REG - Evraz Plc - Half-year Report <Origin Href="QuoteRef">EVRE.L</Origin> - Part 3
10/08/2017 07:07
- Part 3: For the preceding part double click ID:nRSJ5874Nb
- (5) (5)
Derecognition of non-controlling interests under put options (Note 4) - - - - - (56) - (56) (4) (60)
Contribution of a non-controlling shareholder to share capital of the Group's subsidiary - - - - - - - - 2 2
Transfer of treasury shares to participants of the Incentive Plans - 39 - - - (39) - - - -
Share-based payments - - 8 - - - - 8 - 8
At 30 June 2017 $ 1,507 $ (231) $ 2,525 $ 111 $ 20 $ 391 $ (3,073) $ 1,250 $ 212 $ 1,462
The accompanying notes form an integral part of these unaudited interim condensed consolidated financial statements.
Unaudited Interim Condensed Consolidated Statement of Changes in Equity (continued)
(In millions of US dollars)
Attributable to equity holders of the parent entity
Issued Treasury shares Additional paid-incapital Revaluation surplus Unrealised gains and losses Accumulated profits Translation difference Total Non-controlling interests Total Equity
capital
At 31 December 2015 $ 1,507 $ (305) $ 2,501 $ 124 $ - $ 644 $ (4,335) $ 136 $ 133 $ 269
Net profit/(loss) - - - - - (4) - (4) 11 7
Other comprehensive income/(loss) - - - - - - 370 370 8 378
Reclassification of revaluation surplus to accumulated profits in respect of the disposed items of property, plant and equipment - - - (5) - 5 - - - -
Total comprehensive income/(loss) for the period - - - (5) - 1 370 366 19 385
Contribution of a non-controlling shareholder to share capital of the Group's subsidiary - - - - - - - - 7 7
Transfer of treasury shares to participants of the Incentive Plans - 35 - - - (35) - - - -
Share-based payments - - 10 - - - - 10 - 10
At 30 June 2016 $ 1,507 $ (270) $ 2,511 $ 119 $ - $ 610 $ (3,965) $ 512 $ 159 $ 671
The accompanying notes form an integral part of these unaudited interim condensed consolidated financial statements.
Selected Notes
to the Unaudited Interim Condensed Consolidated Financial Statements
Six-month period ended 30 June 2017
1. Corporate Information
These interim condensed consolidated financial statements were authorised for issue by the Board of Directors of EVRAZ plc
on 9 August 2017.
EVRAZ plc ("EVRAZ plc" or "the Company") was incorporated on 23 September 2011 as a public company under the laws of the
United Kingdom with the registered number 7784342. The Company's registered office is at 5th Floor, 6 St. Andrew Street,
London, EC4A 3AE, United Kingdom.
The Company, together with its subsidiaries (the "Group"), is involved in the production and distribution of steel and
related products and coal and iron ore mining. In addition, the Group produces vanadium products. The Group is one of the
largest steel producers globally.
Lanebrook Limited (Cyprus) is the ultimate controlling party of the Company.
2. Significant Accounting Policies
Basis of Preparation
These interim condensed consolidated financial statements have been prepared in accordance with International Accounting
Standard ("IAS") 34 "Interim Financial Reporting", as adopted by the European Union. Accordingly, these interim condensed
consolidated financial statements do not include all the information and disclosures required for a complete set of
financial statements, and should be read in conjunction with the Group's annual consolidated financial statements for the
year ended 31 December 2016, which were prepared in accordance with International Financial Reporting Standards, as adopted
by the European Union.
The interim condensed consolidated financial statements do not constitute statutory accounts as defined by Section 435 of
the Companies Act 2006. The financial information for the full year is based on the statutory accounts for the financial
year ended 31 December 2016. Statutory accounts for the year ended 31 December 2016 have been filed with the Registrar of
Companies. The auditor's report under section 495 of the Companies Act 2006 in relation to those accounts was unqualified,
did not include a reference to any matters to which the auditor drew attention by way of emphasis without qualifying their
report and did not contain a statement under section 498(2) or (3) of the Companies Act 2006.
Operating results for the six-month period ended 30 June 2017 are not necessarily indicative of the results that may be
expected for the year ending 31 December 2017.
Going Concern
These interim condensed consolidated financial statements have been prepared on a going concern basis.
The Group's activities in all of its operating segments continue to be affected by the uncertainty and instability of the
current economic environment (Note 13). In response, the Group implemented a number of cost cutting initiatives, continues
to reduce the level of debt and proactively manages its debt covenants compliance.
Based on the currently available facts and circumstances the directors and management have a reasonable expectation that
the Group has adequate resources to continue in operational existence for the foreseeable future.
2. Significant Accounting Policies (continued)
Restatement of Financial Statements
Reclassification of Expenses
In the annual consolidated financial statements for 2016, the Group reclassified staff costs of certain categories of
personnel and the related expenses from cost of revenues and selling expenses to general and administrative expenses and
from selling expenses to cost of revenues. The reclassifications were made to better reflect the nature of these costs in
the current business environment and in order to make the financial statements more comparable with industry peers. The
amounts reported in the interim financial statements for the six-month period ended 30 June 2016 were restated
accordingly.
The effects of the restatement on the previously reported amounts are set out below.
Six-month period ended 30 June 2016
As previouslyreported Staff costs Other expenses Restated
Statement of Operations
Cost of revenue $ (2,638) $ (3) $ (3) $ (2,644)
Gross profit 905 (3) (3) 899
Selling and distribution costs (334) 19 7 (308)
General and administrative expenses (200) (16) (4) (220)
Changes in Accounting Policies
In the preparation of the interim condensed consolidated financial statements, the Group followed the same accounting
policies and methods of computation as compared with those applied in the complete consolidated financial statements for
year ended 31 December 2016. In the six-month-period ended 30 June 2017 no new standards, interpretations or amendments
were adopted by the Group.
3. Segment Information
The following tables present measures of segment profit or loss based on management accounts.
Six-month period ended 30 June 2017
US$ million Steel Steel, North America Coal Other operations Eliminations Total
Revenue
Sales to external customers $ 3,805 $ 888 $ 420 $ 40 $ - $ 5,153
Inter-segment sales 143 - 595 143 (881) -
Total revenue 3,948 888 1,015 183 (881) 5,153
Segment result - EBITDA $ 562 $ 29 $ 647 $ 10 $ (57) $ 1,191
Six-month period ended 30 June 2016
US$ million Steel Steel, North America Coal Other operations Eliminations Total
Revenue
Sales to external customers $ 2,376 $ 835 $ 210 $ 30 $ - $ 3,451
Inter-segment sales 107 - 272 110 (489) -
Total revenue 2,483 835 482 140 (489) 3,451
Segment result - EBITDA $ 429 $ 25 $ 210 $ 7 $ (47) $ 624
3. Segment Information (continued)
The following table shows a reconciliation of revenue and EBITDA used by management for decision making and revenue and
profit or loss before tax per the consolidated financial statements prepared under IFRS.
Six-month period ended 30 June 2017
US$ million Steel Steel, North America Coal Other operations Eliminations Total
Revenue $ 3,948 $ 888 $ 1,015 $ 183 $ (881) $ 5,153
Reclassifications and other adjustments (303) (9) 106 39 120 (47)
Revenue per IFRS financial statements $ 3,645 $ 879 $ 1,121 $ 222 $ (761) $ 5,106
EBITDA $ 562 $ 29 $ 647 $ 10 $ (57) $ 1,191
Unrealised profits adjustment (32) - 1 - 63 32
Reclassifications and other adjustments (4) (15) 11 - - (8)
(36) (15) 12 - 63 24
EBITDA based on IFRS financial statements $ 526 $ 14 $ 659 $ 10 $ 6 $ 1,215
Unallocated subsidiaries (63)
$ 1,152
Social and social infrastructure maintenance expenses (14) - (1) - - (15)
Depreciation, depletion and amortisation expense (128) (65) (81) (2) - (276)
Impairment of assets (12) (4) 1 - - (15)
Loss on disposal of property, plant and equipment and intangible assets (2) - (4) - - (6)
Foreign exchange gains/(losses), net (5) 9 22 26
365 (46) 596 8 6 866
Unallocated income/(expenses), net (35)
Profit/(loss) from operations $ 831
Interest income/(expense), net (222)
Share of profits/(losses) of joint ventures and associates 3
Gain/(loss) on financial assets and liabilities (51)
Gain/(loss) on disposal groups classified as held for sale, net (265)
Other non-operating gains/(losses), net (2)
Profit/(loss) before tax $ 294
3. Segment Information (continued)
Six-month period ended 30 June 2016
US$ million Steel Steel, North America Coal Other operations Eliminations Total
Revenue $ 2,483 $ 835 $ 482 $ 140 $ (489) $ 3,451
Reclassifications and other adjustments (84) (3) 62 28 89 92
Revenue per IFRS financial statements $ 2,399 $ 832 $ 544 $ 168 $ (400) $ 3,543
EBITDA $ 429 $ 25 $ 210 $ 7 $ (47) $ 624
Unrealised profits adjustment (41) 1 - - (3) (43)
Reclassifications and other adjustments (6) 1 6 1 47 49
(47) 2 6 1 44 6
EBITDA based on IFRS financial statements $ 382 $ 27 $ 216 $ 8 $ (3) $ 630
Unallocated subsidiaries (53)
$ 577
Social and social infrastructure maintenance expenses (12) - - - - (12)
Depreciation, depletion and amortisation expense (103) (77) (73) (1) - (254)
Impairment of assets (4) - (3) - - (7)
Loss on disposal of property, plant and equipment and intangible assets (5) (3) (2) - - (10)
Foreign exchange gains/(losses), net (6) 39 78 - - 111
252 (14) 216 7 (3) 405
Unallocated income/(expenses), net (72)
Profit/(loss) from operations $ 333
Interest income/(expense), net (236)
Share of profits/(losses) of joint ventures and associates (22)
Gain/(loss) on financial assets and liabilities (10)
Other non-operating gains/(losses), net (17)
Profit/(loss) before tax $ 48
In the six-month period ended 30 June 2017, the Group recognised an allowance for net realisable value of inventory in the
amount of $1 million.
The material changes in property, plant and equipment during the six-month period ended 30 June 2017 other than those
disclosed above are presented below:
US$ million Steel Steel, North America Coal Other operations Total
Additions $ 166 $ 51 $ 69 $ 1 $ 287
4. Changes in Composition of the Group
Sale of Subsidiaries
Nakhodka Trade Sea Port
On 15 June 2017, the Group sold its wholly-owned subsidiary EVRAZ Nakhodka Trade Sea Port ("NMTP") to a wholly-owned
subsidiary of Lanebrook Limited (the ultimate controlling shareholder of the Group) for a cash consideration of $332
million.
In connection with the sale transaction the Group entered into an agreement with NMTP pursuant to which the latter will
transship cargo of the Group's coal and metals in specified volumes for 5 years on terms specified in the agreement. The
Group received a consideration of $8 million in respect of the transshipment agreement, which was recognised as deferred
income with a 5-year period of amortisation.
Prior to disposal the subsidiary was included in the coal segment. The Group recognised a $289 million gain on sale of the
subsidiary, including $(20) million of cumulative exchange losses reclassified from other comprehensive income to the
consolidated statement of operations. The result was included in the Gain on disposal groups classified as held for sale
caption of the consolidated statement of operations. Cash disposed with the subsidiary amounted to $Nil. In addition, the
Group recognised income tax on the sale transaction in the amount of $61 million, which was unpaid at 30 June 2017.
Sukha Balka
On 1 June 2017, the Group sold a Ukrainian iron ore mine Sukha Balka, in which it had a 99.42% ownership interest, to a
third party for a cash consideration of $108 million. The consideration is payable in several instalments: $25 million were
paid upon signing of the transaction documents and the rest will be paid by 31 December 2017.
Prior to disposal the subsidiary was included in the steel segment. The Group recognised a $(556) million loss on sale of
the subsidiary, including $(586) million of cumulative exchange losses reclassified from other comprehensive income to the
consolidated statement of operations. The result was included in the Gain on disposal groups classified as held for sale
caption of the consolidated statement of operations. Cash disposed with the subsidiary amounted to $Nil.
Strategic Minerals Corporation
Following the sale agreement signed in 2016, on 6 April 2017, the Group sold Strategic Mineral Corporation (USA), in which
it had a 78.76% ownership interest, to a third party for a cash consideration of $16 million. Strategic Minerals
Corporation owns a 75% share in the Vametco vanadium mine and plant located in the Republic of South Africa. Prior to
disposal both subsidiaries were included in the steel segment.
The Group recognised a $2 million gain on sale of the subsidiary, including $(3) million of cumulative exchange losses
reclassified from other comprehensive income to the consolidated statement of operations. The result was included in the
Gain on disposal groups classified as held for sale caption of the consolidated statement of operations. Cash disposed with
the subsidiary amounted to $12 million.
The amounts of consideration for the sold subsidiaries were determined based on a debt free and normalised working capital
basis and are subject to insignificant changes in the course of the finalisation of the settlements with the buyers.
Business Combinations
In June 2017, the Group purchased the business of Western Canada Machining Inc. (Alberta, Canada), which produces couplings
for use in the oil and gas industry. The consideration amounted to $5 million in cash and $4 million of liabilities under
finance lease.
4. Changes in Composition of the Group (continued)
Purchase of Non-controlling Interests
Mezhegeyugol
14 March 2017, the Group signed an option agreement with a non-controlling shareholder in respect of shares of
Mezhegeyugol, a coal mining subsidiary of the Group. Under the agreement, the non-controlling shareholder has the right to
sell to the Group (the put option) all its shares in Mezhegeyugol (39.9841%) and to settle the loan payable to the Group
($25 million) for a total consideration of $39 million. As a result, the Group would hold 100% ownership interest in the
subsidiary. The option can be exercised from 1 December 2019 to 1 December 2020.
The Group determined that the terms of the option agreement give the Group the rights to the beneficial interests in
Mezgegeyugol and derecognised the non-controlling interests and recognised a liability under the put option. The difference
between the discounted value of the liability under the put option ($60 million) and the carrying value of non-controlling
interest in the amount of $56 million was charged to the accumulated profits of the Group.
5. Impairment of Non-current Assets
For the purpose of the impairment testing as of 30 June 2017 the Group assessed the recoverable amount of each
cash-generating unit ("CGU") where indicators of impairment were identified. As a result of impairment testing, no
impairment loss was recognised or reversed. However, the Group impaired certain functionally obsolete items of property,
plant and equipment ($18 million).
The recoverable amount has been determined based on a value-in-use calculation using cash flow projections based on the
actual operating results and business plans approved by management and appropriate discount rates reflecting the time value
of money and risks associated with respective cash-generating units. For the periods not covered by management business
plans, cash flow projections have been estimated by extrapolating the respective business plans' results using a zero real
growth rate. The key assumptions used by management in the value-in-use calculations with respect to the cash-generating
units to which the goodwill was allocated and where indicators of impairment existed are presented in the table below.
Period of forecast, years Pre-tax discount rate, % Commodity Average price of commodity per tonne in 2017 Average price of commodity per tonne in 2018 Recoverable amount of CGU, US$ million Carrying amount of CGU, US$ million
Steel North America
Large diameter pipes 5 10.23 steel products $904 $954 1,500 884
In addition, the Group determined that there were indicators of impairment in several other cash generating units and
tested them for impairment using the following assumptions.
Period of forecast, years Pre-tax discount rate, % Commodity Average price of commodity per tonne in 2017 Average price of commodity per tonne in 2018
EVRAZ Palini e Bertoli 8 14.70 steel plates ˆ534 ˆ528
EVRAZ Dneprovsk Iron and Steel Works 5 21.07 steel products $353 $348
EVRAZ Consolidated West-Siberian Metallurgical Plant 5 15.02 steel products $372 $391
EVRAZ Caspian Steel 5 10.89 steel products $388 $376
5. Impairment of Non-current Assets (continued)
The estimations of value in use are most sensitive to the following assumptions:
Discount Rates
Discount rates reflect the current market assessment of the risks specific to each cash-generating unit. The discount rates
have been determined using the Capital Asset Pricing Model and analysis of industry peers. Reasonably possible changes in
discount rates could lead to an impairment at EVRAZ Caspian Steel and EVRAZ Palini e Bertoli cash-generating units. If the
discount rates were 10% higher, this would lead to an impairment of $6 million.
Sales Prices
The price assumptions of the products sold by the Group were estimated using industry research using analysts' views
published by Citigroup, CRU, Credit Suisse, Deutsche Bank, Goldman Sachs, JP Morgan, Morgan Stanley, RBC, Renaissance
Capital, Otkritie and VTB during the period from February to June 2017. The Group expects that the nominal prices will grow
with a compound annual growth rate of (7.2)%-2.9% in 2017 - 2021 and 2.5% in 2022 and thereafter. Reasonably possible
changes in sales prices in the 2nd half of 2017 and 2018 could lead to an impairment at EVRAZ Palini e Bertoli. If the
prices assumed for the 2nd half of 2017 and 2018 were 10% lower, this would lead to an impairment of $1 million.
Sales Volumes
Management assumed that the sales volumes of steel products would increase by 8.0% in 2017 and future dynamics will be
driven by gradual market recovery and changes in assets' capacities. Reasonably possible changes in sales volumes in the
2nd half of 2017 and 2018 could lead to an impairment at EVRAZ Palini e Bertoli. If the sales volumes were 10% lower than
those assumed for the 2nd half of 2017 and 2018, this would lead to an impairment of $1 million.
Cost Control Measures
The recoverable amounts of cash-generating units are based on the business plans approved by management. A reasonably
possible deviation of cost from these plans could lead to an impairment at EVRAZ Caspian Steel, EVRAZ Dneprovsk Iron and
Steel Works and EVRAZ Palini e Bertoli cash-generating units. If the actual costs were 10% higher than those assumed for
the 2nd half of 2017 and 2018, this would lead to an impairment of $44 million.
For the cash-generating units, which were not impaired in the reporting period and for which reasonably possible changes
could lead to impairment, the recoverable amounts would become equal to their carrying amounts if the assumptions used to
measure the recoverable amounts changed by the following percentages:
Discount rates Sales prices Sales volumes Cost control measures
EVRAZ Dneprovsk Iron and Steel Works - - - 3.6%
EVRAZ Palini e Bertoli 0.3% (1.4)% (1.1)% 0.1%
EVRAZ Caspian Steel 7.2% - - 7.1%
6. Income Taxes
Major components of income tax expense were as follows:
Six-month periodended 30 June
US$ million 2017 2016
Current income tax expense $ (254) $ (66)
Adjustment in respect of income tax of previous years (2) (1)
Deferred income tax benefit/(expense) relating to origination and reversal of temporary differences 48 26
Income tax expense reported in the consolidated statement of operations $ (208) $ (41)
7. Property, Plant and Equipment
The movement in property, plant and equipment for the six-month period ended 30 June 2017 was as follows:
US$ million Land Buildings and constructions Machinery and equipment Transport and motor vehicles Mining assets Other assets Assets under construction Total
At 31 December 2016, cost, net of accumulated depreciation $ 100 $ 883 $ 1,809 $ 79 $ 1,347 $ 10 $ 424 $ 4,652
Assets acquired in business combinations 3 1 3 - - - - 7
Additions - - - - - - 287 287
Assets put into operation - 23 120 18 25 1 (187) -
Disposals (2) (6) - (3) - - (11)
Depreciation and depletion charge - (42) (162) (12) (42) (2) - (260)
Impairment losses recognised in statement of operations - (1) (3) - (11) - (3) (18)
Impairment losses reversed through statement of operations - - 1 - 2 - 1 4
Transfer to assets held for sale - (7) (11) (1) (76) - (10) (105)
Change in site restoration and decommissioning provision - 6 - - 32 - - 38
Translation difference 1 27 46 2 38 - 7 121
At 30 June 2017, cost, net of accumulated depreciation $ 104 $ 888 $ 1,797 $ 86 $ 1,312 $ 9 $ 519 $ 4,715
8. Investments in Joint Ventures and Associates
The movement in investments in joint ventures and associates during the six-month period ended 30 June 2017 was as
follows:
US$ million Timir Streamcore Other associates Total
At 31 December 2016 $ 19 $ 37 $ 8 $ 64
Share of profit/(loss) - 2 1 3
Dividends - - (1) (1)
Translation difference - 1 1 2
At 30 June 2017 $ 19 $ 40 $ 9 $ 68
9. Related Party Disclosures
For the Group related parties include associates and joint venture partners, key management personnel and other entities
that are under the control or significant influence of the key management personnel, the Group's ultimate parent or its
shareholders. In considering each possible related party relationship, attention is directed to the substance of the
relationship, not merely the legal form.
Amounts owed by/to related parties were as follows:
Amounts due from Amounts due to
related parties related parties
US$ million 30 June 31 December 2016 30 June 31 December 2016
2017 2017
Loans
Timir $ 7 $ 7 $ - $ -
Trade balances
Nakhodka Trade Sea Port 3 - - -
Vtorresource-Pererabotka - 1 45 39
Yuzhny GOK - - 253 185
Other entities 1 - 2 2
11 8 300 226
Less: allowance for doubtful accounts - - - -
$ 11 $ 8 $ 300 $ 226
Transactions with related parties were as follows for the six-month periods ended 30 June:
Sales to Purchases fromrelated parties
related parties
US$ million 2017 2016 2017 2016
Genalta Recycling Inc. $ - $ - $ 7 $ 4
Interlock Security Services - - 9 9
Vtorresource-Pererabotka 4 3 202 99
Yuzhny GOK 20 11 60 31
Other entities 1 - 1 7
$ 25 $ 14 $ 279 $ 150
Compensation to Key Management Personnel
In the six-month periods ended 30 June 2017 and 2016, key management personnel totalled 30 and 34 persons, respectively.
Total compensation to key management personnel was included in general and administrative expenses and consisted of the
following in the six-month periods ended 30 June:
US$ million 2017 2016
Salary $ 8 $ 6
Performance bonuses 9 5
Social security taxes 3 2
Share-based payments 4 5
$ 24 $ 18
In addition to the disclosures presented in this note, the sale of Nakhodka Trade Sea Port to a related party is disclosed
in Note 4.
10. Cash and Cash Equivalents
Cash and cash equivalents were denominated in the following currencies:
US$ million 30 June 2017 31 December 2016
US dollar $ 1,085 $ 1,058
Russian rouble 159 71
Others 41 28
$ 1,285 $ 1,157
The above cash and cash equivalents mainly consist of cash at banks. At 30 June 2017 and 31 December 2016, the assets of
disposal groups classified as held for sale included cash amounting to $Nil and $2 million, respectively.
11. Equity
Share Capital
Number of shares 30 June2017 31 December 2016
Issued and fully paid
Ordinary shares of $1 each 1,506,527,294 1,506,527,294
Treasury Shares
Number of shares 30 June2017 31 December 2016
Number of treasury shares 74,474,663 87,015,878
Earnings per Share
Earnings per share are calculated by dividing the net income attributable to ordinary shareholders by the weighted average
number of ordinary shares in issue during the period. Diluted earnings per share amounts are calculated by dividing the net
profit attributable to ordinary equity holders by the weighted average number of ordinary shares outstanding during the
period plus the weighted average number of ordinary shares that would be issued on the conversion of all the potential
dilutive ordinary shares into ordinary shares.
The following reflects the profit and share data used in the basic and diluted earnings per share computations:
Six-month period
ended 30 June
2017 2016
Weighted average number of ordinary shares outstanding during the period 1,423,045,129 1,410,286,193
Effect of dilution: share options 30,251,983 -
Weighted average number of ordinary shares adjusted for the effect of dilution 1,453,297,112 1,410,286,193
Profit/(loss) for the period attributable to equity holders of the parent entity, US$ million $ 53 $ (4)
Basic earnings/(losses) per share $ 0.04 $ (0.00)
Diluted earnings/(losses) per share $ 0.04 $ (0.00)
In the six-month period ended 30 June 2016, share-based awards were antidilutive as the Group reported net losses
attributable to the equity holders of the parent entity.
There have been no other transactions involving ordinary shares or potential ordinary shares between the reporting date and
the date of completion of these interim condensed consolidated financial statements.
12. Loans and Borrowings
Short-term and long-term loans and borrowings were as follows:
US$ million 30 June2017 31 December2016
Bank loans $ 1,975 $ 2,067
US dollar-denominated
7.75% bonds due 2017 - 26
9.5% notes due 2018 75 125
6.75% notes due 2018 196 528
7.5% senior secured notes due 2019 5 350
6.50% notes due 2020 700 1,000
8.25% notes due 2021 750 750
6.75% notes due 2022 500 500
5.375% notes due 2023 750 -
Rouble-denominated
12.95% rouble bonds due 2019 254 247
12.60% rouble bonds due 2021 254 247
Fair value adjustment to liabilities assumed in business combination - 1
Unamortised debt issue costs (36) (44)
Interest payable 91 97
$ 5,514 $ 5,894
Some of the loan agreements and terms and conditions of notes provide for certain covenants in respect of EVRAZ plc and its
subsidiaries. The covenants impose restrictions in respect of certain transactions and financial ratios, including
restrictions in respect of indebtedness and profitability.
Pledged Assets
The Group pledged its rights under selected export contracts as collateral under the loan agreements. All proceeds from
sales of steel pursuant to these contracts can be used to satisfy the obligations under the loan agreements in the event of
a default.
At 30 June 2017, a 100% ownership interest in EVRAZ Inc NA and 51% in EVRAZ Inc NA Canada were pledged against the
liability under 7.5% senior secured notes due 2019. The subsidiaries represent approximately 29.2% of the consolidated
assets at 30 June 2017 and generated almost 17.2% of the consolidated revenues in the six-month period ended 30 June 2017.
In addition, property, plant and equipment and inventory of these subsidiaries amounting to $1,039 million and $414
million, respectively, at 30 June 2017 were pledged as collateral under the notes. In 2017, these notes were mostly repaid
(Repurchase of Notes and Bonds).
The Group's pledged assets at carrying value included the following:
US$ million 30 June 2017 31 December 2016
Property, plant and equipment $ 1,039 $ 1,013
Inventory 414 315
12. Loans and Borrowings (continued)
Issue of Notes and Bonds
In March 2017, the Group issued 5.375% notes due 2023 in the amount of $750 million. The proceeds from the issue of the
notes were used to finance the purchase of 9.50% notes due 2018, 6.75% notes due 2018 and 6.50% bonds due 2020 at the
tender offers settled in March 2017 and to refinance other current indebtedness of the Group.
Repurchase of Notes and Bonds
In the first half of 2017, the Group partially repurchased 9.50% notes due 2018 ($50 million), 6.75% notes due 2018 ($332
million) and 6.50% bonds due 2020 ($300 million). The premium over the carrying value on the repurchase and other costs
relating to the transaction in the total amount of $5 million, $18 million and $23 million, respectively, were charged to
the Gain/(loss) on financial assets and liabilities caption of the consolidated statement of operations.
The Group also settled $345 million out of $350 million under 7.5% senior secured notes due 2019. Loss on this transaction
amounted to $17 million, including $13 million of premium.
In addition, the Group fully settled its 7.75% bonds due 2017 ($26 million), there was no gain or loss on this
transaction.
Unutilised Borrowing Facilities
As of 30 June 2017, the Group had unutilised bank loans in the amount of $1,584 million, including $130 million of
committed facilities.
13. Commitments and Contingencies
Operating Environment of the Group
The Group is one of the largest vertically integrated steel producers globally and the largest steel producer in Russia.
The Group's major subsidiaries are located in Russia, Ukraine, the USA and Canada. Russia and Ukraine are considered to be
developing markets with higher economic and political risks. Steel consumption is affected by the cyclical nature of demand
for steel products and the sensitivity of that demand to worldwide general economic conditions.
The political crisis over Ukraine led to uncertainty in the global economy. The unrest in the Southeastern region of
Ukraine and the economic sanctions imposed on Russia caused the depreciation of national currencies in 2014-2015, economic
slowdown, deterioration of liquidity in the banking sector, and tighter credit conditions within Russia and Ukraine. In
addition, a significant drop in crude oil prices in 2015 continues to have a negative impact on the Russian economy. The
combination of the above resulted in reduced access to capital, a higher cost of capital, increased inflation and
uncertainty regarding economic growth. If the Ukrainian crisis broadens and further sanctions are imposed on Russia, this
could have an adverse impact on the Group's business.
Management believes it is taking appropriate measures to support the sustainability of the Group's business in the current
circumstances.
The global economic climate continues to be unstable and this may negatively affect the Group's results and financial
position in a manner not currently determinable.
13. Commitments and Contingencies (continued)
Taxation
Russian and Ukrainian tax, currency and customs legislation is subject to varying interpretations, and changes, which can
occur frequently. Management's interpretation of such legislation as applied to the transactions and activity of the Group
may be challenged by the relevant regional and federal authorities.
Management believes that it has paid or accrued all taxes that are applicable. Where uncertainty exists, the Group has
accrued tax liabilities based on management's best estimate of the probable outflow of resources embodying economic
benefits, which will be required to settle these liabilities. Possible liabilities which were identified by management at
the end of the reporting period as those that can be subject to different interpretations of the tax laws and other
regulations and are not accrued in these financial statements could be up to approximately $28 million.
Contractual Commitments
At 30 June 2017, the Group had contractual commitments for the purchase of production equipment and construction works for
an approximate amount of $147 million.
In 2010, the Group concluded a contract with PraxAir for the construction of an air separation plant and for the supply of
oxygen and other gases produced by a third party at this plant for a period of 20 years (extended to 25 years in 2015). Due
to a change in plans of the third party provider and in management's assessment of the extent of sales of gases to third
parties, effective from 2015 the Group no longer considers this supply contract to fall within the scope of IFRIC 4
"Determining whether an Arrangement Contains a Lease". At 30 June 2017, the Group has committed expenditure of $601 million
over the life of the contract.
Social Commitments
The Group is involved in a number of social programmes aimed to support education, healthcare and social infrastructure
development in towns where the Group's assets are located. The Group budgeted to spend approximately $40 million under
these programmes in the second half of 2017.
Environmental Protection
In the course of the Group's
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