Evraz Regulatory News (EVR)

Risk Type

Risk

Mitigation

Strategic Risks

Global Economy and Industry Cyclicality

The steel and mining industries are cyclical and strongly influenced by global economic conditions. As a result, EVRAZ's business is highly dependent on, and sensitive to, the global macroeconomic environment. If macroeconomic conditions deteriorate or a significant economic contraction take place in any of the Group's key geographic markets, the Group's business, financial condition and prospects could be materially affected.

The industries in which the majority of our steel customers operate, are themselves cyclical in nature and sensitive to economic conditions. Renewed weakness in these industries would adversely affect EVRAZ's business.

The prices of EVRAZ's primary commodities and its steel products are influenced by many factors including demand, worldwide production capacity, capacity utilisation rates, raw material costs, exchange rates and trade barriers. Prices for these commodities may experience significant fluctuations as a result of these and other factors, any of which could have a material adverse effect on the Group's business, financial condition, the results of operations and future prospects.

Regular strategic planning, global operations diversifying risk across a number of key economic markets, increasing the number of medium and long term customer contracts, maintaining a competitive low product cost structure, prudent financial management.

Dependency on Russian and North American Markets

In 2011, EVRAZ derived around 40% of its consolidated revenues from sales to customers in Russia and about 22% from sales to customers in North America. The overall success of EVRAZ's operations is therefore closely tied to the business and operating environments from these two regions. Any significant decrease in demand for steel products or decline in the price of these products in these territories could result in significantly reduced revenues, thereby materially adversely affecting EVRAZ's business, financial condition, results of operations and future prospects.

Regular strategic planning, increasing the number of medium and long-term customer contracts, maintaining a competitive low cost product structure, matching contract product pricing to key input costs, increasing product portfolio and customer focus strategies to more robust infrastructure market categories.

Political

Adverse consequences from specific or general political actions hindering the Group's long-term planning ability and limiting its capacity to obtain financing in the international markets which could have a material adverse effect on EVRAZ's business, financial condition, results of operations and future prospects.

Regular strategic planning, positive investment in social and community projects, effective sustainability activity in health, safety and environmental programmes, careful and diligent attention to local and international regulations, laws and taxation regimes.

Capital Expenditure

Steel production and mining are capital intensive businesses. EVRAZ plans to continue to invest in its production facilities, maintaining and upgrading existing facilities, developing new mines and investing in new projects. In 2011, the Group had capital expenditure of US$1.28 billion. The Group expects to be able to fund its current planned capital expenditures from cash generated from operations and external funding. However, planned capital expenditures may be adversely affected by the following factors: changes in the terms of existing financing arrangements; changes in economic conditions; fluctuations in the Russian or global steel markets; regulatory developments; delays in project completion; cost overruns; and defects in design or construction. It is possible that EVRAZ may have difficulty in financing its capital expenditures and external sources of financing may not be available. The failure to fully finance its planned capital expenditures at a level intended to grow its business, or to finance such expenditures at an acceptable cost or at all, may have an adverse impact on EVRAZ's business, financial condition, results of operations and future prospects.

In addition to the mitigation actions described above regarding global economic risks, the Group has established procedures and dedicated management for investment project planning, realisation and commissioning of capital

projects. The Group aims to minimise short term debt and secure liquidity to ensure funding of the necessary capital expenditure.

Operational Risks

Health, Safety and Environmental Risks

EVRAZ's operations are subject to a wide range of health, safety and environmental (HSE) laws, regulations and standards. Any breach of existing laws and regulations resulting from health, safety or environmental incidents may result in the imposition of fines, penalties, or other actions, which could have a material adverse effect on the Group's business, financial condition, results of operations and future prospects.

The introduction of new laws and regulations may result in increased costs, or in the event of non-compliance, also lead to the imposition of substantial penalties or other actions that could have a material adverse effect on the Group's business, financial condition, results of operations and future prospects.

The Group has introduced a management structure to appropriately escalate material HSE issues to board level. The Group is actively assessing its environmental impacts and potential liabilities to improve management of those exposures.

Labour Relations

EVRAZ's business depends on good labour relations with employees. Labour disputes, restrictive labour and employment laws, as well as increasing costs of skilled labour, could have a material adverse impact on EVRAZ.

Although EVRAZ believes its labour relations with its employees are good, a strike or a work stoppage could occur at any of the Group's facilities or greenfield operations. At most of the Group's business units, there are collective bargaining agreements in place with labour unions. However, existing agreements may not prevent future strikes, work stoppages or other labour-related disputes which could result in a decrease in EVRAZ's production levels. They could also lead to adverse publicity or an increase in costs, which could have a material adverse effect on EVRAZ's business, results of operations, financial condition and future prospects.

There are established Group and local HR procedures, channels for timely communications and negotiations with Trade Unions, other representative bodies and authorities.

Cost Competitiveness

EVRAZ operates in markets that are highly competitive. Competitors include major international steel producers and mining companies, as well as other Russian steel and mining producers and producers in other emerging market countries. The Group's competitive position as one of the world's lowest cost steel producers is dependent on, among other factors, its ability to manage its cost base and increase the efficiency and productivity of its employees. Competition for skilled labour is intense in the steel and mining industries, and labour costs are increasing significantly, particularly in Russia. Continued high demand for skilled labour and labour cost inflation could make it difficult for the Group to attract qualified employees at a commercially reasonable cost and such a difficulty could thus have a material adverse effect on EVRAZ's business, results of operations, financial condition and future prospects.

In addition, EVRAZ's Russian subsidiaries are in many instances the largest employers in the cities in which they operate, which means its ability to reduce the numbers of its employees may be subject to political and social considerations. Any inability to make planned reductions in workforce numbers in order to increase efficiency could have a material adverse effect on EVRAZ's business, financial condition, results of operations and future prospects.

Management reporting framework, Group and site operational KPI's, regular Management Committee meetings, PMR (Product and Resource Management) meetings. Proactive HR skills and management gap analysis, site and group level in-house training and established Lean management processes. The above management mitigation action is supported by specific investment projects to deliver reduced cost per tonne; a key example being the investment in PCI facilities at EVRAZ NTMK and EVRAZ ZSMK.

Business Interruption

The mining, smelting and refining operations of EVRAZ are subject to a number of operational risks which can cause prolonged shut downs or production delays. These include: the availability of raw materials, water and power, geological and technical challenges, climatic conditions such as flooding and earthquakes, equipment failure, interruptions to power supplies, or limitations or disruptions to transportation services such as railways. Any such disruptions could have a material adverse effect on EVRAZ's operating performance, production levels, financial condition and future prospects. In addition, long term business interruption may result in a loss of customers and damage to the Group's reputation.

The Group has established protocols and procedures across the Group as a whole such that plans are in place to ensure business continuity in the Group's operations in the event of a major disruption to the Group's operations. The Group also carries business interruption insurance except for mining operations.

Financial Risks

Treasury Risks

EVRAZ, like many large multinational companies, faces a variety of treasury risks including liquidity risk, credit risk, currency risk and interest rate risk. Adverse events or uncertainties affecting the global financial markets could adversely affect EVRAZ's ability to raise new debt or refinance existing debt facilities in the capital markets. It could also in future lead to higher borrowing costs.

EVRAZ needs ongoing access to liquidity funding in order to meet its trading requirements, support its existing operations and invest in new investment projects. There is a risk that the Group may be unable to obtain the necessary funds when required or that such funds will only be available on unfavorable terms. EVRAZ's borrowing facilities include a requirement to comply with certain specified covenants in relation to the level of net debt and interest cover. A breach of these covenants could result in a significant proportion of the Group's borrowings becoming repayable immediately.

EVRAZ transacts with a variety of commercial and financial counterparties including customers, financial institutions and suppliers. Accordingly, the failure or default of a counter party could give rise to a material loss which may have an adverse impact on EVRAZ's business, financial condition, results of operations and future prospects.

The mix of EVRAZ's revenues and costs is such that it is exposed to fluctuations in exchange rates, particularly between the Rouble and the US dollar. The appreciation of the Rouble against the US dollar tends to result in an increase in the EVRAZ Group's costs relative to its revenues. Therefore, adverse currency movements may materially adversely affect EVRAZ's financial condition and results of operations.

EVRAZ borrows on both a fixed and variable rate basis and has other interest-bearing liabilities, such as finance lease liabilities and other obligations.

EVRAZ incurs interest rate risk on liabilities with variable interest rates.

EVRAZ manages liquidity risk by maintaining adequate cash reserves and borrowing facilities, by continuously monitoring forecast and actual cash flows and matching the maturity profiles of financial assets and liabilities.

EVRAZ reviews cash flow forecasts, debt profile and funding options by financial team and top management, by the Audit Committee, in respect of Going Concern deliberations, and by the board.

To manage credit risk related to cash, EVRAZ maintains its available cash, mainly in US dollars, in reputable international banks and major Russian banks. Management periodically reviews the creditworthiness of the banks in which it deposits cash.

EVRAZ's trade receivables consist of a large number of customers, spread across diverse industries and geographical areas. There are no significant concentrations of credit risk within the EVRAZ customer base.

Some of EVRAZ's sales are made on terms of letter of credit. In addition, EVRAZ requires prepayments from certain customers. EVRAZ does not require collateral in respect of trade and other receivables, except when a customer asks for a payment period which is longer than normal terms. In this case, EVRAZ requires bank guarantees or other liquid collateral. The Group developed standard payment terms and constantly monitors the status of accounts receivable collection and the creditworthiness of the customers.

Natural hedging against foreign exchange risk. The majority of EVRAZ revenues are received in roubles (for sales in Russia) and US dollars (almost all sales in other countries). However, roubles prices in the Russian domestic market are linked to export parity, so viewed as effectively US dollar prices with a domestic premium in times of higher demand. Also, domestic sales in Russia are generally

more profitable compared to exports due to the effect of transportation costs. When the Russian market performs well, the roubles appreciates, which leads to both increased costs and increased revenues in US dollar terms due to both the domestic premium and the higher proportion of domestic sales. On the other hand, when the Russian economy weakens, rouble production costs fall, while steel prices usually follow the RUB/USD exchange rate trend and more steel is exported. Finally, almost all of EVRAZ's debt is US dollar denominated (including the rouble bonds which are swapped into US dollars).

EVRAZ's treasury function performs analysis of current interest rates. In the event of changes in market fixed or variable interest rates management may consider the refinancing of a particular debt on more favourable terms.

Taxation

EVRAZ is exposed to tax compliance and tax management processes in multiple tax jurisdictions. The integrated nature of EVRAZ's worldwide operations can give rise to uncertainty with regards to the Group's tax liabilities and produce conflicting claims from revenue authorities in relation to the profits to be taxed in specific jurisdictions. Failure to manage tax risks could lead to additional tax charges. It could also lead to reputational damage or a financial penalty for failure to comply with required tax procedures or other aspects of tax law.

The procedures of tax risk identification and tax compliance are established. The Audit Committee reviews tax risk and compliance each half year.

Other Risks

Control Exercised by the Major Shareholder

EVRAZ is controlled by Lanebrook (the "Major Shareholder"), a limited liability company incorporated under the laws of Cyprus. As at 31 December 2011, the Major Shareholder held a 72.34% stake in EVRAZ. As a result of its controlling interest in EVRAZ, the Major Shareholder has the ability to exert control over certain actions requiring shareholder approval, including increasing or decreasing the authorised share capital of the Company (and disapplying pre-emptive rights), the election of directors, the declaration of dividends, the appointment of management and other policy decisions. While transactions with the Major Shareholder can benefit the Company, the interests of the Major Shareholder could at times conflict with the interests of the other shareholders. Any such conflict of interest could adversely affect EVRAZ's business, financial condition and results of operations.

The board has a balance of 50% independent non executive directors who have a duty to protect the 'minority shareholder' regarding General Meeting resolutions, also to oversee and where appropriate seek independent valuations of any proposed 'related party' transactions. The Nomination Committee is charged with the selection of the Chief Executive, succession plans for key senior management and selection of Independent non-executive directors.