Last checked at 15 Apr 2010 10:14
15 April 2010
Ferrexpo plc - Annual Report and 2010 Annual General Meeting
·; Annual Report and Accounts 2009
·; Notice of the 2010 Annual General Meeting
·; Proxy Form
Copies of the above documents have today been submitted to the UK Listing Authority and will shortly be available for inspection at the UKLA's Document Viewing Facility, which is situated at The Financial Services Authority, 25 The North Colonnade, Canary Wharf, London E14 5HS, tel. +44 (0) 207 066 1000. Copies of these documents may also be obtained from the Company Secretary, Ferrexpo plc, 2-4 King Street, London SW1Y 1QL, tel +44 (0) 207 389 8300. Further to the information contained in our Preliminary Results announcement of 23 March 2010, a copy of the Annual Report and Accounts for 2009 (the "Annual Report") is attached to this announcement.
http://www.rns-pdf.londonstockexchange.com/rns/2314K_-2010-4-15.pdf
The above documents have today been posted to the shareholders.
The Annual Report and the Notice of the AGM are available to view or download in PDF format from the Ferrexpo website, www.ferrexpo.com.
The appendix to this announcement set out below contains additional information which has been extracted form the Annual Report for the purposes of compliance with the Disclosure and Transparency Rules and should be read together with the Preliminary Results Announcement which can be downloaded from the Company's website www.ferrexpo.com . The present announcement should be read in conjunction with, and is not a substitute for, the full Annual Report. Together the two announcements constitute the information required to be communicated to media in full unedited text through a Regulatory Information Service.
Enquiries:
| Ferrexpo |
|
| Ingrid Boon
| +44 207 389 8304 |
| Pelham Bell Pottinger | +44 207 337 1500 |
| Evgeniy Chuikov |
|
| Charles Vivian |
|
APPENDIX
1. Risks to our business
The Group faces several risks to its business and strategy and management of these risks is an integral part of the management of the Group. The Group's Executive Committee has put in place a formal process to assist it in identifying and reviewing risks. Plans to mitigate known risks are formulated and the effectiveness of, and progress in, implementing these plans is reviewed regularly, in accordance with the Turnbull Guidance. Despite the Group's best efforts to factor these known risks into its business strategy, inevitably risks will exist of which the Group is currently unaware.
The list of the principal risks and uncertainties facing the Group's business that follows below is based on the Board's current understanding, but because of the very nature of risk it cannot be expected to be exhaustive. New risks may emerge and the severity or probability associated with known risks may change over time.
| Risks relating to the Group's operations |
| |
| Iron ore prices and market Description: In the current economic environment, uncertainty remains regarding the iron ore price and iron ore demand in both the short and long-term. The Group's business is dependent on price developments in the international iron ore market. Sale prices and volumes in the worldwide iron ore market depend predominantly on the prevailing and expected level of demand for iron ore.
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Impact: Fluctuations in iron ore prices as well as demand may negatively impact the financial result of the Group.
Mitigation: Developments in the market are closely monitored by management and by the Board in order for the Group to be in a position to react in a timely manner to changes to iron ore prices and demand.
The Group successfully reacted to adverse market conditions during the 2009 financial year by recognising the importance of cost reduction and marketing flexibility at an early stage. | |
| Ukrainian VAT receivable Description: Ferrexpo Poltava Mining, as an exporter, and Ferrexpo Yeristovo Mining, as an investor, do not have substantial amounts of VAT on revenues to offset against VAT incurred on purchases. The Group relies on the timely repayment of VAT from the Ukrainian government to ensure sufficient cash flows.
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Impact: The late repayment of VAT will result in increased working capital which has to be funded by the Group. This will incur increased borrowing costs or result in temporary reduced levels of investment.
Mitigation: The repayment of VAT is closely monitored by management. Funding plans, including the commitment to capital expenditure, are developed to manage temporary increases in VAT receivable.
| |
| Mining risks and hazards Description: The Group's operations are subject to risks and hazards, including industrial accidents, equipment failure, unusual or unexpected geological conditions, environmental hazards, labour disputes, changes in the local regulatory environment, extreme weather conditions (especially in winter) and other natural phenomena. Hazards associated with open-pit mining include accidents involving the operation of open-pit mining and rock transportation equipment and the preparation and ignition of large scale open-pit blasting operations, collapses of the open-pit wall and flooding of the open pit.
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Impact: The Group may experience material mine or plant shutdowns or periods of reduced production as a result of any of the before mentioned factors, and any such events could negatively affect the Group's results of operations.
Mitigation: The Group is dedicated to a zero-harm objective and the mitigation of mining risk is one of the primary operational goals of the Group. However, given the nature of mining operations there is no guarantee that accidents and fatalities will not occur in the future, despite all the safety initiatives undertaken and processes put in place. In 2009 the Group had no operational fatalities, compared with three in 2008 and one in 2007.
| |
| Costs and reliance on State monopolies Description: Ukraine and Russia entered into a dispute relating to natural gas in January 2009. The issues in dispute included the price to be paid by Ukraine for the use of Russian gas and the distribution of Russian gas across Ukraine to Western Europe. The dispute resulted in a two-week period in which the gas supply to Ukraine and Western Europe was disrupted. The dispute was settled on 20 January 2009, and resulted in Ukraine being required to pay significantly more for natural gas than was the case previously. There can be no assurance that such a dispute will not recur again in the future.
In addition to that, the Group currently relies substantially on the rail freight network operated by Ukrzaliznytsya, the Ukrainian State-owned southern railway authority, for transportation of its raw materials and finished products. Railway tariffs for freight increase periodically and there can be no assurance that additional increases will not occur in the future. |
Impact: Increased gas prices will affect the Group's costs and, if gas supplies are disrupted in future for any substantial period of time, this may have a detrimental effect on the Group's ability to conduct its operations.
Changes in costs of the Group's mining and processing operations could occur as a result of unforeseen events and consequently result in changes in profitability or the feasibility and cost expectations in mining existing reserves. Many of these changes may be beyond the Group's control, such as those input costs controlled by Ukrainian state regulation, including railway tariffs, energy costs and royalties.
Mitigation: The factors having an impact on the Group's future cost structure are closely monitored and cost reduction initiatives are planned and reported to the Board.
The reduction of average C1 cash costs in the 2009 financial year emphasises the successful processes in place throughout the Group. | |
| Logistics Description: The Group is dependent on logistics services provided by third parties and State-owned organisations. The dependency is primarily related to the rail freight network services, services from port facilities and barging companies and may result in logistics bottlenecks which could adversely impact the Group's ability to expand its operations.
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Impact: The identified potential logistics bottlenecks, if left unmanaged, could adversely impact the ability of the Group to distribute its products on time and may affect its future growth strategy.
Mitigation: The Group has embarked upon a programme of investing in its own railcars and making further investments at its TIS-Ruda port facility for dredging in order to reduce the risk of these potential bottlenecks.
As an example, the investment in TIS-Ruda enabled the Group to meet delivery commitments requiring shipment from the port of Yuzhny at all times throughout 2009. | |
| Licences Description: Licences are critical to the Group's operations, and there is no guarantee of their renewal or reconfirmation in the future, nor is there a guarantee that the Group will be able to obtain any additional licences. See also 'Risk relating to the Group's strategy - Government approvals of expansion'.
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Impact: The lapse of licences held by the Group as well as any failure to obtain any additional licences may adversely affect the Group's ability to meet future growth targets.
Mitigation: The Group continues to monitor and review its commitments under its various licences, and continues to work to ensure that the conditions contained within the licences are fulfilled or the appropriate waivers obtained.
| |
| Risks relating to finance |
| |
| Exchange rate risk Description: The Group receives the majority of its income in US dollars. A large proportion of the Group's costs are denominated in Ukrainian hryvnia and exposed to the variation in the exchange rate between the US dollar and the Ukrainian hryvnia.
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Impact: Variations in the exchange rate can have a significant impact on the profitability of the Group.
Mitigation: As the depreciation of the Ukrainian hryvnia compared with the US dollar resulted in lower costs and improvement of the operating results, there was no need to enter into foreign currency hedging agreements during the current year.
However, the exposure to foreign currency fluctuation is closely monitored by the Group in order to make appropriate decisions on a timely basis, if needed. | |
| Interest rate risk Description: The majority of the Group's borrowings are linked to US$ LIBOR rates so the Group is exposed to interest rate changes.
|
Impact: An increase in interest rates will have a negative impact on the financial results of the Group.
Mitigation: Conditions in the financial markets and financing facilities in place are regularly reviewed by management in order to maximise the profitability of the Group.
The Group did not enter into derivative financial instruments such as interest rate swaps in 2009. | |
| Financing risk Description: Development projects require additional funding above the cash generation capabilities of the existing operations which need to be covered with specific finance arrangements.
The Group's principal loan facility contains covenants relating to Earnings Before Interest, Tax, Depreciation and Amortisation ('EBITDA') as well as the normal short and
long-term cover ratio requirements. |
Impact: There is a risk that cancellation of contracts as a result of force majeure events and/or low price outcomes in subsequent price negotiations would require the Group to seek the lenders' permission to assign additional contracts under this facility to meet certain ratios.
Mitigation: The Group's financing risk has been mitigated by the new loan facility that was secured in November 2009. The draw-down of the new loan in January 2010 was used to repay the previous pre-export finance facility. The new loan matures 36 months from 1 January 2010 and is to be repaid in 24 equal monthly instalments with the first instalment falling due in January 2011.
The Group expects to have sufficient liquidity to operate successfully throughout 2010 and 2011 and sufficient long-term contracts in order to meet the requirements of all debt covenants. | |
| Counterparty risk Description: In the current economic climate, there is an increased likelihood of unrecoverable debts and customer and supplier credit constraints and insolvency.
|
Impact: Financial instability on the part of the Group's counterparties could adversely affect its financial results.
Mitigation: The outstanding customer balances are subject to regular and thorough review. The results of these reviews are used to change sales terms with customers in order to mitigate the risk of uncollectible receivable balances.
As a result of the rigorous procedures put in place, the Group did not have any significant bad debt losses in 2009.
The profile of the Group's suppliers is regularly reviewed in order to assess and mitigate any dependence on major suppliers.
| |
| Risks relating to the Group's strategy |
| |
| Delays to major growth projects Description: The Group has placed material capital expenditure on its major growth projects on hold owing to the depressed market conditions in late 2008 and the first half of the 2009 financial year. |
Impact: A further delay to any substantial future increase in production by more than 12 months may cause the Group to lose potential future revenues once iron ore markets recover.
Mitigation: Rigorous project planning and capital expenditure approval processes are in place in order to ensure that growth projects can be immediately recommenced and/or started when market conditions are considered by the Board to have stabilised. | |
| Expansion capital expenditure Description: Although not a risk in the short-term, the Group is planning major expansion projects once the iron ore market and global economy stabilises, which will require the investment of significant capital.
|
Impact: As with all major capital projects of this kind, there is a risk of insufficient controls and cost overruns which could impact the time to completion of these projects and the return on the capital invested.
Mitigation: The Group has established procedures to control, monitor and manage this expenditure, and has appointed a Chief Projects Officer. Monthly asset reviews occur on site, and investment risks are periodically reviewed by the Board.
| |
| Government approvals of expansion Description: The Group does not yet have all governmental approvals required to implement its expansion projects. Despite the fact that none of the approvals that have been applied for to date have been refused, there is no guarantee that others will be granted in the future.
In particular, there are some small communities located on the proposed sites of the Group's expansion projects at Yeristovskoye and Belanovskoye. Although the Group considers that there is a low risk of difficulties being encountered in relocating these communities, there can be no assurance of this.
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Impact: A failure to receive governmental approvals will have a negative impact on achieving the Group's growth plans for the future.
Mitigation: The Group maintains an open and proactive relationship with the different governmental authorities and is aware of the importance of compliance with local legislation and standards.
| |
| Risks relating to operations in Ukraine |
| |
| Ukrainian inflation Description: Ukraine experienced very high inflation in the years up to and including 2008 as a result of high government spending and rapid economic growth. Ukrainian inflation was lower in 2009 as a result of global economic conditions, but there are indications that it may rise again in 2010.
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Impact: If not mitigated by further devaluation of the Ukrainian currency and efficiency improvements, this inflationary environment poses a risk to the costs and profitability level of the Group's business.
Mitigation: Ukrainian inflation is closely monitored and relevant conclusions are made by the Board, management of the Group or other committees of the Group in order to assess and address the implications for the Group in a timely manner.
| |
| Ukrainian economic and social risks Description: Ukraine has been adversely affected by the global financial crisis and by continuing government instability. The Ukrainian steel industry, the largest industry in the country, collapsed in late 2008. The Ukrainian national currency, the hryvnia, was informally tied to the US dollar and artificially strengthened during the first half of 2008, to the detriment of the Group. The Ukrainian government decided to weaken the local currency to assist the country in recovering from the economic crisis and high Ukrainian inflation. This benefited the Group, as a large proportion of its costs are denominated in hryvnia. However, it may also result in business failures, repossessions and social unrest in Ukraine owing to extensive borrowing in foreign currencies by the Ukrainian private sector.
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Impact: The uncertainties in the Ukrainian economic and politicial environment could have an adverse effect on the Group's business and financial results.
Mitigation: The Board is closely monitoring any developments and changes and maintains regular contact with regional and national government authorities.
Government activities were impacted by Ukraine's presidential elections in February 2010 but this situation is expected to normalise as stability is restored. | |
2. Related Party transactions
During the periods presented the Group entered into arm's length transactions with entities under common control of the majority owner of the Group, Kostyantin Zhevago and with other related parties. Management considers that the Group has appropriate procedures in place to identify and properly disclose transactions with the related parties.
The related party transactions undertaken by the Group during the periods presented are summarised below:
Revenue, expenses, finance income and finance costs
| | Year ended 31.12.09 | Y/E 31.12.08 | ||||
| US$000 | Entities under common control | Associated companies | Other related parties | Entities under common control | Associated companies | Other related parties |
| Iron ore pellet sales | – | – | – | – | – | – |
| Other sales1 | 506 | – | 1,480 | 853 | – | 2,937 |
| Total revenue | 506 | – | 1,480 | 853 | – | 2,937 |
| Purchase of materials | 4,458 | – | 11,930 | 22,999 | – | 20,293 |
| Purchase of services2 | 444 | – | 23 | 477 | – | 426 |
| General and administration expenses | 3,315 | – | – | 2,642 | – | 128 |
| Selling and distribution | – | 11,849 | 11,736 | – | 3,482 | 11,332 |
| Other expenses | 91 | – | 8 | 43 | – | 247 |
| Total expenses | 8,308 | 11,849 | 23,697 | 26,161 | 3,482 | 32,426 |
| Finance income | 1,329 | 267 | – | 239 | 394 | – |
| Finance expense | (816) | – | – | (761) | – | – |
| Net finance income/(expense) | 513 | 267 | – | (522) | 394 | – |
Sale and purchases of property, plant and equipment and investments
| | Year ended 31.12.09 | Y/E 31.12.08 | ||||
| US$000 | Entities under common control | Associated companies | Other related parties | Entities under common control | Associated companies | Other related parties |
| | | | | | | |
| | | | | | | |
| Sale of investments6 | – | – | 1,849 | – | – | |
| Purchase of investments4 | – | – | – | 270 | – | – |
| Purchase of own Ordinary Shares3 | – | – | – | 58,249 | – | – |
| Sale of property, plant and equipment | – | – | – | – | – | – |
| Purchase of property, plant and equipment1,2,5 | 2,200 | – | – | 192 | – | 16 |
The outstanding investments/balances with related parties for the periods presented are as follows:
| | As at 31.12.09 | As at 31.12.08 | ||||
| US$000 | Entities under common control | Associated companies | Other related parties | Entities under common control | Associated companies | Other related parties |
| Investments available-for-sale | 2,917 | – | – | – | – | – |
| Loans | – | 2,550 | – | – | 9,000 | – |
| Total non-current assets | 2,917 | 2,550 | – | – | 9,000 | – |
| Investments available-for-sale | 626 | – | – | 650 | – | – |
| Trade and other receivables | 1,999 | 93 | 6 | 1,890 | – | 8 |
| Prepayments and other current assets | 995 | – | 1 | 145 | 299 | 581 |
| Short-term deposits with banks | 411 | – | – | 5,000 | – | – |
| Cash and cash equivalents | 1,712 | – | – | 36,984 | – | – |
| Total current assets | 5,742 | 93 | 7 | 44,669 | 299 | 589 |
| Trade and other payables | 514 | – | 1,146 | 659 | – | 1,250 |
| Total current liabilities | 514 | – | 1,146 | 659 | – | 1,250 |