and other advanced solutions on a wide three fatalities in 2019, which is not range of new crops. This not only enables acceptable. No words can describe the our agronomists to advise farmers on the loss felt by friends, family and colleagues. products they should use on which crops continuous Our Board and the management agree that in which soils – it also guides development we shall not rest until there are no serious by measuring the effect of every new accidents in EuroChem. Once we have product on soil and the wider environment. reached this point, we shall continue to EEFs were not the only area of focus make the working day even safer for all in 2019. This was also the first year of our colleagues. improvement full production at Russia’s first Urea We are equally conscious of our Ammonium Sulphate (UAS) facility at responsibility for the sustainable growth our plant in Novomoskovsk. This further of agriculture. We will adopt the highest boosts yields by adding sulphur to our standards of Environmental, Social and products, stimulating the production of Governance (ESG) reporting, introducing vital amino acids and proteins to meet more demanding metrics and targets the growing needs of Russian and We believe acting sustainably means across all areas of sustainability European farmers. achieving more while using fewer resources. during 2020. This is the second year we have So we help feed the world’s increasing We are developing In parallel, we will continue our strong integrated our sustainability report into population by growing more food from less focus on creating and continuously our annual financial report, emphasising land. We use new technologies to consume a culture of continuous improving our range of Enhanced that sustainability is a key element of our less energy per unit of production. And we Efficiency Fertilizers (EEFs), which help strategy. The topics it covers are those utilise our integrated business model to improvement, adopting to control nutrient release and reduce we deem material across the Group. optimise transportation and consume the loss of nitrogen to the environment. less fuel. best practice wherever We are always looking for new ways to run our company better, as we believe We also create effective products we see it – internally, a sustainably run business is good for that enable farmers to achieve more everyone – the Earth, employees, sustainable production. We invest in our from new recruits, from customers, partners, investors, local communities, with a particular focus communities and suppliers. on the health and safety of our colleagues. competitors and from And we support our customers and the companies identified sustainability of farmers and farming across the planet. as world class in We will continuously improve our other industries. sustainability as we progress towards global industry leadership – an ambition that comes with great responsibilities. We need to feed a much larger population by 2050, while driving down emissions from farming. We must ensure our employees and contractors come home safely every day. And we have to ensure the professional and private lives of everyone who works for us and lives near our operations are fulfilling and rewarding.
Samir Brikho Petter Østbø CHAIRMAN OF THE BOARD CHIEF EXECUTIVE OFFICER
48 www.eurochemgroup.com EuroChem 2019 Annual Report and Accounts 49 Sustainability review – continued Strategic Report Corporate Governance Financial Statements Our sustainability strategy
EuroChem is responsive to the needs of employees, Strategy in action customers, the communities where we operate, lawmakers and regulators. The Group’s priorities are environmental stewardship, economic sustainability and social responsibility. Areas of focus Strategic goals and activities Managing our environmental performance Ensuring continuous improvement in • Focused on achieving more for less – enabling environmental performance more food to be grown for more people, minimising • Opened the world’s most advanced, energy- environmental impact and using less land and other efficient ammonia plant on a brownfield site Environmental finite resources at EuroChem NorthWest ® ® stewardship • Promoted our UTEC and ENTEC inhibited • Incorporated more than 60 Best Available fertilizers and continued our R&D programme Technologies (BAT) during the engineering to develop new products with a reduced and design phase of new facilities to ensure environmental impact environmental good practice • Ensured compliance with all relevant legislation at • Considered all available means of minimising all sites, including new environmental regulations negative environmental impacts when evaluating potential new investment projects
Environmental Promoting and supporting sustainable agriculture Ensuring financial stability and • Continued to focus on R&D for our portfolio of shareholder returns stewardship inhibited products • Continued to invest in future growth while • Leveraged our global distribution system developing effective products that support better Economic to improve efficiency and reduce yields and financial performance for farmers environmental impact sustainability Meet or exceed customers’ expectations • Engaged with farmers to ensure ongoing satisfaction and continuous service improvement • Continuing to deliver high-quality variants of the three primary nutrients that meet growing customer Investing in new technologies, value-added demand for reduced environmental impact products and vertical integration Maintain excellent working relationships Invested in BAT and developing the next • with suppliers generation of premium fertilizers with minimised environmental impact • Worked to sustain the best possible standards • Our focus on vertical integration improves at every point of our value chain operations throughout the value chain • Collaborated and delivered value to support excellent relationships that benefit everybody
Improving safety and working to become the Maintaining strong working relationships with Economic Social company with the best occupational and process lawmakers, regulators, government agencies sustainability responsibility safety performance in the fertilizer industry and local authorities • Further increased our emphasis on safety in the • Worked closely with regional and central Social workplace as our most important strategic focus governments to ensure cooperation on supporting responsibility • Implemented numerous safety-related programmes the environment as part of our Project Zero membership, including • Undertook systematic work with local authorities #SafeEuroChem, Life-Saving Rules and At close to our operations to help them attract EuroChem, We Care state funding Introduced a safety IT system to underpin new • Supporting and investing in local communities safety KPIs and reporting procedures close to our key operational sites Recruiting and retaining motivated employees • Expanded our community investment portfolio, • Ran programmes with the Russian and contributing RUB460 million (US$6 million) to international schools and universities to projects at nine locations help attract talented young STEM students • Constructed or opened new community facilities • Delivered 1,283,433 man-hours of on-the-job in Berezniki and Kotelnikovo training as well as secondments, coaching and • Funded educational, environmental and cultural other programmes to build knowledge and skills projects across many towns • Launched online training platform to provide • Supported two major promotional projects to access to more than 500 courses promoting give cities clear and attractive tourism identities soft skills • Focused on internal career opportunities to help employees grow and develop within EuroChem
50 www.eurochemgroup.com EuroChem 2019 Annual Report and Accounts 51 Sustainability review – continued Strategic Report Corporate Governance Financial Statements
Non-recycled water consumption Environmental (m3 per tonne of production) 4.8 4.2 3.5 3.3 3.30 3.2 3.1 2.9 2.8 stewardship 2.6 2.3 2.2 2.2 2.2 130 111 91 90 88 88 84 82 81 79 73 72 72 71 Managing and continuously Our performance Product stewardship Russia ratified the Paris Agreement on Water use improving our environmental Climate Change in September 2019, and 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 3 performance We use large volumes of water from we recognise the important role that our Water consumption, m per tonne of production Water consumption, total million m3 Our approach surface and groundwater sources in operations and our industry have to play in production. We have invested in line abiding by its requirements. This extends The CEO, Group management and senior with international best practice in water beyond a drive for enhanced energy managers across our plants have primary conservation and efficiency measures efficiency. It also implies a responsibility, Air emissions per tonne of production responsibility for meeting our targets across our plants. Russia’s Ministry of which we accept, to market products around environmental management. Natural Resources and Environmental and provide information that help farmers (kg/tonne) They are supported by the Health, Protection recognises our Clean Water achieve their yield targets while keeping 1.2 1.2 1.2 1.2 1.2 1.1 1.0 1.0 Safety and Environment (HSE) Programme as an industry-leading their use of fertilizers within safe and 1.0 0.9 0.8 0.9 Department and its on-site personnel. initiative. The programme uses state-of- appropriate limits. 0.8 0.8 the-art conservation and treatment 33 32
At Group level, the HSE team contains 31 30 30 30 30
The fertilizer industry has developed 30 29
technologies at six plants in Russia, 29 28 more than 180 specialists, including 27 and prioritised the notion of product and 25
aiming to reduce our water usage. 258 engineering and policy professionals. The nutrient stewardship – setting standards team works to a policy framework that sets EuroChem’s new ammonia production for the environmental footprint of individual out what we expect from all managers and facility at Kingisepp in north west Russia products and optimising their use to employees. It references how we reduce features a closed-water recycling system minimise their impact. We take a targeted 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 our impact on the environment and covers that stops effluent from being discharged environmental approach to this challenge, Air emissions, kg per tonne of production the use of natural resources, continuous into the nearby Luga River, which flows including enhanced water and energy Air emissions, total thousand tonnes HSE improvement and associated targets. into the Baltic Sea in the Gulf of Finland. efficiency and the design and manufacture This approach enables us to take a The system is similar to others installed at of advanced fertilizer products. By this, systematic approach to addressing EuroChem plants across the country and we mean products that reduce NO₂ environmental issues. reflects our determination everywhere we Effluent per tonne of production emissions and nitrate run-off when 3 operate to reduce the environmental We are committed to using international fertilizers are applied. (m per tonne) impact of our business. best practice, in particular by applying BAT We believe more effective, environmentally 5.1 and ISO 14001 environmental management 4.4 3.9 Air emissions sensitive fertilizers will allow farmers to 3.3 3.2 3.3 3.1 2.9 2.8 2.5 2.2 2.1 systems. We are compliant in all areas of produce more food from existing stocks 1.9 1.9 national and international environmental Our mineral extraction, manufacturing of agricultural land. We are working to 138 legislation, including recent developments and distribution activities result in a range help meet this need by creating the next 116 of emissions to the air, including sulphur 99 90 89 88 such as the EU’s new rules on controlling 87 84
generation of crop nutrient solutions. 81 76
oxides, carbon monoxide, nitrogen oxides, 71 cadmium levels in phosphate fertilizers. 68 63 ammonia, particulates and hydrocarbons. 62 Greenhouse gas (GHG) emissions We continue to study how we can We continuously monitor air quality improve our environmental stewardship. around our production facilities, sharing In line with industry efforts to address 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 This includes constantly considering how our data with regulatory authorities and climate change, we continue to implement Effluent, m3 per tonne of production 3 new investment projects can incorporate local communities. measures across our operations that will Effluent, total million m the latest environmental management improve energy efficiency and reduce processes, such as waste water recycling Waste and effluent GHG emissions. and the re-use of excavation waste. Our plants generate a range of inert During the year, Igor Nechaev, General Energy consumption per tonne wastes. In particular, manufacturing Manager of MCC EuroChem, attended fertilizers produces large volumes of two the Russian parliamentary hearings held to of production (kWh per tonne) by-products: phosphogypsum from the define state regulation of GHG emissions. 150 143 135 128 130 133 130 production of phosphate fertilizer; and 125 122 118 113 113 111 114 overburden and concentration tailings The Russian President’s Decree, which from our mining operations. We work hard established a national goal of limiting
GHG emissions by 2030, will become a 4,099
to minimise any adverse environmental 3,854 3,737 3,678 3,671 3,654 3,654 3,641 3,600 3,576 3,578 3,552
key guideline for Russian businesses over 3,440 impact arising from the storage and/or 3,330 disposal of both these by-products. the next 10 years. The goal is expected to stimulate the sustainable development of the Russian economy through improved energy efficiency and by encouraging 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 industries to seek more environmentally Energy consumption, kWh per tonne of production sensitive solutions to the challenges Energy consumption, total (billion kWh) they face. EuroChem Antwerpen, Belgium In 2019 approval of a Carbon Capture and
Use case means CO2 emissions at Antwerp are down to 30% of 2012 levels.
52 www.eurochemgroup.com EuroChem 2019 Annual Report and Accounts 53 Sustainability review – continued Strategic Report Corporate Governance Financial Statements
Atmospheric emissions down Our team at our Kovdorskiy GOK site has brought atmospheric emissions down to half those required by national regulations. This was before EuroChem spent more than RUB140 million (US$ 2.1 million) on making further improvements, which we expect to have a further positive impact on our figures.
We have a lot of work ahead of us in implementing a robust safety culture. Our biggest task is to establish and maintain reliable reporting, investigate where necessary and learn from our mistakes. We are determined to turn EuroChem into the EuroChem Northwest sets safest company in the standards across the board We built our new ammonia production industry, and also its facility at Kingisepp on a brownfield site most attractive employer. and using Best Available Technologies The launch of the Green Club (BAT). ECNW has the largest annual In late 2019, EuroChem was one of several production capacity of any ammonia fertilizer companies, agribusiness groups unit in Europe and is one of the most and retailers in Russia to create the ‘Green energy-efficient plants of its kind in Club’ – a trade association of producers the world. It is also already making a and suppliers of products offering what the Ekaterina Dolgova significant contribution to our industry’s HEAD OF HSE Agriculture Ministry defines as ‘improved efforts to reduce levels of phosphogypsum environmental characteristics’. residue. By reducing impact on the Luga River, ECNW’s closed-loop water These products cannot be certified system is helping to protect the Baltic organic, because a certain amount of Sea, contributing to the work we are high-quality fertilizer will be allowed in their doing in partnership with Finnish production. As a result, they will be more environmental organisation, the John Aiming for a carbon-neutral factory affordable for consumers, while having a Nurminen Foundation. This work is very Our fertilizer factory in Antwerp has more lower environmental impact than more important to us, and we value the advice than halved its CO₂ emissions since 2012. intensively grown food. and collaboration of our Finnish partners In 2019, thanks to the approval by The Bill to recognise this new category very highly. European and Flanders authorities of could come into effect as early as January a Carbon Capture and Use (CCU) case, 2021. The Agriculture Ministry estimates it brought its CO₂ emissions down to that products with improved environmental 30 percent of its 2012 levels. characteristics could account for 10-15 This followed the Antwerp team’s percent of total agricultural exports realisation that they might be able to by 2024. subtract from their figures the CO₂ that is captured during lime production. Now the team is exploring ways of reducing its CO₂ emissions further, to make the site one of the EU’s first carbon-neutral fertilizer factories.
54 www.eurochemgroup.com EuroChem 2019 Annual Report and Accounts 55 Sustainability review – continued Strategic Report Corporate Governance Financial Statements Economic sustainability
Promoting and supporting Investing in new technologies Exceeding customers’ sustainable agriculture Improved digital capabilities will also expectations With their much-reduced environmental be important as the world develops. EuroChem is one of just three companies impact, our highly efficient next-generation We are beginning to build some of these globally with its own production in all three fertilizers will play a significant role in capabilities in-house, as we believe these primary nutrient groups, making supply feeding the fast-growing global population technologies will help farmers improve more straightforward and cost-effective for more sustainably. As a result, EuroChem on-farm efficiency by enabling them to us than most competitors. Our presence is a globally important player in driving the target fertilizer application much more in the premium sector is also important to growth in sustainable food production on a precisely to achieve specific yield targets. customers, particularly as farmers across scale that the human race will increasingly We continue to adopt new technologies regions like the North America, Europe and require. And, as we grow, the importance wherever it makes sense to do so. Latin America become more sophisticated of our role will grow in parallel. These range from using BAT in all new in their requirements. In addition to our constantly evolving and production processes to developing Part of this growing sophistication relates improving product line-up, we have a big increasingly efficient premium products, to farmers’ attitudes to environmental best distribution platform that enables us to such as targeted fertilizers that take into practice. They increasingly recognise that reach any farmer easily and efficiently. account the specific nutrient needs of the economies we deliver also serve to We are present in all major agricultural each individual piece of land. These reduce emissions during transportation. regions across the world, and have an products include inhibited or Enhanced Unlike mono-producers, we can load intimate knowledge of the land, the soils Efficiency Fertilizers (EEFs), which can fertilizers from all primary nutrient groups ® and their individual nutrient requirements control nutrient release. Our UTEC and into a single vessel and deliver it into a ® in all areas. ENTEC products are highly advanced single port. examples of these. This level of knowledge extends to the In our customers’ eyes, factors like these, Farming in individual farmers who work that land. We work with a group of customers to test plus the greater efficiency and quality of We are in continuous contact with them, the performance of new products before our products and our understanding of Germany not only to find out what they need from they come to market. farmers’ needs, justify the price premium Use of our next- us and how we can improve our products that we charge for our specialty products generation fertilizers is boosting yields and services, but also to guide them on Ensuring financial stability and over commodity fertilizers. shareholder returns for farmers across fertilizer use. We provide advice on how Western Europe. to improve the application of fertilizers We aim to generate funds to invest in our Excellent relationships and the right mix to use, enabling farmers business for future growth, while ensuring with suppliers to reduce usage with no negative impact strong shareholder returns and enabling We aim to sustain the best possible on their yields. better yields and financial performance standards of behaviour at every point for farmers. of the value chain in our dealings with We recognise the environmental impact suppliers of raw materials and other of our business and industry, which is a products and services. We also ensure result of the current structure of the global that when we have to buy externally, we agricultural sector. We work continuously deal only with the best producers and to identify and implement the best possible suppliers to ensure we source the technologies to help us reduce this impact highest-quality ingredients. in all areas – extracting and sourcing Raw materials in which we are not materials, producing and distributing self-sufficient include apatite, which is our products, and in our ongoing used in the production of phosphate communication with farmers and fertilizers. We have to buy around 30 other stakeholders. percent of our requirements from external We also stay alert to shifts in the market, parties. Overall, however, we became changing consumer habits (such as increasingly self-sufficient during 2019 in meat-consumption patterns) and new areas including ammonia and potash for LISTENING TO producing our NPK fertilizers. THE VOICE science-based solutions that will give us OF OUR CUSTOMERS opportunities to reduce our environmental impact. This will help to ensure our continuing success and relevance in the years ahead.
PLEASE SEE Q&A’S WITH OUR CUSTOMERS ON PAGE 9
56 www.eurochemgroup.com EuroChem 2019 Annual Report and Accounts 57 Sustainability review – continued Strategic Report Corporate Governance Financial Statements Social responsibility
Safety: a top priority A diagnosis of EuroChem’s safety We also implemented the #SafeEuroChem Safety in the community culture places our safety maturity at the project to raise safety awareness and Our responsibility for safety extends Our approach ‘dependent’ level on the DuPont Bradley encourage creative safety initiatives among beyond the immediate workplace, and in curve. This is on the borderline between employees – many of our young specialists Further improving our safety culture and 2019 we introduced a new programme in the point where safety is driven by took part in a series of projects hosted by performance is a fundamental element of Russia’s Commercial Division, where they compliance with rules, procedures and social networks using this hashtag. our strategy for growth. are more exposed to this risk, to improve protocols and one where it is driven by Also during the year, development started the quality of driving by those employees EuroChem aims to achieve the best internal motivation. The latter produces on a new set of KPIs, comprising safety- who use company cars. This started with safety performance in the fertilizer industry, a better safety performance. related guidelines and metrics for our total a detailed car policy, setting out every coupled with the highest profitable growth, Improving our safety culture and recordable injury frequency rate (TRIFR). aspect of conduct relating to driver the lowest production cost per unit and performance is central to the company’s We did the same for loss of primary safety, supported by a communications the best premiums. A relentless focus on 2025 strategy, EuroChem One. This containment (LOPC), the process-safety programme including leaflets and in-car improving our safety performance will be envisages a process of continuous equivalent of TRI. stickers. We also delivered a training at the heart of our company strategy for improvement across the organisation, programme, which will be repeated every many years into the future. We developed new guidelines for near- using relevant technologies, and learning year for new employees. Those who have miss and hazardous condition reporting Tragically, industrial accidents resulted in from best practice examples, whether from been through it once will participate in an and safety walks. These will be three fatalities at EuroChem during 2019. within the fertilizer industry or elsewhere. advanced programme. In 2020 we will implemented in 2020. There were also 50 lost time incidents This will include using international safety continue to implement this programme (LTIs) during the year. These figures practices such as lead indicators on near A new safety IT system was under on all production facilities. illustrate the extent of the challenge misses, unsafe behaviours and hazardous development during 2019 which, when To ensure people are applying the lessons we face and highlight the need conditions (and their process safety launched, will underpin our new safety they learn, we have installed GPS sensors for improvement. equivalents) to help prevent accidents. KPIs and reporting procedures. These are in all our cars to track transgressions like due for pilot rollout at our Novomoskovsk, EuroChem is targeting a ‘zero harm’ speeding. These monitoring systems Our performance Usolskiy, Tuapse and Belorechensk strategy and the Health and Safety enable us to gather data every month. sites during 2020. In addition, we have function now reports directly to the CEO. During 2019, we invested significantly Once analysed, we can reward safe developed and are introducing a set of This will ensure a relentless Board-level in areas including personal protection drivers with commendations and bonuses. streamlined processes around incident focus on improving safety and productivity equipment, training and assessment, Those who score in the green zone of 90 reporting and investigation. We will within the business. Organisations that medical examinations, compliance percent and above can be happy with their introduce these during 2020, along focus on Health and Safety outperform checks and more to drive down the performance. Those in the orange or red with new management procedures their peers over time, across industries, injury rate across the organisation. zones know they need to improve and and initiatives embracing the new KPIs. they face further training. across companies and across units Several safety-related initiatives were within a company. launched across the Group in 2019. We also created a new training centre Overall, the programme has proven highly in Novomoskovsk, where employees can EuroChem’s lost time injury frequency These included a set of ‘Life-Saving successful, with a significant reduction in receive training on working at heights. rate (LTIFR) has averaged 0.92 since 2014. Rules’ (LSRs), which give our people road accident numbers during its first year. This rate translates to an average of the knowledge they need to protect We have now introduced a driving test for 49.8 accidents per year, and a loss themselves and their colleagues against all new recruits who will be required to of 85.8 working days per accident. potentially fatal accidents. The LSRs drive as part of their daily routine. officially came into force across all our We are investing in the training and Russian plants and operations during equipment needed to reduce these figures. September, and preparations for a Group-wide launch and communications plan were underway at year-end. Injury rates
EuroChem now
1 2 3 4 Safety Maturity Health and Safety Statistics
Reactive Supervision Independent Interdependent LTIFR FA LTIs • Safety by natural instinct • Management commitment • Personal knowledge, • Help others to conform 2016 0.98 2 49 • Compliance is the goal • Fear/Discipline commitment and standards • Being brother’s keeper 2017 0.76 5 52 • Care for self • Delegated to safety manager • Rules/Procedures • Organisation pride 2018 0.89 2 56 Health and Safety • Practice & habits 2019 0.78 3 53 The protection of “I follow the rules because I have to” “I follow the rules because I want to” our employees in the workplace is a top priority.
58 www.eurochemgroup.com EuroChem 2019 Annual Report and Accounts 59 Sustainability review – continued Strategic Report Corporate Governance Financial Statements
Gender diversity For example, we have a programme of Recruiting and retaining company days, scholarships, summer People Male Female development motivated employees apprenticeships and joint educational Having our industry’s best-qualified, 2016 70 30 We continue to and research activities. We also work hard 2017 72 28 develop young highest-performing and most motivated to select and recruit the most talented talent throughout the and loyal workforce is central to 2018 71 29 students. As an example, since 2010 we business, ensuring EuroChem’s strategy to become the 2019 71 29 have an agreement with Ivanovo Chemical our future success. largest and most successful fertilizer Technology University that enables us business in the world. Attracting and Our remuneration policy specifies to hire its graduates. We are also the retaining top talent is therefore a priority appropriate salary increases in line with first business to offer graduates of the at every level of our organisation. global industry best practice. We base Novocherkassk Technical University the We believe in driving salary levels on the industry norms where opportunity to begin their careers with us. Our approach we operate and by analysing international And we made good progress during 2019 business growth by EuroChem’s Head of Human Resources compensation data. on developing our relationship with engaging, developing (HR) has overall responsibility for our HR Magnitogorsk Mining University and strategy, objectives and policy, supported Links with education several other high schools. We intend and promoting our that 240 students currently studying at by managers within our Divisions and Our company is young, and we in turn see 10 partner universities will also join the own people. Investing business units. Key responsibilities include young people as the key agents of change EuroChem team. defining required standards of behaviour, at EuroChem. More than 30 percent of our in people is critical for attracting the best talent, creating and 27,000-plus employees are aged under 30, To ensure we support the progress of the us as our employees delivering comprehensive and effective and we see them as our main asset. people who join us the best we can, we training and development tools, and have carried out a detailed assessment represent a key part of Educational links are therefore important devising reward and motivation systems of our entire graduate intake since 2019. to us, and we have strong working to drive commitment and loyalty. We are also continuing dual study our value. EuroChem is relationships with secondary and tertiary programmes (the first took place back It is important to us that we keep channels schools and colleges via our established a multinational company: in 2005) in Germany and a ‘young of communication between all levels of the EuroChem students’ programme. This professionals’ programme in Brazil. our people work in organisation open and positive. Our senior attracts and supports new recruits We have focused significant effort on executive team therefore holds regular through a focus on science, technology, 40 countries across six improving our induction processes for ‘town hall’ meetings with employees at engineering and mathematics (STEM) new employees, and we have introduced continents and they speak every major EuroChem facility throughout education at Russian, European and effective mentorship programmes that the year. Employees are encouraged to American universities, as well as in should start gaining ground in 2020. We 15 different languages. participate in an open forum and to raise secondary schools and colleges in also partner with specialist schools and any questions they like. This transparent Russia, Lithuania and Kazakhstan. We want each of them colleges to train our engineers and environment helps to support an to be effective and to atmosphere of trust and encourages To improve the programme’s effectiveness technical specialists. and support the Group’s sustainable a ‘speak-up’ culture where employees The EuroChem Case Solving feel they work in the best development, we have several other feel able to put their concerns to Championships, running since 2014, initiatives in place to generate an inflow possible environment. senior managers. are designed to help our students develop of young specialists and provide the the knowledge and skills required to solve smooth transition of knowledge and Our performance EuroChem-specific production challenges. skills from older colleagues. As of December 31, 2019, we employed In it, our expert judging panel assesses more than 27,000 people at Group level participants’ knowledge and skills, giving and at our corporate offices and business them a better understanding of our units located across more than 40 countries. business and enabling them to Viktoria Chervatyuk We comply with all relevant employment make informed career decisions. GROUP HEAD OF HUMAN RESOURCES laws and codes on the rights of employees, FROM JANUARY 2020 including international conventions. We do not use forced, compulsory, child or agency labour, and we respect all human rights under the laws and conventions of Key HR indicators Productivity per main the countries where we operate. type of product per person (tonnes)
2016 2017 2018 2019 2,391 2,386 2,433 2,521 Full-time equivalent employee numbers (people) 24,819 25,854 26,376 27,184 Staff turnover at production facilities (%) 2.8 3.2 3.5 3.6 Personnel costs (US$m) 462.6 611.5 580.7 612.6 Average wage (US$/month) 1,050 1,217 1,207 1,268 Changes in average monthly wage (%) 1.5 16.0 (0.9) 5.1
2016 2017 2018 2019
60 www.eurochemgroup.com EuroChem 2019 Annual Report and Accounts 61 Sustainability review – continued Strategic Report Corporate Governance Financial Statements
Training and career development Attracting and retaining skilled and What our people say motivated professionals with the right technical, managerial and interpersonal skills is an ongoing challenge for EuroChem. We give all our employees numerous opportunities to improve their abilities and experience, ensuring that our training function helps them refine skills for their current jobs, qualify for roles in other parts of the business or move up to more senior positions. We provide a variety of on-the-job training placements and secondments, coaching and other formal programmes that build Young Specialists knowledge, skills and abilities. We give qualified employees a clear route into Our annual gathering of high-potential a management or professional career. Scouting for talent employees is We provide support through continuous We launched a ‘high potential’ (or HiPo) a highlight of learning and tuition and, in some instances, programme in 2018. This is our first step our global HR can make financial support available. programme. towards improving how we select our We delivered 1,283,433 man-hours of future leaders and give them the best training during the year. environment in which to grow. Olga Sakara Dmitriy Ledovskoy We run one of Russia’s leading corporate CHIEF SPECIALIST IN EUROCHEM-ENERGO’S HEAD OF THE MECHANISATION DEPARTMENT HiPo is global, giving us access to a pool BOOKKEEPING, TAX ACCOUNTING AND AT NEVINNOMYSSK-REMSTROYSERVIS. HE HAS ‘Young Specialists’ programmes, which of people with the talent eventually to fill FINANCIAL CONTROL DEPARTMENT. IN 2019, UNDERTAKEN MORE THAN 400 HOURS OF includes an incentives package, personal key positions in our organisation. Of the SHE COMPLETED 306 HOURS OF TRAINING TRAINING ON THE CORPORATE PLATFORM development plans, mentoring, training 1,907 people who applied, we selected ON THE CORPORATE PLATFORM programmes and the chance to participate just 40 to participate in this fast-track in scientific and technical conferences. For me, a corporate training platform is development programme. Knowledge is the most powerful We also provide the opportunity to attend an effective and convenient tool for testing investment of all. It’s great that the Young Specialists meetings – the 13th of They are now building and developing their and adding to your existing knowledge. these took place in Sochi during 2019, core business and personal competencies, company’s management understands Learning is not restricted by site, time or attended by 16 students and 138 opening the door to greater cross- that it’s more effective to build the team device, whether that’s a desktop, laptop delegates from 23 businesses. functional responsibilities. They are also of tomorrow from a team of today, creating preferentially placed for promotion or smartphone. Our Divisions revise their succession the conditions for each employee to learn opportunities, provided they perform plans relating to our talent pool each year. The courses are interesting and the teachers strongly during the HiPo programme. and develop. Each year, the Company promotes are leading professionals in their fields. high-performing people to key We also have local development There’s a vast array of high-quality Business cases are based on practical senior internal positions. programmes for those employees who training available on the corporate platform. material or are close to real conditions. are not part of the corporate programme. We launched our new online training I know I want to dive in and complete many They are given an extensive grounding The most useful courses for me were platform successfully in 2019, giving of the training modules there, and so I’m in business processes and advanced those covering compliance, effective employees access to more than 500 approaches to enterprise management. encouraging my colleagues to do so as courses designed to improve their soft management, employee involvement, These programmes also provide well. As the science fiction author Robert skills. It is used across the organisation for team building and conflict resolution. employees with opportunities to Heinlein says: ‘Learning isn’t a means to self-study, obligatory EuroChem courses I recommend the platform to all develop their management skills and tests that make up part of our offline an end; it is an end in itself’. and prepare for more senior roles. my colleagues. training programmes. During the year, close to 9,000 employees started distance learning, collectively completing more than 71,000 courses. We aim to extend distance learning to all employees during 2020.
62 www.eurochemgroup.com EuroChem 2019 Annual Report and Accounts 63 Sustainability review – continued Strategic Report Corporate Governance Financial Statements
Maintaining relationships We work hard to ensure that every Activities by contribution or commitment we make is with lawmakers and directly relevant to the individual needs of individual operation regulators each community. Our focus continues to EuroChem-VGK: at Kotelnikovo in be on practical areas like master-planning, Our approach the Volgograd Region city improvement, healthcare and Major building projects underway during Engaging with our stakeholders is both a education infrastructure, cultural the year included the construction of driver and an outcome of our sustainability development and sports. the Oak Grove residential area, with 10 strategy. It enables us to build a picture of Our performance cottages commissioned, a new day-care the concerns and opinions of those who centre for 100 children and the opening interact with us. We continued to expand our of a new training centre at our plant. We Engagement is vital for a company community investment portfolio during also helped to launch a major new social with large-scale, long-life assets such 2019, contributing RUB460 million project, called ‘Kotelnikovo, the Land We believe implementing as EuroChem’s. We meet regularly (US$6.8 million) to projects across nine of Heroes’. This featured more than 20 with national government figures in the locations. Our overall aim is to help the events, including concerts, competitions environmental technology countries where we operate, and attend towns where we work by developing and excavations of WWII battlefields, and new environmental international trade fairs, exhibitions and facilities that will attract funding, not which altogether involved more than conferences. We stage open days for only from EuroChem but also from Kovdorskiy GOK in the Murmansk Region Novomoskovskiy Azot in the Tula region 10,000 people. Other events during the protection measures government, including at national level. year included a Safety Day at our plant, local government officials, regulators and Our cultural projects included the More than 300 children aged 10 to 12 various inter-regional sports tournaments others to tour our facilities and gain a In one example, in partnership with the support we gave Kovdor as the ‘Capital took part in the 2019 EuroChem Cup, our must be based on a and the Safe Wheel Campaign to better understanding of what we do and Monocities Foundation and VEB we have of Hyperborea’, a semi-mythical ‘perfect annual ice hockey tournament, which this encourage better driving. constructive dialogue how we operate. We take part in regular set up a workshop for the mayors of the land’ first mentioned by the Greek historian year hosted 14 teams from 10 countries. discussions with local authorities in Herodotus. Activities included media visits The competition was watched by more between government towns and cities where we operate to Nevinnomyssk in the Stavropol Territory an effort to build a mutually beneficial discuss strategies for attracting and the first-ever conference of science than 28,000 people including the state and business. We are dialogue on issues of common concern, further funding. fiction writers. In just over a year, Kovdor governor, making Novomoskovsk the The Andrey Melnichenko Foundation has including the environment and sustainable has evolved from being little known to world capital of children’s ice hockey for funded new astronomy and computer- very active in this area Examples of successful initiatives stewardship. Our systematic approach becoming the most famous town in the four days. Other events included the Eco science laboratories at the Children’s already underway include the Capital ensures we are adequately informed about Russian north. We also supported the Generation ecological competition for Scientific and Engineering Creativity and I’m honoured to of Hyperborea and the Land of Heroes the concerns of lawmakers and regulators, Hyperborea Ethnic Festival. This included children and guided plant tours for school Centre. The Centre has also housed projects, two tourism initiatives that have be Deputy Chairman enabling us to foresee and respond to the EuroCall 2019 extremity race, which and college students. We also planted many an agrochemical project evaluating the attracted huge numbers of visitors to them in a timely manner. attracted more than 3,000 participants. We trees, working in partnership with public efficiency of fertilizer use in agriculture. of the Committee for places with interesting local stories. also supported New Year festivities in the environmental protection organisations. We also supported the reconstruction of the Olimp sports complex, and teams of Environmental Protection Supporting and investing Individual initiatives ranged widely in scale. Hyperborean Park, which brought together EuroChem employees have been involved The biggest involved building an entire 2,500 people, and the All-Russian Walk and Natural Resources in local communities in a range of clean-up projects and tree community at Berezniki in Russia’s Perm the City Campaign. planting activities. Management of the Russian Our approach region. Other relatively small investments, Phosphorit and EuroChem Northwest: Union of Industrialists and Our Board oversees all the investments such as cleaning up the banks of the River we make in projects and infrastructure Don at Novomoskovsk in the Tula region, at Kingisepp in the Leningrad region Entrepreneurs. EuroChem close to our sites. Our corporate and are nonetheless important to their At Phosphorit the cultural initiatives we plant management teams, who know local communities. supported included ‘A Week without also works with several and understand local communities well, Turnstiles’, offering students and local government departments to guide these decisions based on their people free access to attractions and deep understanding of local needs. guided tours. Among other campaigns help close gaps in existing our volunteers supported were a Victory This is particularly important in more remote Day-themed motoring event and a environmental legislation, regions, where our plants are often major festival at a social rehabilitation centre. ensuring we play a full part local employers and contributors to regional economies. We normally co-create and At EuroChem Northwest, a major Usolskiy: at Berezniki in the EX-BMU: at Belorechensk in the in this important area. co-finance our investments in partnership programme of construction and renovation Perm Territory Krasnodar Territory with local government or non-governmental began, with the creation of a playground We continued to build a major residential Construction and renovation projects organisations (NGOs). for a local day-care centre and repairs to community at Berezniki. The site includes we supported during 2019 included the several local schools and hospitals. We 30 apartment blocks, two day-care We believe we have a strong responsibility design, development and reconstruction of also hosted more than 15 meetings for centres, a sports centre and a school for Igor Nechaev to the communities in the areas where the railway station square in Belorechensk MEMBER OF THE MANAGEMENT BOARD, members of the local community and 620 students. We also held a competition our people live and work. Our business and repairs to a CT scanning room in a GENERAL DIRECTOR MCC EUROCHEM carried out plant tours for journalists, for the community’s best street name benefits when these communities are local hospital. We also ran walk-in days environmentalists and other and launched the EuroChem Safe Area healthy, stable and sustainable, with a for local people and environmental groups. Mr Nechaev is also heading a working industry experts. Campaign for its residents. Other initiatives direct positive impact on our employees’ group of the Committee looking at how to included a children’s rugby tournament and TBT: at Tuapse in the Krasnodar Territory performance at work. We see ourselves create a new industry by diverting waste the release of more than 13,000 sturgeon as an active part of our local communities, We held meetings with people from the that is currently sent to landfill for use in hatchlings into a nearby reservoir. connecting local authorities and encouraging Clean City organisation, students from the road construction. people to set up and participate in local, Tuapse Hydrometeorological College and regional and federal programmes. volunteers from the Tuapse District Youth Centre. Many of our people also took part in festivities around Victory Day.
64 www.eurochemgroup.com EuroChem 2019 Annual Report and Accounts 65 Risk management Strategic Report Corporate Governance Financial Statements Driving decision-making
EuroChem is committed to proactive and effective Monitoring and reporting Continuous improvement We review and monitor the results of We will continuously monitor and adapt risk management that reduces volatility in our risk analysis to verify and improve the our risk-management practices to address performance, improves decision-making and quality and effectiveness of the design, external and internal changes. As relevant implementation and outcomes of our gaps or improvement opportunities are strengthens corporate culture. risk-management activities. We then identified, we will develop plans and incorporate our findings into EuroChem’s assign them to those accountable for performance-management and implementation. Once implemented, Risk management is integrated into Risk management framework reporting activities. these improvements will contribute EuroChem’s day-to-day management We continue to transform our risk- to enhanced risk management. and business operations, guiding corporate Risk management culture management approach to better align decision-making and forming an integral Some of the key risk-management with the latest updates to the ISO31000 At EuroChem, we see risk management part of our company culture. activities for 2020 include: standard, the COSO ERM framework, as an integral part of our management Risk management responsibilities and the requirements outlined in the UK approach, organisational culture and (1) further integrating risk management Corporate Governance Code and the decision-making. into decision-making across various levels EuroChem’s Board of Directors oversees Swiss code of best practice for of the organisation. The Company will A strong risk culture is essential for effective the risk management processes and corporate governance. Risk management continue its journey towards better risk management as it promotes individual annually reviews the effectiveness of risk-based planning, budgeting and and organisational risk awareness and risk management and internal control. Risk assessments is an integral performance management informed risk-taking. EuroChem’s strong EuroChem’s management ensures that We carry out risk assessments to support risk culture continuously improves our element of treasury (2) further integrating a quantitative risk risks are adequately considered when material business decisions. decision-making. management. analysis approach into new investment setting the organisation’s objectives, Relevant stakeholders are involved in projects (cost and schedule risk analysis) strategy and business plans. Management EuroChem is committed to developing all risk assessments, and the outcomes It allows us to (3) strengthening our risk culture by: is responsible for setting risk-adjusted competencies and awareness around risk of analysis are communicated to key management and risk-based decision- performance targets and providing the building quantitative and decision- decision-makers and management. making throughout the organisation. quantify, measure • Board with timely and accurate reporting making competencies within our risk, During the year, we undertook numerous on risk-adjusted performance. When making a decision, carrying out a and monitor key audit, compliance and project- activities to reinforce risk management as business activity or approving an initiative management teams The Risk Management team is an integral part of the Company’s culture, financial risks, set or budget, we apply a range of quantitative • improving the risk-management responsible for coordinating risk risk-management techniques to measure including training, awareness sessions management activities across the Group. and publications. risk appetite and information we provide on the uncertainty. Back testing allows us to review internal corporate portal It also provides methodological support for and continuously improve the effectiveness limits and drive • incorporating risk-based decision- decision-making, planning, budgeting and of different risk-analysis methods. performance management. In addition, it decision-making making courses into the corporate delivers training and carries out activities Risk response e-learning platform that integrate the principles of risk • improving the awareness and We take great care when selecting and within the Group. management into our overall communication of risk management implementing risk treatments. We also organisational culture. pursue business opportunities to ensure Material risks that each risk is optimally managed. In this section, we outline the principal Risk response involves balancing risks and uncertainties faced by EuroChem the potential benefits to be gained by Kuzma Marchuk in 2019 – and link them to the sections of achieving our objectives against the CHIEF FINANCIAL OFFICER the Annual Report that cover the mitigating costs, efforts, potential risk exposure and activities in place. disadvantages involved in implementation. The list of risks below is by no means exhaustive, nor does its running order reflect their probability or degree of potential harm. It simply highlights the key areas of focus for EuroChem during the year under review. Depending on the prevailing circumstances – whether international or domestic, economic, political or financial – our risk priorities will inevitably change from year to year.
66 www.eurochemgroup.com EuroChem 2019 Annual Report and Accounts 67 Risk management – continued Strategic Report Corporate Governance Financial Statements
A. Markets and geopolitical risks B. Production-related risks
Risk Description Mitigation Risk Description Mitigation А1. Market EuroChem is subject to intense price competition around the EuroChem is a vertically integrated business with B1. Health, safety, EuroChem’s operations are subject to the safety, The health, safety and security of our people competition and world. The Company competes with a number of producers modern production facilities that allow the Group environmental and health, security and environmental risks inherent in mining, and protecting the environment are EuroChem’s price volatility globally, including state-owned and government-subsidised to benefit from economies of scale and strong security risks manufacturing, transportation, storage and distribution. These biggest priorities. entities. EuroChem’s competitive position could also be geographical diversification across the world’s factors could result in injuries, fatalities or loss of property. When it comes to safety and security, EuroChem adversely affected should additional consolidation occur most important agricultural regions. The Group They could also affect the biodiversity, water resources and has implemented ‘zero harm’ goals and invests in the fertilizer industry. On one hand, a reduction in the can rapidly flex productivity in response to related ecosystems near our operations, affecting our significantly in areas such as personal protection number of market players could potentially benefit EuroChem. changing market conditions. operations, financial performance and reputation. equipment, training and assessment, medical It may, however, also increase the resources of EuroChem’s EuroChem has a strong logistics infrastructure and examinations, compliance checks and more to competitors to a level where such companies or alliances its own distribution, providing it with clear competitive drive down the injury rate across the organisation. could significantly influence prices and/or product demand, cost advantages. Several safety-related initiatives were launched reducing EuroChem’s ability to compete successfully. The diversity of EuroChem’s product portfolio enables across the Group during 2019. These include: sales to increase while reducing cash-flow volatility. • a set of ‘Life-Saving Rules’ (LSR) • the #SafeEuroChem project to raise safety FOR MORE DETAILS SEE PAGES 27-28 AND 42-47 awareness and encourage creative safety initiatives among employees A2. Changes in Government policies, currently beneficial for EuroChem, EuroChem continuously monitors changes in • a set of KPIs, comprising safety-related guidelines government policies could change in a way that is adverse to the Group’s trade laws, policies and other initiatives that could and metrics for the total recordable injury and legislation business. An increase in existing trade barriers or the potentially affect the Group’s business. We build frequency rate (TRIFR) and loss of primary imposition of new trade barriers on EuroChem’s products strong business relationships with federal, regional containment (LOPC). could also cause a significant decrease in demand in and local government bodies, confirming our Environmental strategies have been developed affected markets. responsible attitude to the economies of the and approved. The Company constantly carries regions where we operate. out environmental assessments of its production EuroChem also participates proactively in facilities, including risks and opportunities, reviewing and developing new legislation compliance with environmental requirements and government policies. and environmental action plans.
FOR MORE DETAILS FOR MORE DETAILS SEE PAGES 27 AND 56-59 SEE PAGES 32, 38, 43, 56-59 AND 62
A3. Climate change Climate change is a significant risk for EuroChem because EuroChem takes proactive steps to minimise the B2. Mining‑related EuroChem’s mining operations are subject to the hazards EuroChem continuously monitors its project- agriculture and the other sectors in which the Group operates environmental impact of our activities. Areas in which risks and risks normally associated with the exploration for and management systems and control measures for are influenced by weather conditions. Climate change affects we invest include water conservation and efficiency extraction of natural resources. Any of these could result key stages of its mining projects. We also ensure demand and could lead to altered market preferences, across our plants, continuously monitoring air quality in impacts including: that mining and equipment risks are identified and legislation and technology. around our production facilities and sharing data with • materially damaged or destroyed mineral properties and mitigated in a timely manner. regulatory authorities and the local community. production facilities EuroChem has significantly reinforced the We take a targeted environmental approach, which • personal injury or death competences of the mining team and uses includes the design and manufacture of advanced • damage to environmental and natural resources international best practice, in particular the fertilizer products – those with properties that application of ‘Best Available Technology’ (BAT). • delays in mining operations and possible legal liability. reduce NO₂ emissions and nitrate run-off from fertilizer application. These risks could have a material adverse effect on the FOR MORE DETAILS Group’s business, financial condition, results of operations SEE PAGES 32-35 In line with industry efforts to address climate change, and prospects. we continue to implement measures to increase energy efficiency and reduce GHG emissions across B3. Equipment EuroChem’s operations may be affected by equipment EuroChem is continuously improving plant reliability our operations. For example, during the engineering failures or production failures, including the risk of extraordinary losses due to to minimise accidents and shutdowns. We do this and design phase of new facilities at our EuroChem curtailments or unanticipated events such as fires, explosions and adverse by developing and implementing company-wide Northwest ammonia plant, we used around 60 shutdowns weather conditions. The Group’s manufacturing processes technical and operational standards, along with best best available technologies to ensure good rely on critical pieces of equipment, which may on occasion practices for safety, operations, maintenance and environmental performance. break down or otherwise be out of service due to scheduled turnarounds. Critical equipment is identified and or unscheduled maintenance or repairs. This could result in closely monitored. Employees undergo extensive FOR MORE DETAILS SEE PAGES 55-59 prolonged suspension of relevant operations and cause a training and risk-awareness programmes, and reduction in production. process safety and productivity are subject to A4. New digital There is a risk that fast-growing digital industries may have EuroChem is increasing its digital capabilities in all frequent and regular audits. In addition, the Group technologies a significant global impact on EuroChem’s production, operational areas. These include a focus on digital has comprehensive insurance policies in place. distribution or sales. farming to help on-farm efficiency in areas such as FOR MORE DETAILS reducing the amount of fertilizer required to achieve SEE PAGES 27- 29 AND 32 specific yield targets. Most EuroChem facilities are equipped with B4. The availability EuroChem’s business depends on the availability, and/or The location of the Company’s main facilities, advanced digital solutions for improving of raw materials and price fluctuations, of raw materials such as natural gas, with access to our own raw materials, enables productivity and supporting safety. price fluctuations ammonia, apatite, sulphur and more. Natural gas is the our production assets to compete strongly on costs. primary raw material the Group uses to produce ammonia, Our long-term relationships with key suppliers allow FOR MORE DETAILS the main building block for nitrogen-based fertilizers. The us to maintain an uninterrupted supply of key SEE PAGE 59-60 Group is self-sufficient in this feedstock. The Group’s other raw materials. raw materials include phosphate rock, potassium chloride (MOP) and potash sulphate. FOR MORE DETAILS SEE PAGES 20-21, Risk change during 2019 32, 35 AND 42
Risk has increased Risk has not changed Risk has decreased
68 www.eurochemgroup.com EuroChem 2019 Annual Report and Accounts 69 Risk management – continued Strategic Report Corporate Governance Financial Statements
B. Production related risks (continued) C. Financial risks
Risk Description Mitigation Risk Description Mitigation B5. EuroChem’s Potential risks include delays in completion, cost overruns EuroChem’s dedicated project management function C1. Credit risks EuroChem is exposed to certain credit risks relating to timely Credit risk is monitored and managed by business existing and planned and/or defects in design or construction, all of which may uses risk-based methodologies to identify, assess payment by its customers for products the Group provides units and dedicated risk professionals in line with capital expenditure require additional investments. EuroChem’s capital and mitigate project-related risks. The Group’s on extended payment terms. As the Group has entered EuroChem’s policy and procedures. Regular credit programmes expenditure programme may also be affected by changes requirements for new capital have reduced due to new markets (including such emerging markets as Brazil, risk reporting is available to support decision-making. in economic and market conditions, the worsening of which some projects coming on-stream and our ability Argentina, Hungary and Bulgaria), its sales and trade We have a well-established system for credit could reduce the economic viability of any given capital to cover some of the expenditure through our receivables have also continued to grow. management, with defined exposure limits at expenditure project. own cash flows. customer, product and financial institution level. EuroChem successfully featured on both the The Group’s geographically diversified portfolio international and Russian debt capital markets reduces the overall credit risk. during 2019, enabling the Group to significantly FOR MORE DETAILS diversify its investor base. SEE PAGES 27-29 FOR MORE DETAILS SEE PAGES 28-29 C2. Interest rate risks EuroChem’s principal interest-rate risk arises from its EuroChem has a well-balanced portfolio of fixed floating-rate long- and short-term borrowings and project and floating rate loans, which acts as a natural hedge B6. Licences, EuroChem’s business depends on the continuing validity The Group’s geographic expansion, together finance. An increase in interest rates would increase the against the risk of interest costs growing due to rising permits, certificates of its authorisations, including licences (such as subsoil with increasingly onerous regulation including Group’s interest payments, which could have a limited market rates. The Group can also use hedging to and other licences and associated licensing agreements), permits licencing, permitting and certification, necessitates adverse effect on the Group’s business, financial position further reduce the volatility of interest expenses. (including those relating to construction and maintenance) a robust monitoring system. EuroChem continued to and the results from our operations and prospects. authorisations FOR MORE DETAILS and certificates. strengthen its Group Compliance Function in 2019, SEE PAGES 28-29 revising and updating existing policies and confirming international certification. EuroChem also implemented C3. Foreign While most EuroChem production is based in Russia, EuroChem seeks to minimise its foreign exchange its new Compliance E-learning platform and other the fertilizer business is essentially a US dollar industry. exposure on an ongoing basis, using derivatives to initiatives designed to ensure compliance with exchange risks EuroChem sells products to various markets across the manage foreign currency exchange rate risks. Since relevant regulatory requirements. world, creating exposure to foreign exchange fluctuations the largest part of our export revenue is denominated FOR MORE DETAILS both from a revenue and cost point of view. Although this in or tied to the US dollar, a significant appreciation in SEE PAGES 27 AND 33 allows some natural hedging, the risk remains significant. the rouble exchange rate against the US dollar may negatively affect the Group’s operations, the bulk B7. Shortages of Competition for skilled labour is intense in the global fertilizer EuroChem is continuously working to attract and of our expenses being denominated in roubles. skilled labour or industry. The demand for skilled engineers, technicians, retain qualified and motivated specialists with the Foreign exchange risk may also arise from a labour disputes chemical experts, mining and construction workers and necessary skills. EuroChem provides competitive mismatch between recognised assets and liabilities operators of specialist equipment continues to increase, wages and benefits packages as well as an denominated in different currencies. Key elements reflecting the significant demand from other industries and attractive working environment. of our policy involve minimising the volatility of the public infrastructure projects. Further increases in demand The Group runs several collaborative projects with Group’s cash flows and balancing our non-US$ cash for skilled labour are likely to lead to increases in labour specialist colleges and universities. It also operates assets and liabilities. Our well-established system costs, which may affect EuroChem’s business. a talent pool programme and succession plan for for managing currency risks includes defined key positions. currency exposure limits and standardised tools measuring exposure. FOR MORE DETAILS SEE PAGES 18-19 AND 60-64 FOR MORE DETAILS SEE PAGES 28-29 B8. Information and Cyberattacks, breaches of EuroChem’s systems or EuroChem has strong Group IT capability and cybersecurity exposure to potential computer viruses could lead to infrastructure responsible for monitoring and C4. Liquidity risks It may be difficult or expensive to refinance maturing loans or The Group maintains an adequate level of liquidity disrupted operations, loss of data, the unintended addressing cybersecurity threats. establish new finance. Adverse financial market conditions through careful planning and access to revolving disclosure of confidential information and damage to FOR MORE DETAILS could lead to higher funding costs and the postponement lines of committed credit. It also reduces refinancing products and property. These may result in business SEE PAGE 60 of EuroChem projects. risks by basing its long-term funding on a variety disruption, reputational damage, personal injury and of sources to avoid overdependence on individual third-party claims, any of which could affect EuroChem markets and maturity periods. EuroChem has access operations, performance and reputation. to sufficient funding and borrowing facilities to meet currently foreseeable requirements, combined with a cash position that covers short-term needs.
FOR MORE DETAILS SEE PAGES 28-29
Risk change during 2019
Risk has increased Risk has not changed Risk has decreased
70 www.eurochemgroup.com EuroChem 2019 Annual Report and Accounts 71 Board of Directors in 2019 Strategic Report Corporate Governance Financial Statements Delivering effective leadership
Samir Brikho Alexander Landia Andrey Melnichenko Petter Østbø Stefan Judisch Geoffery Merszei Juerg Seiler Steve Packebush Chairman of the Board from 2020 Chairman of the Board in 2019 Chairman of the Nomination Chief Executive Officer Chairman of the Strategy Chairman of the Audit Committee Member of the Audit Committee Member of the Nomination and Member of the Strategy Member of the Strategy and Remuneration Committee Chairman of the Committee Independent Director Independent Director Remuneration Committee Committee Committee, Nomination and Member of the Management Board Member of the Audit Committee Member of the Background and experience Background and experience Member of the Nomination and Remuneration Committee Strategy Committee Non-executive Director Strategy Committee Background and experience Remuneration Committee Non-executive Director Non-executive Director Geoffery started his career at the Juerg served as CFO of Ventyx, Independent Director Petter has significant frontline Background and experience Royal Bank of Canada. From the enterprise software business Independent Director Background and experience Background and experience experience in the fertilizer Throughout his professional 1977 to 2001 and from 2005 to of ABB, from 2012 until 2014. Background and experience Background and experience Alexander has extensive Andrey is a self-made Russian industry and a proven track life, Stefan has been involved 2013, he served in a number Prior to this, he was global CFO Between 2003 and 2018, Steve senior management experience, industrialist. Over the past 20 record of leadership and team in commodity trading and of senior executive positions at at ABB’s Power Systems Division served as a President for Koch Samir held senior management management. He has extensive The Dow Chemical Company, and earlier served as CFO at positions at Asea and ABB Power leading and advising various years, he has co-founded a risk-management activities, Ag & Energy Solutions LLC, organisations throughout his number of multi-billion-dollar experience of overseeing predominantly focused on including EVP and CFO. He also ABB Lummus Global. Juerg has one of nine Koch Industries Generation between 1983 and production processes and a served as CEO and Chairman of more than 30 years’ international 2000, before moving to Alstom. career. Between 1993 and 2001, businesses including fertilizer energy-related commodities business groups, focusing on the he worked at Dresdner Bank in producer EuroChem, coal strong background in productivity and non-ferrous metals. Stefan the Board of Dow Europe, Middle experience, including agriculture, fertilizer and energy There he served as Chief transformation, corporate finance East and Africa. He served on assignments in South Africa, International Operations Officer Frankfurt as First Vice President, producer SUEK and power began his career in 1981 at sectors. Prior to that, Steve led Oil & Gas Global Debt. Until generator SGC (now directly and commercial restructuring. Metallgesellschaft’s central Dow’s Board from 2005 to 2009, Hong Kong, the US and various aspects of Koch’s and Senior Vice-President, and was Lead Director of Dow Switzerland. He previously held as CEO of Alstom Kraftwerke in 2004, he was General Director owned by SUEK). These are Petter began his career as a controlling department agriculture and fertilizer of Accenture Russia and was among the biggest companies consultant with McKinsey & Co, in Frankfurt. While with Corning Corporation from 2005 key financial positions across businesses, holding the positions Germany. In 2003, he became to 2010, and was a Director on several countries and businesses. CEO of ABB Lummus Global. subsequently appointed as in the world in their industries. supporting energy, chemicals Metallgesellschaft, he worked in of EVP at Koch Fertilizer, VP at Global Gas Lead Partner. In the early 1990s, Andrey and materials companies in London, New York and Hamburg, the boards of the Chemical Koch International and Business He was appointed to the Group Financial Corporation and Qualifications Executive Committee of ABB Ltd Alexander currently serves co-founded MDM Bank, which Europe, the Middle East and where he served as CEO of the Development Manager at Chemical Bank from 2006 to Juerg holds a Master’s degree in in 2005, and served as Head of as Chairman of the Board of under his leadership became Africa. He advised on issues company’s non-ferrous metal Koch Agriculture. 2010. From 2001 to 2005, he was Economics from the University of the Power Systems Division at Directors and Nomination and one of Russia’s largest and ranging from M&A and corporate trading and brokerage subsidiary. Compensation Committee of most successful private banks. finance through to operational/ In 1992, he was hired by the EVP and CFO of Alcan. Geoffery St. Gallen, Switzerland. Qualifications ABB Group. From 2006 to 2016, also served as an Executive SUEK. He is a member of the In the 2000s, he exited MDM commercial improvement Swiss bank UBS to develop Steve holds a Bachelor’s degree Samir was CEO of Amec Foster Committee member of the Strategy Committee of SUEK Bank, while investing in already programmes and regulatory their commodity trading business. in Agriculture Economics from Wheeler. He is a Non-executive European Chemical Industry Director of Skandinaviska Enskilda and also serves on the Board privatised industries: fertilizers, strategies. He joined Yara Following the deregulation of Kansas State University. of Directors of Lambert Energy coal and steel pipes (which he International in 2010 as VP, Germany’s electricity market in Council (CEFIC) from 2009 to Banken and a member of the 2012. He brings more than 30 advisory board of Stena. Samir Advisory Ltd. (UK). He is exited in 2006 through an IPO). Product Management and 1999, he moved to German utility Chairman of the Board of Optimization, subsequently RWE. He helped to build RWE’s years’ experience in corporate serves as a UK Business Andrey is the main beneficiary governance and finance to Ambassador, and is co-chair Directors of The Mobility and a member of the Board of becoming SVP of Gas and global energy and commodity- House AG (Switzerland). Industrial Applications. He was trading and wholesale-supply EuroChem. He currently serves of both the UK-UAE CEO Forum Directors of EuroChem and on the boards of OC Oerlikon and the UK-Korea CEO Forum. Until September 2008, he SUEK. He also chairs the promoted to EVP Production, business over a period of 16 was Chairman of the Board where he managed 28 chemical years. He retired as the AG and Clariant AG and is also A member of the advisory board Strategy Committee at SUEK. Chairman and CEO of Zolenza of LIFE Lebanon and a member of Directors of the Siberian He sits on the Board of the production factories and four company’s CEO in February Generating Company (Russia). mines in 16 countries, before 2015. Stefan is a Non-executive AG, an investment and advisory of the advisory board of SOAS Russian Union of Industrialists firm based in Switzerland. University of London, Samir was and Entrepreneurs, where he being appointed EVP and CFO. Director of Trimet SE, the largest Qualifications aluminium producer in Germany, also the 2009 and 2016 chair of chairs the Mining Commission. A published author, he also Qualifications the World Economic Forum’s Alexander graduated from the founded Network Nine, a and its holding company. Geoffery holds a BA in Engineering and Construction Tbilisi State University (Hons) Qualifications development programme for Between June 2018 and October Economics from Albion College, Board. He served as chair of and has a PhD in Mathematics senior leaders. 2018, he was a member of Andrey studied Physics at Michigan, US. the Forum’s Disaster Resource from the Minsk Institute of the Lomonosov Moscow State EuroChem Board. Subsequently, Partnership and is currently Mathematics of the National University and graduated from Qualifications from November 2018 until June co-chair of the Forum’s Academy of Sciences of Belarus. the Plekhanov Russian Academy Petter holds a Master´s degree 2019, he was Chief Commercial Infrastructure & Urban of Economics with a degree in Finance from the Norwegian Officer and Deputy CEO of Development Industries in Finance. School of Economics and EuroChem. He currently chairs the Committee. Strategy Committee at EuroChem As at the date of this report, a Business Administration (NHH). and is a Director of AIM-Capital. company that holds business He has also completed a Qualifications He has also been a member of the interests beneficially for Andrey one-year qualification in SUEK Board since June 2015. Samir holds a Master of Science indirectly owns 100% of AIM History Studies at the degree in Thermal Technology University of Bergen. Capital S.E., registered in the Qualifications from the Royal Institute of Republic of Cyprus, which in Technology in Stockholm, turn owns 90% of the share Stefan holds a degree in Sweden. He received an Honorary capital of EuroСhem Group AG. Business Administration Doctorate from Cranfield The remaining 10% of the share from Frankfurt. University in the UK. He is a capital is held by the Group’s graduate of the Young Managers wholly owned subsidiary. Programme at INSEAD and the Senior Executive Programme at Stanford University.
72 www.eurochemgroup.com EuroChem 2019 Annual Report and Accounts 73 Corporate Governance Strategic Report Corporate Governance Financial Statements Best-in-class principles
The Board also ensures that EuroChem The EuroChem Board makes full use of Induction process of interest and sign up to the Group’s the Company. The Management The primary focus of adopts and maintains international each Director’s unique experience and Board Regulations. These require them to Board comprises key managers with On joining the Board, each new Director is standards and best practices. It monitors perspective, ensuring that each individual refrain from taking any action that could responsibility for daily operations, finance the Board is to steer, given a clear and comprehensive picture of the Group’s accounting function, its risk has ample opportunity to freely express lead to any conflict, with an obligation and accounting, fertilizer production, mining, the Group and its operations. This formal support and oversee management processes, internal controls their opinion. To fully understand the to inform the Chairman at the earliest oil and gas, sales and marketing, legal and induction process includes a series of and governance framework. Its activities business and operations, Directors have opportunity should such a situation arise. compliance and human resources. the Company’s strategic meetings with key managers from across are aligned with the principles set out the opportunity to undertake an annual the Group. It also requires a Director to At the end of 2019, four of the Board’s The Board is responsible for appointing development. EuroChem’s in the Articles of Association and the site visit to one of the Group’s facilities. become familiar with the regulations eight Directors were fully independent the CEO and Management Board and for Regulations of the Board of Directors. Alternatively, they may participate in relating to Board procedures and standing of the Company’s executives, affiliates determining the length of their terms. Board of Directors is separate deep-dive technical sessions Each member of the Board is expected items on the Board’s forward agenda. New and major counterparties. Their status and Q&A discussions with the CEO, responsible for the overall to have a good understanding of the Directors also have the opportunity to visit as ‘independent’ is confirmed after each Equal opportunities senior management team and facilities Group’s business and the industry in which EuroChem facilities to obtain a first-hand election or re-election to the Board, using stewardship of the Group. management experts attached to one We are committed to attracting the best it operates. Directors develop relationships understanding of the Group’s operations. a standard questionnaire relating to the of the Company’s facilities. people to EuroChem, with the right talent, It is accountable for with the management team, enabling them declaration of interests. The Non-executive Three new Directors joined the Board experience and attitude. We promote a to readily obtain information on key issues The agenda for Board meetings is planned Directors exercise independent, objective determining that the this year and undertook a comprehensive working environment that is free from as well as strategy implementation and a year in advance, taking into account judgement regarding Board decisions, and induction process, which included a discrimination, and treat colleagues risk management. the optimal cycle for reviewing recurrent scrutinise and challenge management. Group’s affairs are combination of presentations, seminars, equally, regardless of age, disability, issues such as budgets, financial reporting face-to-face meetings with management gender, ethnicity, marital status, conducted and managed Decision-making and strategies. The timing, expectations Leading by example and site visits. sexual orientation or religion. in such a way as to To fulfil its function, the Board receives and goals of these reviews are well The Chairman of the Board oversees EuroChem’s Board exhibits a mix of up-to-date, comprehensive information understood by the Directors and the Directors’ independence and steers its deliberations, ensuring experience, age and nationality. We achieve this objective. in a timely manner. Directors receive management team alike. They include its effectiveness by enabling open We apply the UK Corporate Governance continue to look at ways of achieving occasional updates in addition to materials detailed updates on core operational communications and cultivating an The Board’s mission is Code’s definition of ‘independent’ Director. greater female representation in senior prepared for scheduled quarterly meetings. areas, investment projects and strategy. atmosphere of mutual respect and A key criterion is that the individual is free roles, including at Board level. Our to ensure there is a solid These include management accounts, HSE constructive debate. The Chairman’s from any conflicts of interest. Should education programmes help identify updates and media coverage summaries, Effectiveness specific responsibilities are set out in and consistent strategy actual or potential conflicts arise, talented, motivated young individuals as well as details of corporate events, At its meetings towards the end of the the Board Regulations. independent Directors are notified within EuroChem and play a significant role for the business, enabling strategic investment projects and any year, the Board reviews its activities over and required to act appropriately. The Board establishes the Company’s in our drive to provide new opportunities legal proceedings. the previous 12 months and discusses EuroChem to achieve its strategy, monitors its progress and holds for women and prepare them for leadership how it can improve its overall performance. All Directors are required to inform The management team advises Directors the Management Board accountable for its roles within the Group. We take an During the most recent assessment, the Company of any events that could business goals and deliver of all significant corporate events at the execution. The CEO and members of the integrated approach to training and there was a renewed focus on improving compromise their independent status. earliest opportunity. This communication Management Board are responsible for the professional development for all categories long-term sustainable corporate governance, defining the New Directors must declare any conflicts process, which is defined in a policy and day-to-day management and operation of of employee at all our plants, from workers Board’s roles more clearly and enabling shareholder and associated procedures, enables the and specialists to the most senior levels richer Board engagement in strategic Board to make balanced and informed of management. stakeholder value. planning and forward-looking activities. assessments of the Company’s The Board’s emphasis was also on The Board of Directors may delegate the preparation and execution of its decisions to performance, position and prospects. Corporate governance achieving closer cooperation with the committees or to its individual members. The Board of Directors has appointed three management team to focus boardroom standing committees: the Strategy Committee, the Audit Committee, and the Nomination and compliance discussion more tightly on strategy and and Remuneration Committee. EuroChem is subject to the laws of overall value creation. Switzerland. We apply the Swiss Code of Competency matrix of the EuroChem Board The Board delegates certain responsibilities to its three Committees best practice for Corporate Governance, Competency/attribute Melnichenko A. Landia A. Judisch S. Merszei G. Seiler J. Brikho S. Packebush S. Østbø P. Committee Principal function as well as the principles recommended Operating by the UK Corporate Governance Code. Audit Oversees the reliability and integrity of financial reporting, accounting EuroChem is committed to robust Committee policies and disclosure practices. Reviews the adequacy and corporate governance through compliance Financial effectiveness of the management reporting and control systems with all applicable laws, rules and to manage risks and ensure compliance. regulations wherever it operates. Risk/Crisis Management Strategy Makes recommendations on the Group’s strategic direction, evaluates Committee strategies regarding growth opportunities, sales & marketing and We strive to uphold the highest ethical standards across all our activities, in Chemical/Commodity operations. Assesses new business proposals including acquisitions/ line with EuroChem’s values, goals Industry joint ventures. Together with the Nomination and Remuneration Committee, it oversees the Company’s corporate reputation and and objectives. The Board and senior Agriculture/Food its social and HSE-related strategic goals. management of the Group drive the Industry corporate culture and set the ‘tone at Nomination Focuses on remuneration and incentive programmes. Considers Oil & Gas/Power the top’, both of which are underpinned and succession planning for Directors and other senior executives with Industry by our Code of Conduct. New Directors Remuneration a view to the challenges and opportunities facing the Company and and all employees receive a copy of the Sales & Marketing the skills and expertise the Board will need in future. It places a strong Committee Code during their induction process. All emphasis on HSE performance and oversees compliance with relevant employees are responsible for respecting laws and regulations. Scientific/Information applicable laws and following the Technology principles of our Code of Conduct FURTHER DETAILS ON THE GROUP’S BOARD AND COMMITTEES and associated Compliance Policies. ARE AVAILABLE IN THE CORPORATE GOVERNANCE SECTION OF EUROCHEM’S CORPORATE WEBSITE AT WWW.EUROCHEMGROUP.COM The Code is accessible via the Corporate
74 www.eurochemgroup.com EuroChem 2019 Annual Report and Accounts 75 Corporate Governance – continued Strategic Report Corporate Governance Financial Statements
Governance section of the Company’s Our approach to governance The following key documents Share capital website at www.eurochemgroup.com. Board priorities define EuroChem’s approach to EuroChem’s corporate governance system As at December 31, 2019 and December 31, 2018, the nominal registered amount of The Board’s principal activities include: corporate governance: We promote the Group’s ‘zero tolerance to is based on the following principles: the Company’s issued share capital in Swiss francs (‘CHF’) was CHF 100. The total non-compliance’ culture. This encourages • Articles of Association; authorised number of ordinary shares is 1,000 shares with a par value of CHF 100 • treating our shareholders fairly; • developing and setting the Group’s dialogue and openness, including through • Code of Conduct; per share. • recognising and protecting their rights; overall strategy the established Whistleblower system. • Regulations on the Board of Directors; This enables colleagues to report potential • operating an effective system of internal EuroChem Group AG shareholders • overseeing the Group borrowings and • Organisational Regulations; problems, anonymously if they prefer. control and audit; treasury policy As at 31.12.2019 As at 31.12.2018 • ensuring access to the Company’s • Audit Committee Regulations; Shares No. Share capital % Shares No. Share capital % The Group’s geographical expansion, information, and financial transparency; • Nomination and Remuneration together with increasingly onerous • reviewing and deciding on material • applying the highest levels of business Committee Regulations; AIM Capital SE 900 90 900 90 regulatory requirements, necessitates a acquisitions, contracts, major capital ethics; and • Strategy Committee Regulations. MCC EuroChem JSC 100 10 – – robust monitoring system. Early warning expenditure projects and budgets Midstream Group Limited 100 10 of any changes in relevant legislation is • providing an excellent working (supported by the Strategy Committee); The legal and environment, career progression and also essential to the Group’s planning regulatory environment and compliance activities. We continued to effective communication mechanisms • overseeing risk management and Board composition for employees. internal controls (supported by strengthen the Group Compliance Function The EuroСhem Group comprises the At the start of 2019, the Board comprised eight directors: Alexander Landia (Chairman), the Audit Committee); parent entity, EuroСhem Group AG, and in 2019, revising and updating existing Governance structure Andrey Melnichenko, Geoffery Merszei, Juerg Seiler, Sergey Vasnetsov, Clark Bailey, policies as required on a continuing basis. its subsidiaries (collectively the ‘Group’ Samir Brikho and Dmitry Strezhnev. We maintain the Group Compliance EuroChem’s highest-ranking corporate • reviewing and deciding on succession or ‘EuroChem Group’). The Company was Programme through the ongoing education governance body is the General Meeting of planning and appointments incorporated under the laws of Switzerland At the extraordinary General Meeting of Shareholders held on June 21, 2019, the and training of our employees on our Code Shareholders (GM). The Board of Directors (supported by the Nomination on 17 July 2014 and has its registered following members were elected to the Board: Alexander Landia (Chairman), Andrey of Conduct and compliance policies. New is elected by – and reports directly to – the and Remuneration Committee); office at Baarerstrasse 37, 6300, Zug, Melnichenko, Samir Brikho, Stefan Judisch, Geoffery Merszei, Juerg Seiler, Petter Østbø employees receive compliance training as GM. The Board of Directors appoints the Switzerland. and Steve Packebush. • overseeing corporate governance and part of their onboarding, and the Group Chief Executive Officer (CEO) and the compliance issues (supported by the We have introduced the principles As of December 31, 2019, EuroChem’s multi-national Board of Directors comprised eight Compliance function provides refresher Management Board, and determines the Audit Committee); recommended by the UK Corporate directors, as presented on pages 72-73 of this report, with their diverse competencies length of their mandates. The CEO and training and updates for existing Governance Code and apply recognised and experience presented on page 74. employees. This year we also launched a Management Board report directly to the • reviewing and endorsing international best practice, including: Compliance E-learning platform across the Board of Directors, which is represented corporate policies. Board committees and attendance Group, which delivers customised online by the Chairman. • the positions of Chairman of the Board training to provide our employees with of Directors and Chief Executive Officer In 2019, the Board held 6 meetings in person and 11 in absentia. The Board works to a forward agenda. the tools and knowledge needed to are separate; This is updated annually and considers Committee attendance build a culture of compliance. Board Directors are elected and Board attendance (meetings and teleconferences) all issues that are referred to it by the law, • the Board’s performance is Attended/held In Nomination and EuroChem recognises its ethical the Company’s Articles of Association assessed annually; Director in 2019 In person absentia Audit Remuneration Strategy and regulatory responsibilities to act in and Regulations on the Board of Directors. Non-executive Directors accordance with applicable anti-bribery The Board receives the final draft of the • the Board has a majority of independent and anti-corruption laws and regulations agenda in advance at the end of each and non-executive Directors; Andrey Melnichenko 17/17 6/6 11/11 – 2/5 6/6 in all our global locations. The Company is year, to suggest any modifications • the independence of individual members Alexander Landia 17/17 6/6 11/11 1/8 4/5 6/6 committed to a zero tolerance policy and before final approval. is verified by the Board annually; and Petter Østbø1 11/17 4/6 7/11 1/8 3/5 4/6 will not tolerate any acts, attempted acts • individual Board members avoid 3 The meeting schedule for the year includes Stefan Judisch 9/17 3/6 6/11 4/8 4/5 6/6 or assistance with any form of bribery or potential conflicts of interests six joint-presence meetings covering corruption, whether direct or indirect. In when making decisions. Independent Directors issues that require substantive discussion. our Anti-Corruption Policy, we give our The Board also holds supplementary Samir Brikho 15/17 4/6 11/11 – 5/5 6/6 employees and other stakeholders with Shareholder structure meetings to address any significant Geoffery Merszei 16/17 5/6 11/11 8/8 – 6/6 whom EuroChem has a relationship clear matters that may arise during the year. As at December 31, 2019, AIM Capital S.E. Juerg Seiler 17/17 6/6 11/11 8/8 – 6/6 guidance on our Anti-Corruption values These are held either by teleconference or, owned 90 percent (December 31, 2018: 90 2 and our commitment to upholding them. Steve Packebush 14/17 5/6 9/11 5/8 3/5 3/6 for procedural issues, by absentee voting. percent) of the share capital of EuroСhem One of the key messages running The Board also participates in workshop- Group AG. The remaining 10 percent was 1. Petter Østbø joined the Board in June 2019 through our guidance on anti-bribery style sessions to discuss key points in the held by the Group’s wholly owned 2. Steve Packebush joined the Board in March 2019 3. Stefan Judisch was re-elected to the Board in July 2019 and corruption procedures relates to processes with management. subsidiary (December 31, 2018: 10 percent our top-level commitment. Management of the Company was held indirectly by The Company’s Legal & Compliance Board Changes in 2019 has the ultimate responsibility both for Dmitry Strezhnev). Function oversees the preparations for ensuring that our Anti-Corruption Policy is Steve Packebush joined the Board in March 2019. The same month Clark Bailey left the the Board and Committee meetings. The effectively communicated to all employees, Board to take over as Head of the Mining Division. agenda is prepared in conjunction with the and for demonstrating that adequate Chairman, the CEO and the Company’s Dmitry Strezhnev, who served as CEO and Board Member for more than 15 years, systems and controls are designed and Corporate Secretary. Materials are stepped down from the Board in May 2019 after deciding to focus on other business operate effectively. Management is also distributed to the Board and Committee ventures outside EuroChem. responsible for ensuring that all employees members in advance by email and receive sufficient and adequate training. Petter Østbø was elected to the Board and joined the company as Chief Executive uploaded to the Board’s Portal. We monitor compliance with this Policy Officer on June 1, 2019. and associated procedures on a regular Stefan Judisch was re-elected to the Board in July 2019 after serving as Deputy CEO, basis, and our Compliance function takes Chief Commercial Officer. any necessary action to prevent breaches.
76 www.eurochemgroup.com EuroChem 2019 Annual Report and Accounts 77 Corporate Governance – continued Strategic Report Corporate Governance Financial Statements
Board Changes in 2020 The ‘EuroChem Business System’ Risks and internal control Board assessment Directors’ remuneration Samir Brikho was appointed as Chairman EuroChem will learn from the ideas The Group maintains an effective system The Board assesses its own performance Matters concerning Directors’ of the Board of Directors as of January 01, everyone has and share best practices of risk oversight, risk management and on a regular basis. In June 2019, Directors remuneration are referred to the General 2020. Mr Brikho replaces Alexander Landia, from inside and outside the business. The internal control. Like all international conducted an annual appraisal exercise Meeting of Shareholders. The Board who is leaving the Board after more than Company will rationalise these new ways companies, EuroChem faces many to measure their own performance by Member Remuneration Regulations allow six years’ service but continues in other of working into the ‘EuroChem Business business risks that it needs to handle completing a Board Self-Assessment the payment of additional remuneration to roles within AIM Capital SE group, the System’ – a systematic way of working in the course of its ongoing business. Questionnaire, followed by interviews Board members by resolution of either the holding company of EuroChem Group AG. for all functions and production units that It addresses many of the more pressing with the Chairman. The Questionnaire General Meeting of Shareholders or the will help EuroChem become safer, more risks through its annual risk-assessment is designed to provide Directors with an Board of Directors. Unless a Director is Michael Hogan, who has more than 32 productive and continuously improving process. The Board reviews the policies opportunity to examine how well the Board performing an individual assignment, years’ experience in the mining industry to stay ahead of the competition. and procedures relating to risk oversight is operating and to make suggestions for remuneration is fixed and adjusted and previously worked for Potash Corp, EuroChem has an and management on an annual basis improvement. The questionnaire primarily according to Committee membership, joined the Board of Directors in 2020. A learning organisation via the Audit Committee. In 2019, the covered governance and the Board agenda, Chairmanship and Curatorship. As set To succeed, EuroChem needs to combine excellent compliance Board received an overview of the 2020 the Board’s role in the Company’s out in the Board Member Remuneration 2019 Board agenda its performance focus with organisational risk-assessment process and changes to strategy, the performance of the Board Regulations, only non-executive Directors Key agenda items discussed by the Board health. The aim is to differentiate EuroChem system that is in the Group risk map compared with the and senior management, succession are entitled to remuneration. previous year. All divisions and Group planning, and the relationship and of Directors during the year included: by becoming a ‘leadership engine’, making The total amount of remuneration paid line with legislative functions participated in risk-assessment information flow between the Board leaders of everyone at every level of the to Directors for their contribution in 2019 Health, Safety interviews, conducted jointly by the and management team. organisation. The Company will attract, requirements and amounted to US$2.1 million, including Internal Audit and Risk Management and Environment (HSE) develop and retain the best talent from While the Board continues to perform US$751,000 in compensation for Functions. For more information on the chemical industry and beyond. oversees business effectively with good leadership and work-related expenses. EuroChem’s first priority is to improve the Risks, please refer to page 66. safety of its employees by strengthening competent and engaged members, a EuroChem is already a strong brand ethics norms. Our 2019 2018 the safety culture at every level of the for potential employees, supported by Appointments and incentives number of focus areas in both in-year US$k US$k Company. The Board is regularly updated best practice processes from recruitment performance and strategy for the future objective is to keep One of the Board’s principal objectives is Total remuneration 1,362 1,459 on the HSE status at all Group companies. and onboarding, through succession were identified. The focus in 2020 will to ensure continuity of strong leadership. paid to the members planning and performance management to improving our strong therefore be on the Board’s greater The 2019 HSE assessment reflected The Board oversees the appointment of of the Board compensation and benefits. The Company involvement in forward-looking strategic notable progress compared to the Directors and key managers and reviews Total compensation 751 1,226 will continue to develop its learning internal legal culture matters, reviewing and reinforcing 2018 review. The strong commitment and their performance and compensation. for work-related strategy, embedding a skills matrix that appropriate Board and management roles. communication from the CEO making HSE by adhering to best expenses a top priority going forward, combined with includes functional and leadership skills In 2019, the Board approved several An assessment of the Board Chairman a set of new KPIs regarding health and and an articulation of what is expected practice. new appointments and departures of key was also carried out by a survey of Board The Company does not have a long-term safety, serve as a solid base to accelerate from our employees. The Company will Group personnel. members in 2019. The results showed incentive programme (stock options plan). also provide learning and coaching the programme’s development. For more Dmitry Strezhnev stepped down from the that the Chairman’s performance had Liability insurance costs for the Board of resources to help deliver against information on HSE, please refer to page 58. Board in May after serving more than 15 been highly effective. The Board members’ Directors and Management Board are paid this expectation. years as CEO and Board member. Petter individual assessments were reviewed by the Group. Strategic development Axel Thorsdal Østbø was appointed as Chief Executive and curators were re-appointed for a Financial stability CHIEF LEGAL AND number of primary areas, including sales EuroChem has successfully delivered Officer, effective June 1, 2019. and investment control COMPLIANCE OFFICER management, supply chain management against previous strategy targets, enabling Stefan Judisch was re-elected to the and corporate strategy development. it to become a leading diversified fertilizer The Board monitored the Group’s 2019 Board in July after serving as Chief producer with an international footprint. financial planning and approved its Commercial Officer and Deputy CEO In 2019, the Board carried out an analysis In June 2019, the Board directed the consolidated budget for 2020. It also of EuroChem from November 2018 until for the first time to assess, based on the management team to develop the regularly reviewed the Company’s June 2019. The CCO position was taken Board agenda for the past three years, ‘EuroChem 2025’ strategy to define performance (including management by Charlie Bendaña in July 2019. whether Boardroom discussions were the next frontier of business development. accounts, flash reports and CEO’s reports). effective and had the right focus. The This was presented by the CEO in October To ensure the Group is financed to support Axel Thorsdal joined the Group as Chief results obtained will help to adjust the 2019, restating EuroChem’s mission and current operations, repayment of loans Legal & Compliance Officer in September focus of future discussions and facilitate vision and key strategic targets. For more and other corporate business, the Board 2019. Oleg Shiryaev was appointed as well-structured meetings. information on the Strategy please refer approved a number of key financing Head of the Mining Division to replace to page 22. transactions during the year. Clark Bailey in November 2019. EuroChem aims gradually to expand its sales, logistics and trading capabilities to support production growth. EuroChem will focus on ramping up the Usolskiy and VolgaKaliy sites to full phase-one capacity, and then consider expanding both assets into their second phase.
78 www.eurochemgroup.com EuroChem 2019 Annual Report and Accounts 79 Corporate Governance – continued Strategic Report Corporate Governance Financial Statements Audit Committee
The Audit Committee oversees the quality of EuroChem’s financial and sustainability 2019 Audit reporting and the integrity of its information disclosure. The Committee ensures the Audit Committee activity in 2019 adequacy of the Company’s compliance activities, including risk management. It also External auditor • Monitoring the performance of the Group’s external auditor Committee oversees the Company’s relationship with its external auditor and directs and monitors and its independence status meetings the performance of the Internal Audit Function. • Reviewing the annual plans of the external auditor for 2019, and overseeing the auditor’s work throughout the year, The Audit Committee’s role, responsibilities, composition and membership requirements including an assessment of its effectiveness are documented in the Committee Regulations approved by the Board and available in • Approving the annual fee for audit services and overseeing the Corporate Governance section of our website. compliance with the policy for non-audit services • Holding regular private meetings with the external auditor 8 Key priorities for 2020 Geoffery Merszei Key priorities Overview of activity Financial reporting • Reviewing and making recommendations to the Board for CHAIRMAN OF THE AUDIT and budgeting approval of the annual audited consolidated financial statements COMMITTEE Oversee internal processes, including • Regularly reviewing the internal • Approving half-year unaudited consolidated financial statements those related to IT, risk management and controls, including IT and financial • Monitoring the evolution of accounting standards and expected our corporate risk culture reporting controls relevant changes in legislation • Monitoring the risk-assessment process Committee members • Reviewing significant accounting, financial reporting and and risk matrix, the implementation of other issues raised by management and internal and mitigation action plans and related Chairman – Geoffery Merszei (IND) external auditors Internal Audit reports • Monitoring and assessing the budgeting process and annual Juerg Seiler (IND) budget for 2020 Oversee further strengthening of the • Continuous analysis of the results, • Reviewing and challenging reports from the Group CEO and Stefan Judisch (NED) Compliance Function findings and improvement areas under CFO, overseeing the development of the Board reporting the current Compliance Function development plan Risk management • Reviewing the Group’s risk map, risk management framework FOR THE 2019 ATTENDANCE • Overseeing the development of the and internal control and strategy SEE TABLE ON PAGE 77 updated compliance programme with • Reviewing existing internal controls and their efficiency key development areas • Assessing the Group’s insurance policy and directors’ and • Updates on compliance with officers’ liability insurance (D&O) sanctions and developments in • Monitoring compliance issues on a regular basis including tax, the related legislation credit controls, data storage and security compliance, as well as compliance training and communication procedures Further promote Internal Audit, • Monitoring Internal Audit effectiveness, • Overseeing the development of the overall Compliance strengthening and elevating its focusing on improving the implementation programme. Reviewing the maturity level assessment of image within the Group rate of corrective actions the Group’s Compliance Function • Regularly reviewing Internal Audit reports Reviewing the Group’s tax-planning activities to ensure they are actionable and • Analysing the Group’s hedging approach recommendations/improvements • Monitoring regular reports on material fraud cases and are properly implemented • major litigations • Holding regular private meetings with the Head of Internal Audit Internal Audit • Reviewing the performance and effectiveness of the Internal Audit function • Approving the Internal Audit plan and budget for 2020 2019 Audit Committee meetings and attendance • Assessing the independence of the Internal Audit Function and As at December 31, 2019, the Audit Committee had three members: Committee the adequacy of its resources and funds Chairman Geoffery Merszei (IND), Juerg Seiler (IND) and Stefan Judisch (NED). • Considering key findings of Internal Audit reviews and management’s response to these In 2019, the Committee held a total of eight meetings, six in person and two in the form Holding regular private meetings with the Head of Internal Audit of conference calls. • The CFO, the Chief Legal and Compliance Officer, as well as senior representatives from Information • Reviewing the quality and integrity of financial and PwC and Internal Audit, attended every scheduled meeting of the Audit Committee disclosure non-financial data, including the 2018 Annual Report throughout the period. and financial press releases published during the period • Monitoring and endorsing the risk management and corporate governance sections of the 2018 Annual Report • Discussing the Company’s financial and operating results with management and the external auditor prior to filing the Annual Report
80 www.eurochemgroup.com EuroChem 2019 Annual Report and Accounts 81 Corporate Governance – continued Strategic Report Corporate Governance Financial Statements Strategy Committee
The Committee’s principal role is to protect the interests of EuroChem’s shareholders by Strategy Committee activity in 2019 2019 Strategy monitoring the Group’s strategic development. The Committee considers the strategic Committee plans of the Group’s business divisions, major investment projects, M&A transactions Strategy and • Guiding the strategic planning process, overseeing the and project management. It prepares required recommendations that fall within the terms development development of the Group Corporate Strategy for 2025 meetings of reference of the Board of Directors and are delegated by the Board to the Committee. • Reviewing the Commercial Division’s economic model and the Group’s five-year Sales Strategy 2019 Strategy Committee meetings and attendance • Reviewing the refreshed Group Safety Strategy As at December 31, 2019, the Committee had five members: Committee Chairman Stefan (with the Nomination and Remuneration Committee) Judisch (NED), Andrey Melnichenko (NED), Alexander Landia (NED), Steve Packebush • Holding a strategic and technical session dedicated to Kovdorsky GOK 6 (IND) and Samir Brikho (IND). • Reviewing logistics projects, including an optimal routeing Stefan Judisch The CEO, CFO, Divisional Heads and the Head of Strategy and Investment regularly CHAIRMAN OF THE STRATEGY strategy for transhipping our own-produced products COMMITTEE attend meetings by invitation of the Chairman. Investment activity • Assessing new strategic initiatives and those supporting The Strategy Committee’s role, responsibilities, composition and membership and strategic projects existing facilities requirements are documented in the Committee Regulations approved by the Board. • Reviewing M&A initiatives and the potential disposal of Committee members They are available to view in the Corporate Governance section of our website. non-core assets • Regularly reviewing progress reports and plans for further Chairman – Stefan Judisch (NED) Key priorities for 2020 action on strategic projects, including deep dives into development plans for our Mining assets Andrey Melnichenko (NED) Key priorities Overview of activity • Monitoring existing business units, products and solutions, Focus on the formulation and delivery of • Review and approve the strategies and Alexander Landia (NED) including underperforming assets and operations development strategies and action plans action plans of individual divisions and Steve Packebush (IND) for individual divisions and functions in corporate functions Financing and • Reviewing the 2019 consolidated budget and progress line with the Group’s updated budgeting on execution Samir Brikho (IND) Corporate Strategy • Assessing the 2020 budget • Reviewing updated macro-economic parameters for 2020 Engage in developing the most • Continue monitoring trends and • Assessing proposals for significant transactions FOR THE 2019 ATTENDANCE appropriate strategic direction economic signals with potential SEE TABLE ON PAGE 77 and business responses amid impacts on the business ongoing uncertainty • Discuss and oversee planning for various economic scenarios and outcomes • Oversee the proper allocation of capital and other resources
Oversee the development of the • Review the outcomes of the improvement operational improvement project and project, phase-by-phase its formulation within the framework of • Identify opportunities and design the new EuroChem Business System business services and systems • Consider options and promote the benefits of transformation
Oversee the development of key • Continue to track and oversee the strategic projects development of key strategic projects
82 www.eurochemgroup.com EuroChem 2019 Annual Report and Accounts 83 Corporate Governance – continued Strategic Report Corporate Governance Financial Statements Nomination and Remuneration Committee
The Committee assists the Board in fulfilling its corporate governance responsibilities 2019 Nomination relating to remuneration and nomination matters. It focuses on the Company’s overall Nomination and Remuneration Committee remuneration and incentive framework, remuneration packages for senior executives, activity in 2019 and Remuneration strategic human resources policies, Board appointments, re-elections and performance, Corporate • Ensuring regular collaboration with executive bodies and the Committee Directors’ induction programmes and the continuing development and endorsement of governance HR Function through business meetings and joint sessions on meetings senior executives’ appointments as well as succession planning for management roles. the Committee’s operational issues The CEO and Head of HR are invited to attend meetings of the Committee. • Reviewing existing policies and making proposals for changes to the Board (regarding the Articles of Association and The Nomination and Remuneration Committee’s role, responsibilities, composition and Organisational Regulations) membership requirements are documented in the Committee Regulations approved by • Assessing Board performance, evaluating Board composition Andrey Melnichenko the Board. They are available to view in the Corporate Governance section of our with a focus on skills/diversity and re-distributing tasks among 5 CHAIRMAN OF THE NOMINATION corporate website. Board members AND REMUNERATION COMMITTEE • Overseeing the restructuring of the Commercial and Mining Key priorities for 2020 Divisions and reviewing the Group’s organisational structure Key priorities Overview of activity • Reviewing the Corporate governance structure HSE performance • Regularly reviewing HSE performance at Group companies Committee members Continue to enhance the Group • Reviewing the updated HR Strategy and HR Function cascading down to individual divisional • Overseeing the development of the refreshed Safety Strategy • Overseeing the introduction of new Safety KPIs (TRIFR and Chairman – Andrey Melnichenko and functional action items LOPC), as well as safety walks and reporting near-misses and (NED) • Monitoring initiatives to develop the HR function, including enhancing the hazardous conditions Alexander Landia (NED) recruitment, talent management and Personnel strategy • Endorsing the HR Budget for 2020 internal communication functions Samir Brikho (IND) and policy • Reviewing 2020 targets for key personnel, evaluating delivery • Assessing further development of of individual targets by key personnel in 2019 and providing Steve Packebush (IND) grading and norming projects recommendations to the Board Maintain focus on strengthening the • Overseeing HSE processes and the • Overseeing the Job Evaluation (grading) project Reviewing the results of the engagement survey HSE Function implementation of refreshed HSE • strategies and development programmes Appointments and Endorsing appointments and incentives for key personnel, and FOR THE 2019 ATTENDANCE • SEE TABLE ON PAGE 77 • Reviewing the effectiveness of the HSE incentives agreeing dismissal and terms of termination contracts with them Function and overseeing the • Reviewing and endorsing the payment of incentives under LTIP development of HSE leadership competency and relevant training Nomination and Remuneration Committee meetings Continue to focus on developing solutions • Identifying critical roles and skill pools and attendance Overseeing projects on to meet succession planning, leadership • As at December 31, 2019, the Committee had four members: Committee Chairman building employee capabilities and talent needs Andrey Melnichenko (NED), Alexander Landia (NED), Samir Brikho (IND) and Steve and developing career paths Packebush (IND). and succession programmes • Developing the talent pipeline, talent management and communication • Overseeing improvement of employee engagement, and shaping and creating the Group’s leadership model
Maintain focus on better aligning the • Developing a well-defined set of KPIs incentive system with strategy tied to specific targets within the strategic plan
84 www.eurochemgroup.com EuroChem 2019 Annual Report and Accounts 85 Strategic Report Corporate Governance Financial Statements Independent Auditors’ Report Report of the statutory auditor to the General Meeting of EuroChem Group AG, Zug
Report on the audit of the consolidated financial statements Opinion Financial Statements We have audited the consolidated financial statements of EuroChem Group AG and its subsidiaries (the Group), which comprise the consolidated statement of financial position as at 31 December 2019 and the consolidated statement of profit or loss, consolidated statement of comprehensive income, consolidated statement of cash flows and consolidated statement of changes in equity for the year then ended, and notes to the consolidated financial statements, including a summary of significant accounting policies. In our opinion, the accompanying consolidated financial statements give a true and fair view of the consolidated financial position of the Group as at 31 December 2019 and its consolidated financial performance and its consolidated cash flows for the year then ended in accordance with the International Financial Reporting Standards (IFRS) and comply with Swiss law. Basis for opinion We conducted our audit in accordance with Swiss law, International Standards on Auditing (ISAs) and Swiss Auditing Standards. Our responsibilities under those provisions and standards are further described in the “Auditor’s responsibilities for the audit of the consolidated financial statements” section of our report. We are independent of the Group in accordance with the provisions of Swiss law and the requirements of the Swiss audit profession, as well as the IESBA Code of Ethics for Professional Accountants, and we have fulfilled our other ethical responsibilities in ccordancea with these requirements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion. Our audit approach
Overview Overall Group materiality: USD 62’000’000 • We conducted a full scope audit at 11 significant reporting units audited by component teams Materiality in 6 countries. • In addition, we performed an audit of significant financial statement line items of 6 reporting units, with the involvement of component teams in 2 countries. Audit scope • Our audit scope addressed 85% of the Group’s total revenue and 85% of the Group’s total assets. Key audit As key audit matter the following area of focus has been identified: matters • Impairment assessment of the potash mine project, Gremyachinskoe in the Volgograd region (the “Potash mine project”), and related mineral rights.
Materiality The scope of our audit was influenced by our application of materiality. Our audit opinion aims to provide reasonable assurance that the consolidated financial statements are free from material misstatement. Misstatements may arise due to fraud or error. They are considered material if, individually or in aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of the consolidated financial statements. 87 Independent Auditors’ Report Based on our professional judgement, we determined certain quantitative thresholds for materiality, including the overall Group 92 Consolidated Statement of Financial Position materiality for the consolidated financial statements as a whole as set out in the table below. These, together with qualitative considerations, helped us to determine the scope of our audit and the nature, timing and extent of our audit procedures and to 93 Consolidated Statement evaluate the effect of misstatements, both individually and in aggregate, on the consolidated financial statements as a whole. of Profit or Loss 94 Consolidated Statement Overall Group materiality USD 62’000’000 of Comprehensive Income How we determined it 5% of profit before tax 95 Consolidated Statement Rationale for the materiality We chose profit before tax as the benchmark because, in our view, it is the benchmark against which of Cash Flows benchmark applied the performance of the Group is most commonly measured, and it is a generally accepted benchmark. 96 Consolidated Statement of Changes in Equity 97 Notes to the Consolidated Financial Statements
86 www.eurochemgroup.com EuroChem 2019 Annual Report and Accounts 87 Strategic Report Corporate Governance Financial Statements Independent Auditors’ Report – continued Report of the statutory auditor to the General Meeting of EuroChem Group AG, Zug
Audit scope Impairment assessment of potash mine project and related mineral rights We tailored the scope of our audit in order to perform sufficient work to enable us to provide an opinion on the consolidated financial Key audit matter How our audit addressed the key audit matter statements as a whole, taking into account the structure of the Group, the accounting processes and controls, and the industry in which the Group operates. As at 31 December 2019, the carrying amount of We obtained the valuation model for Potash mine project (discounted cash non-current assets (property, plant and equipment, flow model) used by management to determine the recoverable amount of As part of designing our audit, we determined materiality and assessed the risks of material misstatement in the consolidated financial construction in progress and mineral rights) related the relevant assets. We engaged our internal valuation experts to assist us statements. In particular, we considered where subjective judgements were made by management; for example, in respect of significant to potash mine project, Gremyachinskoe in the in evaluating the methodology and assumptions used in the impairment accounting estimates that involved making assumptions and considering future events that are inherently uncertain. We also addressed Volgograd region (the “Potash mine project”), assessment described below. the risk of management override of internal controls, including among other matters consideration of whether there was evidence of is US$ 1,949 million, including mineral rights Our audit procedures related to management’s assessment of non-current bias that represented a risk of material misstatement due to fraud. of US$ 73 million. assets impairment of Potash mine project and related mineral rights included: The Group’s consolidated financial statements are prepared based on the financial information of its components, i.e. individual We continued to focus on the impairment • analysis of the methodology used by management for the impairment test; companies of the Group, and represent a consolidation of over 80 companies in over 20 countries comprising the Group’s operating assessment of the Potash mine project and related business and head office functions. mineral rights due to the significance of these assets • examination of the mathematical accuracy of the valuation model for Potash mine project; For the purpose of the Group audit, the significance of components was assessed based on the component’s individual share to the consolidated financial statements (about 21% • assessment of key assumptions such as macroeconomic forecasts: (more than 10%) of the Group’s revenue, expenses, total assets or total liabilities. If we considered a component to be significant, of total non-current assets at 31 December 2019) inflation rates, foreign exchange rates, future market potash prices, and we performed a full scope audit, which involved an audit of its financial information based on the materiality level determined for the and the subjective nature of judgements and ass those specific to the Group: capital investments, sales volumes and discount component in the context of the Group audit. In certain cases, when additional audit evidence for the purpose of expressing our opinion umptions that management are required to make in rate (weighted average cost of capital (WACC)) applied and whether these on the consolidated financial statements was required, we performed audit procedures for individual financial statement line items determining whether there are impairment indicators are in line with the approved budget and strategy – the Group’s Potash and types of transactions on selected components of the Group. We selected these components for audit procedures on individual and in performing an impairment assessment, which Strategy for 2019-2023, external available and reliable sources (including balances and types of transactions separately for each financial statement line item included in the scope of our audit, considering are affected by the projected future market and macroeconomic forecasts); the level of audit evidence obtained from the audit of the financial information of significant components. economic terms that are inherently uncertain. • consideration of the accuracy of the budgeting process by comparing, on a Management considered the long-term development In the audit process, the group engagement team worked closely with component audit teams in Germany, Belgium, Russian sample basis and with the benefit of hindsight, the budgets used in prior-year period, requirements for timely completion of Federation, United States of America, Brazil and Lithuania. As part of providing direction and supervision over the work of the valuation models with the actual results of the current year; project, possible delays in reaching full production component auditors, we determined the nature and extent of the audit procedures for components of the Group to ensure that • re-performance of sensitivity analysis around the key assumptions such as capacity and license compliance as potential we performed enough work to be able to give an opinion on the consolidated financial statements as a whole. future market potash prices, discount rate, sales volume, capital investments, impairment indicators as at 31 October 2019 foreign exchange rates and inflation rates to ascertain the extent of change in For the purpose of our audit procedures over certain complex and specific areas, we also engaged specialists in taxation, IFRS and therefore proceeded with a full impairment those assumptions that either individually or collectively would be required application, as well as experts in the valuation of non-current assets. assessment of these assets. for the non-current assets and mineral rights to be impaired; Overall, audit procedures performed at the level of significant components and other components of the Group, including testing of Under the impairment assessment, management • obtaining management’s and Board of Directors’ written representations selected controls, detailed testing, analytical procedures and procedures on the consolidation provided us with a coverage of 85% updated value in use model based on discounted related to the impairment test including their position in relation to the of the Group’s total revenue and 85% of the Group’s total assets. cash flows (DCF). The Group’s management partial water inflow and its effect for the overall development of the performed analysis of the business performance, By performing the procedures at components, combined with additional procedures at the Group level, we have obtained sufficient Potash mine project. industry outlook and operational plans and and appropriate audit evidence regarding the financial information of the Group as a whole to provide a basis for our opinion on the calculated the recoverable amounts of Our audit procedures in relation to management’s assessment of the risk of consolidated financial statements. non-current assets including mineral rights. possible delays in the construction and development of the potash deposit, which may result in the risk of non-compliance with the terms of the mining Key audit matters Management assessed the risk of possible delays licenses and potential impairment of the related non-current assets and Key audit matters are those matters that, in our professional judgement, were of most significance in our audit of the consolidated in the construction and development of the potash mineral rights, comprised: financial statements of the current period. These matters were addressed in the context of our audit of the consolidated financial deposit resulting from the water inflow at one of • testing of compliance with the key terms of the licenses, including analysis of statements as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters. the shafts at Gremyachinskoe field, and which may result in the risk of non-compliance with the terms supporting documentation provided by management to confirm that all key of the mining licenses and potential impairment of dates and key terms stated in the licenses have been complied with, on a the related non-current assets. sample basis; • interviews with geologists responsible for the Potash mine project and Management has compared the recoverable amount discussion of the stage of the mining processes, as well as the current of non-current assets related to the Potash mine estimate of reserves; project, including mineral rights, determined as • obtaining confirmation from the management and the Board of Directors the value in use, with the carrying amount of these that they regularly monitor the status of the development stage of the Potash assets and concluded that no impairment should mine project, the company (EuroChem-VolgaKaliy, LLC) is ready to execute be recognised in respect of the assets as at the terms of the licenses with respect to mining conditions, all required 31 December 2019. reports have been submitted on a timely basis and there have been no Refer to Note 2 ‘Basis of preparation and significant issues of non-compliance with the terms of mining licenses. accounting policies’, 9 ‘Mineral rights’ and Note 8 Based on the above procedures, we found that the key assumptions and ‘Property, plant and equipment’ for judgements used for the assessment of impairment for the Potash mine project more information. in the Volgograd region are reasonable, consistently applied and supported by the available evidence. Finally, we compared the recoverable amount of the non-current assets related to the Potash mine project, including mineral rights, determined as their value in use, with the carrying amount of these assets. As a result of the performed procedures we are satisfied that audit evidence obtained supports management’s assessment that no impairment is required.
88 www.eurochemgroup.com EuroChem 2019 Annual Report and Accounts 89 Strategic Report Corporate Governance Financial Statements Independent Auditors’ Report – continued Report of the statutory auditor to the General Meeting of EuroChem Group AG, Zug
Other information in the annual report We communicate with the Board of Directors or its relevant committee regarding, among other matters, the planned scope and timing of the audit and significant audit findings, including any significant deficiencies in internal control that we identify during our audit. The Board of Directors is responsible for the other information in the annual report. The other information comprises all information included in the annual report, but does not include the consolidated financial statements of EuroChem Group AG and our auditor’s We also provide the Board of Directors or its relevant committee with a statement that we have complied with relevant ethical report thereon. The annual report is expected to be made available to us after the date of this auditor’s report. requirements regarding independence, and to communicate with them all relationships and other matters that may reasonably be thought to bear on our independence, and where applicable, related safeguards. Our opinion on the consolidated financial statements does not cover the other information in the annual report and we will not express any form of assurance conclusion thereon. From the matters communicated with the Board of Directors or its relevant committee, we determine those matters that were of most significance in the audit of the consolidated financial statements of the current period and are therefore the key audit matters. In connection with our audit of the consolidated financial statements, our responsibility is to read the other information in the We describe these matters in our auditor’s report unless law or regulation precludes public disclosure about the matter or when, annual report when it becomes available and, in doing so, consider whether the other information is materially inconsistent with the in extremely rare circumstances, we determine that a matter should not be communicated in our report because the adverse consolidated financial statements or our knowledge obtained in the audit, or otherwise appears to be materially misstated. If, based on consequences of doing so would reasonably be expected to outweigh the public interest benefits of such communication. the work we perform, we conclude that there is a material misstatement of this other information, we will be required to report that fact. Responsibilities of the Board of Directors for the consolidated financial statements Report on other legal and regulatory requirements In accordance with article 728a paragraph 1 item 3 CO and Swiss Auditing Standard 890, we confirm that an internal control system The Board of Directors is responsible for the preparation of the consolidated financial statements that give a true and fair view in exists which has been designed for the preparation of consolidated financial statements according to the instructions of the Board accordance with IFRS and the provisions of Swiss law, and for such internal control as the Board of Directors determines is necessary of Directors. to enable the preparation of consolidated financial statements that are free from material misstatement, whether due to fraud or error. We recommend that the consolidated financial statements submitted to you be approved. In preparing the consolidated financial statements, the Board of Directors is responsible for assessing the Group’s ability to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless PricewaterhouseCoopers AG the Board of Directors either intends to liquidate the Group or to cease operations, or has no realistic alternative but to do so. Auditor’s responsibilities for the audit of the consolidated financial statements Our objectives are to obtain reasonable assurance about whether the consolidated financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor’s report that includes our opinion. Reasonable assurance Joanne Burgener Hanspeter Gerber AUDIT EXPERT AUDIT EXPERT is a high level of assurance, but is not a guarantee that an audit conducted in accordance with Swiss law, ISAs and Swiss Auditing AUDITOR IN CHARGE Standards will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on Zug, 31 January 2020 the basis of these consolidated financial statements. Enclosure: Consolidated financial statements (consolidated statement of financial position, consolidated statement of profit or loss, consolidated statement As part of an audit in accordance with Swiss law, ISAs and Swiss Auditing Standards, we exercise professional judgment and maintain of comprehensive income, consolidated statement of cash flows, consolidated statement of changes in equity and notes) professional scepticism throughout the audit. We also: • Identify and assess the risks of material misstatement of the consolidated financial statements, whether due to fraud or error, design and perform audit procedures responsive to those risks, and obtain audit evidence that is sufficient and appropriate to providea basis for our opinion. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control. • Obtain an understanding of internal control relevant to the audit 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 Group’s internal control. • Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made. • Conclude on the appropriateness of the Board of Directors’ use of the going concern basis of accounting and, based on the audit evidence obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on the Group’s ability to continue as a going concern. If we conclude that a material uncertainty exists, we are required to draw attention in our auditor’s report to the related disclosures in the consolidated financial statements or, if such disclosures are inadequate, to modify our opinion. Our conclusions are based on the audit evidence obtained up to the date of our auditor’s report. However, future events or conditions may cause the Group to cease to continue as a going concern. • Evaluate the overall presentation, structure and content of the consolidated financial statements, including the disclosures, and whether the consolidated financial statements represent the underlying transactions and events in a manner that achieves fair presentation. • Obtain sufficient appropriate audit evidence regarding the financial information of the entities or business activities within the Group to express an opinion on the consolidated financial statements. We are responsible for the direction, supervision and performance of the Group audit. We remain solely responsible for our audit opinion.
90 www.eurochemgroup.com EuroChem 2019 Annual Report and Accounts 91 Strategic Report Corporate Governance Financial Statements Consolidated Statement of Financial Position Consolidated Statement of Profit or Loss as at 31 December 2019 for the year ended 31 December 2019 (all amounts are presented in thousands of US dollars, unless otherwise stated) (all amounts are presented in thousands of US dollars, unless otherwise stated)
31 December 31 December Note 2019 2018 Note 2019 2018 Sales 24 6,183,970 5,577,472 ASSETS Cost of sales 25 (3,809,862) (3,437,727) Non-current assets:
Property, plant and equipment 8 8,190,662 6,666,090 Gross profit 2,374,108 2,139,745 Mineral rights 9 364,985 315,753
Goodwill 10 469,104 475,797 Distribution costs 26 (912,542) (744,985) Intangible assets 11 74,592 102,838 General and administrative expenses 27 (241,830) (208,292) Investment in associates and joint ventures 12 24,771 38,198 Other operating income/(expenses), net 28 (41,848) 2,956 Originated loans 1,000 3,864
Restricted cash 15 37,049 2,276 Operating profit 1,177,888 1,189,424 Derivative financial assets 20 59,354 –
Deferred income tax assets 30 76,203 82,613 Share of profit/(loss) from associates and joint ventures, net 819 3,395 Other non-current assets 73,857 71,011 Gain/(loss) from disposal of subsidiaries, net – (45,753) Total non-current assets 9,371,577 7,758,440 Interest income 10,161 8,130 Interest expense (174,734) (94,480) Current assets: Financial foreign exchange gain/(loss), net 168,360 (162,070) Inventories 13 1,170,228 1,044,690 Other financial gain/(loss), net 29 57,682 (159,804) Trade receivables 14 443,902 366,836 Profit before taxation 1,240,176 738,842 Prepayments, other receivables and other current assets 14 336,015 289,201
Income tax receivable 11,412 15,428 Income tax expense 30 (222,500) (200,421) Restricted cash 15 3,895 2,850
Derivative financial assets 20 9,167 1,126 Profit 1,017,676 538,421 Fixed-term deposits 15 124 1,801
Cash and cash equivalents 15 313,241 341,911 Profit/(loss) attributable to: Total current assets 2,287,984 2,063,843 Owners of the parent 1,017,118 538,448 TOTAL ASSETS 11,659,561 9,822,283 Non-controlling interests 558 (27)
1,017,676 538,421 LIABILITIES AND EQUITY
Equity attributable to owners of the parent: Earnings per share – basic and diluted 31 1,059.50 538.45 Share capital 16 111 111 Treasury shares 16 (785,050) – The accompanying notes on pages 97 to 144 are an integral part of these consolidated financial statements. Cumulative currency translation differences (1,825,722) (2,403,963) Retained earnings and other reserves 7,592,130 6,578,487 4,981,469 4,174,635 Non-controlling interests 1,669 117 Total equity 4,983,138 4,174,752
Non-current liabilities: Bank borrowings and other loans received 17 1,405,458 2,003,275 Project Finance 18 435,192 420,070 Bonds issued 19 1,660,982 1,211,261 Derivative financial liabilities 20 7,453 57,103 Deferred income tax liabilities 30 286,627 212,721 Other non-current liabilities and deferred income 21 311,351 178,057 Total non-current liabilities 4,107,063 4,082,487
Current liabilities: Bank borrowings and other loans received 17 1,085,568 371,133 Project Finance 18 54,405 21,612 Bonds issued 19 366,225 215,850 Derivative financial liabilities 20 25,929 12,629 Trade payables 23 508,138 470,264 Other accounts payable and accrued expenses 23 472,126 407,191 Income tax payable 19,907 37,539 Other taxes payable 37,062 28,826 Total current liabilities 2,569,360 1,565,044 Total liabilities 6,676,423 5,647,531 TOTAL LIABILITIES AND EQUITY 11,659,561 9,822,283
The accompanying notes on pages 97 to 144 are an integral part of these consolidated financial statements.
9288 www.eurochemgroup.comwww.eurochemgroup.com EuroChem 2019Annual Annual Report Report and Accounts and Accounts 2019 89 93 Strategic Report Corporate Governance Financial Statements Consolidated Statement of Comprehensive Income Consolidated Statement of Cash Flows for the year ended 31 December 2019 for the year ended 31 December 2019 (all amounts are presented in thousands of US dollars, unless otherwise stated) (all amounts are presented in thousands of US dollars, unless otherwise stated)
Note 2019 2018 Note 2019 2018 Profit 1,017,676 538,421 Operating profit 1,177,888 1,189,424 Income tax paid (179,848) (140,364) Other comprehensive income/(loss) that may be reclassified to profit or loss in Operating profit less income tax paid 998,040 1,049,060 subsequent periods Currency translation differences 578,995 (1,080,523) Depreciation and amortisation 27 388,555 308,336 Share of other comprehensive income/(loss) of associates and joint ventures, net 12 (620) (917) (Gain)/loss on disposals, impairment and write-off of property, plant and equipment, net 11,091 7,570 Currency translation differences on disposed subsidiaries reclassified to profit or loss – 25,289 Change in provision for impairment of receivables (incl. ECL allowance) and provision for obsolete and damaged inventories, net 4,541 18,276 Total other comprehensive income/(loss) that may be reclassified to profit or loss in subsequent periods 578,375 (1,056,151) Other non-cash (income)/expenses, net 75,423 (41,820) Gross cash flow 1,477,650 1,341,422 Other comprehensive income/(loss) that will not be reclassified to profit or loss in Cash proceeds/(payments) on operation derivatives, net 3,027 (38,935) subsequent periods Remeasurements of post-employment benefit obligations, net of tax (3,475) 1,361 Changes in operating assets and liabilities: Change in fair value of financial assets measured at fair value through other Trade receivables (81,886) (119,787) comprehensive income – (4,321) Advances to suppliers 152 14,282 Total other comprehensive income/(loss) for the period that will not be reclassified to Other receivables (61,844) (16,228) profit or loss in subsequent periods (3,475) (2,960) Inventories (108,680) (403,778) Total other comprehensive income/(loss) 574,900 (1,059,111) Trade payables (19,159) 46,425 Total comprehensive income/(loss) 1,592,576 (520,690) Advances from customers 9,718 90,563 Other payables 7,030 49,809 Total comprehensive income/(loss) attributable to: Restricted cash (35,582) 17,942 Owners of the parent 1,591,884 (520,642) Net cash – operating activities 1,190,426 981,715 Non-controlling interests 692 (48) 1,592,576 (520,690) Cash flows from investing activities Capital expenditure on property, plant and equipment and intangible assets (936,991) (1,100,134) The accompanying notes on pages 97 to 144 are an integral part of these consolidated financial statements. Purchase of mineral rights (11,171) (357) Other payments related to mineral rights (1,524) (10,913) Deferred payment for investment in associate – (2,769) Proceeds from sale of interest in associate 2,744 – Acquisition of subsidiaries, net of cash acquired (4,949) – Deferred compensation related to business combination, paid (326) (3,004) Proceeds from sale of property, plant and equipment 1,834 589 Net change in fixed-term deposits 1,666 (1,701) Originated loans – (503) Repayment of originated loans 3,000 24,100 Interest received 7,562 7,783 Other investing activities 44,464 11,369 Net cash – investing activities (893,691) (1,075,540)
Free cash inflow/(outflow) 296,735 (93,825)
Cash flows from financing activities Proceeds from bank borrowings and other loans received 1,257,717 2,723,656 Funds received under the Project Finance Facilities 93,746 219,309 Repayment of bank borrowings and other loans received (1,159,625) (2,136,094) Repayment of Project Finance Facility 18 (35,583) (750,000) Proceeds from bonds, net of transaction costs 1,506,887 – Repayment of bonds (978,694) (79,697) Prepaid and additional transaction costs related to bank borrowings and bonds (9,909) (10,898) Prepaid and additional transaction costs related to Project Finance Facilities (5,563) (5,285) Interest paid (210,886) (219,873) Cash proceeds/(payments) on derivatives, net 20 22,675 (110,572) Capital contribution 16 – 600,000 Purchase of treasury shares 16 (785,050) – Payments of lease liabilities (9,945) – Other financial activities (7,966) (3,972) Net cash – financing activities (322,196) 226,574 Effect of exchange rate changes on cash and cash equivalents (3,209) (19,451) Net increase/(decrease) in cash and cash equivalents (28,670) 113,298 Cash and cash equivalents at the beginning of the period 15 341,911 228,613 Cash and cash equivalents at the end of the period 15 313,241 341,911
The accompanying notes on pages 97 to 144 are an integral part of these consolidated financial statements.
9490 www.eurochemgroup.comwww.eurochemgroup.com EuroChem 2019Annual Annual Report Report and Accounts and Accounts 2019 91 95 Strategic Report Corporate Governance Financial Statements Consolidated Statement of Changes in Equity Notes to the Consolidated Financial Statements for the year ended 31 December 2019 for the year ended 31 December 2019 (all amounts are presented in thousands of US dollars, unless otherwise stated) (all amounts are presented in thousands of US dollars, unless otherwise stated)
Attributable to owners of the parent 1 The EuroСhem Group and its operations Cumulative currency Retained Non- The EuroСhem Group comprises the parent entity, EuroСhem Group AG (the “Company”) and its subsidiaries (collectively the “Group” Share Treasury translation earnings and controlling or “EuroChem Group”). The Company was incorporated under the laws of Switzerland on 16 July 2014 and has its registered office at: capital shares differences other reserves Total interests Total equity Baarerstrasse, 37, 6300, Zug, Switzerland. Balance at 1 January 2018 111 – (1,347,833) 5,442,999 4,095,277 165 4,095,442 These consolidated financial statements were granted with approval and confirmed as accurate by the Board of Directors of the Company
on 31 January 2020. Comprehensive income/(loss) Profit/(loss) – – – 538,448 538,448 (27) 538,421 A company that holds business interests beneficially for Mr. Andrey Melnichenko indirectly owns 100% of AIM Capital S.E., registered in the Republic of Cyprus (31 December 2018: 100%), which in turn owns 90% of the share capital of EuroСhem Group AG (31 December Other comprehensive income/(loss) 2018: 90%). The remaining 10% of the share capital is held by a Group’s wholly-owned subsidiary (Note 16) (31 December 2018: 10% of the Company was held indirectly by Mr. Dmitry Strezhnev). Currency translation differences – – (1,080,502) – (1,080,502) (21) (1,080,523) Share of other comprehensive income/(loss) of The Group’s principal activity is the production of mineral fertilizers (nitrogen-, potash- and phosphate-based) as well as mineral extraction associates and joint ventures, net – – (917) – (917) – (917) (apatite, phosphate rock, iron-ore, baddeleyite and potash), and the operation of a distribution network. The Group is developing two Currency translation differences on disposed potassium salts deposits. Production of potassium fertilizers began at Verkhnekamskoe deposit in the first half of 2018. The Group’s main subsidiaries reclassified to profit or loss – – 25,289 – 25,289 – 25,289 production facilities are located in Russia, Lithuania, Belgium and Kazakhstan. The Group’s distribution assets are located globally across Change in fair value of financial assets Europe, Russia, North and Latin America, Central and South-East Asia. measured at fair value through other comprehensive income – – – (4,321) (4,321) – (4,321) 2 Basis of preparation and significant accounting policies Remeasurements of post-employment benefit Basis of preparation. These consolidated financial statements have been prepared in accordance with International Financial Reporting obligations, net of tax – – – 1,361 1,361 – 1,361 Standards (“IFRS”) under the historical cost convention, as modified by the initial recognition of financial instruments based on fair value Total other comprehensive income/(loss) – – (1,056,130) (2,960) (1,059,090) (21) (1,059,111) and derivative financial instruments, which are accounted for at fair value. Total comprehensive income/(loss) – – (1,056,130) 535,488 (520,642) (48) (520,690) The principal accounting policies applied in the preparation of these consolidated financial statements are set out below. These policies Transactions with owners have been consistently applied to all periods presented, apart from the accounting policy changes resulting from the adoption of IFRS 16 Capital contribution (Note 16) – – – 600,000 600,000 – 600,000 “Leases” effective from 1 January 2019 and early adoption of amendments to IFRS 3 “Business Combinations” – Definition of a business. Total transactions with owners – – – 600,000 600,000 – 600,000 Adoption of new and amended standards. Effective 1 January 2019, the Group adopted IFRS 16 “Leases” using the modified Balance at 31 December 2018 111 – (2,403,963) 6,578,487 4,174,635 117 4,174,752 retrospective approach allowing not to restate the comparative information but rather recognise the cumulative effect of the initial application in the opening retained earnings. Balance at 1 January 2019 111 – (2,403,963) 6,578,487 4,174,635 117 4,174,752 As at 1 January 2019, the Group recognised right-of-use assets of US$68,649 thousand, based on the corresponding amount of lease liabilities adjusted by the amount of lease payments made in advance and capitalised initial direct costs related to lease contracts and Comprehensive income/(loss) recognised in the statement of financial position before 1 January 2019 with no effect on the opening retained earnings. Profit/(loss) – – – 1,017,118 1,017,118 558 1,017,676 In applying IFRS 16 “Leases” for the first time, the Group used exemptions permitted by the standard to the leases with a remaining
lease term of less than 12 months as at 1 January 2019 (short-term leases) and leases of low-value assets. As at the transition date Other comprehensive income/(loss) the lease liability was measured as the present value of fixed lease payments in accordance with the lease contract that are not paid Currency translation differences – – 578,861 – 578,861 134 578,995 at the commencement date. At the transition date lease payments were discounted at incremental borrowing rate. The weighted average Share of other comprehensive income/ (loss) of incremental borrowing rate varied from 4.5% to 9.0% depending on a subsidiary’s country of domicile. In determining the lease term the associates and joint ventures, net – – (620) – (620) – (620) management applied judgment in cases where contracts provide for the possibility of extending or terminating the lease. Remeasurements of post-employment benefit obligations, net of tax – – – (3,475) (3,475) – (3,475) The right-of-use assets mainly comprised land plots and buildings lease contracts and amounted to US$68,649 thousand as at 1 January 2019. Movements in the carrying amount of right-of-use assets for the year ended 31 December 2019 were as follows: Total other comprehensive income/(loss) – – 578,241 (3,475) 574,766 134 574,900 Total comprehensive income/(loss) – – 578,241 1,013,643 1,591,884 692 1,592,576 Machinery Land and Land and Transactions with owners Buildings Improvements equipment Total Purchase of treasury shares (Note 16) – (785,050) – – (785,050) – (785,050) Balance at 1 January 2019 (Note 8) 24,632 36,951 7,066 68,649 Acquisition of subsidiary – – – – – 860 860 Additions 5,115 182 2,027 7,324 Total transactions with owners – (785,050) – – (785,050) 860 (784,190) Additions through business combination 575 – 100 675 Balance at 31 December 2019 111 (785,050) (1,825,722) 7,592,130 4,981,469 1,669 4,983,138 Modifications (9) (36) – (45) Depreciation charge for the period (8,205) (1,641) (1,814) (11,660) The accompanying notes on pages 97 to 144 are an integral part of these consolidated financial statements. Currency translation differences 1,150 904 293 2,347 Balance at 31 December 2019 23,258 36,360 7,672 67,290
The leases resulting from lease contracts which are not capitalised and are recognised in profit or loss for the year ended 31 December 2019 were as follows:
2019 Expenses relating to variable lease payments 10,369 Expenses relating to short-term leases 2,340 Expenses relating to lease of low-value assets 2,078 Total 14,787
Future cash outflows to which the Group is potentially exposed include variable lease payments based on cadastral value of land that are not reflected in the measurement of lease liabilities and amounted to US$78,599 thousand as at 31 December 2019.
9692 www.eurochemgroup.comwww.eurochemgroup.com EuroChem 2019Annual Annual Report Report and Accounts and Accounts 2019 93 97 Strategic Report Corporate Governance Financial Statements
Notes to the Consolidated Financial Statements – continued for the year ended 31 December 2019 (all amounts are presented in thousands of US dollars, unless otherwise stated)
2 Basis of preparation and significant accounting policies (continued) 2 Basis of preparation and significant accounting policies (continued) Lease liabilities comprise current and non-current portions as follows: Goodwill is measured by deducting the net assets of the acquiree from the aggregate of the consideration transferred for the acquiree, the amount of non-controlling interest in the acquiree and fair value of an interest in the acquiree held immediately before the acquisition date. 31 December 1 January 2019 2019 Any negative amount (“negative goodwill” or “bargain purchase”) is recognised in profit or loss, after management reassesses whether it identified all the assets acquired and all liabilities and contingent liabilities assumed and reviews the appropriateness of their Current 10,193 8,175 measurement. Non-current 57,014 59,009 Total lease liabilities 67,207 67,184 The consideration transferred for the acquiree is measured at the fair value of the assets given up, equity instruments issued and liabilities incurred or assumed, including fair value of assets or liabilities from contingent consideration arrangements but excluding acquisition Interest expense accrued on lease liabilities amounted to US$4,553 thousand for the year ended 31 December 2019. related costs such as advisory, legal, valuation and similar professional services. Transaction costs related to the acquisition and incurred for issuing equity instruments are deducted from equity; transaction costs incurred for issuing debt as part of the business combination In accordance with IAS 17 “Leases”, at 31 December 2018 the Group disclosed future minimum undiscounted lease payments under non- are deducted from the carrying amount of the debt and all other transaction costs associated with the acquisition are expensed. cancellable operating lease contracts amounted to US$105,808 thousand. Upon transition to IFRS 16 “Leases”, future lease payments of US$38,624 thousand were not included in the measurement of lease liabilities as being variable payments and not dependent on an index Intercompany transactions, balances and unrealised gains on transactions between group companies are eliminated; unrealised losses are or a rate. Resulting from lease terms revision for other leases and use of professional judgment in accordance with requirements of also eliminated unless the cost cannot be recovered. the new standard, the recognised liability was increased in approximately the same amount and was decreased due to the effect of discounting and prepaid payments, recognised in the statement of financial position before 1 January 2019. Therefore, the Group The Company and all of its subsidiaries use uniform accounting policies consistent with the Group’s policies. recognised lease liabilities of US$67,184 thousand. Non-controlling interest is that part of the net results and of the equity of a subsidiary attributable to interests which are not owned, directly Functional and presentation currency. The functional currency of each of the Group’s entities is the currency of the primary economic or indirectly, by the Company. Non-controlling interest forms a separate component of the Group’s equity. environment in which the entity operates. Purchases and sales of non-controlling interests. The Group applies the economic entity model to account for transactions with owners While the Company’s functional currency is the US dollar (“US$”), the functional currency for each of the Group’s subsidiaries is of non-controlling interest that do not result in a loss of control. Any difference between the purchase consideration and the carrying determined separately. The functional currency of subsidiaries located in Russia is the Russian rouble (“RUB”); the functional currency amount of non-controlling interest acquired is recorded as a capital transaction directly in equity. The Group recognises the difference of subsidiaries located in the Eurozone is the Euro (“EUR”), the functional currency of subsidiaries in North America and in Switzerland between sales consideration and carrying amount of non-controlling interest sold as a capital transaction in the consolidated statement carrying trading activities is the US$. of changes in equity. Monetary assets and liabilities are translated into each entity’s functional currency at the official exchange rate at the respective Disposals of subsidiaries and associates. When the Group ceases to have control or significant influence, any retained interest is reporting dates. Foreign exchange gains and losses resulting from the settlement of the transactions and from the translation of monetary remeasured to its fair value at the date when control or significant influence is lost, with the change in carrying amount recognised in assets and liabilities into each entity’s functional currency at year-end official exchange rates are recognised in profit or loss. Translation profit or loss. differences on non-monetary financial assets and liabilities such as equities held at fair value through profit or loss are recognised in profit Property, plant and equipment. Property, plant and equipment are stated at historical cost, less accumulated depreciation and a or loss as part of the fair value gain or loss. Translation differences on non-monetary financial assets such as equities classified as financial provision for impairment, where required. instruments measured at fair value through other comprehensive income are recognised in other comprehensive income. Subsequent costs are included in the asset’s carrying amount or recognised as a separate asset, as appropriate, only when it is probable Foreign exchange gains and losses that relate to cash and cash equivalents, bank borrowings, third party loans, intragroup loans, bonds that future economic benefits associated with the item will flow to the Group and the cost of the item can be measured reliably. The cost issued and deposits are presented in the consolidated statement of profit or loss in a separate line “Financial foreign exchange gain/(loss), of replacing major parts or components of property, plant and equipment items is capitalised and the replaced part is retired. Minor repair net”. All other foreign exchange gains and losses are presented in the consolidated statement of profit or loss within “Other operating and maintenance costs are expensed when incurred. income/(expenses), net”. At each reporting date management assesses whether there is any indication of impairment of property, plant and equipment. If any such Goodwill and fair value adjustments arising on the acquisition of a foreign entity are treated as assets and liabilities of the foreign entity and indication exists, management estimates the recoverable amount, which is determined as the higher of an asset’s fair value less costs of translated at the closing rate. disposal and its value in use. The carrying amount is reduced to the recoverable amount and the impairment loss is recognised in profit or The presentation currency of the Group is the US$ since the management considers the US$ to be more appropriate for the understanding loss. An impairment loss recognised for an asset in prior years is reversed if there has been a change in the estimates used to determine and comparability of consolidated financial statements. The results and financial position of each of the Group’s subsidiaries were the asset’s value in use or fair value less costs to sell. translated to the presentation currency as required by IAS 21 “The Effects of Changes in Foreign Exchange Rates”: Gains and losses on disposals determined by comparing proceeds with carrying amount are recognised in profit or loss. (i) assets and liabilities for each consolidated statement of financial position presented are translated at the closing rate at the date of Capitalisation of borrowing costs. General and specific borrowing costs directly attributable to the acquisition, construction or that consolidated statement of financial position; production of assets that necessarily take a substantial time to get ready for intended use or sale (qualifying assets) are capitalised as part (ii) income and expenses for each consolidated statement of profit or loss are translated at monthly average exchange rates (unless this of the costs of those assets. The commencement date for capitalisation is when (a) the Group incurs expenditures for the qualifying asset; average is not a reasonable approximation of the cumulative effect of the rates prevailing on the transaction dates, in which case (b) it incurs borrowing costs; and (c) it undertakes activities that are necessary to prepare the asset for its intended use or sale. income and expenses are translated at the dates of the transactions); Capitalisation of borrowing costs continues up to the date when the assets are substantially ready for their use or sale. (iii) components of equity are translated at a historical rate; and The Group capitalises borrowing costs that could have been avoided if it had not made capital expenditure on qualifying assets. Borrowing costs capitalised are calculated at the Group’s average funding cost (the weighted average interest cost is applied to the expenditures on (iv) all resulting exchange differences are recognised as currency translation differences in other comprehensive income. the qualifying assets), except to the extent that funds are borrowed specifically for the purpose of obtaining a qualifying asset. Where this occurs, actual borrowing costs incurred less any investment income on the temporary investment of those borrowings are capitalised. At 31 December 2019, the official exchange rates were: US$ 1 = RUB61.9057, US$ 1 = EUR0.8928 (31 December 2018: US$ 1 = RUB69.4706, US$ 1 = EUR0.8743). Average rates for the year ended 31 December 2019 were: US$ 1 = RUB64.7362, US$ 1 = EUR0.8929 Depreciation. Land as well as assets under construction is not depreciated. Depreciation of other items of property, plant and equipment (2018: US$ 1 = RUB62.7078, US$ 1 = EUR0.8465). (other than oil and gas and mining assets) is calculated using the straight-line method to allocate their cost to their residual values over their estimated useful lives from the time they are ready for use: Consolidated financial statements. Subsidiaries are entities (including structured entities) over which the Group has control. The Group controls an entity when the Group is exposed to, or has rights to, variable returns from its involvement with the entity and has the ability to Useful lives in years affect those returns through its power over the entity. Subsidiaries are fully consolidated from the date on which control is transferred to Depreciation method (for straight-line method) the Group (acquisition date) and are de-consolidated from the date that control ceases. Buildings and land improvements straight-line/unit-of-production 15 to 85 Transfer devices straight-line/unit-of-production 25 to 50 The acquisition method of accounting is used to account for business combinations. The Group determines whether a transaction is a business combination based on the fact that the assets acquired and liabilities assumed constitute a business. A business is an integrated Machinery and equipment straight-line 2 to 35 set of activities and assets that is capable of being conducted and managed for the purpose of providing goods or services to customers, Transport straight-line 5 to 40 generating investment income or generating other income from ordinary activities. Identifiable assets acquired and liabilities and Other items straight-line 1 to 15 contingent liabilities assumed in a business combination are measured at their fair values at the acquisition date, irrespective of the extent of any non-controlling interest. The Group measures non-controlling interest on a transaction-by-transaction basis, either at: (a) fair value, Depreciation of oil and gas and mining assets is calculated using the unit-of-production method. or (b) the non-controlling interest’s proportionate share of net assets of the acquiree.
9894 www.eurochemgroup.comwww.eurochemgroup.com EuroChem 2019Annual Annual Report Report and Accounts and Accounts 2019 95 99 Strategic Report Corporate Governance Financial Statements
Notes to the Consolidated Financial Statements – continued for the year ended 31 December 2019 (all amounts are presented in thousands of US dollars, unless otherwise stated)
2 Basis of preparation and significant accounting policies (continued) 2 Basis of preparation and significant accounting policies (continued) The residual value of an asset is the estimated amount that the Group would currently obtain from disposing of the asset less the Goodwill. Goodwill is carried at cost less accumulated impairment losses, if any. The Group tests goodwill for impairment at least annually estimated costs of disposal, if the asset were already of the age and in the condition expected at the end of its useful life. The residual and whenever there are indications that goodwill may be impaired. The carrying value of CGU containing goodwill is compared to the value of an asset is nil if the Group expects to use the asset until the end of its physical life. The assets’ residual values and useful lives are relevant amount, which is the higher of value in use and the fair value less cost of disposal. Any impairment is recognised immediately as reviewed, and adjusted if appropriate, at each reporting date. an expense and is not subsequently reversed. Goodwill is allocated to the cash-generating units, or groups of cash-generating units, that are expected to benefit from the synergies of the business combination. Such units or groups of units represent the lowest level at which Remaining useful life of property, plant and equipment. Management assesses the remaining useful life of property, plant and the Group monitors goodwill and are not larger than an operating segment. equipment in accordance with the current technical conditions of assets and the estimated period during which these assets will bring economic benefit to the Group. Gains or losses on disposal of an operation within a cash generating unit to which goodwill has been allocated include the carrying amount of goodwill associated with the operation disposed of, generally measured on the basis of the relative values of the operation disposed of Development expenditures. Development expenditures incurred by the Group are capitalised and accumulated separately in the assets and the portion of the cash-generating unit which is retained. under construction category for each area of interest in which economically recoverable resources have been identified. Such expenditures comprise cost directly attributable to the construction of a mine and the related infrastructure. Mineral rights. Mineral rights include rights for evaluation, exploration and production of mineral resources under the licences or agreements. Such assets are carried at cost, amortisation is charged on a straight-line basis over the shorter of the valid period of the Stripping costs. The Group separates two types of stripping costs related to mining activity: a) stripping activity asset; and b) current license or the agreement, or the expected life of mine, starting from the date when production activities commence. The costs directly stripping costs. Stripping costs incurred to obtain an access to the ore body during the pre-production phase or improve access to attributable to acquisition of rights for evaluation, exploration and production or related costs unavoidably arising from licences and related further quantities of minerals are capitalised into stripping activity asset which is subsequently amortised over the life of the mine. agreements (such as social and infrastructure objects construction) are capitalised as a part of the mineral rights. If the reserves related to Current stripping costs incurred in order to mine mineral ore only in current period are expensed as incurred. the mineral rights are not economically viable, the carrying amount of such mineral rights is written off. Exploration assets. Exploration and evaluation costs related to an area of interest are written off as incurred except they are carried Mineral resources are recognised as assets when acquired as part of a business combination and then depleted using the unit-of- forward as an asset in the consolidated statement of financial position if the rights of the area of interest are current and it is considered production method based on total proved mineral reserves. Proved mineral reserves reflect the economically recoverable quantities which probable that the costs will be recouped through successful development and exploitation of the area of interest. Capitalised costs include can be legally recovered in the future from known mineral deposits and were determined by independent professional appraisers when costs directly related to exploration and evaluation activities in the relevant area of interest. In accordance with IFRS 6, “Exploration for acquired as part of a business combination and are subject to updates in future periods. and Evaluation of Mineral Resources”, exploration assets are measured applying the cost model described in IAS 16, “Property, Plant and Equipment” after initial recognition. Depreciation and amortisation are not calculated for exploration assets because the economic benefits Intangible assets other than goodwill. The Group’s intangible assets other than goodwill have definite useful lives and primarily include that the assets represent are not consumed until the production phase. Capitalised exploration and evaluation expenditure is written off acquired core process technology, distribution agreements, customer relationships, trademarks, capitalised computer software costs and where the above conditions are no longer satisfied. other intangible assets. All capitalised exploration and evaluation expenditures are assessed for impairment if facts and circumstances indicate that impairment These assets are capitalised on the basis of the costs incurred to acquire and bring them to use. may exist. Exploration and evaluation assets are also tested for impairment once commercial reserves are found, before the assets are Intangible assets with definite useful lives are amortised using the straight-line method over their useful lives: transferred to development properties. Leases. The Group assesses whether a contract is a lease based on the fact that the Group obtains the right to control the use of an Useful lives in years underlying asset for a period of time in exchange for consideration. Lease contracts are mainly represented by the land lease contracts. Know-how and production technology 5 – 18 Trademarks 15 Right-of-use assets. The Group recognises a right-of-use asset and a corresponding lease liability at the commencement date of the Customer relationships 10 lease. The right-of-use asset is initially measured at cost comprising of the lease liability, lease payments made at or before the commencement date, any initial direct costs and other lease related costs. Distribution agreement 8 Software licences 5 The right-of-use asset is depreciated on a straight-line basis from the commencement date to the earlier of: the end of the useful life of the underlying asset or the end of the lease term. The lease term may include periods covered by an option to extend (or terminate) the lease, The Group tests intangible assets for impairment whenever there are indications that intangible assets may be impaired. whenever the lease is reasonably certain to be extended (or not terminated). Management assesses extension and termination options of If impaired, the carrying amount of intangible assets is written down to the higher of value in use and fair value less cost of disposal. the leases on a regular basis. Impairment of non-financial assets. Assets that are subject to depreciation and amortisation are reviewed for impairment whenever The right-of-use asset is subject to testing for impairment, whenever there are indications that the asset may be impaired. events or changes in circumstances indicate that the carrying amount may not be recoverable. Prior impairments of non-financial assets Right-of-use assets are accounted for within “Property, plant and equipment” in the consolidated statement of financial position. (other than goodwill) are reviewed for possible reversal at each reporting date. The payments related to short-term leases (with a lease term of 12 months or less) as well as leases of low-value assets are recognised as Financial instruments – key measurement terms. Fair value is the price that would be received to sell an asset or paid to transfer a an expense in the consolidated statement of profit or loss as incurred over the period of the lease. liability in an orderly transaction between market participants at the measurement date. The best evidence of fair value is the price in an active market. An active market is one in which transactions for the asset or liability take place with sufficient frequency and volume to Lease liabilities. The lease liability is initially measured at the present value of fixed lease payments that are not paid at the commencement provide pricing information on an ongoing basis. date. Lease payments are discounted using the interest rate implicit in the lease. If that rate cannot be readily determined, the lessee’s individual incremental borrowing rate is used. Fair value of financial instruments traded in an active market is measured as the product of the quoted price for the individual asset or liability and the number of instruments held by the entity. This is the case even if a market’s normal daily trading volume is not sufficient The lease liability is subsequently remeasured in case of change in the lease term, lease modification or revised lease payments. to absorb the quantity held and placing orders to sell the position in a single transaction might affect the quoted price. The quoted market Current portion of lease liabilities is included in “Other accounts payable and accrued expenses” and non-current portion is included in price used to value financial assets is the current bid price; the quoted market price for financial liabilities is the current asking price. “Other non-current liabilities and deferred income” of the consolidated statement of financial position. Valuation techniques such as discounted cash flow models or models based on recent arm’s length transactions or consideration of Previous accounting policy applied to operating leases under IAS 17 till 31 December 2018. Where the Group is a lessee in a financial data of the investees are used to measure fair value of certain financial instruments for which external market pricing information lease which does not transfer substantially all the risks and rewards incidental to ownership from the lessor to the Group, the total lease is not available. payments are charged to profit or loss on a straight-line basis over the period of the lease. The lease term is the non-cancellable period Fair value measurements are analysed by level in the fair value hierarchy as follows: (i) level one are measurements at quoted prices for which the lessee has contracted to lease the asset together with any further terms for which the lessee has the option to continue to (unadjusted) in active markets for identical assets or liabilities, (ii) level two measurements are valuations techniques with all material inputs lease the asset, with or without further payment, when at the inception of the lease it is reasonably certain that the lessee will exercise observable for the asset or liability, either directly (that is, as prices) or indirectly (that is, derived from prices), and (iii) level the option. three measurements are valuations not based on solely observable market data (that is, the measurement requires significant When assets are leased out under an operating lease, the lease payments receivable are recognised as rental income on a straight-line unobservable inputs). basis over the lease term. Transaction costs are incremental costs that are directly attributable to the acquisition, issue or disposal of a financial instrument. An incremental cost is one that would not have been incurred if the transaction had not taken place. Transaction costs include fees and commissions paid to agents (including employees acting as selling agents), advisors, brokers and dealers, levies by regulatory agencies and securities exchanges, and transfer taxes and duties. Transaction costs do not include debt premiums or discounts, financing costs or internal administrative or holding costs.
10096 www.eurochemgroup.comwww.eurochemgroup.com EuroChem 2019Annual Annual Report Report and Accounts and Accounts 2019 97 101 Strategic Report Corporate Governance Financial Statements
Notes to the Consolidated Financial Statements – continued for the year ended 31 December 2019 (all amounts are presented in thousands of US dollars, unless otherwise stated)
2 Basis of preparation and significant accounting policies (continued) 2 Basis of preparation and significant accounting policies (continued) Amortised cost is the amount at which the financial instrument was recognised at initial recognition less any principal repayments, plus For other financial assets loss allowances are measured as 12-month ECL unless there has been a significant increase in credit risk accrued interest, and for financial assets less any allowance for expected credit losses (“ECL”). Accrued interest includes amortisation of since initial recognition or if the instrument contains a significant financing component. In those cases the allowance is based on the transaction costs deferred at initial recognition and of any premium or discount to the maturity amount using the effective interest method. lifetime ECL. Accrued interest income and accrued interest expense, including both accrued coupon and amortised discount or premium (including fees The loans granted are analysed individually based on credit history of each borrower with the Group, financial performance and external deferred at origination, if any), are not presented separately and are included in the carrying values of the related items in the consolidated credit ratings. The amount of ECL is assessed based on market risk premium that is taken as probability of default. statement of financial position. The Group recognises a loss allowance based on the difference between the contractual cash flows and all the cash flows that the Group The effective interest method is a method of allocating interest income or interest expense over the relevant period, so as to achieve a expects to receive, discounted at the original effective interest rate. The calculation of the present value of the estimated future cash flows constant periodic rate of interest (effective interest rate) on the carrying amount. The effective interest rate is the rate that exactly discounts of a collateralised financial asset reflects the cash flows that may result from foreclosure less costs for obtaining and selling the collateral, estimated future cash payments or receipts (excluding future credit losses) through the expected life of the financial instrument or a shorter whether or not foreclosure is probable. period, if appropriate, to the net carrying amount of the financial instrument. The effective interest rate discounts cash flows of variable interest instruments to the next interest repricing date, except for the premium or discount which reflects the credit spread over the Financial assets – write-off. Financial assets are written-off, in whole or in part, when the Group has exhausted all practical recovery floating rate specified in the instrument, or other variables that are not reset to market rates. Such premiums or discounts are amortised efforts and concluded that there is no reasonable expectation of recovery. The Group may write off financial assets that are still subject over the whole expected life of the instrument. The present value calculation includes all fees paid or received between parties to the to enforcement activity when it seeks to recover amounts that are contractually due but there is no reasonable expectation of recovery. contract that are an integral part of the effective interest rate. Modification of financial assets. The Group sometimes renegotiates or otherwise modifies the contractual terms of the financial assets. Classification and subsequent measurement of financial assets. The Group classifies its financial assets in the following measurement The Group assesses whether the risks and rewards of the modified asset are substantially different as a result of the contractual categories: modification by comparing the original and revised expected cash flows to assets. If the modified terms are substantially different, the Group derecognises the original financial asset and recognises a new asset at its fair value. If the risks and rewards do not change, the • those to be measured subsequently at fair value (either through other comprehensive income or profit or loss), and modification does not result in derecognition, the Group recalculates the gross carrying amount by discounting the modified contractual those to be measured at amortised cost. • cash flows by the original effective interest rate, and recognises a modification gain or loss in profit or loss. The classification depends on the Group’s business model for managing the financial assets and the contractual terms of the cash flows. Derecognition of financial assets. The Group derecognises financial assets when (i) the assets are redeemed or the rights to cash flows For debt instruments, the recognition of gains and losses depends on the business model in which the investment is held: from the assets have otherwise expired or (ii) the Group has transferred substantially all the risks and rewards of ownership of the assets or (iii) the Group has neither transferred nor retained substantially all risks and rewards of ownership but has not retained control. Control is Assets that are held for collection of contractual cash flows, where those cash flows represent solely payments of principal and interest, retained if the counterparty does not have the practical ability to sell the asset in its entirety to an unrelated third party without needing to are measured at amortised cost. Interest income from these financial assets is included in finance income using the effective interest rate impose additional restrictions on the sale. method. Any gains or losses arising from derecognition are recognised directly in profit or loss. Classification and derecognition of financial liabilities. The Group’s financial liabilities have the following measurement categories: Assets that are held for collection of contractual cash flows and for sale, where the assets’ cash flows represent solely payments of (a) derivative liabilities (see Derivative financial instruments below) and (b) other financial liabilities. Other financial liabilities are carried principal and interest, are measured at fair value through other comprehensive income (FVOCI). at amortised cost. The Group’s other financial liabilities comprise “trade and other payables” and “borrowings and bonds” and “Project Assets that do not meet the criteria for amortised cost or FVOCI are measured at fair value through profit or loss (FVPL). Finance” in the consolidated statement of financial position. The Group derecognises financial liabilities when, and only when, the Group’s obligations are discharged, cancelled or they expire. For investments in equity instruments that are not held for trading, when the Group has made an irrevocable election at the time of initial recognition to account for the equity investment at FVOCI, there is no subsequent reclassification of gains and losses to profit or loss. Derivative financial instruments. The Group’s derivative financial instruments comprise forwards, options and swap contracts in foreign Dividends from such investments are recognised in profit or loss, when the Group’s right to receive payments is established. There are exchange, securities and commodities. Derivative financial instruments, including forward rate agreements, options and interest rate no impairment requirements for equity investments measured at FVOCI. swaps, are carried at their fair value. All derivative instruments are carried as assets when their fair value is positive and as liabilities when their fair value is negative. Changes in the fair value of derivative instruments are included in profit or loss (as financial gain /loss Trade and other receivables. Trade and other receivables are recognised initially at fair value and subsequently measured at amortised or operating income/expense) in the period in which they arise (Note 20). cost using the effective interest method, less ECL allowance. The Group has no derivatives accounted for as hedges. Initial recognition of financial instruments. Derivatives are initially recorded at their fair value. All other financial assets and liabilities are initially recorded at their fair value plus transaction costs. The fair value at initial recognition is best evidenced by the transaction price. Offsetting financial instruments. Financial assets and liabilities are offset and the net amount is reported in the consolidated statement of A gain or loss on initial recognition is only recorded if there is a difference between the fair value and the transaction price which can be financial position only when there is a legally enforceable right to offset the recognised amounts, and there is an intention to either settle evidenced by other observable current market transactions in the same instrument or by a valuation technique whose inputs include only on a net basis, or to realise the asset and settle the liability simultaneously. Such a right to offset (a) must not be contingent on a future data from observable markets. event and (b) must be legally enforceable in all of the following circumstances: (i) in the normal course of business, (ii) in the event of default and (iii) in the event of insolvency or bankruptcy. All purchases and sales of financial assets that require delivery within the time frame established by regulation or market convention (“regular way” purchases and sales) are recorded at their trade date, which is the date that the Group commits to deliver a financial asset. Associates. Associates are entities over which the Group has significant influence (directly or indirectly), but not control, generally All other purchases are recognised when the Group becomes a party to the contractual provisions of the instrument. accompanying a shareholding of between 20 and 50 percent of the voting rights. Investments in associates are accounted for using the equity method of accounting and are initially recognised at cost, and the carrying amount is increased or decreased to recognise the Reclassification of financial assets. Financial instruments are reclassified only when the business model for managing the portfolio investor’s share of the profit or loss of the investee after the date of acquisition. Dividends received from associates reduce the carrying as a whole changes. The reclassification takes place from the beginning of the first reporting period that follows after the change in value of the investment in associates. Post-acquisition changes in the Group’s share of net assets of an associate are recognised as the business model. The entity did not change its business model during the current and comparative period and did not make follows: (i) the Group’s share of profits or losses of associates is recorded in the consolidated profit or loss for the year as the share of any reclassifications. results of associates, (ii) the Group’s share of other comprehensive income is recognised in other comprehensive income and presented Financial assets impairment – credit loss allowance for ECL. Loss allowances are measured on either of the following bases: 12-month separately, (iii) all other changes in the Group’s share of the carrying value of net assets of associates are recognised in profit or loss within ECLs that result from default events that are possible within the 12 months after the reporting date; and lifetime ECLs that result from all the share of results of associates. possible default events over the expected life of a financial instrument. However, when the Group’s share of losses in an associate equals or exceeds its interest in the associate, including any other unsecured As permitted by IFRS 9 “Financial Instruments”, the Group measures loss allowances for trade receivables applying a simplified approach receivables, the Group does not recognise further losses, unless it has incurred obligations or made payments on behalf of the associate. at an amount equal to lifetime ECL. In calculating the expected credit loss, the Group considers the credit rating for each counterparty, Unrealised gains on transactions between the Group and its associates are eliminated to the extent of the Group’s interest in the adjusted with forward-looking factors specific to the debtors and economic environment in which they operate, and historical credit associates; unrealised losses are also eliminated unless the transaction provides evidence of an impairment of the asset transferred. loss experience.
10298 www.eurochemgroup.comwww.eurochemgroup.com EuroChem 2019Annual Annual Report Report and Accounts and Accounts 2019 99 103 Strategic Report Corporate Governance Financial Statements
Notes to the Consolidated Financial Statements – continued for the year ended 31 December 2019 (all amounts are presented in thousands of US dollars, unless otherwise stated)
2 Basis of preparation and significant accounting policies (continued) 2 Basis of preparation and significant accounting policies (continued) Joint arrangements. Under IFRS 11 “Joint Arrangements”, investments in joint arrangements are classified as either joint operations Factoring arrangements. The Group enters into non-recourse factoring arrangements under which trade receivables can be sold and or joint ventures depending on the contractual rights and obligations of each investor. The Group has assessed the nature of its joint therefore are derecognised in the full amount from trade receivables as the Group does not retain substantially all risks and rewards of arrangements and determined them to be joint ventures. Joint ventures are accounted for using the equity method. ownership and no longer retain control over the asset sold. The Group continues to collect and service the receivables and then transfers to the purchaser the collected amounts of the trade receivables sold less loss reserve. Loss reserve is recognised as other receivable. Under the equity method of accounting, interests in joint ventures are initially recognised at cost and adjusted thereafter to recognise the Factoring fees (e.g. running costs etc.) are recognised as other financial expense. Group’s share of the post-acquisition profits or losses, movements in other comprehensive income. When the Group’s share of losses in a joint venture equals or exceeds its interests in the joint ventures (which includes any long-term interests that, in substance, form part of the Prepayments. Prepayments are carried at cost less provision for impairment. A prepayment is classified as non-current when the goods Group’s net investment in the joint ventures), the Group does not recognise further losses, unless it has incurred obligations or made or services relating to the prepayment are expected to be obtained after one year, or when the prepayment relates to an asset which will payments on behalf of the joint ventures. itself be classified as non-current upon initial recognition. Prepayments to acquire assets are transferred to the carrying amount of the asset once the Group has obtained control of the asset and it is probable that future economic benefits associated with the asset will flow Unrealised gains on transactions between the Group and its joint ventures are eliminated to the extent of the Group’s interest in the joint to the Group. Other prepayments are recognised in profit or loss when the goods or services relating to the prepayments are received. ventures. Unrealised losses are also eliminated unless the transaction provides evidence of an impairment of the asset transferred. If there is an indication that the assets, goods or services relating to a prepayment will not be received, the carrying value of the Accounting policies of the joint ventures have been changed where necessary to ensure consistency with the policies adopted by prepayment is written down accordingly and a corresponding impairment is recognised in profit or loss for the year. the Group. Cash and cash equivalents. Cash and cash equivalents include cash in hand, term deposits held with banks, and other short-term highly Income taxes. Income taxes have been provided for in the consolidated financial statements in accordance with tax legislation enacted liquid investments with original maturities of three months or less. or substantively enacted by the reporting date for each country where the Group companies are registered. The income tax expense comprises current tax and deferred tax and is recognised in profit or loss unless it relates to transactions that are recognised in other Term deposits for longer than three months that are repayable on demand within one working day without penalties or that can be comprehensive income or directly in equity. redeemed/withdrawn, subject to the interest income being forfeited, are classified as cash equivalents if the deposit is held to meet short term cash needs and there is no significant risk of a change in value as a result of an early withdrawal. Other term deposits are included The Group companies are subject to tax rates depending on the country of domicile (Note 30). into fixed-term deposits. Current tax is the amount expected to be paid to or recovered from the tax authorities in respect of taxable profits or losses for the Cash and cash equivalents are carried at amortised cost using the effective interest method. current and prior periods. Deferred income tax is provided using the balance sheet liability method for tax loss carry forwards and temporary differences arising between the tax bases of assets and liabilities and their carrying amounts for financial reporting purposes. Restricted balances are excluded from cash and cash equivalents. Balances restricted from being exchanged or used to settle a liability In accordance with the initial recognition exemption, deferred taxes are not recorded for temporary differences on initial recognition of an for at least twelve months after the reporting date are included in non-current assets in the consolidated statement of financial position. asset or a liability in a transaction other than a business combination if the transaction, when initially recorded, affects neither accounting In managing the business, management focuses on a number of cash flow measures including “gross cash flow” and “free cash flow”. nor taxable profit. Gross cash flow refers to the operating profit after income tax and adjusted for items which are not of a cash nature, which have been Deferred tax liabilities are not recorded for temporary differences on initial recognition of goodwill and subsequently for goodwill which charged or credited to profit or loss. The gross cash flow is available to finance movements in operating assets and liabilities, investing is not deductible for tax purposes. Deferred tax balances are measured at tax rates enacted or substantively enacted at the reporting and financing activities. date which are expected to apply to the period when the temporary differences will reverse or the tax loss carry forwards will be utilised. Free cash flows are the cash flows available to the debt or equity holders of the business. Deferred tax assets for deductible temporary differences and tax loss carry forwards are recorded only to the extent that it is probable that the temporary difference will reverse in the future and there is sufficient future taxable profit available against which the deductions can be Since these terms are not standard IFRS measures EuroChem Group’s definition of gross cash flow and free cash flow may differ from that utilised. Deferred income tax assets and liabilities are offset when there is a legally enforceable right to offset current tax assets against of other companies. current tax liabilities and when the deferred income taxes assets and liabilities relate to income taxes levied by the same taxation authority on either the same taxable entity or different taxable entities where there is an intention to settle the balances on a net basis. Fixed-term deposits. Fixed-term deposits are deposits held with banks and have various original maturities and can be withdrawn with early notification and/or with penalty accrued or interest income forfeited. They are included in the current assets, except for those with Deferred income tax is provided on post-acquisition retained earnings of subsidiaries, except where the Group controls the subsidiary’s maturities greater than 12 months after the reporting date, which are classified as non-current assets. dividend policy and it is probable that the difference will not be reversed through dividends or upon disposal in the foreseeable future. Share capital. Ordinary shares are classified as equity. Incremental costs directly attributable to the issue of new shares are shown in Deferred income tax liabilities are provided on taxable temporary differences arising from investments in associates and joint arrangements equity as a deduction, net of tax, from the proceeds. Any excess of the fair value of consideration received over the par value of shares except for deferred income tax liabilities for which the timing of the reversal of the temporary difference is controlled by the Group and it is issued is presented in the consolidated statement of changes in equity as a share premium. probable that the temporary differences will not be reversed in the foreseeable future. Generally the Group is unable to control the reversal of the temporary difference for associates. Only where there is an agreement in place that gives the Group the ability to control the reversal Treasury shares. Where the Company or its subsidiaries purchases the Company’s shares, the consideration paid, including any directly of the temporary difference, a deferred income tax liability is not recognised. attributable incremental costs, net of income taxes, is deducted from equity attributable to the Company’s equity holders until the shares are cancelled, reissued or disposed of. Where such shares are subsequently sold or reissued, any consideration received, net of any Deferred income tax assets are recognised on deductible temporary differences arising from investments in associates and joint directly attributable incremental transaction costs and the related income tax effects, is included in equity attributable to the Company’s arrangements only to the extent that it is probable the temporary difference will be reversed in the future and there is sufficient taxable equity holders. profit available against which the temporary difference can be utilised. Capital contribution. Capital contributions received from shareholders in a form of a perpetual loan which does not require repayment, or Uncertain tax positions. The Group’s uncertain tax positions are reassessed by management at the end of each reporting period. for which the Group will be able to avoid any payments is classified as a component of equity within retained earnings and others reserves Liabilities are recorded for income tax positions that are determined by management as more likely than not to result in additional taxes in the consolidated statement of changes in equity. being levied if the positions were to be challenged by the tax authorities. The assessment is based on the interpretation of tax laws that have been enacted or substantively enacted by the end of the reporting period, and any known court or other rulings on such issues. Dividends. Dividends are recognised as a liability and deducted from equity in the period in which they are declared and approved. Liabilities for penalties, interest and taxes other than on income are recognised based on management’s best estimate of the expenditure Dividends are disclosed when they are proposed before the reporting date or proposed or declared after the reporting date but before the required to settle the obligations at the end of the reporting period. Adjustments for uncertain income tax positions are recorded within consolidated financial statements are authorised for issue. the income tax charge. Value added tax (“VAT”). Output VAT related to sales is payable to tax authorities on the earlier of (a) collection of receivables from Inventories. Inventories are recorded at the lower of cost and net realisable value. The cost of inventory is determined on the weighted- customers or (b) delivery of goods or services to customers. VAT incurred on purchases may be offset, subject to certain restrictions, average basis. The cost of finished goods and work in progress comprises direct costs such as raw material, labour, other direct costs and against VAT related to revenues, or can be reclaimed in cash from the tax authorities under certain circumstances. VAT related to sales related production overheads (based on normal operating capacity) as well as transportation expenses to the point of sale, but excludes and purchases is recognised in the consolidated statement of financial position on a gross basis and disclosed separately as an asset borrowing costs. Net realisable value is the estimated selling price in the ordinary course of business, less the estimated cost of and liability. Where provision has been made for the impairment of receivables, the impairment loss is recorded for the gross amount of completion and selling expenses. the debtor, including VAT. Borrowings. Borrowings are initially recognised at fair value, net of transaction costs incurred, and are subsequently stated at amortised cost using the effective interest method.
104100 www.eurochemgroup.comwww.eurochemgroup.com EuroChem 2019Annual Annual Report Report and Accounts and Accounts 2019 101 105 Strategic Report Corporate Governance Financial Statements
Notes to the Consolidated Financial Statements – continued for the year ended 31 December 2019 (all amounts are presented in thousands of US dollars, unless otherwise stated)
2 Basis of preparation and significant accounting policies (continued) 3 Critical accounting estimates and judgements in applying accounting policies Trade and other payables. Trade payables are accrued when the counterparty performs its obligations under the contract and are The Group makes estimates and assumptions that affect the amounts recognised in the consolidated financial statements and the carrying recognised initially at fair value and subsequently measured at amortised cost using the effective interest method. amounts of assets and liabilities. Estimates and judgements are continually evaluated and are based on management’s experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances. Management also Investment grants. Investment grants are recognised at their fair value where there is a reasonable assurance that the grant will be makes certain judgements, apart from those involving estimations, in the process of applying the accounting policies. Judgements that received and the Group will comply with all attached conditions. Investment grants relating to the purchase of property, plant and have the most significant effect on the amounts recognised in the consolidated financial statements and estimates that can cause an equipment are included in non-current liabilities as deferred income and are credited to profit or loss on a straight-line basis over adjustment to the carrying amount of assets and liabilities include: the expected lives of the related assets. Taxation. Judgments are required in determining tax liabilities (Note 33). The Group recognises liabilities for taxes based on estimates Provisions for liabilities and charges. Provisions for liabilities and charges are recognised when the Group has a present legal or of whether additional taxes will be due. Where the final outcome of various tax matters is different from the amounts that were initially constructive obligation as a result of past events, it is probable that an outflow of resources will be required to settle the obligation, and recorded, such differences will impact the tax assets and liabilities in the period in which such determination is made. a reliable estimate of the amount can be made. Provisions are measured at the present value of the expenditures expected to be required to settle the obligation using pre-tax rate that reflects current market assessments of the time value of money and the risks specific to the Deferred income tax asset recognition. The recognised deferred tax assets represent income taxes recoverable through future obligation. The increase in the provision due to the passage of time is recognised as an interest expense. deductions from taxable profits and are recorded in the consolidated statement of financial position. Deferred income tax assets are recorded to the extent that realisation of the related tax benefit is probable. This includes temporary difference expected to reverse in Where the Group expects a provision to be reimbursed, for example under an insurance contract, the reimbursement is recognised as a the future and the availability of sufficient future taxable profit against which the deductions can be utilised. The future taxable profits separate asset but only when the reimbursement is virtually certain. and the amount of tax benefits that are probable in the future are based on the medium term business plan prepared by management Levies and charges, such as taxes other than income tax or regulatory fees based on information related to a period before the obligation and extrapolated results thereafter. The business plan is based on management expectations that are believed to be reasonable under to pay arises, are recognised as liabilities when the obligating event that gives rise to pay a levy occurs, as identified by the legislation that the circumstances (Note 30). triggers the obligation to pay the levy. If a levy is paid before the obligating event, it is recognised as a prepayment. Related party transactions. The Group enters into transactions with related parties in the normal course of business (Note 32). These Asset retirement obligations. The Group’s mining, extraction and processing activities are subject to requirements under federal, state transactions are priced at market rates. Judgement is applied in determining whether transactions are priced at market or non-market and local environmental regulations which result in asset retirement obligations. Such retirement obligations include restoration costs rates where there is no active market for such transactions. Judgements are made by comparing prices for similar types of transactions primarily relating to mining and drilling operations, decommissioning of underground and surfacing operating facilities. with unrelated parties. The present value of a liability for asset retirement obligation is recognised in the period in which it is incurred if respective costs could be Capital contribution. The Group classified the capital contribution received from a shareholder in a form of perpetual loan which does not reliably estimated. The estimated future land restoration costs discounted to present value, are capitalised in underlying items of property, require repayment, or for which the Group will be able to avoid any payments as component of equity. plant and equipment and then depreciated over the useful life of such assets based on the unit-of-production method for oil and gas Recognition of 100% interest in Fertilizantes Tocantins Ltda. In 2016, the Group entered into agreement with Fertilizantes Tocantins Ltda, assets and on the straight-line basis for other assets. The unwinding of the obligation is recognised in profit or loss as part of other according to which the Group acquired 50% interest plus one share and entered into put and call options for the remaining 50% interest financial gain/loss. Actual restoration costs are recognised as expenses against the provision when incurred. minus one share to be executed in 2022. Since put and call options will be executed simultaneously at the same exercise price, the Changes to estimated future costs are recognised in the consolidated statement of financial position by either increasing or decreasing the judgement was applied that the risks and rewards associated with 100% interest in Fertilizantes Tocantins Ltda were transferred to the provision for land restoration and asset to which it relates. The Group reassesses its estimation of land restoration provision as at the end Group on 1 September 2016, thus, no non-controlling interest was recognised and the transaction was accounted for as the acquisition of each reporting period. of 100% interest in the company. The liability under the put and call options scheme payable in 2022 is assessed on an annual basis and subject to unwinding. The valuation technique used to measure the liability arising from contingent consideration is based on calculating Revenue recognition. Revenue from contracts with customers is recognised when control of the goods or services is transferred to a the present value of the future expected cash flows. customer. The amount of revenue recognised reflects the consideration the Group expects to receive in exchange for goods or services, taking into account any trade, volume and other discounts. Advances received before the control passes to a customer are recognised as the contract liabilities. There are no other contract liabilities. The amount of consideration does not contain a significant financial 4 Adoption of new or revised standards and interpretations component as payment terms for the majority of contracts are less than one year. In addition to those disclosed in note 2, other new amendments and improvements to standards set out below became effective 1 January 2019 and did not have any impact or did not have a material impact on the Group’s consolidated financial statements: Contracts with customers for the supply of products use a variety of delivery terms. In a number of contracts Group is responsible for providing shipping services after the date at which control of the goods passes to the customer at the loading point. Under IFRS 15 • Annual improvements to IFRSs 2015-2017 cycle; “Revenue from Contracts with Customers” such shipping revenue is required to be accounted for as a separate performance obligation • IFRIC 23 “Uncertainty over Income Tax Treatments”; and should be recognised over time as the service is rendered. The Group allocates the transaction price to each performance obligation • Amendments to IFRS 9 – Prepayment Features with Negative Compensation; based on the relative stand-alone selling prices of the product and shipping services. • Amendments to IAS 28 – Long-term Interests in Associates and Joint Ventures; In the sales disclosure the revenue of certain product groups includes the proceeds from shipping services presented in the note as well. • Amendments to IAS 19 – Plan Amendment, Curtailment or Settlement. Costs related to rendering of shipping services are mainly represented by transportation expenses and included in distribution costs A number of new standards, amendments to standards and interpretations are not yet effective as at 31 December 2019, and have not disclosed in the corresponding note. been early adopted by the Group: Sales are shown net of VAT and other sales taxes. • Amendments to IFRS 10 and IAS 28 – Sale or Contribution of Assets between an Investor and its Associate or Joint Venture; • IFRS 17 “Insurance contracts”; Interest income is recognised on a time-proportion basis using the effective interest method. • Amendments to the Conceptual Framework for Financial Reporting; Employee benefits. Wages, salaries, contributions to the state pension and social insurance funds, paid annual leave and sick leave, • Amendments to IAS 1 and IAS 8 – Definition of materiality; bonuses, and non-monetary benefits are accrued in the year in which the associated services are rendered by the employees of the • Amendments to IFRS 9, IAS 39 and IFRS 7 – Interest rate benchmark reform. Group. The following new standards, amendments to standards and interpretations were early adopted by the Group starting from the annual A number of the Group’s European subsidiaries operates defined benefit pension plans, which represent an amount of pension benefit period beginning on 1 January 2019: that an employee will receive on retirement, usually dependent on one or more factors such as age, years of service and compensation. The defined benefit obligation is calculated annually by independent actuaries using the projected unit credit method. Remeasurements • Amendments to IFRS 3 – Definition of a business. of post-employment benefit obligations are recognised in other comprehensive income. The defined pension obligation of the Group is Unless otherwise described above, the new standards, amendments to standards and interpretations are expected to have no impact or not material. to have a non-material impact on the Group’s consolidated financial statements. Earnings/(loss) per share. Earnings/(loss) per share is determined by dividing the profit or loss attributable to equity holders of the Company by the weighted average number of ordinary shares outstanding during the reporting period. Segment reporting. A segment is a component of the Group that is engaged in business activities from which it may earn revenues and incur expenses. Operating segments are reported in a manner consistent with the internal reporting provided to the chief operating decision-maker. The chief operating decision-maker is responsible for allocating resources and assessing performance of the operating segments.
106102 www.eurochemgroup.comwww.eurochemgroup.com EuroChem 2019Annual Annual Report Report and Accounts and Accounts 2019 103 107 Strategic Report Corporate Governance Financial Statements
Notes to the Consolidated Financial Statements – continued for the year ended 31 December 2019 (all amounts are presented in thousands of US dollars, unless otherwise stated)
5 Principal subsidiaries, associates and joint ventures 5 Principal subsidiaries, associates and joint ventures (continued) The Group had the following principal subsidiaries, associates and joint ventures as at 31 December 2019: Percentage Country Name Nature of business of ownership of registration Percentage Country Depo-EuroChem, LLC Logistics 100% Russia Name Nature of business of ownership of registration EuroChem-Energo, LLC Other service 100% Russia EuroChem Group AG Holding and Trading company – Switzerland EuroChem Usolsky Mining S.à r.l. Holding company 100% Luxemburg Subsidiaries: EuroChem International Holding B.V. Holding company 100% Netherlands Industrial Group Phosphorite, LLC Manufacturing 100% Russia MCC EuroChem JSC Holding company 100% Russia Azot, JSC Manufacturing 100% Russia EuroChem SaratovKaliy, LLC Potash project under development 100% Russia Novomoskovsky Chlor, LLC Manufacturing 100% Russia EuroChem-Terminal Nevinnomyssk, LLC Logistics 100% Russia Nevinnomyssky Azot, JSC Manufacturing 100% Russia Geres Fertilizers, LLP Phosphate project under development 100% Kazakhstan EuroChem-Belorechenskie Minudobrenia, LLC Manufacturing 100% Russia Azottech, LLC Blasting and drilling 74.99% Russia Kovdorsky GOK, JSC Mining 100% Russia Joint ventures: Lifosa AB Manufacturing 100% Lithuania EuroChem – Migao Ltd. Holding company 50% Hong-Kong* EuroChem Antwerpen NV Manufacturing 100% Belgium Thyssen Schachtbau EuroChem Drilling, LLC Drilling 45% Russia EuroChem-VolgaKaliy, LLC Potash project under development 100% Russia EuroChem-Usolsky potash complex, LLC Mining 100% Russia * Represents the country of incorporation of holding company which owns manufacturing facilities located in Yunnan, China EuroChem-ONGK, LLC Gas project under development 100% Russia During the year ended 31 December 2019, the main changes in Group’s structure were as follows: EuroChem Northwest, JSC Manufacturing 100% Russia Percentage of EuroChem-Fertilizers, LLP Mining 100% Kazakhstan ownership as at Astrakhan Oil and Gas Company, LLC Gas project under development 100% Russia 31 December Name Nature of business Main changes in 2019 2019 Sary-Tas Fertilizers, LLP Other service 85.79% Kazakhstan Subsidiaries: EuroChem Karatau, LLP Manufacturing 100% Kazakhstan EuroChem North America Trading and Distribution Merger of Ben-Trei Ltd. into Eurochem Trading USA Corp 100% Kamenkovskaya Oil and Gas Company LLP Gas project under development 100% Kazakhstan Corp. and change in name to EuroChem North America Corp. EuroChem Trading GmbH Trading 100% Switzerland Geres Fertilizers, LLP Phosphate project under Acquisition of assets 100% EuroChem North America Corp. Trading and Distribution 100% USA development EuroChem USA, LLC Ammonia project 100% USA Azottech, LLC Blasting and drilling Step-up acquisition of additional 50.1% interest 74.99% EuroChem Agro SAS Distribution 100% France EuroChem Agro Turkey Distribution Disposal of interest – EuroChem Agro Asia Pte. Ltd. Distribution 100% Singapore Associates: EuroChem Agro Iberia SL Distribution 100% Spain Hispalense de Líquidos S.L. Distribution Disposal of interest – EuroChem Agricultural Trading Hellas SA Distribution 100% Greece EuroChem Agro Spa Distribution 100% Italy EuroChem Agro GmbH Distribution 100% Germany EuroChem Agro México SA de CV Distribution 100% Mexico EuroChem Agro Hungary Kft Distribution 100% Hungary Agrocenter EuroChem Srl Distribution 100% Moldova EuroChem Agro Bulgaria Ead Distribution 100% Bulgaria EuroChem Agro doo Beograd Distribution 100% Serbia Emerger Fertilizantes S.A. Distribution 100% Argentina EuroChem Comercio de Produtos Quimicos Ltda. Distribution 100% Brazil Fertilizantes Tocantins Ltda Distribution 50% plus 1 share Brazil EuroChem Agro Trading (Shenzhen) Co., Ltd. Distribution 100% China EuroChem Trading RUS, LLC Distribution 100% Russia Ural-RemStroiService, LLC Repair and constructions 100% Russia Kingisepp RemStroiService, LLC Repair and constructions 100% Russia Novomoskovsk RemStroiService, LLC Repair and constructions 100% Russia Nevinnomyssk RemStroiService, LLC Repair and constructions 100% Russia Volgograd RemStroiService, LLC Repair and constructions 100% Russia Berezniki Mechanical Works, JSC Repair and constructions 100% Russia Tulagiprochim, JSC Design engineering 100% Russia EuroChem-Project, LLC Design engineering 100% Russia Harvester Shipmanagement Ltd. Logistics 100% Cyprus Eurochem Logistics International, UAB Logistics 100% Lithuania EuroChem Terminal Sillamäe Aktsiaselts Logistics 100% Estonia EuroChem Terminal Ust-Luga, LLC Logistic project under development 100% Russia Tuapse Bulk Terminal, LLC Logistics 100% Russia Murmansk Bulkcargo Terminal, LLC Logistics 100% Russia
108104 www.eurochemgroup.comwww.eurochemgroup.com EuroChem 2019Annual Annual Report Report and Accounts and Accounts 2019 105 109 Strategic Report Corporate Governance Financial Statements
Notes to the Consolidated Financial Statements – continued for the year ended 31 December 2019 (all amounts are presented in thousands of US dollars, unless otherwise stated)
6 Fair value of financial instruments 6 Fair value of financial instruments (continued) Management applies judgment in categorising financial instruments using the fair value hierarchy. The significance of a valuation input is b) Assets and liabilities not measured at fair value but for which fair value is disclosed assessed against the fair value measurement in its entirety. Financial assets and liabilities carried at amortised cost Recurring fair value measurements The carrying amounts of trade and other receivables, trade and other payables, contingent consideration related to business combinations Recurring fair value measurements are those that the accounting standards require or permit in the consolidated statement of financial and originated loans approximate their fair values and are included into Level 3 of fair value hierarchy. Cash and cash equivalents and position at the end of each reporting period. fixed-terms deposits are carried at amortised cost which approximates their current fair value, included in Level 2 of fair value hierarchy. The fair values in Level 2 and Level 3 of the fair value hierarchy were estimated using the discounted cash flows valuation technique. a) Financial instruments carried at fair values Loans received and bank borrowings are carried at amortised cost. The fair value of floating rate instruments normally approximates The recurring fair value measurements are included into Level 2 of the fair value hierarchy and are as follows. their carrying amount. The estimated fair value of fixed interest rate instruments is based on estimated future cash flows expected to 31 December 31 December be received discounted at current interest rates for new instruments with similar credit risk and remaining maturity. 2019 2018 Fair values analysed by level in the fair value hierarchy and the carrying value of liabilities not measured at fair value are as follows: Financial assets Current Financial assets 31 December 2019 Non-deliverable foreign exchange forward contracts 8,683 74 Level 1 Level 2 Level 3 Carrying Fair value Fair value Fair value value Deliverable foreign exchange forward contracts – 806 Financial liabilities Swap contracts – 246 • RUB-denominated bonds payable 1,109,647 – – 1,076,330 Cross-currency interest swaps 484 – • US$-denominated bonds payable 1,020,144 – – 950,877 Total current financial assets 9,167 1,126 • Long-term US$-denominated fixed interest loans – – 674,789 650,000
• Long-term RUB-denominated fixed interest loans – – 34,079 36,684 Non-current Financial assets • Long-term BRL-denominated fixed interest loans – – 1,406 1,443 Cross-currency interest swaps 59,354 – Total financial liabilities 2,129,791 – 710,274 2,715,334 Total non-current financial assets 59,354 –
Total assets recurring fair value measurements 68,521 1,126 31 December 2018 Level 1 Level 2 Level 3 Carrying Financial liabilities Fair value Fair value Fair value value Current Financial liabilities Financial liabilities Non-deliverable foreign exchange forward contracts 8,756 6,752 • RUB-denominated bonds payable 435,810 – – 431,332 Deliverable foreign exchange forward contracts – 1,278 • US$-denominated bonds payable 979,785 – – 995,779 Commodity swaps 332 – • Long-term US$-denominated fixed interest loans – – 545,297 550,000 Commodity collars 1,717 – • Long-term RUB-denominated fixed interest loans – – 61,267 66,863 Cross-currency interest swaps 15,124 4,599 • Long-term BRL-denominated fixed interest loans – – 1,837 2,019 Total current financial liabilities 25,929 12,629 Total financial liabilities 1,415,595 – 608,401 2,045,993 The following information sets out the key inputs relevant to the determination of the fair value of the liabilities for which fair value Non-current Financial liabilities information is provided as a disclosure only. Non-deliverable foreign exchange forward contracts 7,453 6,869 • For US$ and RUB-denominated bonds traded on organised financial markets (Irish stock exchange and Moscow Exchange), quotations Cross-currency interest swaps – 50,234 or executable prices are used as the key inputs to fair value determination. These instruments are included in Level 1 of the fair value Total non-current financial liabilities 7,453 57,103 hierarchy. Total liabilities recurring fair value measurements 33,382 69,732 • The fair value of long-term loans and borrowings bearing a fixed interest rate is determined by a discounted cash flows method. The discount factor applied to principal and interest repayments in the valuation model is calculated as a risk free rate at the reporting For derivative financial instruments at fair value through profit or loss, which typically include foreign exchange forward contracts, cross date adjusted for the Group’s credit risk. The Group’s credit risk component in the discount factor at inception is assumed to remain currency interest rate swaps, commodity swaps etc., the fair values are based on recurring mark-to-market valuations provided by the unchanged on the reporting date and is calculated as a difference between the contract interest rate and the risk-free interest rate, financial institutions which deal in these financial instruments. in effect at loan inception date for debt instruments with similar maturities. These instruments are included in Level 3 of the fair value hierarchy.
110106 www.eurochemgroup.comwww.eurochemgroup.com EuroChem 2019Annual Annual Report Report and Accounts and Accounts 2019 107 111 Strategic Report Corporate Governance Financial Statements
Notes to the Consolidated Financial Statements – continued for the year ended 31 December 2019 (all amounts are presented in thousands of US dollars, unless otherwise stated)
6 Fair value of financial instruments (continued) 6 Fair value of financial instruments (continued) During 2019 and 2018 there were no transfers between levels 1, 2 and 3 of the fair value hierarchy. 31 December 31 December 2019 2018 The Group’s financial assets and liabilities were as follows: Financial liabilities 31 December 31 December 2019 2018 Non-current financial liabilities Financial assets Bank borrowings and other loans received 1,405,458 2,003,275 Bonds issued 1,660,982 1,211,261 Non-current financial assets Project Finance 435,192 420,070 Restricted cash 37,049 2,276 Derivative financial liabilities 7,453 57,103 Originated loans 1,000 3,864 Other non-current liabilities including: Derivative financial assets 59,354 – Contingent liability related to business combination 172,946 122,866 Other non-current assets including: Long-term portion of deferred payables related to acquisition of additional interest in subsidiary – 1,821 Long-term receivables due to sale of subsidiaries – 9,431 Long-term portion of deferred payables related to mineral rights acquisition 11,346 11,088 Other assets 4,012 4,012 Long-term portion of lease payables 57,014 – Total non-current financial assets 101,415 19,583 Total non-current financial liabilities 3,750,391 3,827,484
Current financial assets Current financial liabilities Restricted cash 3,895 2,850 Bank borrowings and other loans received 1,085,568 371,133 Trade receivables 443,902 366,836 Project Finance 54,405 21,612 Derivative financial assets 9,167 1,126 Bonds issued 366,225 215,850 Other receivables and other current assets including: Derivative financial liabilities 25,929 12,629 Other receivables 45,610 27,426 Trade payables 508,138 470,264 Collateral held by banks to secure derivative transactions 464 – Other accounts payable and accrued expenses including: Interest receivables 606 580 Interest payables 42,177 27,457 Fixed-term deposits 124 1,801 Short-term portion of lease payables 10,193 – Cash and cash equivalents 313,241 341,911 Short-term portion of deferred payables related to business combinations and acquisition of additional Total current financial assets 817,009 742,530 interest in subsidiary 1,500 1,500 Total financial assets 918,424 762,113 Short-term portion of deferred payables related to mineral rights acquisition 1,642 1,460 Total current financial liabilities 2,095,777 1,121,905 Total financial liabilities 5,846,168 4,949,389
112108 www.eurochemgroup.comwww.eurochemgroup.com EuroChem 2019Annual Annual Report Report and Accounts and Accounts 2019 109 113 Strategic Report Corporate Governance Financial Statements
Notes to the Consolidated Financial Statements – continued for the year ended 31 December 2019 (all amounts are presented in thousands of US dollars, unless otherwise stated)
6 Fair value of financial instruments (continued) 7 Segment information As required by the amendment to IAS 7 “Statement of cash flows”, the Group presents the reconciliation of movements in liabilities arising The Group has a vertically integrated business model conducted by three operating divisions, representing reportable segments, which are from financing activities: Mining, Fertilizers and Commercial:
Bank • Mining division encompasses the extraction of ores to obtain apatite, baddeleyite, iron-ore concentrates and phosphorite; as well as borrowings the potash production at the Verkhnekamskoe deposit that started in 2018 and the development of the second potassium salt deposit and other Bonds Project Interest Lease (potash) at the Gremyachinskoe deposit. The Division also includes the exploration and subsequent development of hydrocarbons loans received issued Finance payable liabilities Total fields; Balance at 1 January 2019 2,374,408 1,427,111 441,682 27,457 67,184 4,337,842 Fertilizers division includes the production of mineral fertilizers (nitrogen, phosphate and complex) and industrial products; • Commercial division is responsible for the sale of the complete range of products produced by the Group as well as third-party products Cash flows • through the Group’s global distribution network spanning across Europe, Russia, North and Latin America, Central and South-East Asia. Proceeds 1,257,717 1,506,887 93,746 – – 2,858,350 The Division also covers all supply chain operations including transportation services, purchase and delivery of raw materials and Repayments (1,159,625) (978,694) (35,583) – (9,945) (2,183,847) finished goods, as well as freight forwarding and other logistic services. Prepaid and additional transaction costs (2,050) (7,859) (5,563) – – (15,472) Interest paid – – – (210,886) (4,531) (215,417) Since 2019, the Logistics and Sales divisions were integrated in Commercial Division, the operating results for the years ended 31 December 2019 and 31 December 2018 were jointly presented in Commercial Division.
Non-cash flows Starting 2019, the Oil & Gas division was included in the Group’s corporate structure as a part of Mining division, the operating results for Loans and lease liabilities acquired in a business the year ended 31 December 2019 were presented in the Mining division. The comparative information for the year ended 31 December combination 2,834 – – – 675 3,509 2018 was not changed as being immaterial. Lease liabilities arising due to new contracts – – – – 7,527 7,527 Activities not assigned to a particular division are reported in “Other”. These include certain service activities, central management and Interest expenses accrued – – – 224,192 4,553 228,745 other items. Аll intersegment transactions and unrealised profit in inventory from intragroup sales are eliminated through “Elimination”. Amortisation of transaction costs 6,719 5,715 19,091 – – 31,525 The review of financial reports of the Group, evaluation of the operating results and allocation of resources between the operating divisions Financial foreign exchange (gain)/loss, net (8,302) (35,135) (78,386) (403) 15 (122,211) are performed by the Management Board (considered to be the chief operating decision maker in the Group). The development and Currency translation difference, net 19,325 112,892 54,610 1,817 1,729 190,373 approval of strategies, market and risk analysis, investment focus, technological process changes are undertaken mostly in accordance Other movements – (3,709) – – – (3,709) with the operating divisions. Budgets and financial reports are prepared in a standard format according to the IFRS accounting policy Balance at 31 December 2019 2,491,026 2,027,208 489,597 42,177 67,207 5,117,215 adopted by the Group. Sales between divisions are carried out on an arm’s length basis. The Management Board assesses the performance of the operating divisions based on, among other factors, a measure of EBITDA (profit Bank before taxation adjusted by interest expense, depreciation and amortisation, financial foreign exchange gain or loss, other non-cash and borrowings and other Bonds Project Interest one-off items, excluding profit attributed to non-controlling interests), allocated by division according to internal rules. Since the EBITDA loans received issued Finance payable Total term is not a standard IFRS measure, EuroChem Group’s definition of EBITDA may differ from that of other companies. Balance at 1 January 2018 1,880,610 1,599,504 959,373 29,604 4,469,091 The division results for the year ended 31 December 2019 were:
External sales Internal sales Total sales EBITDA Cash flows Proceeds 2,723,656 – 219,309 – 2,942,965 Mining 48,083 945,420 993,503 479,448 Repayments (2,136,094) (79,697) (750,000) – (2,965,791) Fertilizers 66,722 3,281,679 3,348,401 895,362 Prepaid and additional transaction costs (10,836) (62) (5,285) – (16,183) Commercial 6,071,538 273,891 6,345,429 244,096 Interest paid – – – (219,873) (219,873) Other 5,530 10,215 15,745 (117,534) Elimination (7,903)* (4,511,205) (4,519,108) 45,187
Non-cash flows Total 6,183,970 – 6,183,970 1,546,559 Interest expenses accrued – – – 220,473 220,473 * Elimination of revenue earned before an asset is ready for its intended use Amortisation of transaction costs 5,157 3,182 18,313 – 26,652 Financial foreign exchange (gain)/loss, net (70,068) 93,037 126,370 1,286 150,625 Currency translation difference, net (18,017) (188,853) (126,398) (4,033) (337,301) Balance at 31 December 2018 2,374,408 1,427,111 441,682 27,457 4,270,658
114110 www.eurochemgroup.comwww.eurochemgroup.com EuroChem 2019Annual Annual Report Report and Accounts and Accounts 2019 111 115 Strategic Report Corporate Governance Financial Statements
Notes to the Consolidated Financial Statements – continued for the year ended 31 December 2019 (all amounts are presented in thousands of US dollars, unless otherwise stated)
7 Segment information (continued) 7 Segment information (continued) The division results for the year ended 31 December 2018 were: The analysis of Group sales by region was:
External sales Internal sales Total sales EBITDA 2019 2018 Mining 11,601 675,608 687,209 304,401 Europe 1,632,204 1,600,106 Fertilizers 66,653 3,364,594 3,431,247 1,032,777 Latin America 1,522,486 1,154,193 Commercial 5,496,682 168,866 5,665,548 301,805 Russia 1,055,830 1,062,519 Other 2,536 14,259 16,795 (39,336) North America 991,435 841,997 Elimination – (4,223,327) (4,223,327) (82,721) Asia Pacific 617,782 526,780 Total 5,577,472 – 5,577,472 1,516,926 CIS* 260,656 262,158 Africa 103,577 129,719 A reconciliation of EBITDA to profit before taxation is provided below: Total sales 6,183,970 5,577,472 Note 2019 2018 * Including associate states EBITDA 1,546,559 1,516,926 The sales are allocated to regions based on the destination country. During the year ended 31 December 2019, the Group had sales in excess of 10% to Brazil, Russia and the United States of America, representing 20.7%, 17.1% and 12.4% of total revenues, respectively Depreciation and amortisation 27 (388,555) (308,336) (2018: sales to Russia, Brazil and the United States of America, representing 19.1%, 16.5% and 12.8% of the total revenues, respectively). (Impairment)/reversal of impairment/(write-off) of idle property, plant and equipment 25,28 (7,313) (1,459) Non-recurring income/(expenses), net 28 37,619 (6,155) During 2019 and 2018 there were no sales in excess of 10% to one customer. Gain/(loss) from disposal of subsidiaries, net – (45,753) Interest expense (174,734) (94,480) 8 Property, plant and equipment Financial foreign exchange gain/(loss), net 168,360 (162,070) Movements in the carrying amount of property, plant and equipment were:
Other financial gain/(loss), net 29 57,682 (159,804) Machinery Non-controlling interests 558 (27) Land and Land Transfer and Assets under Profit before taxation 1,240,176 738,842 Buildings Improvements devices equipment Transport Other construction Total Cost The divisional capital expenditure on property, plant and equipment, intangible assets and mineral rights for the years ended 31 December Balance at 1 January 2019 889,112 952,919 295,467 2,092,462 253,117 136,792 3,697,031 8,316,900 2019 and 31 December 2018 were: Adjustment due to adoption of IFRS 16 24,632 36,951 – 7,066 – – – 68,649 2019 2018 Balance at 1 January 2019, adjusted 913,744 989,870 295,467 2,099,528 253,117 136,792 3,697,031 8,385,549 Mining 514,214 594,559 Additions and transfers from assets Fertilizers 310,032 447,863 under construction 421,372 664,401 324,178 1,017,570 126,432 55,594 (1,503,115) 1,106,432 Commercial 88,933 69,921 Additions through business Other 18,424 19,431 combination 618 – – 1,849 – 1 1,185 3,653 Elimination 18,083 (20,370) Disposals (2,362) (5,877) (5,165) (46,974) (14,385) (1,466) (534) (76,763) Total capital expenditure 949,686 1,111,404 Changes in estimates of asset retirement obligations (Note 22) – 18,941 – – – – – 18,941 The analysis of non-current assets other than financial instruments, deferred income tax assets and other non-current assets by (Impairment)/reversal of geographical location was: impairment/(write-off) of idle property, 31 December 31 December plant and equipment – – (70) (3,382) (41) (18) (5,612) (9,123) 2019 2018 Currency translation difference 103,023 125,827 42,236 206,243 33,549 16,200 377,096 904,174 Russia 7,696,954 6,236,501 Balance at 31 December 2019 1,436,395 1,793,162 656,646 3,274,834 398,672 207,103 2,566,051 10,332,863 Europe 819,978 806,921 Kazakhstan 264,693 221,441 Accumulated Depreciation Brazil 241,887 241,154 Balance at 1 January 2019 (166,510) (159,487) (144,704) (976,734) (122,219) (81,156) – (1,650,810) Other countries 100,602 92,659 Charge for the year (55,281) (49,823) (31,537) (222,885) (27,891) (16,716) – (404,133) Total 9,124,114 7,598,676 Disposals 2,014 5,634 4,622 46,803 12,576 1,227 – 72,876 (Impairment)/reversal of The Group’s main manufacturing facilities are based in Russia, Lithuania, Belgium and Kazakhstan. impairment/(write-off) of idle property, plant and equipment – – 34 1,725 41 10 – 1,810 Currency translation difference (16,114) (16,854) (13,832) (93,320) (13,058) (8,766) – (161,944) Balance at 31 December 2019 (235,891) (220,530) (185,417) (1,244,411) (150,551) (105,401) – (2,142,201)
Net Carrying Value Balance at 1 January 2019, adjusted 747,234 830,383 150,763 1,122,794 130,898 55,636 3,697,031 6,734,739 Balance at 31 December 2019 1,200,504 1,572,632 471,229 2,030,423 248,121 101,702 2,566,051 8,190,662
116112 www.eurochemgroup.comwww.eurochemgroup.com EuroChem 2019Annual Annual Report Report and Accounts and Accounts 2019 113 117 Strategic Report Corporate Governance Financial Statements
Notes to the Consolidated Financial Statements – continued for the year ended 31 December 2019 (all amounts are presented in thousands of US dollars, unless otherwise stated)
8 Property, plant and equipment (continued) 8 Property, plant and equipment (continued) Machinery Land and Land Transfer and Assets under Evaluation and exploration expenditures Buildings Improvements devices equipment Transport Other construction Total Potash fields. At 31 December 2019, the Group has capitalised expenses relating to the evaluation and exploration stages of the potash Cost fields of US$61,156 thousand, including borrowing costs capitalised of US$7,327 thousand (31 December 2018: US$42,108 thousand, Balance at 1 January 2018 615,509 648,835 312,685 2,067,848 300,785 145,970 4,469,708 8,561,340 including borrowing costs capitalised of US$4,809 thousand). Additions and transfers from assets under Hydrocarbons fields. At 31 December 2019, the Group has capitalised expenses relating to the evaluation and exploration stages of construction 400,607 459,387 34,396 372,155 35,257 17,810 (12,627) 1,306,985 the hydrocarbon fields of US$30,889 thousand (31 December 2018: US$25,475 thousand). Disposal due to sale of subsidiaries (2,052) (1,140) – (1,815) (29,652) (309) (1,321) (36,289) Disposals (9,866) (5,633) (2,249) (23,257) (6,176) (1,978) (186) (49,345) These expenses were included in the assets under construction of “Property, plant and equipment” in the consolidated statement of financial position. Substantially, these costs have been paid in the same period when incurred. Changes in estimates of asset retirement obligations (Note 22) – (6,138) – – – – – (6,138) Borrowing costs capitalised (Impairment)/reversal of During the year ended 31 December 2019, borrowing costs totalling US$80,983 thousand were capitalised in property, plant and impairment/(write-off) of idle property, equipment at an average interest rate of 5.28% p.a. (2018: US$151,465 thousand capitalised at an average interest rate of 5.66% p.a.). plant and equipment (67) – (7) (396) (18) (521) (1,323) (2,332) Currency translation difference (115,019) (142,392) (49,358) (322,073) (47,079) (24,180) (757,220) (1,457,321) 9 Mineral rights Balance at 31 December 2018 889,112 952,919 295,467 2,092,462 253,117 136,792 3,697,031 8,316,900 31 December 31 December 2019 2018 Accumulated Depreciation Rights for exploration and production: Balance at 1 January 2018 (168,789) (153,046) (146,030) (963,000) (130,602) (81,869) – (1,643,336) Verkhnekamskoe potash deposit 68,726 63,775 Charge for the year (31,207) (37,501) (23,585) (183,636) (23,467) (15,870) – (315,266) Gremyachinskoe potash deposit 72,896 66,611 Disposal due to sale of subsidiaries 289 184 – 742 3,873 135 – 5,223 Kok-Jon and Gimmelfarbskoe phosphate deposits 10,868 11,417 Disposals 7,322 5,128 2,097 21,022 5,502 1,684 – 42,755 Geres phosphate deposit 20,990 – (Impairment)/reversal of Kovdorsky apatite deposit 2,135 2,016 impairment/(write-off) of idle property, Rights for exploration, evaluation and extraction: plant and equipment 33 – 7 326 18 489 – 873 Belopashninskiy potash deposit 14,297 12,741 Currency translation difference 25,842 25,748 22,807 147,812 22,457 14,275 – 258,941 Ozinsky hydrocarbon deposit 3,983 3,549 Balance at 31 December 2018 (166,510) (159,487) (144,704) (976,734) (122,219) (81,156) – (1,650,810) Perelyubsko-Rubezhinskiy hydrocarbon deposit 357 318 Vostochno-Perelyubskiy potash deposit 485 432 Net Carrying Value Zapadno-Perelyubskiy potash deposit 378 337 Balance at 1 January 2018 446,720 495,789 166,655 1,104,848 170,183 64,101 4,469,708 6,918,004 Rights for proven and unproven mineral resources: Balance at 31 December 2018 722,602 793,432 150,763 1,115,728 130,898 55,636 3,697,031 6,666,090 Astrakhan hydrocarbon deposit 138,365 123,298 Kamenkovsky hydrocarbon deposit 31,505 31,259 Total mineral rights 364,985 315,753
Under the terms of valid licences for the exploration and development of mineral resource deposits, the Group is required to comply with a number of conditions, including preparation of design documentation, commencement of the construction of mining facilities and commencement of the extraction of mineral resources by certain dates. If the Group fails to materially comply with the terms of the licence agreements there are circumstances whereby the licences can be revoked. Management of the Group believes that the Group faces no material regulatory risks in relation to the validity and operation of any of its licences. Verkhnekamskoe potash deposit In accordance with the conditions of licence agreement and related licence amendments for developing the potash sites, the Group has major commitments in respect of the timing for the potash extraction. The Group is in compliance with the licence terms, commenced production activities and continues construction and mining activities at Verkhnekamskoe potash deposit. As at 31 December 2019, the carrying amount of property, plant and equipment (including construction in progress) related to Verkhnekamskoe potash deposit was US$2,060 million (2018: US$1,633 million). Gremyachinskoe potash deposit In accordance with the conditions of licence agreement and related licence amendments for developing the potash deposit, the Group has major commitments in respect of the timing for the construction of the mining facilities and for the potash extraction. The Group is in compliance with the licence terms and continues with construction of the mining and surface facilities at site. Management believes that each stage under the current licence terms for Gremyachinskoe potash deposit development will be completed according to the schedules. As at 31 December 2019, Gremyachinskoe potash deposit was in the development phase with the shaft sinking completed for two shafts at Gremyachinskoe while the third shaft has been delayed due to a water inflow which is being managed. Management has worked out a program which will allow the Group to continue sinking at the third shaft without breaching any of the terms of the licence agreement for Gremyachinskoe deposit.
118114 www.eurochemgroup.comwww.eurochemgroup.com EuroChem 2019Annual Annual Report Report and Accounts and Accounts 2019 115 119 Strategic Report Corporate Governance Financial Statements
Notes to the Consolidated Financial Statements – continued for the year ended 31 December 2019 (all amounts are presented in thousands of US dollars, unless otherwise stated)
9 Mineral rights (continued) 11 Intangible assets As at 31 December 2019, the carrying amount of property, plant and equipment (including construction in progress) related to Movements in the carrying amount of intangible assets were: Gremyachinskoe potash deposit was US$1,876 million (2018: US$1,483 million). Know-how For the purpose of impairment testing of the Verkhnekamskoe and Gremyachinskoe potash deposits management has compared the and Acquired production Customer software and Trademarks recoverable amount of the non-current assets related to these projects, determined as their value in use with consideration of a recent technology relation-ships licences and others Total industry outlook and the operational plans, with the carrying amount of these assets and concluded that no impairment should be Cost recognised in respect of these assets as at 31 December 2019 and 31 December 2018. Balance at 1 January 2019 100,995 124,709 32,357 41,717 299,778 10 Goodwill Adjustment due to adoption of IFRS 16 – – – (2,152) (2,152) Balance at 1 January 2019, adjusted 100,995 124,709 32,357 39,565 297,626 Movements in goodwill arising from the acquisition of subsidiaries are: Additions – – 235 4,304 4,539 2019 2018 Disposals – – (237) (161) (398) Carrying amount at 1 January 475,797 516,830 Currency translation difference (2,101) (3,172) 273 1,761 (3,239) Acquisition of subsidiaries 4,011 – Balance at 31 December 2019 98,894 121,537 32,628 45,469 298,528 Disposal of subsidiaries – (60) Currency translation difference (10,704) (40,973) Accumulated Depreciation Carrying amount at 31 December 469,104 475,797 Balance at 1 January 2019 (81,855) (63,893) (30,717) (20,475) (196,940) Adjustment due to adoption of IFRS 16 – – – 577 577 Goodwill impairment test Balance at 1 January 2019, adjusted (81,855) (63,893) (30,717) (19,898) (196,363) Goodwill is allocated to cash-generating units (CGUs) which represent the lowest level within the Group at which the goodwill is monitored Charge for the year (11,368) (13,086) (875) (4,454) (29,783) by management and which are not larger than a segment, as follows: Disposals – – 237 11 248 31 December 31 December Currency translation difference 1,696 1,548 (231) (1,051) 1,962 2019 2018 Balance at 31 December 2019 (91,527) (75,431) (31,586) (25,392) (223,936) EuroChem Antwerpen NV 288,937 295,050
EuroChem Agro 19,468 19,880 Net Carrying Value EuroChem North America Corp. 20,803 20,803 Balance at 1 January 2019, adjusted 19,140 60,816 1,640 19,667 101,263 Fertilizantes Tocantins Ltda 118,149 123,123 Balance at 31 December 2019 7,367 46,106 1,042 20,077 74,592 EuroChem-Project, LLC 11,322 10,089
Azottech, LLC 4,042 – Emerger Fertilizantes S.A. 1,662 2,632 Know-how and Acquired production Customer software and Trademarks Other 4,721 4,220 technology relation-ships licences and others Total Total carrying amount of goodwill 469,104 475,797 Cost The recoverable amount of each CGU was determined based on value-in-use calculations. These calculations use cash flow projections Balance at 1 January 2018 105,587 134,984 34,576 44,159 319,306 based on development strategy and financial budgets approved by management covering a five-year period. Cash flows beyond the five- Additions – – 263 2,551 2,814 year period are extrapolated using the estimated growth rates stated below. The growth rates do not exceed the long-term average growth Disposals – – – (186) (186) rate for the business sector of the economy in which the CGU operates. Currency translation difference (4,592) (10,275) (2,482) (4,807) (22,156) Management determined budgeted prices and expenses based on past performance and market expectations. The weighted average Balance at 31 December 2018 100,995 124,709 32,357 41,717 299,778 growth rate used is consistent with the forecasts included in industry reports. Accumulated Depreciation Assumptions used for value-in-use calculations are listed below: Balance at 1 January 2018 (73,431) (53,635) (31,866) (17,450) (176,382) 31 December 31 December Charge for the year (11,992) (13,857) (1,157) (5,618) (32,624) 2019 2018 Disposals – – – 76 76 Adjusted US$ WACC rates, % p.a. 6.59%-9.74% 6.50%-9.27% Currency translation difference 3,568 3,599 2,306 2,517 11,990 Adjusted BRL WACC rates, % p.a. 9.72% 9.95% Balance at 31 December 2018 (81,855) (63,893) (30,717) (20,475) (196,940) Long-term EUR annual inflation rate, % p.a. 1.70%-2.00% 1.50%-2.10%
Long-term US$ annual inflation rate, % p.a. 2.20%-2.70% 2.10%-2.40% Net Carrying Value Long-term BRL annual inflation rate, % p.a. 4.00%-4.10% 4.21% Balance at 1 January 2018 32,156 81,349 2,710 26,709 142,924 Estimated nominal growth rate beyond the five-year period, % p.a. 2.20% 2.10% Balance at 31 December 2018 19,140 60,816 1,640 21,242 102,838 Performed calculations showed significant excess of recoverable amounts over respective carrying values of each CGU and the changes of 5 bps in the key assumptions will not lead to the impairment. 12 Investment in associates and joint ventures The Group did not recognise any goodwill impairment at 31 December 2019 and 31 December 2018. The Group’s investment in associates and joint ventures was as follows:
31 December 31 December 2019 2018 Investment in joint venture EuroChem-Migao Ltd. 17,462 23,019 Others 7,309 15,179 Total 24,771 38,198
At 31 December 2019 the category “Others” included investment in joint venture Thyssen Schachtbau EuroChem Drilling LLC (31 December 2018: investments in joint ventures Thyssen Schachtbau EuroChem Drilling LLC, Biochem Technologies LLC and associates Hispalense de Liquidos S.L., Azottech LLC), which is immaterial.
120116 www.eurochemgroup.comwww.eurochemgroup.com EuroChem 2019Annual Annual Report Report and Accounts and Accounts 2019 117 121 Strategic Report Corporate Governance Financial Statements
Notes to the Consolidated Financial Statements – continued for the year ended 31 December 2019 (all amounts are presented in thousands of US dollars, unless otherwise stated)
13 Inventories 14 Trade receivables, prepayments, other receivables and other current assets 31 December 31 December (continued) 2019 2018 Analysis of credit quality of trade receivables is presented in Note 34. Finished goods 762,013 682,656 Materials 226,108 225,227 The movements in the ECL allowance/provision for impairment of accounts receivable were: Catalysts 104,475 79,667 Trade Other Work in progress 86,894 63,921 receivables receivables Less: provision for obsolete and damaged inventories (9,262) (6,781) As at 1 January 2019 22,334 13,323 Total inventories 1,170,228 1,044,690 ECL allowance/provision for impairment 5,035 1,148 Write-offs (1,345) (772) 14 Trade receivables, prepayments, other receivables and other current assets ECL allowance/provision for impairment reversed (1,426) (2,922) 31 December 31 December Currency translation difference 408 1,482 2019 2018 Total ECL allowance/provision for impairment of accounts receivable as at 31 December 2019 25,006 12,259 Trade receivables Trade receivables denominated in US$ 279,588 233,414 Trade Other receivables receivables Trade receivables denominated in EUR 56,021 59,214 As at 1 January 2018 8,359 12,058 Trade receivables denominated in RUB 73,754 64,082 ECL allowance/provision for impairment 15,888 4,534 Trade receivables denominated in BRL 46,569 25,425 Write-offs (272) (244) Trade receivables denominated in other currencies 12,976 7,035 ECL allowance/provision for impairment reversed (1,031) (1,047) Less: ECL allowance (25,006) (22,334) Disposal of ECL allowance due to sale of subsidiary (64) – Total trade receivables 443,902 366,836 Currency translation difference (546) (1,978)
Total ECL allowance/provision for impairment of accounts receivable as at 31 December 2018 22,334 13,323 Prepayments, other receivables and other current assets Advances to suppliers 98,037 96,722 VAT recoverable and receivable 149,848 134,110 15 Cash and cash equivalents, fixed-term deposits and restricted cash Other taxes receivable 7,039 4,032 31 December 31 December 2019 2018 Other receivables and other current assets 92,280 67,080 Cash on hand* 90 5,777 Collateral held by banks to secure derivative transactions 464 – Bank balances denominated in US$ 169,311 96,829 Interest receivable 606 580 Bank balances denominated in RUB 10,316 16,827 Less: provision for impairment (12,259) (13,323) Bank balances denominated in EUR 18,335 91,140 Total prepayments, other receivables and other current assets 336,015 289,201 Bank balances denominated in other currencies 16,015 10,110 Total trade receivables, prepayments, other receivables and other current assets 779,917 656,037 Term deposits denominated in US$ 65,805 77,214 Management believes that the fair value of accounts receivable does not differ significantly from their carrying amounts. Term deposits denominated in RUB 6,434 9,467 Term deposits denominated in Euro – 296 During 2019 and 2018 the Group entered into a number of non-recourse factoring arrangements according to which the trade receivables were sold to a factoring company and, thus, derecognised in the consolidated statement of financial position. As at 31 December 2019, Term deposits denominated in other currencies 26,935 34,251 trade receivables of US$135,055 thousand were sold (31 December 2018: US$120,899 thousand). Total cash and cash equivalents 313,241 341,911
As at 31 December 2019, the ECL allowance and provision for impairment of trade receivables, prepayments, other receivables and Fixed-term deposits in different currencies 124 1,801 other current assets amounted to US$37,265 thousand (31 December 2018: US$35,657 thousand). The ageing of these receivables is as follows: Total fixed-term deposits 124 1,801
31 December 31 December 2019 2018 Current restricted cash 3,895 2,850 Less than 3 months 9,250 11,121 Non-current restricted cash 37,049 2,276 From 3 to 12 months 1,216 6,565 Total restricted cash 40,944 5,126 Over 12 months 26,799 17,971 * Includes cash on hand denominated in different currencies. Total 37,265 35,657 Term deposits as at 31 December 2019 and 31 December 2018 were held to meet short-term cash needs and had various original maturities but could be withdrawn on request without any restrictions. As at 31 December 2019, trade receivables of US$47,613 thousand (31 December 2018: US$58,654 thousand) were past due but not individually impaired (only ECL allowance was created for these receivables). Out of this, US$22,602 thousand (31 December 2018: Fixed-term deposits had various original maturities and could be withdrawn with an early notification and/or with a penalty accrued or US$35,318 thousand) were covered either by bank guarantees or backed by solid ratings from independent rating agencies or by internal interest income forfeited. creditworthiness rating and internal payment discipline rating (Note 34). The ageing analysis of these trade receivables from past due date is:
31 December 31 December 2019 2018 Less than 3 months 36,720 54,627 From 3 to 12 months 5,363 2,504 Over 12 months 5,530 1,523 Trade accounts receivable past due not impaired 47,613 58,654
122118 www.eurochemgroup.comwww.eurochemgroup.com EuroChem 2019Annual Annual Report Report and Accounts and Accounts 2019 119 123 Strategic Report Corporate Governance Financial Statements
Notes to the Consolidated Financial Statements – continued for the year ended 31 December 2019 (all amounts are presented in thousands of US dollars, unless otherwise stated)
15 Cash and cash equivalents, fixed-term deposits and restricted cash (continued) 17 Bank borrowings and other loans received No bank balances, term and fixed-term deposits were past due or impaired. The credit quality of bank balances, term and fixed-term Interest rate Interest rate 31 December 31 December deposits which is based on the credit ratings of independent rating agencies, Standard & Poor’s and Fitch Ratings, was as follows*: Currency and rate 2019* 2018* 2019 2018 Current loans and borrowings 31 December 31 December 2019 2018 Short-term unsecured bank loans A to AAA rated 97,250 76,970 US$ with floating rate 3.58%-6.80% 4.11%-5.42% 34,520 85,402 BB- to BBB+ rated 240,289 251,675 US$ with fixed rate 3.41%-4.23% 3.08%-4.85% 477,961 171,363 B- to B+ rated 2,093 2,491 RUB with fixed rate 5.00% 8.30%-10.20% 11,954 11,152 C to CCC rated 2,447 2,293 BRL with fixed rate 7.50% – 9,024 – Unrated 12,140 9,632 Current portion of unsecured targeted loans Total** 354,219 343,061 RUB with fixed rate 5.00% – 2,895 – Current portion of unsecured long-term bank loans * Credit ratings as at 11 January 2020 and 16 January 2019, respectively. US$ with floating rate 3.25%-3.96% 4.67% 497,794 45,955 ** The rest of the consolidated statement of financial position item ‘cash and cash equivalents’ is cash on hand. RUB with fixed rate 7.55%-8.30% 7.60% 53,189 45,703 At 31 December 2019, non-current restricted cash consisted of US$34,723 thousand (31 December 2018: nil) held in a debt service ARS with fixed rate – 19.00%-36.50% – 213 reserve account as required by the Project Finance Facility Agreement (Note 18) and US$1,892 thousand held in bank accounts as Current portion of secured long-term bank loans security deposits for third parties (31 December 2018: US$1,865 thousand) and US$434 thousand held in deposit against possible BRL with floating rate – 10.13% – 59 environmental obligations in compliance with the statutory rules of the Republic of Kazakhstan (31 December 2018: US$411 thousand). BRL with fixed rate 2.94% 2.94%-6.80% 495 13,550 At 31 December 2019, current restricted cash consisted of US$1,010 thousand received under targeted loan agreements with a state Less: short-term portion of transaction costs (2,264) (2,264) industrial development fund (31 December 2018: US$954 thousand) and of US$2,885 thousand held at banks under regulatory Total current loans and borrowings 1,085,568 371,133 requirements for state contracts (31 December 2018: US$1,896 thousand).
16 Equity Interest rate Interest rate 31 December 31 December Currency and rate 2019* 2018* 2019 2018 Share capital. As at 31 December 2019 and 31 December 2018, the nominal registered amount of the Company’s issued share capital in Non-current loans and borrowings Swiss francs (“CHF”) was CHF 100 thousand (US$111 thousand). The total authorised number of ordinary shares is 1,000 shares with a Long-term unsecured bank loans par value of CHF 100 (US$111) per share. All authorised shares were issued and fully paid in 2014. US$ with floating rate – 3.98%-4.01% – 1,020,000 Treasury shares. In August 2019, MCC EuroChem JSC, a Group’s wholly-owned subsidiary, bought from a company that holds business US$ with fixed rate 4.20%-4.60% 3.45%-4.75% 650,000 550,000 interests for Mr. Dmitry Strezhnev 100 ordinary shares of EuroChem Group AG, representing 10% of the issued share capital, for Long-term unsecured targeted loans US$785 million paid in cash (Note 32). RUB with fixed rate 3.00%-5.00% 5.00% 21,275 21,592 The voting rights in the Company’s 100 ordinary shares owned by MCC EuroChem JSC, as well as the rights associated therewith, Long-term portion of unsecured bank loans are suspended. US$ with floating rate 3.25%-3.96% 4.67% 731,215 379,053 Dividends. During 2019 and 2018 the Group did not declare or pay dividends. RUB with fixed rate 7.55%-10.20% 7.70% 11,498 45,271 ARS with fixed rate – 22.00% –2 Capital contribution. In 2016, the Group signed an agreement and subsequently several amendments with AIM Capital S.E. to receive a Long-term portion of secured bank loans capital contribution in a form of a perpetual loan up to US$1 billion with the availability period to 31 December 2020. In 2016 and in 2018 BRL with fixed rate 2.94% 2.94% 948 1,504 the Group received funds of US$250 million and US$600 million, respectively. Less: long-term portion of transaction costs (9,478) (14,147) Other reserves within “Retained earnings and other reserves”. At 31 December 2019 and 31 December 2018, other reserves of the Total non-current loans and borrowings 1,405,458 2,003,275 Company included a cash contribution of US$5 million from AIM Capital S.E., the parent company. Total loans and borrowings 2,491,026 2,374,408 * Contractual interest rate on 31 December 2019 and 31 December 2018, respectively. According to IFRS 7, Financial Instruments: Disclosures, an entity shall disclose the fair value of financial liabilities. The fair value of short-term bank borrowings and borrowings bearing floating interest rates is not materially different from their carrying amounts. The fair value of the long-term borrowings bearing a fixed interest rate is estimated based on expected cash flows discounted at a prevailing market interest rate. As at 31 December 2019, the total fair value of long-term loans with fixed interest rates was less than their carrying amount by US$22,147 thousand (31 December 2018: the fair value of long-term loans was less than their carrying amount by US$10,481 thousand). Under the terms of the loan agreements, the Group is required to comply with a number of covenants and restrictions, including the maintenance of certain financial ratios and financial indebtedness and cross-default provisions. The Group was in compliance with covenants during the reporting periods and as at 31 December 2019 and 31 December 2018.
124120 www.eurochemgroup.comwww.eurochemgroup.com EuroChem 2019Annual Annual Report Report and Accounts and Accounts 2019 121 125 Strategic Report Corporate Governance Financial Statements
Notes to the Consolidated Financial Statements – continued for the year ended 31 December 2019 (all amounts are presented in thousands of US dollars, unless otherwise stated)
17 Bank borrowings and other loans received (continued) 19 Bonds issued Interest rates and outstanding amounts of major loans and borrowings 31 December 2019 31 December 2018 Coupon Fair Carrying Fair Carrying In August 2019, the Group signed a US$200 million uncommitted credit facility bearing a fixed interest rate and maturing in August 2020. Currency Rate rate, p.a. Maturity value amount value amount The funds through this facility may be obtained in multiple currencies. As at 31 December 2019, the outstanding amount was US$200 million (31 December 2018: nil). Current bonds US$ Fixed 3.80% 2020 124,749 124,128 – – In December 2018, the Group signed a US$150 million uncommitted revolving credit facility with a Russian bank. The funds through this RUB Fixed 8.75% 2020 244,727 242,304 – – facility may be obtained in multiple currencies. As at 31 December 2019, the outstanding amount was US$150 million (31 December 2018: RUB Fixed 10.60% 2019 – – 217,948 215,919 US$150 million). In January 2020, the additional drawdown was made of US$150 million following execution of amendment on increase of the facility amount in December 2019. Less: transaction costs – (207) – (69) Total current bonds issued 369,476 366,225 217,948 215,850 In June 2018, the Group signed a US$820 million committed credit facility bearing a floating interest rate and maturing in July 2021.
As at 31 December 2019, the outstanding amount was US$820 million (31 December 2018: US$820 million). Non-current bonds In March 2018, the Group signed a US$200 million committed credit facility bearing a floating interest rate and maturing in April 2022. US$ Fixed 5.50% 2024 765,884 700,000 – – As at 31 December 2019, the outstanding amount was US$200 million (31 December 2018: US$200 million). US$ Fixed 3.95% 2021 129,511 128,046 486,265 500,000 In 2017, the Group signed a US$750 million unsecured credit facility bearing a floating interest rate and maturing in September 2022. US$ Fixed 3.80% 2020 – – 493,520 500,000 As at 31 December 2019, the outstanding amount was US$109 million (31 December 2018: US$425 million). RUB Fixed 7.85% 2023 546,492 533,069 – – RUB Fixed 8.55% 2022 318,428 306,918 – – In 2014, the Group signed an uncommitted revolving credit facility with a Russian bank. The funds through this facility may be obtained in multiple currencies. As at 31 December 2019, the outstanding amount was US$500 million (31 December 2018: US$500 million). RUB Fixed 8.75% 2020 – – 217,862 215,919 Less: transaction costs – (7,051) – (4,658) Undrawn facilities Total non-current bonds issued 1,760,315 1,660,982 1,197,647 1,211,261 As at 31 December 2019, the below facilities had no outstanding balances and were available to the Group: Total bonds issued 2,129,791 2,027,207 1,415,595 1,427,111
• US$100 million committed revolving credit facility bearing a floating interest rate, signed in September 2019, maturing in September 2021; US$-denominated bonds and RUB-denominated bonds were listed on the Irish Stock Exchange and the Moscow Exchange, respectively. • US$125 million uncommitted revolving credit facility bearing a floating interest rate, signed in April 2016, maturing in March 2020; The fair value of the bonds was determined with reference to their market quotations or executable prices. • US$100 million uncommitted revolving credit facility bearing a floating interest rate, signed in May 2012, maturing in May 2020. In March 2019, the Group completed a tender offer for its 3.80% US$-denominated loan participation notes and 3.95% US$-denominated Collaterals and pledges guaranteed notes with total nominal value of US$1 billion, which were partially redeemed at total nominal value of US$748 million, with a As at 31 December 2019, loans of a Brazilian subsidiary totalling US$1,443 thousand were collateralised by property, plant and equipment simultaneous new issue of US$-denominated guaranteed notes at a nominal value of US$700 million bearing a semi-annual coupon rate with the carrying value of US$7,062 thousand (31 December 2018: loans of US$15,113 thousand were collateralised by property, plant of 5.50% per annum to finance the purchase of notes under the tender offer. The new US$700 million bonds issue matures in March 2024. and equipment with the carrying value of US$17,155 thousand). In April 2019, the Group issued RUB-denominated bonds totalling RUB19 billion bearing a semi-annual coupon rate of 8.55% per annum As at 31 December 2019 and 31 December 2018, all other bank borrowings and loans received listed in Note 17 were not secured. maturing in April 2022. In April 2019 10.60% RUB-denominated bonds were redeemed at maturity in full amount of US$234,577 thousand or RUB15 billion. 18 Project Finance In the period from July to August 2019, the Group made three issues of RUB-denominated bonds totalling RUB33 billion bearing a Due to the non-recourse nature of the Project Finance facilities they are excluded from financial covenant calculations in accordance quarter-annual and a semi-annual coupon rate of 7.85% per annum each and maturing in the period from January to August 2023. with the Group’s various debt, project, finance, legal and other documents and are presented as a separate line “Project Finance” in the consolidated statement of financial position. Ammonia project in Kingisepp. In 2015, the Group signed a EUR557 million Non-recourse 13.5-year Project Finance Facility with a floating interest rate based on 3-month Euribor to finance the construction of an Ammonia Plant in Kingisepp, Russia. During the year ended 31 December 2019, the Group received funds under the Facility of EUR82,939 thousand (US$93,746 thousand) (2018: EUR186,292 thousand (US$219,309 thousand)) and made the first repayment of EUR32,001 thousand (US$35,583 thousand). As at 31 December 2019, the outstanding balance was US$489,597 thousand shown net of transaction costs of US$96,856 thousand (31 December 2018: US$441,682 thousand shown net of transaction costs of US$98,916 thousand). The contractual interest rate as at 31 December 2019 was 1.3% p.a. (31 December 2018: 1.3% p.a.). The fair value of this Facility was not materially different from its carrying amount. As at 31 December 2019, in compliance with terms of the facility agreement the Group held US$34,723 thousand on a debt service reserve account (31 December 2018: nil) (Note 15). As at 31 December 2019 and 31 December 2018, under the terms of the facility agreement 100% of the shares in EuroСhem Northwest JSC, the project owner and wholly-owned subsidiary of the Group, were pledged as collateral. The carrying value of the total assets of the company pledged under the Facility related to the project amounted to US$1,196,921 thousand as at 31 December 2019 (31 December 2018: US$946,059 thousand). During the year ended 31 December 2019, the EBITDA of the subsidiary under the Ammonia project was positive of US$53,510 thousand (2018: negative of US$4,360 thousand).
126122 www.eurochemgroup.comwww.eurochemgroup.com EuroChem 2019Annual Annual Report Report and Accounts and Accounts 2019 123 127 Strategic Report Corporate Governance Financial Statements
Notes to the Consolidated Financial Statements – continued for the year ended 31 December 2019 (all amounts are presented in thousands of US dollars, unless otherwise stated)
20 Derivative financial assets and liabilities 20 Derivative financial assets and liabilities (continued) At 31 December 2019, net derivative financial assets and liabilities were: Foreign exchange non-deliverable forward contracts Assets Liabilities Outstanding at the beginning of the year, EUR/US$ non-deliverable forward contracts with total notional amount of EUR42 million matured Non- Non- in the period from February to November 2019. current Current current Current Commodity collars – – – 1,717 Outstanding at the beginning of the year, RUB/US$ non-deliverable forward contract with a notional amount of RUB1,500 million matured Commodity swaps – – – 332 in January 2019. RUB/US$ non-deliverable forward contracts with a nominal amount In the period from August to November 2019, the Group signed RUB/US$ non-deliverable forward contracts with total notional amount of of RUB9,000 million – 8,683 – – RUB12,000 million, out of which contracts with total notional amount of RUB3,000 million matured in the period from October to EUR/US$ non-deliverable forward contracts with a nominal amount of EUR122 million – – 7,453 7,984 December 2019, and the outstanding contracts mature in the period from January to June 2020. BRL/US$ non-deliverable forward contracts with a nominal amount of US$65 million – – – 772 Cross currency interest rate swaps 59,354 484 – 15,124 Foreign exchange deliverable forward contracts Outstanding at the beginning of the year, RUB/US$ deliverable forward contracts with total notional amount of RUB8,287 million matured Total 59,354 9,167 7,453 25,929 in the period from March to April 2019. At 31 December 2018, net derivative financial assets and liabilities were:
Assets Liabilities 21 Other non-current liabilities and deferred income Non- Non- 31 December 31 December current Current current Current Note 2019 2018 RUB/US$ deliverable forward contracts with a nominal amount of RUB8,287 million – 806 – 1,278 Liability from contingent consideration related to business combination 32 172,946 122,866 RUB/US$ non-deliverable forward contracts with a nominal amount Deferred payable related to acquisition of additional interest in subsidiary – 1,500 of RUB1,500 million – – – 1,101 Deferred payable related to business combination – 321 EUR/US$ non-deliverable forward contracts with a nominal amount of EUR164 million – – 6,869 3,187 Deferred payable related to mineral rights acquisition 11,346 11,088 BRL/US$ non-deliverable forward contracts with a nominal amount of US$145 million – 74 – 2,464 Provisions for age premium, retirement benefits, pensions and similar obligations 28,000 22,768 RUB/US$ swap contracts with a nominal amount of RUB2,000 million – 246 – – Provision for land restoration 22 40,562 17,625 Cross currency interest rate swaps – – 50,234 4,599 Deferred income − Investment grants received 1,483 1,889 Total – 1,126 57,103 12,629 Long-term part of lease payables 57,014 – Total other non-current liabilities and deferred income 311,351 178,057 Movements in the carrying amount of derivative financial assets/(liabilities) were:
Cash Gain/(loss) from (proceeds)/ Currency 1 January changes of fair payments on translation 31 December 2019 value, net derivatives, net difference 2019
Operating activities (3,901) 13,134 (3,027) 46 6,252 Commodity collars – (4,411) 2,694 – (1,717) Commodity swaps – (332) – – (332) Foreign exchange deliverable and non-deliverable forward contracts, net (3,901) 17,877 (5,721) 46 8,301
Financing activities (64,705) 116,145 (22,675) 122 28,887 Foreign exchange deliverable and non-deliverable forward contracts, net (10,118) (2,671) (3,160) 122 (15,827) Foreign exchange swap contracts, net 246 2,723 (2,969) – – Cross currency interest rate swaps, net (54,833) 116,093 (16,546) – 44,714 Total derivative financial assets and liabilities, net (68,606) 129,279 (25,702) 168 35,139
Changes in the fair value of derivatives, which are entered into for the purpose of mitigating risks linked to cash flows from operating activities of the Group, are recognised in “Other operating income/(expenses), net” (Note 28), foreign currency derivative contracts are recognised in “Foreign exchange gain/(loss) from operating activities, net” and commodity collars and commodity swaps are recognised in “Other operating income/(expenses), net”. Changes in the fair value of derivatives, which are entered into for the purpose of hedging the financing and investing cash flows, are recognised in “Other financial gain/(loss), net” (Note 29). Cross currency interest rate swaps Outstanding at the beginning of the year, RUB/US$ cross currency interest rate swap agreement with a notional amount of RUB3,175 million matured in June 2019 and RUB/US$ cross currency interest rate swap agreement with a notional amount of RUB3,145 million matures in September 2020. Outstanding at the beginning of the year, RUB/US$ swap contracts with total notional amount of RUB2,000 million matured in April 2019. In the period from March to August 2019, the Group signed RUB/US$ cross currency interest rate swap agreements with total amount of RUB52,000 million, maturing in the period from April 2022 to August 2023.
128124 www.eurochemgroup.comwww.eurochemgroup.com EuroChem 2019Annual Annual Report Report and Accounts and Accounts 2019 125 129 Strategic Report Corporate Governance Financial Statements
Notes to the Consolidated Financial Statements – continued for the year ended 31 December 2019 (all amounts are presented in thousands of US dollars, unless otherwise stated)
22 Provision for land restoration 23 Trade payables, other accounts payable and accrued expenses In accordance with federal, state and local environmental regulations the Group’s mining, drilling and processing activities result in asset 31 December 31 December retirement obligations to restore the disturbed land in regions in which the Group operates. 2019 2018 Trade payables Movements in the amount of provision for land restoration were as follows: Trade payables denominated in US$ 169,209 136,147 Note 2019 2018 Trade payables denominated in EUR 140,309 143,060 As at 1 January 17,625 26,348 Trade payables denominated in RUB 37,061 86,380 Change in estimates 8 18,941 (6,138) Trade payables denominated in other currencies 17,788 23,972 Unwinding of the present value discount 29 1,686 1,903 Trade payables denominated in RUB with irrevocable documentary letter of credit 143,771 80,705 Currency translation difference 2,310 (4,488) Total trade payables 508,138 470,264 Total provision for land restoration as at 31 December 40,562 17,625
During 2019 and 2018 the Group reassessed estimates of provision for land restoration due to changes in inflation, discount rates and Other accounts payable and accrued expenses expected timing for land restoration. Therefore, the amount of provision for land restoration was recalculated and the appropriate changes Advances received 166,027 157,773 were disclosed as a change in estimates. Payroll and social tax 15,243 14,933 The principal assumptions used for the calculation of land restoration provision were as follows: Accrued liabilities and other creditors 235,344 204,068 Interest payable 42,177 27,457 31 December 31 December 2019 2018 Short-term part of lease payables 10,193 – Discount rates 6.19%-6.60% 8.18%-8.95% Short-term part of deferred payable related to mineral rights acquisition 1,642 1,460 Expected inflation rates in Russia 3.00%-4.00% 3.60%-4.00% Short-term part of deferred payables related to business combination and acquisition of additional interest Expected timing for land restoration 2025-2070 2021-2070 in subsidiary 1,500 1,500 Total other payables 472,126 407,191 The present value of expected costs to be incurred for the settlement of land restoration obligations was as follows: Total trade payables, other accounts payable and accrued expenses 980,264 877,455 31 December 31 December As at 31 December 2019, trade payables included payables to suppliers of property, plant and equipment and construction companies 2019 2018 of US$172,551 thousand (31 December 2018: US$123,116 thousand). Trade payables included payables with irrevocable documentary Between 1 and 5 years – 307 letters of credit with a deferred term of payment opened in the amount of US$86,191 thousand (31 December 2018: US$72,120 thousand) Between 6 and 10 years 349 – under the contracts with construction companies, of US$49,547 thousand under the contracts with suppliers of property, plant and Between 11 and 20 years 8,737 4,261 equipment (31 December 2018: US$6,709 thousand) and of US$8,033 thousand under operating activities contracts (31 December 2018: More than 20 years 31,476 13,057 US$1,875 thousand). Total provision for land restoration 40,562 17,625 24 Sales 2019 2018 Sales volume Sales volume (thousand Sales (thousand Sales metric (thousand metric (thousand tonnes) US$) tonnes) US$) Nitrogen products 8,652 2,070,806 7,813 1,837,985 Nitrogen fertilizers 8,637 2,068,007 7,797 1,835,278 Other products 15 2,799 16 2,707 Phosphate products and complex fertilizers 6,228 2,461,337 5,685 2,317,795 Phosphate fertilizers 2,542 1,021,242 2,379 1,044,475 Complex fertilizers 3,297 1,267,727 2,907 1,097,168 Feed phosphates 389 172,368 399 176,152 Potash fertilizers 1,104 422,600 632 235,705 Mining products 5,622 487,889 5,977 422,252 Iron ore concentrate 5,486 441,593 5,844 381,800 Other products 136 46,296 133 40,452 Industrial products 2,018 620,416 1,871 632,003 Other sales – 120,922 – 131,732 Logistic services – 37,761 – 43,728 Other products – 16,382 – 31,937 Other services – 66,779 – 56,067 Total sales 6,183,970 5,577,472
The sales of fertilizers, mining and industrial products for the year ended 31 December 2019 included US$366,750 thousand of revenues from delivery of these products to customers (2018: US$273,449 thousand).
130126 www.eurochemgroup.comwww.eurochemgroup.com EuroChem 2019Annual Annual Report Report and Accounts and Accounts 2019 127 131 Strategic Report Corporate Governance Financial Statements
Notes to the Consolidated Financial Statements – continued for the year ended 31 December 2019 (all amounts are presented in thousands of US dollars, unless otherwise stated)
25 Cost of sales 28 Other operating income and expenses 2019 2018 2019 2018 Raw materials 1,164,159 1,204,587 Sponsorship 11,435 6,752 Goods for resale 1,446,293 1,403,816 (Gain)/loss on disposal of property, plant and equipment and intangible assets, net 4,213 8,409 Other materials 217,494 184,508 Foreign exchange (gain)/loss from operating activities, net 55,562 (3,676) Energy 198,600 184,709 Impairment /(reversal of impairment)/write-off of idle property, plant and equipment, net 5,832 539 Utilities and fuel 88,268 84,542 (Gain)/loss on sales and purchases of foreign currencies, net (359) (4,780) Labour, including contributions to social funds 269,161 244,770 Non-recurring (income)/expenses, net* (37,619) 6,155 Depreciation and amortisation 323,937 255,366 Other operating (income)/expenses, net 2,784 (16,355) Repairs and maintenance 57,379 53,253 Total other operating (income)/expenses, net 41,848 (2,956) Production overheads 77,564 78,756 * The amount for the year ended 31 December 2019 includes income of US$74,258 thousand (EUR67,459 thousand) from Engineering, Procurement Property tax, rent payments for land and related taxes 27,473 27,236 and Construction (EPC) and Engineering and Procurement (EP) contracts net of payment under Bonus Deed agreement of US$36,639 thousand (EUR33,500 thousand). Impairment /(reversal of impairment)/write-off of idle property, plant and equipment, net 1,481 920 Provision/(reversal of provision) for obsolete and damaged inventories, net 263 (68) 29 Other financial gain and loss Changes in work in progress and finished goods (88,686) (293,288) Other costs/(compensations), net 26,476 8,620 Note 2019 2018 Changes in fair value of cross currency interest rate swaps 20 (116,093) 121,995 Total cost of sales 3,809,862 3,437,727 Changes in fair value of foreign exchange deliverable and non-deliverable forward contracts 20 2,671 13,371 26 Distribution costs Change in fair value of foreign exchange swap contracts 20 (2,723) 797 Reassessment of liability from contingent consideration related to business combination 54,941 19,095 2019 2018 Unwinding of discount on deferred payables 703 707 Transportation 703,376 530,320 Unwinding of discount on land restoration obligation 22 1,686 1,903 Labour, including contributions to social funds 94,386 87,650 (Gain)/loss on disposal of investment in associates and joint ventures, net 2,897 – Depreciation and amortisation 47,635 41,511 Other financial (gain)/loss, net (1,764) 1,936 Repairs and maintenance 8,270 8,033 Total other financial (gain)/loss, net (57,682) 159,804 Provision/(reversal of provision) for impairment of receivables, including ECL allowance, net 3,252 16,307 Other costs 55,623 61,164 30 Income tax Total distribution costs 912,542 744,985 2019 2018 27 General and administrative expenses Income tax expense – current 167,180 213,953 Deferred income tax – (origination)/reversal of temporary differences, net 54,922 (21,853) 2019 2018 Prior periods adjustments for income tax (1,017) 2,163 Labour, including contributions to social funds 132,588 122,366 Reassessment of deferred tax assets/liabilities due to change in the tax rate 1,415 6,158 Depreciation and amortisation 16,983 11,459 Income tax expense 222,500 200,421 Audit, consulting and legal services 30,110 13,150 Bank charges 3,761 3,436 A reconciliation between theoretical income tax charge calculated at the applicable tax rates enacted in the countries where Group Social expenditure 3,909 3,227 companies are incorporated, and actual income tax expense was as follows: Repairs and maintenance 2,435 2,401 2019 2018 Provision/(reversal of provision) for impairment of receivables, including ECL allowance, net 1,026 2,037 Profit before taxation 1,240,176 738,842 Other expenses 51,018 50,216 Total general and administrative expenses 241,830 208,292 Theoretical tax charge at statutory rate of subsidiaries (198,099) (176,315) Tax effect of items which are not deductible or assessable for taxation purposes: The total depreciation and amortisation expenses included in the consolidated statement of profit or loss amounted to US$388,555 thousand (2018: US$308,336 thousand). • Non-deductible expenses (21,562) (16,189) • (Unrecognised tax loss for the year)/recovery of previously unrecognised tax loss carry forward, net (3,303) 2,169 The total labour costs (including social expenses) included in the consolidated statement of profit or loss amounted to US$496,135 thousand • Adjustment on deferred tax assets/liabilities on prior periods 862 (1,765) (2018: US$454,786 thousand). • Reassessment of deferred tax assets/liabilities due to change in the tax rate (1,415) (6,158) The total statutory pension contributions included in all captions of the consolidated statement of profit or loss amounted to Prior periods adjustments recognised in the current period for income tax 1,017 (2,163) US$68,050 thousand (2018: US$64,837 thousand). Income tax expense (222,500) (200,421) The fees for the audit of the consolidated and statutory financial statements for the year ended 31 December 2019 amounted to US$2,775 thousand (2018: US$3,063 thousand). The auditors also provided the Group with other non-audit services amounting to US$554 thousand (2018: US$152 thousand).
132128 www.eurochemgroup.comwww.eurochemgroup.com EuroChem 2019Annual Annual Report Report and Accounts and Accounts 2019 129 133 Strategic Report Corporate Governance Financial Statements
Notes to the Consolidated Financial Statements – continued for the year ended 31 December 2019 (all amounts are presented in thousands of US dollars, unless otherwise stated)
30 Income tax (continued) 30 Income tax (continued) The Group companies are subject to tax rates depending on the country of domicile. The movements in deferred tax (assets) and liabilities during 2019 and 2018 were as follows: Subsidiaries located in Russia applied a tax rate of 20.0% on taxable profits during the year ended 31 December 2019 (2018: 20.0%). Reassessment Several subsidiaries applied reduced income tax rates within a range from 16.5% to 19.8% according to regional tax law and agreements of deferred tax 1 January Differences assets/liabilities Currency with regional authorities (2018: within a range from 15.5% to 19.3%). 1 January Adjustment, 2019, recognition due to change in translation 31 December 2019 IFRS 16 adjusted and reversals the tax rate difference 2019 Under the terms of a special investment contract, effective till 31 December 2025, in respect of its ammonia project, EuroСhem Northwest JSC may apply the reduced income tax rate of 5%. In 2019 EuroСhem Northwest JSC did not apply the reduced income tax rate as profit Tax effects of (deductible)/taxable from its primary activity was lower than required by the special investment contract. The management expects to use the reduced income temporary differences tax rate in future periods. Property, plant and equipment and Intangible assets 327,755 9,981 337,736 49,039 263 30,135 417,173 Under the terms of the signed special investment contracts, effective till 31 December 2025, in respect of their potash projects, EuroChem- Accounts receivable (8,364) – (8,364) 1,661 (9) (7) (6,719) Usolsky potash complex LLC and EuroChem-VolgaKaliy LLC may apply the reduced income tax rates of 0% and 5%, respectively. Accounts payable 1,832 – 1,832 (13,383) (14) 263 (11,302) EuroChem-Usolsky potash complex LLC applied the reduced income tax rate of 0% for the year ended 31 December 2019. Inventories (32,969) – (32,969) 8,692 145 452 (23,680) EuroChem-VolgaKaliy LLC did not apply the reduced income tax rate of 5% for the year ended 31 December 2019 as the subsidiary did Other 6,090 (9,981) (3,891) (6,437) 2,302 (526) (8,552) not generate revenue from its primary activity that is one of conditions of the special investment contract. The management expects to use Tax losses carried forward (198,572) – (198,572) 12,047 (1,272) (6,338) (194,135) the reduced income tax rate in future periods. Less: Unrecognised deferred tax assets 34,336 – 34,336 3,303 – – 37,639 Subsidiaries located in Europe, North and Latin Americas and Asia are subject to the income tax rates ranging from 9.0% to 34.0% Net deferred tax (asset)/liability 130,108 – 130,108 54,922 1,415 23,979 210,424 (2018: 7.8% to 34.0%). Recognised deferred tax assets (82,613) – (82,613) 5,882 361 167 (76,203) Starting from 1 January 2020, following the changes in tax legislation the income tax rate of subsidiaries located in Switzerland is changed Recognised deferred tax liabilities 212,721 – 212,721 49,040 1,054 23,812 286,627 to 11.91% and the different tax regimes used earlier by Swiss companies are revoked. As at 31 December 2019, the effect from Net deferred tax (asset)/liability 130,108 – 130,108 54,922 1,415 23,979 210,424 reassessment of deferred tax assets and liabilities was immaterial.
At 31 December 2019, the Group had US$200,480 thousand (31 December 2018: US$171,681 thousand) of unused accumulated tax Reassessment losses carried forward in respect of which deferred tax asset of US$37,639 thousand (31 December 2018: US$34,336 thousand) had of deferred tax not been recognised as it is not probable that future taxable profit will be available against which the Group can utilise such benefits. Differences assets/liabilities Currency These tax losses carried forward expire as follows: 1 January recognition Disposal of due to change in translation 31 December 2018 and reversals subsidiaries the tax rate difference 2018 31 December 31 December Tax effects of (deductible)/taxable 2019 2018 temporary differences Tax losses carry forwards expiring by: Property, plant and equipment and • 31 December 2020 1,901 1,901 Intangible assets 335,944 42,727 – – (50,916) 327,755 • 31 December 2021 35,840 35,840 Accounts receivable (4,207) (4,346) – – 189 (8,364) • 31 December 2022 37,224 37,224 Accounts payable (2,350) 3,868 – – 314 1,832 • 31 December 2025 42,178 42,178 Inventories (14,491) (19,054) (114) – 690 (32,969) • 31 December 2026 74,916 44,565 Other 9,787 (4,129) – – 432 6,090 • 31 December 2027 8,184 9,973 Tax losses carried forward (185,744) (38,750) – 6,158 19,764 (198,572) • 31 December 2028 237 – Less: Unrecognised deferred tax assets 36,960 (2,169) – – (455) 34,336 Tax loss carry forwards 200,480 171,681 Net deferred tax (asset)/liability 175,899 (21,853) (114) 6,158 (29,982) 130,108 Recognised deferred tax assets (55,360) (33,827) – – 6,574 (82,613) Recognised deferred tax liabilities 231,259 11,974 (114) 6,158 (36,556) 212,721 Net deferred tax (asset)/liability 175,899 (21,853) (114) 6,158 (29,982) 130,108
The total amount of the deferred tax charge for 2019 and 2018 is recognised in profit or loss. 31 Earnings per share Basic earnings per share are calculated by dividing the profit attributable to equity holders of the Company by the weighted average number of ordinary shares in issue during the period, excluding treasury shares (Note 16). The Company has no dilutive potential ordinary shares and, therefore, the diluted earnings per share equal the basic earnings per share.
2019 2018 Profit for the period attributable to owners of the parent 1,017,118 538,448 Weighted average number of ordinary shares outstanding 960 1,000 Earnings per share – basic and diluted 1,059.50 538.45
134130 www.eurochemgroup.comwww.eurochemgroup.com EuroChem 2019Annual Annual Report Report and Accounts and Accounts 2019 131 135 Strategic Report Corporate Governance Financial Statements
Notes to the Consolidated Financial Statements – continued for the year ended 31 December 2019 (all amounts are presented in thousands of US dollars, unless otherwise stated)
31 Balances and transactions with related parties 33 Contingencies, commitments and operating risks The Group’s related parties are considered to include the ultimate beneficiaries, affiliates and entities under common ownership and i Capital expenditure commitments control within the Group and/or entities having common principal ultimate beneficiaries. The relationships with those related parties with whom the Group entered into significant transactions or had significant balances outstanding are detailed below: As at 31 December 2019, the Group had contractual commitments for capital expenditures of US$400,107 thousand (31 December 2018: US$499,134 thousand), including amounts denominated in RUB of US$211,872 thousand and in EUR of US$128,483 thousand, which will 31 December 31 December represent cash outflows in the next 4 years according to the contractual terms. Financial statements caption Nature of relationship 2019 2018 Consolidated statement of financial position US$136,655 thousand and US$98,123 thousand of the total amount relate to the development of potassium salt deposits and the Assets construction of mining facilities at the Gremyachinskoe and Verkhnekamskoe potash licence areas, respectively (31 December 2018: US$130,154 thousand and US$166,135 thousand, respectively). Non-current originated loans Joint ventures 1,000 864 Other non-current assets Other related parties* – 9,431 ii Tax legislation Trade receivables Other related parties* 3,753 1,356 Management of the Group believes that its interpretation of the tax legislation is appropriate and the Group’s tax position will be sustained. Other receivables Other related parties* 2,670 24,176 Given the scale and international nature of the Group’s business, intragroup transfer pricing and issues such as controlled foreign
corporations’ legislation, beneficial ownership, permanent establishment and tax residence issues, are inherent tax risks just as they are Liabilities for other international businesses. Changes in tax laws or their application with respect to tax matters in the countries where the Group Liability from contingent consideration related to business combination has subsidiaries could increase the Group’s effective tax rate. (Note 21) Other related parties* 172,946 122,866 The majority of the Group’s production subsidiaries are located in Russia and are required to comply with Russian tax, currency and Non-current bonds issued Parent company 4,234 27,864 customs legislation. The Russian tax authorities may be taking a more assertive position in their interpretation of the legislation and Non-current bonds issued Other related parties* 24,411 – assessments than the Management of the Group, and it is possible that transactions and activities that have not been challenged in the Current bonds issued Other related parties* 25,104 – past may be challenged. Fiscal periods remain open to review by the authorities in respect of taxes for three calendar years preceding Trade payables Joint ventures 5,573 1,959 the year of review with possible extension of this period under certain circumstances. Trade payables Other related parties* 1,328 2,846 Where management believes that it is probable that certain tax positions taken by the Group may not be sustained if challenged by the tax authorities, the Group recognises provisions for related taxes, interest and penalties. There were no such provisions recorded by the Consolidated statement of profit or loss Group at 31 December 2019 and 31 December 2018. Sales Joint ventures 6,978 7,327 iii Insurance policies Sales Other related parties* 33,027 16,660 The Group obtains risk insurance cover as mandated by statutory requirements. The Group also holds voluntary insurance policies Distribution costs Other related parties* (37,298) (4,502) covering directors’ and officers’ liability (D&O insurance), general third party and product liability, physical property damage and business Interest expense Other related parties* (1,246) – interruption insurance at major production plants, as well as insurance policies related to trade operations, including export shipments, Gain/(loss) from disposal of subsidiaries, net Other related parties* – 4,799 and credit insurance of certain trade debtors. Other financial gain/(loss), net Other related parties* (47,878) – The Group also carries voluntary life and accident insurance for employees.
Consolidated statement of cash flows The Group insures the risks of physical property damage and business interruption in the production of ammonia in Kingisepp under the (Increase)/decrease in trade receivables Other related parties* (2,418) (1,049) terms of the facility agreement and in compliance with the requirements of lenders. Increase/(decrease) in trade payables Other related parties* (1,679) 1,825 iv Environmental matters Capital expenditure on property, plant and equipment and other The Group’s plants and operations are subject to numerous national, state and local environmental laws and regulations. The Group’s intangible assets Joint ventures (9,364) (3,609) management regularly evaluates its obligations under these laws and regulations and believes that the Group’s plants and operations Other investing activities Other related parties* 40,054 3,768 are in material compliance with environmental laws and regulations. The estimated cost of known environmental obligations has been Other investing activities Joint ventures 2,300 – provided for in these consolidated financial statements in accordance with the Group’s accounting policies. Repayment of originated loans Other related parties* – 21,100 The environmental laws and regulations are essentially complex and tend to change over time. The scope, extent and speed of this Repayment of bonds issued Parent company (28,516) – change may vary substantially in different jurisdictions. Accordingly, the Group’s management system provides for ongoing monitoring of Interest paid Other related parties* (1,141) – the key trends in applicable environmental laws and regulations. Though it is inherently difficult to estimate precisely all costs associated Purchase of treasury shares (Note 16) Other related parties* (785,050) – with current and newly proposed environmental requirements. The Group’s management does not expect these costs to have a material Capital contribution (Note 16) Parent company – 600,000 effect on the Group’s financial position or liquidity. * Other related parties are represented by the companies under common control with the Group and/or by the company ultimately controlled by one of the Group’s shareholders or key management personnel. v Legal proceedings Management compensation. The total key management personnel compensation amounted to US$12,842 thousand and During the reporting period, the Group was involved in a number of court proceedings (both as a plaintiff and a defendant) arising in the US$16,496 thousand for the years ended 31 December 2019 and 31 December 2018, respectively. This compensation of members of the ordinary course of business. In the opinion of management, there are no current legal proceedings or other claims outstanding which Management Board for their services in full time positions is made up of an annual fixed remuneration plus a performance bonus accrual. could have a material effect on the results of operations or the financial position of the Group. vi Operating environment of the Group The Group operates in the fertilizer industry with production assets in Russia, Lithuania, Belgium, Kazakhstan, China and sales networks in Europe, Russia, the CIS, North and Latin America, Central and South-East Asia. The highly competitive nature of the market makes prices of the Group’s key products relatively volatile. Possible deteriorating economic conditions may have an impact on management’s cash flow forecasts and assessment of the impairment of financial and non-financial assets. Debtors of the Group may also become adversely affected by the financial and economic environment, which could in turn impact their ability to repay amounts owed or fulfil obligations undertaken. Management is unable to predict all developments which could have an impact on the industry and the wider economy and consequently what effect, if any, they could have on the future financial position of the Group. Management believes all necessary measures are being taken to support the sustainability and growth of the Group’s business in the current circumstances.
136132 www.eurochemgroup.comwww.eurochemgroup.com EuroChem 2019Annual Annual Report Report and Accounts and Accounts 2019 133 137 Strategic Report Corporate Governance Financial Statements
Notes to the Consolidated Financial Statements – continued for the year ended 31 December 2019 (all amounts are presented in thousands of US dollars, unless otherwise stated)
34 Financial and capital risk management 34 Financial and capital risk management (continued) 34.1 Financial risk management 34.1 Financial risk management (continued) The Group’s activities expose it to a variety of financial risks: market risk (including foreign currency risk, interest rate risk and price risk), The table below summarises the Group’s financial assets and liabilities which are subject to foreign currency risk as at 31 December 2019: credit risk and liquidity risk. The overall risk management program seeks to minimise potential adverse effects on the financial performance Other foreign of the Group. Functional currency RUB US$ currencies Other foreign (a) Market risk Foreign currency US$ RUB currencies (i) Foreign currency risk ASSETS The Group is exposed to foreign exchange risk to the extent that its future cash inflows and outflows over a certain period of time are Non-current financial assets: denominated in different currencies. Restricted cash – – 35,664 The objective of the Group’s foreign exchange risk management is to minimise the volatility of the Group’s cash flows arising from US$/RUB cross currency swaps (gross amount) – 989,201 – fluctuations in exchange rates versus the US$ (which is viewed by the Group as its base currency), while simultaneously achieving at RUB/US$ non-deliverable forward contracts – 8,683 – least average annual market exchange rates for the Group’s non-US$ purchases. Management focuses on assessing the Group’s future Total non-current financial assets – 997,884 35,664 cash flows in currencies other than US$ and managing operational currency position – the gaps arising between inflows and outflows. Management also pursues to avoid open transactional currency positions by balancing non-US$ cash assets and liabilities. Current financial assets: The Group includes a number of subsidiaries with Russian rouble as functional currency which have a significant volume of Trade receivables – – 146,285 US$-denominated transactions as well as several subsidiaries with US$ functional currency having RUB-denominated transactions. Other receivables – – 40,707 At 31 December 2019, if the RUB had appreciated/depreciated against the US$ by 10%, all other things being equal, the after tax US$/RUB cross currency swaps (gross amount) – 374,749 – result for the year and equity would have been US$137,172 thousand lower/higher (2018: US$59,378 thousand lower/higher), purely as Cash and cash equivalents 73,694 63 28,367 a result of foreign exchange gains/losses on translation of US$-denominated assets and liabilities at subsidiaries with RUB as a functional Total current financial assets 73,694 374,812 215,359 currency and RUB-denominated assets and liabilities at subsidiaries with US$ as a functional currency and with no regard to the impact Total financial assets 73,694 1,372,696 251,023 of this appreciation/depreciation on sales.
The Group is disclosing the impact of such a 10% shift in the manner set out above to ease the calculation for the users of these LIABILITIES consolidated financial statements of the impact on the after tax profit and equity resulting from subsequent future exchange rate changes; Non-current financial liabilities: this information is not used by the management for foreign currency risk management purposes. Project Finance – – 521,547 The Group believes that it benefits from the strengthening of US$ exchange rate versus the RUB and the EUR, and the other way around. EUR/US$ non-deliverable forward contracts – – 7,453 This is mainly due to the fact that in terms of economic substance, as opposed to purely settlement perspective, the Group’s revenues are Deferred payable related to mineral rights acquisition – – 9,988 directly or indirectly US$-denominated, whereas a significant portion of its operating and capital costs is denominated in RUB and EUR. Total non-current financial liabilities – – 538,988 During 2019 and 2018 the Group entered into foreign exchange non-deliverable and deliverable forward contracts in order to achieve lower RUB and EUR exchange rates for its RUB and EUR purchases than the average annual exchange rates. The Group also routinely Current liabilities: enters into forward and swap agreements aimed at lowering the cost of its debt portfolio in US$ terms. Bank borrowings and loans received 200,000 50,803 312,481 Bonds issued 124,128 – – Project Finance – – 64,906 EUR/US$ non-deliverable forward contracts – – 7,984 BRL/US$ non-deliverable forward contracts – – 772 Trade payables 45,989 – 101,765 Interest payables 1,136 258 4,124 Deferred payable related to acquisition of additional interest in subsidiary 1,500 – – Deferred payable related to mineral rights acquisition – – 1,075 Total current financial liabilities 372,753 51,061 493,107 Total financial liabilities 372,753 51,061 1,032,095
138134 www.eurochemgroup.comwww.eurochemgroup.com EuroChem 2019Annual Annual Report Report and Accounts and Accounts 2019 135 139 Strategic Report Corporate Governance Financial Statements
Notes to the Consolidated Financial Statements – continued for the year ended 31 December 2019 (all amounts are presented in thousands of US dollars, unless otherwise stated)
34 Financial and capital risk management (continued) 34 Financial and capital risk management (continued) 34.1 Financial risk management (continued) 34.1 Financial risk management (continued) The Group’s financial assets and liabilities subject to foreign currency risk as at 31 December 2018 are presented below: In practice, as noted above, while assessing and managing its exposure to foreign currency risk, the Group’s Treasury views most of the Group’s sales as predominantly US$-denominated, regardless of the settlement currency. The Group’s Treasury views all currencies other Other foreign Functional currency RUB US$ currencies than the US$ as foreign currency risk exposures of the Group, while the US$ is viewed as the Group’s base economic currency against Other foreign which all exposures are measured. Foreign currency US$ RUB currencies (ii) Interest rate risk ASSETS The Group’s income and operating cash flows are substantially independent of changes in market interest rates. The Group’s principal Non-current financial assets: interest rate risk arises from long-term and short-term borrowings. Restricted cash – – 876 US$/RUB cross currency swaps (gross amount) – 273,182 – The Group is exposed to the risk from floating interest rates primary from borrowings and loans denominated in foreign currencies. Other non-current assets – – 9,431 The Group had US$1,263,529 thousand of US$ denominated loans outstanding at 31 December 2019 (31 December 2018: US$1,530,410 Total non-current financial assets – 273,182 10,307 thousand) bearing floating interest rates varying from 1-month Libor +1.55% to 1-month Libor +2.20%, from 3-month Libor +1.50% to 3-month Libor +1.95%, from 6-month Libor +2.65% to 6-month Libor +4.00% (2018: from 1-month Libor +1.55% to 1-month Libor Current financial assets: +2.20%, 3-month Libor +2.00%, 6-month Libor +2.75%). Trade receivables – – 106,223 The Group’s profit after tax for the year ended 31 December 2019 and equity would have been US$1,105 thousand, or 0.1% lower/higher Other receivables – – 24,176 (2018: US$1,261 thousand, or 0.2% lower/higher), if the US$ Libor interest rate was 10 bps higher/lower than its actual level during the year. US$/RUB cross currency swaps (gross amount) – 98,746 – During 2019 and 2018 the Group did not hedge this exposure using financial instruments. RUB/US$ deliverable forward contracts – 119,288 – Cash and cash equivalents 17,258 3,760 117,394 The Group has a formal policy of determining how much maximum unhedged exposure it should have to interest rate risk on the basis of Total current financial assets 17,258 221,794 247,793 the assessment of the likely interest rate changes on the Group’s cash flows. The Group performs periodic analysis of the current interest Total financial assets 17,258 494,976 258,100 rate environment on the basis of which management makes decisions on the appropriate mix of fixed-rate and variable-rate debt for both existing and planned new borrowings.
(iii) Price risk LIABILITIES Non-current financial liabilities: The Group can be exposed to equity securities price risk because of investments held by the Group classified as financial assets measured at FVOCI. As at 31 December 2019 and 31 December 2018, the Group had no material exposure to equity securities price risk. Bank borrowings – 45,271 – Bonds issued 500,000 – – The Group can be exposed to price risk because it enters into transactions with commodity swaps and collars whose value is subject to Project Finance – – 509,460 the value of commodities traded on a public market (Note 20). As at 31 December 2019 and 31 December 2018, the Group had no EUR/US$ non-deliverable forward contracts – – 6,869 material exposure to price risk. Deferred payable related to acquisition of additional interest in subsidiary 1,500 – – (b) Credit risk Deferred payable related to mineral rights acquisition – – 10,295 Credit risk arises from the possibility that counterparties to transactions may default on their obligations, causing financial losses for the Total non-current financial liabilities 501,500 45,271 526,624 Group. Financial assets, which potentially subject Group entities to credit risk, consist principally of originated loans, trade receivables, advances to suppliers and contractors, as well as cash and bank deposits. The objective of managing credit risk is to prevent losses of Current liabilities: liquid funds deposited with or invested in financial institutions or the loss in value of receivables. Bank borrowings and loans received – 45,703 106,765 The maximum exposure to credit risk resulting from financial assets is equal to the carrying amount of the Group’s financial assets, which Project Finance – – 31,138 at 31 December 2019 amounted to US$918,424 thousand (31 December 2018: US$762,113 thousand). The Group has no significant EUR/US$ non-deliverable forward contracts – – 3,187 concentrations of credit risk. RUB/US$ non-deliverable forward contracts – 1,101 – Cash and cash equivalents, restricted cash and fixed-term deposits. Cash and term deposits are mainly placed in major multinational BRL/US$ non-deliverable forward contracts – – 2,464 banks and banks with independent credit ratings. No bank balances and term deposits are past due or impaired. (See the analysis by Trade payables 4,299 – 112,122 credit quality of bank balances, term and fixed-term deposits in Note 15). Interest payables 4,169 458 3,102 Deferred payable related to acquisition of additional interest in subsidiary 1,500 – – Originated loans. Originated loans are issued to companies which are under common control with the Group and to associated company or joint venture of the Group. Deferred payable related to mineral rights acquisition – – 1,225 Total current financial liabilities 9,968 47,262 260,003 Trade receivables. Trade receivables are subject to a policy of active credit risk management which focuses on an assessment of Total financial liabilities 511,468 92,533 786,627 ongoing credit evaluation and account monitoring procedures. The objective of the management of trade receivables is to sustain the growth and profitability of the Group by optimising asset utilisation while maintaining risk at an acceptable level. The Group’s sales for the years ended 31 December 2019 and 31 December 2018 are presented in the table below: Receivables management is geared towards collecting all outstanding accounts punctually and in full to avoid the loss of receivables. Other Additionally, the Group sells certain trade receivables to a factor on a non-recourse basis. US$ EUR RUB currencies Total 2019 3,376,492 1,158,128 1,081,069 568,281 6,183,970 55% 19% 17% 9% 100% 2018 2,802,514 1,120,085 1,091,677 563,196 5,577,472 50% 20% 20% 10% 100%
140136 www.eurochemgroup.comwww.eurochemgroup.com EuroChem 2019Annual Annual Report Report and Accounts and Accounts 2019 137 141 Strategic Report Corporate Governance Financial Statements
Notes to the Consolidated Financial Statements – continued for the year ended 31 December 2019 (all amounts are presented in thousands of US dollars, unless otherwise stated)
34 Financial and capital risk management (continued) 34 Financial and capital risk management (continued) 34.1 Financial risk management (continued) 34.1 Financial risk management (continued) Advances to Suppliers and Contractors. Advances given to suppliers and contractors are subject to a policy of the supplier credit risk The table below analyses the Group’s financial liabilities into the relevant maturity groupings based on the time remaining from the management which focuses on ongoing credit limit evaluation and monitoring goods/services supply contract performance. reporting date to the contractual maturity date.
The monitoring and controlling of credit risk is performed by the corporate treasury function of the Group. The credit policy requires the Less than Between Between More than performance of credit evaluations and ratings of all counterparties, including customers, suppliers and contractors. The credit quality of 1 year 1 and 2 years 2 and 5 years 5 years Total each new customer, supplier or contractor is analysed using internal credit rating before the Group provides it with the terms of delivery As at 31 December 2019 and payment, or terms of advance payments in the case of suppliers and contractors. The Group gives preference to counterparties with Trade payables 508,138 – – – 508,138 an independent credit rating. New counterparties without an independent credit rating are evaluated with reference to Group’s credit Gross-settled swaps:** policy which is based on minimum of two ratings: internal creditworthiness rating and internal payment discipline rating. The credit • inflows (374,749) (68,041) (921,160) – (1,363,950) quality of other counterparties is assessed taking into account their financial position, past experience and other factors. • outflows 345,649 29,517 837,625 – 1,212,791 Customers, suppliers and contractors that do not meet the credit quality requirements are supplied on a prepayment basis only and Non-deliverable forward contracts 8,756 7,453 – – 16,209 receive no advance payments. Bank borrowings* 1,164,186 857,580 620,263 – 2,642,029 Although the collection of receivables could be influenced by economic factors, management believes that there is no significant risk of Project Finance* 72,865 77,489 212,887 297,541 660,782 loss to the Group beyond the provision already recorded (Note 14). Bonds issued* 487,036 241,422 1,724,439 – 2,452,897 Lease liabilities 10,193 11,455 9,058 36,501 67,207 The major part of trade receivables that are not individually impaired (only ECL allowance was created for these receivables) relates to wholesale distributors and steel producers for which the credit exposures and related ratings are presented below: Other current and non-current liabilities 1,575 1,392 176,656 12,864 192,487 Total 2,223,649 1,158,267 2,659,768 346,906 6,388,590 31 December 31 December
Group of customers Rating agency Credit rating/Other 2019 2018 Wholesale customers – Credit Insurance 3,369 – As at 31 December 2018 Wholesale customers – Letter of credit 28,229 2,713 Trade payables 470,264 – – – 470,264 Wholesale customers – Bank guarantee 5,142 2,152 Gross-settled swaps:** Wholesale customers Fitch 2019: A+ to BBB- • inflows (98,746) (273,182) – – (371,928) and steel producers 2018: A+ to BBB- 13,504 21,988 • outflows 90,815 316,070 – – 406,885 Wholesale customers Dun & Bradstreet Credibility Corp.* Minimum risk of failure 40,169 36,359 Deliverable forward contracts: Wholesale customers Dun & Bradstreet Credibility Corp.* Lower than average risk 26,662 45,316 • inflows (119,288) – – – (119,288) Wholesale customers Dun & Bradstreet Credibility Corp.* Average risk of failure 35,423 25,389 • outflows 118,175 – – – 118,175 Wholesale customers CreditInfo A-very good 1,795 3,814 Non-deliverable forward contracts 6,752 4,030 2,839 – 13,621 Wholesale customers CreditInfo Lower than average risk 4,687 3,478 Bank borrowings* 471,786 1,164,788 953,050 – 2,589,624 Wholesale customers CreditInfo Average risk of failure 2,189 3,418 Project Finance* 41,223 65,270 196,253 294,256 597,002 Wholesale customers Other local credit agencies – 5,228 25,557 Bonds issued* 285,262 754,487 519,805 – 1,559,554 Wholesale customers Counterparties with internal credit rating Minimum risk of failure 1,253 1,250 Other current and non-current liabilities 2,811 2,811 216,545 13,058 235,225 Wholesale customers Counterparties with internal credit rating Lower than average risk 15,509 29,153 Total 1,269,054 2,034,274 1,888,492 307,314 5,499,134 Wholesale customers Counterparties with internal credit rating Average risk of failure 368 3,701 * The table above shows undiscounted cash outflows for financial liabilities (including interest together with the borrowings) based on conditions existing as Total 183,527 204,288 at 31 December 2019 and 31 December 2018, respectively. * Independent credit rating agencies used by the Group for evaluation of customers’ credit quality. ** Payments in respect of the gross settled swaps will be accompanied by related cash inflows. The rest of trade receivables is analysed by management who believes that the balance of the receivables is of good quality due to strong The Group controls the minimum required level of liquidity, consisting of cash balances, as well as committed undrawn bank facilities business relationships with these customers. The credit risk of every individual customer is monitored. available for short-term payments in accordance with the financial policy of the Group. Such liquidity are represented by current cash balances on bank accounts, bank deposits, short-term investments, cash and other financial instruments, which may be classified as (c) Liquidity risk cash equivalents in accordance with IFRS, as well as undrawn committed bank facilities. Liquidity risk results from the Group’s potential inability to meet its financial liabilities, such as settlements of financial debt and payments to suppliers. The Group’s approach to liquidity risk management is to maintain sufficient readily available reserves in order to meet its As at 31 December 2019, the Group had US$100 million in committed undrawn facilities with major international banks liquidity requirements at any point in time. (31 December 2018: US$100 million). While managing its liquidity, the Group aims to ensure that it is sufficient to meet its short-term existing and potential obligations. At the The Group assesses liquidity on a weekly basis using a twelve-month rolling cash flow forecast. same time, the Group strives to minimise its idle cash balances. These goals are achieved by ensuring, among other things, that there is 34.2 Capital risk management a sufficient amount of undrawn committed bank facilities at the Group’s disposal at all times. This may result, from time to time, in the The Group’s objective when managing capital are to safeguard its ability to continue as a going concern, to provide returns for shareholders Group’s current liabilities exceeding its current assets. and benefits for other stakeholders, to have available the necessary financial resources for investing activities and to maintain an optimal In order to take advantage of financing opportunities in the international capital markets, the Group maintains credit ratings from Standard capital structure in order to reduce the cost of capital. The Group considers total capital under management to be equity excluding & Poor’s, Fitch and Moody’s. As at 31 December 2019, Standard & Poor’s affirmed the Group’s rating at BB “minus” with positive outlook cumulative currency translation differences as shown in the IFRS consolidated statement of financial position. This is considered more (31 December 2018: BB “minus” with positive outlook), Fitch affirmed at BB with stable outlook (31 December 2018: BB with stable appropriate than alternatives, such as the value of equity shown in the Company’s statutory financial (accounting) reports. outlook) and Moody’s affirmed at Ba2 with stable outlook (31 December 2018: Ba2 with stable outlook). The Group monitors capital on the basis of the gearing ratio. Additionally, the Group monitors the adequacy of its debt levels using the net Cash flow forecasting is performed throughout the Group. Group Finance monitors rolling forecasts of the Group’s liquidity requirements debt to EBITDA ratio. to ensure it has sufficient cash to meet operational needs while maintaining sufficient headroom on its undrawn committed borrowing facilities (Note 17) at all times so that the Group does not breach borrowing limits or covenants on any of its borrowing facilities. Such forecasting takes into consideration the Group’s debt financing plans, covenant compliance and compliance with internal balance sheet ratio targets.
142138 www.eurochemgroup.comwww.eurochemgroup.com EuroChem 2019Annual Annual Report Report and Accounts and Accounts 2019 139 143 Notes to the Consolidated Financial Statements – continued for the year ended 31 December 2019 (all amounts are presented in thousands of US dollars, unless otherwise stated)
34 Financial and capital risk management (continued) 34.2 Capital risk management (continued)
Gearing ratio The gearing ratio is determined as net debt to net worth. The net worth is calculated as shareholder’s equity excluding the cumulative currency translation differences as this component of equity has no economic or cash flow significance. For the purposes of the Group’s Forward-looking statements Contact covenants in its external borrowing agreements, where appropriate, net debt consists of the sum of short-term borrowings, long-term This Annual Report has been prepared by EuroChem Group AG borrowings and bonds balance outstanding, less cash and cash equivalents, fixed-term deposits and current restricted cash. (‘EuroChem’ or the ‘Company’) for informational purposes, and may information include forward-looking statements or projections. These forward- The gearing ratio as at 31 December 2019 and 31 December 2018 is shown in the table below: looking statements or projections include matters that are not historical facts or statements and reflect the Company’s intentions, 31 December 31 December beliefs or current expectations concerning, among other things, 2019 2018 the Company’s results of operations, financial condition, liquidity, Total debt 4,518,233 3,801,519 performance, prospects, growth, strategies and the industry in which EuroChem Group AG Less: cash and cash equivalents and fixed-terms deposits and current restricted cash 317,260 346,562 the Company operates. By their nature, forwarding-looking statements Baarerstrasse 37, 6300 Zug, Switzerland Net debt 4,200,973 3,454,957 and projections involve risks and uncertainties because they relate to events and depend on circumstances that may or may not occur in the Share capital 111 111 Tel: +41 (41) 727 16 00 future. The Company cautions you that forward-looking statements Fax: +41 (41) 727 76 06 Retained earnings and other reserves 7,592,130 6,578,487 and projections are not guarantees of future performance and that Net worth 7,592,241 6,578,598 the actual results of operations, financial condition and liquidity of the www.eurochemgroup.com Company and the development of the industry in which the Company Gearing ratio 0.55 0.53 operates may differ materially from those made in or suggested by Investor Relations the forward-looking statements or projections contained in this [email protected] Net Debt/EBITDA publication. Factors that could cause the actual results to differ Communications Department The Group’s covenants under the terms of loan agreements and issued Eurobonds stipulate that Net Debt/EBITDA should not exceed the materially from those contained in forward-looking statements or level of three and a half times (3.5x). For the purpose of the ratio calculation, net debt is determined in the same way as described in the projections in this publication may include, among other things, [email protected] Gearing ratio section. general economic conditions in the markets in which the Company EuroChem’s statutory auditor operates, the competitive environment in, and risks associated with PricewaterhouseCoopers AG (PwC) The ratio of net debt to EBITDA as at 31 December 2019 and 31 December 2018 is shown in the table below: operating in, such markets, market change in the fertilizer and related industries, as well as many other risks affecting the Company and its Gotthardstrasse 2, 6302 Zug, Note 2019 2018 operations. In addition, even if the Company’s results of operations, Switzerland EBITDA 7 1,546,559 1,516,926 financial condition and liquidity and the development of the industry in Tel: +41 (58) 792 68 00 Elimination of EBITDA of subsidiaries under the Project Finance 18 (53,510) 4,360 which the Company operates are consistent with the forward-looking www.pwc.com Elimination of EBITDA of Turkish subsidiary from 1 January 2019 to the date of disposal (1,959) – statements or projections contained in this publication, those results or developments may not be indicative of results or developments Elimination of net profit share of disposed associate from 1 January 2019 to the date of disposal (500) – in future periods. The Company does not undertake any obligation Elimination of EBITDA of Ukrainian subsidiaries from 1 January 2018 to the date of disposal – (3,755) to review or confirm expectations or estimates or to update any Elimination of EBITDA of disposed shipping companies from 1 January 2018 to the date of forward-looking statements or projections to reflect events that disposal – (6,352) occur or circumstances that arise after the date of this publication. Covenant EBITDA 1,490,590 1,511,179 Statements regarding competitive position Net debt 4,200,973 3,454,957 Statements referring to EuroChem’s competitive position are based on Net debt/Covenant EBITDA 2.82 2.29 the Company’s belief and, in some cases, rely on a range of sources, including investment analysts’ reports, independent market studies Covenant EBITDA is calculated including EBITDA of acquired associates and subsidiaries for the period from 1 January to the date of and EuroChem’s internal assessments of market share based on acquisition and excluding EBITDA of subsidiaries under the Project Finance for the year and EBITDA of subsidiaries from 1 January to the publicly available information about the financial results and date of sale. performance of market participants.
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