* For the definition of EBITDA, please refer to p.260 of the Annual Report 2016

The following table details the effect of the Group's cost-cutting initiatives.

Selling and distribution expenses decreased by 14.4% in 2016 due to rouble weakening and lower sales volumes to third parties.

General and administrative expenses fell by 15.2% in 2016. This was caused by lower staff costs, mainly due to headcount optimisations at EVRAZ North America and the Russian steel and coal plants, as well as to rouble and hryvnia weakening.

Impairment losses during the reporting period mainly include the write-off of goodwill and of certain functionally obsolete items of property, plant and equipment at subsidiaries in the US and Canada totalling US$430 million. The major drivers that led to impairment were the changes in expectations of long-term prices for iron ore and steel products, the increase in forecast costs and changes in forecast production volumes.

Foreign exchange losses arose as a result of the depreciation of the Russian rouble, Ukrainian hryvnia, Kazakh tenge and Canadian dollar.

The subsidiaries in these countries have US dollar-denominated debts, such as bonds and bank loans. In addition, there are some intragroup debts between subsidiaries with different functional currencies and, consequently, gains/(losses) of one subsidiary recognised in the statement of operations are not offset by the exchange differences of another subsidiary with a different functional currency.

Interest expenses incurred by the Group increased despite achieved debt reduction mainly due to growth of US dollar base rates that affects debt bearing variable interest rate and the larger portion of rouble-denominated debt, that bears higher nominal rates than debt denominated in US dollars. The interest expense for bank loans, bonds and notes amounted to US$439 million in 2016 and US$430 million in 2015.

Losses on financial assets and liabilities amounted to US$9 million and included, among other things, US$273 million of unrealised gains and US$250 million of realised losses on changes in the fair value of derivatives not designated as hedging instruments, accompanied by a realised gain amounting to US$14 million related to the interest portion of the change in fair value of the swaps-hedging instruments for rouble-denominated bonds. This effect was offset by a US$50 million loss on repaying debt, which is primarily a premium on repurchasing US dollar-denominated bonds.

In the reporting period, the Group had an income tax expense of US$96 million, compared with US$12 million in 2015. The change reflects the Group's better operating results.

Net cash flows from operating activities decreased by 7.3% compared with 2015 and US$160 million was attributed to the release in net working capital. Free cash flow for the period was US$659 million.

* For the definition of free cash flow, please refer to p.260 of the Annual Report 2016.

CAPEX and key projects

In 2016, EVRAZ maintained a low level of capital expenditures of US$428 million. Two projects at EVRAZ Regina in Canada made good progress with the launch scheduled in Q1 2017. The Mezhegey coal mine project launched in Q2 2016 and is now ramping up production volumes. EVRAZ NTMK continued implementing its grinding ball mill construction project (in 2016 the engineering work was finished) and also started implementing the blast furnace 7 project (first iron is scheduled at the end of 2017).

Capital expenditures (including those recognised in financing activities) for 2016 in millions of US dollars can be summarised as follows:

Financing and liquidity

At the beginning of 2016, total debt was US$6,724 million. The Group continued to focus its efforts on reducing debt and extending the maturity profile.

In March, EvrazHolding Finance LLC issued RUB15 billion (around US$221 million at the exchange rate on the transaction date) in five-year exchange-traded bonds due in 2021 with a 12.60% coupon payable semi-annually.

In April, EVRAZ entered into a multi-currency facility agreement with VTB Bank governing the general terms and conditions of loans of up to seven years with a total borrowing limit of US$300 million equivalent. During 2016, two tranches amounting to US$150 million and US$99 million were utilised under the facility in the form of loans repayable in 12 equal quarterly instalments starting April and September 2020, respectively.

In June, Evraz Group S.A. issued a US$500 million Eurobond due in 2022 with a 6.75% coupon payable semi-annually.

In October, EVRAZ utilised an additional US$85 million under its Framework agreement with Alfa-Bank repayable in 10 equal quarterly instalments starting in October 2020.

Proceeds from these new borrowings from banks and capital markets were used to refinance EVRAZ' existing maturities, primarily those coming due in 2017 and 2018, thus not increasing overall debt and extending the repayment schedule.

During 2016, in order to reduce total debt and interest expense, as well as to extend the maturity profile, EVRAZ prepaid several bank facilities, namely US$120 million of its US$500 million syndicated pre-export financing facility, US$81 million of the total principal of its US$125 million facility with Unicredit, US$87 million of its US$100 million facility with Nordea Bank, and the loan from Development Bank of Kazakhstan with a principal amount of US$90 million together with capitalised interest of US$23 million.

In April, EVRAZ prepaid €60 million of the outstanding principal under its credit facility with Gazprombank, and later in August 2016, the Group signed new loans with Gazprombank with amounts of approximately RUB18 billion and €180 million. During the following several months after signing, EVRAZ refinanced its existing credit facility with this bank: upon completion of the refinancing process, the maturity of this facility split into tranches of 30% and 70% of the principal was moved to 2021 and 2022, respectively.

During 2016, EVRAZ partly repurchased during two tender offers (in April and June), as well as from the open market, US$496 million of the outstanding principal of its 2018 Eurobonds, US$160 million of Raspadskaya's Eurobonds, and US$109 million of its 2017 Eurobonds. The remaining US$177 million principal of its 2017 Eurobonds was called in full and settled in August.

As a result of these actions, as well as scheduled drawings and repayments of bank loans, total debt fell by US$763 million to US$5,961 million as at 31 December 2016, while net debt dropped by US$547 million to US$4,802 million, compared with US$5,349 million as at 31 December 2015.

Due to the larger portion of rouble-denominated debt and growth of US dollar base rates during 2016, interest expenses accrued in respect of loans, bonds and notes were US$439 million in 2016, compared with US$430 million in 2015.

Net debt to EBITDA stood at 3.1 times, compared with 3.7 times as at 31 December 2015.

As at 31 December 2016, debt with financial maintenance covenants comprised a syndicated pre-export financing facility and various bilateral facilities with a total outstanding principal of around US$1,829 million. The maintenance covenants under these facilities include the two key ratios calculated on the basis of EVRAZ plc's consolidated financials: a maximum net leverage and a minimum EBITDA interest cover. In H1 2016, EVRAZ signed amendments to these facilities, whereby the testing of financial ratios was suspended for three semi-annual testing periods starting 30 June 2016, subject to compliance with certain additional restrictions on indebtedness and dividends. As a result, currently only one of the outstanding facilities has the minimum EBITDA interest cover ratio tested against a comfortable level of 1.5x.

As at 31 December 2016, EVRAZ was in full compliance with its financial covenants. Cash amounted to US$1,157 million and short-term loans and the current portion of long-term loans stood at US$392 million. Cash-on-hand and committed credit facilities are sufficient to cover all of EVRAZ' debt principal maturing in 2017 and 2018.

Key recent developments

In January 2017, EVRAZ made a partial prepayment of its US$500 million syndicated pre-export financing facility, settling another US$110 million of principal. The remaining outstanding under this facility is US$270 million.

Review of operations by Segment

Steel segment

Sales review

The Steel segment's revenues fell, mainly due to lower revenues from sales of steel products. The main drivers were lower prices (down 4.9%, mainly on semi-finished products) and sales volumes (down 3.7%, primarily of construction products).

Revenues from external sales of semi-finished products dropped by 9.3% due to lower average prices (down 9.3%). External sales of billets rose, while volumes of slabs and pig iron decreased compared with 2015, as billets had a higher profit margin. Lower slab volumes, mainly to the Russian and European markets, were partially offset by increased billet shipments to Africa.

Revenues from sales of construction products to third parties dropped, mostly due to reduced volumes (down 9.8%) as a result of weaker demand in the CIS (including Russia) and lower average prices (down 1.0%).

Revenues from external sales of railway products increased due to higher sales volumes (up 12.6%), partially offset by lower average prices (down 6.4%). The increase of railway products sales volumes in 2016 was attributable to operational improvements at EVRAZ ZSMK's rolling mill, an improved product mix, higher demand for rails from Russian Railways and export customers, as well as higher demand for railcar sections.

External revenues from flat-rolled products dropped. This was mostly due to lower sales volumes (down 8.4%) and average prices (down 1.1%) following the deconsolidation of EVRAZ Highveld Steel and Vanadium, as well as to reduced demand.

Revenues from external sales of steel products in Russia decreased by 5.1% year-on-year, mainly due to reduced sales volumes (down 7.7%). However, the share of Russia in external sales of steel products increased from 48.3% in 2015 to 49.7% in 2016, mainly due to shifting sales from Europe and the CIS to the domestic market.

* Includes billets, slabs, pig iron, pipe blanks and other semi-finished products.

** Includes rebars, wire rods, wire, beams, channels and angles.

*** Includes rails, wheels, tyres and other railway products.

**** Includes commodity plate and other flat-rolled products.

***** Includes rounds, grinding balls, mine uprights and strips, tubular products.

The Steel segment's revenues from sales of iron ore products fell by 7.2%. This was due to a decrease in sales volumes (down 4.5%) following the deconsolidation of EVRAZ Highveld Steel and Vanadium, as well as to lower iron ore prices (down 2.7%). Prices for iron ore products generally subsided in 2016, moving in line with global benchmarks.

The Steel segment's revenues from sales of vanadium products slipped by 0.7% due to a decrease in sales volumes (down 7.5%), which stemmed from the deconsolidation of EVRAZ Highveld Steel and Vanadium. This was partially offset by higher sales prices (up 6.8%), in line with market trends.

Steel segment cost of revenue

The Steel segment's cost of revenues fell by 8.2% year-on-year in 2016. The main reasons for the decline were:

•      The cost of raw materials decreased by 3.5% due to several changes

o  Iron ore consumption declined by 17.2%, amid lower pig iron production at EVRAZ ZSMK and a decrease in iron ore prices in local currencies on the Russian market, accompanied by rouble and hryvnia weakening in 2016. The reduction was partially offset by an increase in consumption of iron ore at EVRAZ DMZ due to higher pig iron output and an increase in prices in local currencies on the Ukrainian market.

o  Coking coal consumption surged by 10.3%, driven by higher global benchmark prices. This was partially offset by rouble and hryvnia weakening, as well as the deconsolidation of EVRAZ Highveld Steel and Vanadium.

o  Scrap consumption dropped by 7.1%, largely due to the rouble and hryvnia weakening, albeit partially offset by higher scrap prices in local currencies.

o  Other raw materials fell primarily due to the rouble's weakening, the deconsolidation of EVRAZ Highveld Steel and Vanadium, and a decrease in prices for vanadium materials and ferroalloys in 2016.

o  The decline in raw material costs is also attributable to cost-cutting initiatives, which reduced consumption.

•      Auxiliary material costs were down by 8.2%, primarily due to the rouble's weakening and the deconsolidation of EVRAZ Highveld Steel and Vanadium. This was partly offset by higher prices in local currencies (mainly for refractories).

•      Lower service costs were driven by the rouble and hryvnia weakening, as well as the deconsolidation of EVRAZ Highveld Steel and Vanadium.

•      Transportation costs decreased by 9.6%, primarily due to the rouble's weakening.

•      Staff costs fell by 14.3%, largely due to the rouble and hryvnia weakening and headcount optimisation, accompanied by the effect of EVRAZ Highveld Steel and Vanadium's deconsolidation. This was partly offset by wage inflation at Russian sites.

•      Depreciation and depletion costs dropped by 7.0%, driven mainly by local currency depreciation.

•      Lower energy costs were driven by the rouble and hryvnia weakening, accompanied by the effect of the deconsolidation of EVRAZ Highveld Steel and Vanadium. Lower energy costs were partly offset by an increase in tariffs in local currencies.

•      Other costs decreased, primarily due to changes in goods for resale, intragroup URP, and the rouble and hryvnia weakening.

* Includes goods for resale, taxes in cost of revenues, semi-finished products and inter-segment unrealised profit.

Steel segment gross profit

The Steel segment's gross profit decreased by 8.2% year-on-year, driven primarily by lower revenues from sales of steel products.

Steel, North America segment

Sales review

The segment's revenues from steel product sales decreased due to lower sales volumes (down 24.8%) and the impact of lower sales prices (down 11.1%). Output declined mainly due to weak tubular and rail markets, along with extended planned outages in 2016.

Revenues from sales of construction products fell by 26.9%, primarily due to lower sales prices (down 14.7%) and sales volumes (down 12.2%). The fall in sales volumes was attributable to reduced demand for rod and bar products, as well as to the disposal of a structural tubing facility in Portland in March 2015.

Railway product revenues declined by 46.7%, driven by a 38.0% drop in volumes and a 8.7% reduction in average prices, in line with the general price trend in the US steel market. The rail market fundamentals were less positive, given moderate CAPEX of the Class-1 railroads due to lower traffic and a surplus inventory of rails.

Revenues from flat-rolled products fell, mainly due to lower prices (down 9.1%) and sales volumes (down 6.0%), which was caused by deteriorating conditions in the segment.

Revenues from tubular product sales decreased by 42.1%, primarily due to lower sales volumes (down 34.4%) and sales prices (down 7.7%). The drop in sales volumes was driven by weaker demand for OCTG, which in turn was caused by a slowdown in drilling activities due to the slump in oil prices.

* Includes beams, rebars and structural tubing.

** Includes rails and wheels.

*** Includes commodity plate, specialty plate and other flat-rolled products.

**** Includes large-diameter line pipes, ERW pipes and casing, seamless pipes, casing and tubing.

***** Includes scrap and services.

Steel, North America segment cost of revenue

The Steel, North America segment's cost of revenues fell by 37.1% year-on-year in 2016. The main drivers were:

·     Raw material costs dropped by 39.3%, primarily due to lower consumption of scrap, ferroalloys and other raw materials. The main reasons for this were lower volumes of crude steel and finished products (primarily tubular products and rails), as well as cost-cutting initiatives, which reduced consumption.

·     Costs of semi-finished products fell by 44.6%, amid lower production volumes of tubular products and a decline in prices for purchased slab.

·     Auxiliary material costs decreased by 37.0%, as production volumes of crude steel and finished products dropped compared with 2015 and a cost-cutting plan was implemented.

·     Service costs were down by 33.8%, as production volumes in 2016 fell year-on-year.

·     Energy costs fell, due to a reduction in energy consumption resulting from a drop in production volumes and lower tariffs for energy and natural gas.

·     Other costs decreased primarily due to changes in allowances for inventories on the back of lower inventory write-offs and slowmoving adjustments as a result of reduced inventory volumes, accompanied by the decline in transportation costs and changes in goods for resale.

  * Includes primarily allowances for inventories, goods for resale, certain taxes, transportation and inter-segment unrealised profit.

Steel, North America segment gross profit

The Steel, North America segment's gross profit totalled US$221 million in 2016, down from US$293 million in 2015. The decline was primarily due to lower sales volumes amid the downturn on the OCTG and rail markets.

Coal segment

Sales review

The segment's overall revenues increased amid growth of sales prices due to the recovery of global demand. Additional support came from a temporary domestic supply deficit following the accident at Vorkutaugol's Severnaya mine.

Sales volumes rose due to higher annual output at the Erunakovskaya-8 mine in 2016, following longwall moves and unfavourable geological conditions in 2015. In addition, productivity at the Uskovskaya and Osinnikovskaya mines improved, and annual output at Mezhegeyugol rose following the launch of room-and-pillar mining operations in 2016.

Revenues from internal sales of coal products increased due to higher prices (up 15.9%), partially offset by lower sales volumes (down 0.6%). Revenues from external sales of coal products also rose due to higher prices (up 21.7%) and sales volumes (up 4.1%).

In 2016, the Coal segment's sales to the Steel segment amounted to US$483 million (36.5% of sales), compared with US$419 million (39.2%) in 2015.

During the reporting period, roughly 48% of EVRAZ' coking coal consumption in steelmaking came from the Group's own operations, compared with 51% in 2015.

Coal segment cost of revenue

The main factors behind the decrease in the segment's cost of revenues compared with 2015 were:

•      The cost of auxiliary materials decreased in 2016, primarily due to rouble weakening, as well as to the effect of cost-cutting initiatives.

•      The increase in services costs was due to higher production volumes, though this was partially offset by rouble depreciation.

•      Transportation costs declined as a result of the rouble weakening, which was partially offset by an increase in costs due to higher sales volumes in 2016.

•      Staff costs were down due to rouble weakening and asset optimisation initiatives.

•      Depreciation and depletion costs fell mostly due to rouble weakening and asset optimisation initiatives, including the suspension of operations at Raspadskaya's MUK-96 mine and the closure of a mine field 1 at Raspadskaya Koksovaya.

•      Energy costs fell due the effect of currency movements, albeit partly offset by higher electricity prices in local currencies.

•      Other costs increased, primarily due to changes in goods for resale and raw material costs, partially offset by the effect of the rouble weakening.

* Includes primarily goods for resale and certain taxes, allowance for inventory, raw materials and inter-segment unrealised profit.

Coal segment gross profit

The Coal segment's gross profit amounted to US$621 million in 2016, up from US$310 million in 2015. The gross profit margin rose, primarily due to the increase in sales prices and volumes, cost-cutting initiatives and rouble depreciation's influence on costs.

APPENDIX

Key RISKS AND UNCERTAINTIES

EVRAZ is exposed to numerous risks and uncertainties that exist in its business that may affect its ability to execute its strategy effectively in 2017 and could cause the actual results to differ materially from expected and historical results.

Despite the ongoing market volatility described in the Market Outlook section, the Directors consider that the principal risks and uncertainties as summarised below and detailed in the EVRAZ plc 2016 Annual Report on pages 34 to 35, copies of which are available at http://www.evraz.com/investors/annual_reports/, are relevant in 2017 and the mitigating actions described are appropriate.

Key risks:

EVRAZ monitors these risks and actively pursues strategies to mitigate them on an ongoing basis.

DIRECTOR'S RESPONSIBILITY STATEMENT

Each of the directors whose names and functions are listed on pages 100-101 of the Annual report confirm that to the best of their knowledge:

-     the consolidated financial statements of EVRAZ plc, prepared in accordance with International Financial Reporting Standards as adopted by the European Union, give a true and fair view of the assets, liabilities, financial position and profit or loss of the Company and the undertakings included in the consolidation taken as a whole (the 'Group');

-     the management report required by DTR 4.1.8R includes a fair review of the development and performance of the business and the position of the Company and the Group, together with a description of the principal risks and uncertainties that they face.

By order of the Board

Alexander Frolov

Chief Executive Officer

EVRAZ plc

28 February 2017
 

EVRAZ plc

Consolidated Statement of Operations

(in millions of US dollars, except for per share information)

*    The amounts shown here do not correspond to the previously issued financial statements and reflect reclassifications described in Note 2.

EVRAZ plc

Consolidated Statement of Comprehensive Income

(in millions of US dollars)

EVRAZ plc

Consolidated Statement of Financial Position

(in millions of US dollars)

EVRAZ plc

Consolidated Statement of Cash Flows

(in millions of US dollars)

Continued on the next page
 

EVRAZ plc

Consolidated Statement of Cash Flows (continued)

(in millions of US dollars)