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KTK-AR2011-ENG Document Transcript

  • 1. AnnualReviewDelivering promises
  • 2. THE COMPANYAT A GLANCE Coal production by mine, mln tonnesRevenue, mln RUB EBITDA, mln RUB 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2009 2010 2011 2009 2010 2011 1025,000 23,939 4,000 3,911 8.720,000 20% 8 3 000 15% 16% 6.8 6.215,000 6 5.5 SHAREHOLDER EQUITY OPERATING RESULTS FOК 2011 DISTRIBUTION SYSTEM 14,160 2,178 2,134 2,000 4.3 4.3 10,658 4.110,000 4 KTK’s current share price does not reflect the KTK was Russia’s seventh largest The rapid growth of the distribution network is 3.1 Company’s fundamental value, indicating the producer of thermal coal in 2011. being driven by the demand in Western Siberian 1,000 2.3 2.4 2 possibility of future growth. Analysts at leading The Company plans to increase regions for a stable supplier of quality coal who5,000 1.3 investment companies largely production of washed coal by building can provide a full range of sales P. 24 P. 50 P. 60 0.4 share this view. additional washing facilities. and delivery services0 0 0 to consumers. EBITDA EBITDA margin Karakansky-South Vinogradovsky Cheremshansky 73 7 RISK MANAGEMENTNet profit (loss), mln RUB Production costs, RUB/t Indebtedness, mln RUB 80 8 RESEARCH & DEVELOPMENT 2009 2010 2011 2009 2010 2011 2007 2008 2009 2010 2011 80 Development of a new type of fuel from washed coal 82 Processing of high-ash waste from coal production 83 Production of synthetic diesel fuel from coal2,500 700 4,000 652 3,773 3,911 600 3,370 84 9 HUMAN RESOURCES MANAGEMENT 2,018 3,0872,000 6.5 84 Size of workforce and wages 509 3,000 6% 8% 500 2,663 85 Remuneration and social security 6% 4321,500 400 2,172 2,178 86 Training and professional development 2,134 2,0001,000 300 1,754 87 10 SOCIAL RESPONSIBILITY 823 663 200500 1,000 90 11 OCCUPATIONAL HEALTH & SAFETY AND ENVIRONMENTAL 100 475 1.6 1.7 PROTECTION 0.80 0 0.7 90 Occupational health & safety 0 90 Environmental protection Net profit (loss) Net margin EBITDA Net debt Net debt/EBITDA 94 12 CORPORATE GOVERNANCE 94 Corporate governance system 96 General Shareholders MeetingGeography of sales in 2011 Structure of domestic sales in 2011, Coal production by type 97 Board of Directors by segment 2008 2009 2010 2011 Target 101 General Director 102 Senior Management 105 Control and audit 100% 47% 50% 3% 8% 68% 106 13 COMPANY HISTORY 60% 80% 64% 33% Eastern 31% Retail sales 108 14 FINANCIAL RESULTS Europe 55% Public utilities 28% Asia 13% Power companies 60% 120 15 CONTACTS 39% Russia (TGC/OGC) 53% 40% 50% 37% 25% 20% 28% 0 7% KEY FIGURES 2011 KEEPING THE PROMISES are in the valve cover read more at pages 2–13 Raw Sorted Washed
  • 3. ContentsDelivering promises MESSAGE FROM MESSAGE FROM THE CHAIRMAN SHAREHOLDER EQUITY OPERATING RESULTS FOR 2011 DISTRIBUTION SYSTEM THE GENERAL DIRECTOR OF THE BOARDKTK’s performance in 2011 shows that Summing up the results of 2011, I would In the course of the year the Company KTK’s current share price does not reflect the KTK was Russia’s seventh largest The rapid growth of the distribution network isthe company has fulfilled the planned first of all like to note the record growth consistently met its obligations Company’s fundamental value, indicating the producer of thermal coal in 2011. being driven by the demand in Western Siberiantarget and also well advanced of Kuzbasskaya Toplivnaya Company’s to investors, partners and possibility of future growth. Analysts at leading The Company plans to increase regions for a stable supplier of quality coal whoin achieving of long-term goals. operating results. counterparties. investment companies largely production of washed coal by building can provide a full range of sales P. 2 P. 16 P. 19 P. 24 P. 50 P. 60 share this view. additional washing facilities. and delivery services to consumers.14 1 THE COMPANY TODAY 73 7 RISK MANAGEMENT16 Message from the General Director19 Message from the Chairman of the Board 80 8 RESEARCH & DEVELOPMENT21 Highlights of 2011 & first quarter of 2012 80 Development of a new type of fuel from washed coal 82 Processing of high-ash waste from coal production24 2 SHAREHOLDER EQUITY 83 Production of synthetic diesel fuel from coal24 Charter capital: free float remains at 34.4%25 Trading history: shares outperform market 84 9 HUMAN RESOURCES MANAGEMENT26 Peer comparison: KTK shares have strong growth potential 84 Size of workforce and wages27 Risk factors: low liquidity constrains growth 85 Remuneration and social security28 Analysts from leading investment companies comment on KTK’s shares 86 Training and professional development30 Dividend history: payments to shareholders growing in line with profits 87 10 SOCIAL RESPONSIBILITY31 3 MARKET SITUATION 90 11 OCCUPATIONAL HEALTH & SAFETY AND ENVIRONMENTAL31 World coal market: optimism is warranted PROTECTION32 Coal prices: heavy dependence on market situation 90 Occupational health & safety34 Demand and supply: betting on emerging markets 92 Environmental protection37 Russian coal market: a record year for the Kuznetsk Basin40 Structure of coal consumption in Russia: exports growing 94 12 CORPORATE GOVERNANCE42 Russian coal industry today: current challenges and how to meet them 94 Corporate governance system43 Russian market forecast to 2030: path to the coal industry’s development 96 General Shareholders Meeting 97 Board of Directors45 4 STRATEGY IMPLEMENTATION 101 General Director50 5 OPERATING RESULTS 102 Senior Management50 Production results: betting on coal washing 105 Control and audit51 Production infrastructure: an integrated complex guarantees efficiency 106 13 COMPANY HISTORY60 6 DISTRIBUTION SYSTEM 108 14 FINANCIAL RESULTS60 Sales of third-party coal: reputation as a reliable trader yields rewards61 Exports: KTK enters top five 120 15 CONTACTS62 Geography of exports: betting on promising markets in Asia and Europe64 Sales in Russia: strong positions in Western Siberia65 Sector structure of sales: direct sales to major clients grow66 Retail sales: dynamic development of distribution network68 Coal prices: KTK’s average realized coal price growth70 Coal transportation: a long road to the consumer KEY FIGURES 2011 Delivering promises are in the valve cover read more at pages 2–13
  • 4. THE COMPANY TODAY Delivering promises14 1 THE COMPANY TODAY 69% Revenue growth in 2011 145% Net profit growth in 2011 122% EPS growth in 2011 95% EBITDA growth in 2011 15 Kuzbasskaya Toplivnaya Company OJSC (KTK or the Company) is one of the largest independent thermal coal producers in Russia, the Company is not part of any major energy group. The Company strip mines coal in the Kuznetsk Basin in Western Siberia, one of the largest deposits of coal in the world. RESOURCES INDICATORS FOR 2011 INVESTMENT KTK remains the only publicly tradedThe Company currently minescoal at three open-pit mines: category C2. Its development will increase the Company’s coal mining KTK was Russia’s seventh largest producer of thermal coal in 2011. increasingly visible player on both the domestic market and the global arena. KTK is investing heavily in production, spending 2.25 billion rubles in 2011. Key independent thermal coalKarakansky-South, Vinogradovsky and capacity to 14 million-15 million tonnes The Company increased coal production The Company’s sales are split among areas of investment are construction of producer in Russia.Cheremshansky, which comprise an per year from the current 11 million by 28.5% year-on-year to 8.7 million three regions: Russia, Asia and Eastern washing facilities, expansion of the fleetintegrated operation with design capacity tonnes. tonnes in 2011, including 0.74 million Europe. of mining and transport equipment and The Company’s marketof 11 million tonnes per year. In the nextfew years, the Company plans to begin The Company also has well-developed tonnes of high quality washed coal. The Company plans to increase The Company’s financial results for 2011 railroad infrastructure. capitalization wasdeveloping a fourth open-pit mine that production and transport infrastructure, production of washed coal by building demonstrated strong growth. Revenues The Company has also made about 15 billion rubleswill include the Bryansky license block including a railroad network, washing additional washing facilities next to its grew 69%, net profit soared 145% research and development a priority. on December 30, 2011,acquired in December 2011. plant with annual capacity of 2 million coal mining operations. and earnings per share increased by Pre-feasibility studies are now being according to MoscowThe Company had JORC resources tonnes, coal storage yards with sorting facilities, repair centers, power company Kuzbasskaya Toplivnaya Company’s 122%. Earnings before interest, tax and depreciation (EBITDA) expressed dollar carried out in three areas: development of fuel briquettes with high heat value, Exchange MICEX-RTS.of 402 million tonnes of coal as of Kaskad-Energo and other assets. The export sales surged 76% in 2011, terms grew 90% to $133 million. The production of construction materials The free float was 34.4%January 1, 2011, including 185 million Company plans to launch a second propelling the Company into the Company is pursuing a conservative debt from coal production waste and at the year end.tonnes of probable and proved reserves. washing plant with capacity of 4 million ranks of the top-five exporters of policy, which is reflected in its low net production of synthetic diesel fuel withThe reserves of the new Bryansky block tonnes with pilot production in the fourth thermal coal from Russia for the first debt to EBITDA ratio of 0.68. coal gasification technology.are estimated at 250 million tonnes quarter of 2012. time. The Company is becoming an
  • 5. THE COMPANY TODAY Delivering promises MESSAGE FROM THE GENERAL DIRECTOR16 17 Igor Prokudin General DirectorDear shareholders, clients, partners andcolleagues!Summing up the results of 2011, I wouldfirst of all like to note the record growthof Kuzbasskaya Toplivnaya Company’soperating results. RECORDS OF 2011 GROWTH OF RESOURCE BASE CONSTRUCTION OF WASHING PLANTS MODERNIZATION OF RAILWAY INFRASTRUCTURECoal production grew by almost a third This made the Company the fifth largest In addition to production growth, the Another important development in 2011 was the start of We also carried out plans in 2011 to modernize our own railroadcompared to 2010, to 8.74 million tonnes, Russian exporter of thermal coal. Company’s strategic goal is to expand construction on a second washing plant (Kaskad-2), which the infrastructure, which takes coal from our mines to the nationalbringing the Company to a new level that The Company is confidently moving its resource base and in 2011 we made Company plans to complete in the fourth quarter of 2012. The plant network of Russian Railways (RZD). We completed a majorenabled it to enter the ranks of the top toward its goal of reaching annual coal significant progress in achieving this will have capacity of 4 million tonnes, two times more than the overhaul of our Uba sorting station, building five additionalten thermal coal producers in Russia. production capacity of 11 million tonnes, goal. At the end of the year, Kuzbasskaya plans presented to participants in KTK’s IPO in 2010. The plant will rail tracks with an overhead system, as well as an office and and is even ahead of schedule. Toplivnaya Company won an auction simultaneously use steeply inclined separation and dense medium amenities building to house the employees of Meret FreightThe Company’s exports also reached for the rights to develop the Bryansky gravity separation, which is an innovative technology in both Forwarding Company and RZD. This enabled us to meet RZD’sa record high. We shipped 6.45 million section of the Karakanskoye coal Russian and globally. technical specifications and expand the throughput capacity oftonnes of high quality coal to our foreign field, adding 250 million tonnes of coal the station to 16.7 million tonnes of coal per year.customers, almost 76% more than resources in the direct vicinity of the I would like to point out that the KTK plant is being built in a veryin 2010. Company’s existing infrastructure. short period for a facility of such scale – just 1-1.5 years. We intend Ensuring transport independence remains a strategic priority Geological exploration is already to continue to adopt the latest washing technologies, and pursue for the Company. The joint venture Kuzbass Transport Company underway and in the near future we plan efforts to improve the quality of our coal and increase the share of had a fleet of 2,628 coal wagons at the end of 2011 that KTK to begin developing our fourth open-pit high value-added products in our sales. The existing Kaskad plant leased at fixed rates. There are plans to increase the total mine based at this site. produced 740,000 tonnes of high quality washed coal in 2011. number of coal wagons to 5,000 in future using borrowed funds.
  • 6. THE COMPANY TODAY Delivering promises MESSAGE FROM THE CHAIRMAN OF THE BOARD18 19 UPDATE OF THE FLEET OF MINING AND TRANSPORT EQUIPMENT We continued to update our fleet of mining and transport equipment last year, favoring modern, high-performance machinery. About 40% of the total investment budget for 2011 went toward equipment. As planned, in 2011 we acquired options to purchase mining machinery and equipment valid until 2013, which will minimize the negative impact of price Vadim Danilov fluctuations and guarantee that equipment is delivered to mines Chairman on time. of the Board of Directors Dear ladies and gentlemen! I can say with confidence that 2011 was FINANCIAL RESULTS Summarising the results of the year, another successful year for Kuzbasskaya I would like to note that we met and Toplivnaya Company.The financial results for 2011 reflect the professionalism andefficiency of our management team. The Company’s IFRS even surpassed all financial andrevenues in ruble terms grew by 69%, net profit jumped 145% operating targets set out in the planand earnings per share increased by 122%. EBITDA totaled$133 million, which was in line with our internal forecasts. The for 2011. Delivering promisesnet debt to EBITDA ratio remains low at 0.68. The effective I am confident that the Company’s In the course of the year the Company The Company’s strategy to strengthen This is the recipe for the Company’sborrowing rate continued to decline last year, which will enablethe Company to save on interest payments. Lending institutions’ fulfillment of all promises made to consistently met its obligations to investors, partners and counterparties, its leading position in the industry and increase its investment attractiveness is success and it is leading to the growth of profitability and efficiency: thefavorable disposition toward KTK is due to objective reasons: investors, combined with its financial and responded quickly to changes in based on the expansion of the resource Company’s net profit more than doubledthe Company’s information openness, financial stability andconservative debt policy. transparency, high standards of the situation on both the Russian and base and production capacity, efficient operation of logistics and distribution in 2011 compared to the previous year. global coal markets. As a result, the corporate governance and systematic Company made considerable headway infrastructure, reduction of transport efforts to increase efficiency will toward achieving its strategic goals and dependence on railroad operators, lead to the long-term growth of objectives and laid a strong foundation for future growth. growth in the share of high value-added products, tight control over costs, and shareholder value. I would like to thank penetration of new markets both outside all Kuzbasskaya Toplivnaya Company Russia and inside the country. employees for their teamwork, achievement of goals and support for the management initiatives that ensured the Company’s strong growth last year.
  • 7. THE COMPANY TODAY Delivering promises HIGHLIGHTS OF 2011 AND FIRST QUARTER OF 201220 21 EXPORT SHARE GROWTH INCREASE OF INVESTMENT ATTRACTIVENESS February 2011 May 2011 July 2011I would also like to mention the The Company’s Board of Directors wants We see strong growth potential for The Company signed a contract with The Board of Directors held a meeting Kemerovo Region Deputy Governor forexpansion of the Company’s presence to increase KTK’s investment appeal KTK’s shares and believe that their OJSC Fortum, the Russian division at which it recommended that Natural Resources and the Environmenton promising export markets. Due to a and is increasing information openness current price does not reflect the of Finish power company Fortum, to shareholders at the annual General Vladimir Kovalev and KTK Generalwarm winter in Europe, the Company with this aim in mind. Meetings with Company’s fundamentals: generated supply coal to Chelyabinsk CHPP-2. Meeting approve dividends for 2010 Director Igor Prokudin attended themoved quickly to redirect exports to current and potential investors, as well revenue, net profit and profitability. Tests showed that KTK coal is the of 3 rubles per common share and opening of an innovative pumping andcountries in Asia, to which it shipped 81% as analysts are held throughout the year. This is demonstrated by the Company’s most suitable alternative to brown set aside 297.8 million rubles for this filtration station to treat runoff at themore coal than in 2010. The Company The Company’s public status requires multiples, which are among the lowest coal from the Chelyabinsk basin. It purpose. Vinogradovsky mine. The station is theentered the Japanese market for the it to maintain openness and strengthen in both the Russian and global coal makes it possible to generate heat and only one of its kind in Russia and thefirst time, and received certification investor confidence in its business. industries. We have not abandoned plans electricity for Chelyabinsk businesses world in terms of the set of methods forfrom exchanges in South Korea and Significantly, despite the downturn to issue depositary receipts (without with the least environmental impact. treatment of industrial and domesticTaiwan testifying to the reliable quality on the Russian stock market in 2011 an issue of a new shares) on major The partnership with a major energy waste water. KTK managementof Kuzbasskaya Toplivnaya Company’s (including KTK’s shares) not a single international exchanges in order to company strengthens KTK’s reputation plans to use such stations at all ofcoal. This gives us the green light to major institutional investor pulled out of realize the potential target price of our as a stable and reliable supplier of the group’s enterprises, making itincrease exports to these countries. the Company. shares. This could happen in the next quality coal. possible to discharge high quality waterAn important development on the few years. and minimize environmental impact.European market was the opening of a KTK and the Kemerovo Region The funds for this are included in therepresentative office in Warsaw at the administration signed a socioeconomic investment program for 2012-2016.beginning of 2012, which in future will cooperation agreement for 2011 undermake it possible to work on the Polish which the Company pledged to investmarket without intermediaries. 2.0 billion rubles in production, spend 25 million rubles on creating safe working conditions at its operations, allocate 25.5 million rubles for social payments to its employees and CORPORATE GOVERNANCE Increasing investment appeal is an important element pensioners, and contribute 17.6 million rubles to regional social programs. KTKThe Board of Directors is continuing in Kuzbasskaya Toplivnaya Company’s development, also pledged to raise average wages by June 2011 August 2011to devote a great deal of attention so it is the job of the Board of Directors and 10% compared to 2010. The Company held its annual Construction began on the Kaskad-2to improving corporate governancestandards, and we are seeing progress management to build the foundation for such growth General Meeting to review 2010, at which shareholders approved the washing plant with capacity of 4 million tonnes. The initial plan was for capacityin this key area. The five members of and ensure that shareholders share in the Company’s recommendation of the Board of of 2 million tonnes. The plant willthe Board of Directors, including twoindependent directors, are closely profits. Directors to pay dividends for 2010 of 3 rubles per common share, or a total simultaneously use steeply-inclined separation and dense medium gravitymonitoring how the Company’s of 297.8 million rubles. Shareholders separation, which is an innovativemanagement is achieving set goals. We I am confident that the KTK team will continue to also confirmed the list of board technology both in Russia andare striving to continually develop top members: Igor Prokudin, Eduard internationally. The plant is scheduledmanagement and are now working on a strengthen shareholder confidence in the Company. Alexeenko, Vadim Danilov, David Stewart to begin trial production in the fourththree-level system of bonuses for senior and Yury Fridman. CJSC Balance quarter of 2012.executives. Consulting Group was confirmed as domestic auditor to Russian Accounting Standards for 2011.
  • 8. THE COMPANY TODAY Delivering promises22 23 September 2011 November 2011 December 2011 February 2012 March 2012 April 2012KTK completed the overhaul of the Uba KTK won prizes in national competitions of KTK’s market capitalization as of KTK signed a socioeconomic The Company completed the acquisition KTK released financial results for 2011coal collection station, where railcars annual reports. KTK’s report was awarded December 30, 2011 was about 15 billion cooperation agreement for 2012 with of 500 railcars through its affiliate to International Financial Reportingare sorted for subsequent shipment the prize for Best Debut at the XIV annual rubles ($470 million at the Central Bank the Kemerovo Regional administration. LLC Kuzbass Transport Company, Standards. The Company’s revenuesto RZD’s Meret station. The project competition of annual reports organized exchange rate), according to the merged KTK fulfilled its obligations under increasing its fleet to 3,128 railcars. expressed in rubles grew by 69%, netincluded construction of five tracks by the MICEX and RTS exchanges, which Moscow Exchange MICEX-RTS. The the 2011 agreement in full. In 2012, profit rose by 145% and earnings perwith overhead electricity system, drew a record 141 entries from Russian average share price in 2011, based on the parties agreed to raise average The Board of Directors held a meeting share increased by 122%. EBITDAan administration building, railcar and foreign companies. In the RCB/ closing prices, was 200.80 rubles. The wages for employees by up to 10% at which it recommended that reached $133 million, which wasinspection point building, treatment FFMS competition, KTK’s annual report free float was 34.4% at the end of the compared to 2011 thanks to growth shareholders at the annual General consistent with management forecasts.facilities, and the overhaul of the was recognized as the Best Annual year. of labor productivity. The Company Meeting approve dividends for 2011 Cash production costs amounted tostation’s electric interlocking system. Report in the Fuel and Energy Sector, plans to spend 45 million rubles on of 6 rubles per common share and 652 rubles per tonne. The net debt/This will make it possible to increase Best Comprehensive Presentation of a social payments to its employees and set aside 595.5 million rubles for this EBITDA ratio remained low at 0.68. Allcoal loading from 500 to 700 cars Company, and Best Annual Report from an pensioners (8% more than in 2011), and purpose. It also approved a business economic and operating targets of theper day, and increase the station’s Issuer in the Siberian Federal District. provide 22.1 million rubles to finance plan for KTK and its subsidiaries for plan for 2011 were met.throughput capacity from 12 million regional initiatives and programs 2012.tonnes to 16.7 million tonnes. A new unheated storage facility was (unchanged from 2011). KTK will deliver KTK held its annual General Meeting, opened at the Karakansky-South mine, 350,000 tonnes of coal at fixed prices in at which shareholders approved the and an open coal yard was completed at 2012 for the region’s public utility needs, recommendation of the Board of the Vinogradovsky mine with capacity of and donate 3,500 tonnes of graded Directors to pay dividends for 2011 500,000 tonnes per year. coal for poor households in Kemerovo of 6 rubles per common share, or Region. 595.5 million rubles, up from 3 rubles per share, or 297.8 million rubles in 2010. October 2011 December 2011 February 2012 CJSC Balance Consulting Group was confirmed as auditor. Shareholders alsoKTK opened a mobile explosives KTK won an auction for the rights to KTK released operating results for 2011. elected a new Board of Directors. Alexproduction facility with annual explore and mine the Bryansky section The company increased coal production Williams was appointed independentcapacity of up to 50,000 tonnes at the of the Karakanskoye coal field. The by 28% to 8.74 million tonnes, exceeding director, replacing David Stewart. NoVinogradovsky mine. The facility will property has hard coal resources of the target for the year by 7.4% and other changes were made to the Board.make explosives for KTK’s mines, 250 million tonnes and will have a mine becoming the seventh largest thermalenabling the Company to save on life of 30 years. The Company plans to coal producer in Russia. Coal sortingoutside purchases and ensure a carry out exploration work at Bryansky at mobile crushing and screening unitsguaranteed supply of explosives for its in order to launch development of a increased by 35% to 5.56 million tonnes,operations. The new facility provides fourth open-pit mine in the future. The and production of washed coal at themobility and improved safety, as well as Company already has the infrastructure Kaskad plant soared 270% to 0.74 millionenvironmental advantages. needed to develop the new site, as it is tonnes. Coal sales (which include coal close to the Karakansky-South mine. purchased from third parties) grew 25% The development of the new property to 10.66 million tonnes, with exports is expected to increase coal production increasing by 74% to 6.45 million tonnes, capacity from 11 million tonnes to making the Company Russia’s fifth 14-15 million tonnes per year. largest coal exporter.
  • 9. SHAREHOLDER EQUITY Delivering promises24 2 SHAREHOLDER EQUITY 25Charter capital: Trading history:free float remains at 34.4% shares outperform market It should be noted that the decline inKuzbasskaya Toplivnaya Company’s charter capital as of The Company’s shares declined in 2011 and are currently trading KTK’s share price followed RussianDecember 31, 2011 was 19,851,671 rubles and consisted of at about 20% below the IPO price. The Company’s market stock market indices and was part of a99,258,355 common shares with par value of 0.20 rubles each. capitalization was about 15 billion rubles as of December 31, 2011, general downward trend on the market.KTK does not have preferred shares. or $470 million at the Central Bank of Russia’s exchange rate. Global investors’ interest in the Russian stock market decreased considerably in the second half of 2011 amid the Change in KTK share price compared to MICEX Metals & Mining, MICEX deteriorating situation in the global Power and MICEX Smal Cap indexes economy, particularly the economicThe Company’s shares are traded The share trading history is not very Сharter capital Jan. 11 Mar. 11 May 11 July 11 Sep. 11 Nov. 11 Jan. 12 Mar. 12 problems in Eurozone countries such as 19.85on the merged Moscow Exchange long yet – the Company carried out an Greece, Spain and Portugal. Due to theMICEX-RTS in the B quotation list initial public offering in April 2010. The growing uncertainty, foreign investors 20%under the ticker KBTK and registration free float is about 35%, and most of KTK relative outperformance preferred to minimize their investmentsnumber 10211330F. The International these shares are controlled by major mln rubles 0 widens in 2012 in the equities of emerging markets,Securities Identification Number (ISIN) institutional investors. including Russia.is RU000A0JPYD7. The shares are also –20%included in the Micex StartCap index Consisted of A comparison of KTK’s share price andof small cap stocks and RTS-2 index of 99,258,355 the MICEX Metals & Mining and MICEXsecond-tier stocks. –40% Power indexes, which reflect changes in the prices of shares in the mining –60% common shares industry and the power sector, shows KTK MICEX Metals & Mining MICEX Power MICEX Small Cap that the decline of KTK’s shares was Source: Moscow Exchange MICEX-RTS website in line with sector moves and was notKTK shareholder structure related to Company specific factors.as of December 31, 2011 Changes in share prices of Metals & Mining companies in 2011 –70% –60% –50% –40% –30% –20% –10% 0 Throughout 2011, KTK’s shares Number Shareholder of shares Interest outperformed the MICEX Mechel industry indexes. HAVER HOLDING LIMITED (beneficiary control held by Igor Prokudin) 49,639,103 50.001 % MMK At the beginning of 2012, the relative Laycraft Limited KTK NLMK outperformance widened further. shareholder (direct control held by Vadim Danilov) 15,494,229 15.6 % structure Raspadskaya ТМК Free float 34,125,022 34.4 % MICEX Metals & Mining TOTAL 99,258,355 100 % Kuzbassrazrezugol MICEX Small CapSource: KTK OJSC MICEX Power Severstal RTS-2 KTK shares show best performance in 2011 KTK Source: Moscow Exchange MICEX-RTS website
  • 10. SHAREHOLDER EQUITY Delivering promises26 27Peer comparison: Company Country P/E EV/S EV/EBITDA Such a significant undervaluation of KTK’s shares by the market indicatesKTK shares have strong growth Developed countries that the exchange price does not reflect PEABODY ENERGY CORP USA 8.1 1.7 6.5 the Company’s fundamentals: generatedpotential CONSOL ENERGY INC USA 12.3 1.8 6.4 revenue, net profit, profitability and so ARCH COAL INC USA 13.9 1.5 6.6 on. Analysts are optimistic about the NATURAL RESOURCES USA 12.8 8.4 9.6 prospects for KTK’s development andThe management believes that KTK’s current share price does not MASSEY ENERGY CO USA 13.0 1.8 6.8 the growth of its value in the future,reflect the Company’s fundamental value, indicating the possibility ALLIANCE HOLDINGS GP USA 11.6 1.6 5.1 praising the Company’s high level of transparency and standards of corporateof future growth. Analysts at leading investment companies largely ALLIANCE RESOURCE USA 9.9 1.4 4.4 governance, and its openness to theshare this view. PENN VIRGINIA RESOURCE USA 16.3 2.2 11.3 investment community. This means ALPHA NATURAL RESOUR USA 10.2 0.8 4.3 that in the long-term the market should COAL & ALLIED INDUSTR Australia 13.0 3.5 8.1 restore the fair valuation of the Company NEW HOPE CORP LTD Australia 18.6 3.6 10.5 and its share price should grow. Company P/E EV/S EV/EBITDA KTK’s financial multiples are among the MACARTHUR COAL LTD Australia 12.4 3.3 7.4 KTK 8.50 0.83 5.07 lowest in the coal industry, not just in GLOUCESTER COAL LTD Australia 13.5 5.0 8.9 Growth potential compared to: Russia but also on a global basis, which Walter Energy USA 10.3 2.3 7.2 Russian coal companies 4% 377% 38% shows that the Company is undervalued Median 12.6 2.0 7.0 Emerging market coal companies 33% 154% 30% compared to similar companies. The Developed country coal companies 43% 113% 31% P/E (price to earnings) ratio is 8.5, while Sources: company websites, finance.yahoo.com, Bloomberg the average for world coal companiesCompany Country P/E EV/S EV/EBITDA is 12. In other words, by this ratio KTK is undervalued by about 40-50%. TheRussia Company is undervalued by a thirdRaspadskaya 20.7 4.0 8.9 according to the EV/EBITDA (enterpriseKuzbassrazrezugol 7.7 1.6 5.1 value to EBITDA) ratio. The discountYuzhny Kuzbass 8.8 4.5 n/a to global peers according to revenueMedian 8.8 4.0 7.0 multiples is more than 100%. There are very few publicly listed Russian coal Risk factors: low liquidityEmerging marketsExarro Resourses S. Africa 9.2 5.9 20.7 companies, but comparisons with thoseChina Shenhua EnergyChina Coal Energy Co China China 11.7 11.4 2.5 1.4 6.3 6.1 that are publicly traded also show that KTK is undervalued by all ratios. constrains growthYanzhou Coal Mining China 7.3 1.9 5.2Shanxi Xishan Coal China 15.1 2.7 9.0 While maintaining buy recommendations and forecasting growthShanxi Luan Environm. China 17.7 2.9 11.4 for the Company’s share price, analysts remark that the main factorPingdingshan Tianan China 14.2 1.3 8.0 constraining the growth of KTK’s market capitalization is the lowDatong Coal Industry China 20.2 2.1 7.1 liquidity of its shares.Straits Asia Resources Singapore 8.9 2.2 5.6 Average daily trading volume is about $20,000, which puts the Company’s shares inBumi Resources TBK PT Indonesia 11.2 1.9 5.3 the third tier in terms of liquidity. As liquidity grows, private and institutional investors’Median 11.6 2.2 6.7 interest in the Company’s shares is expected to increase.Table continued on next page.
  • 11. SHAREHOLDER EQUITY Delivering promises28 29Analysts from leading investmentcompanies comment on KTK’s sharesFactors promoting price growth Factors constraining price growthThis is one of the few rapidly growing Russian companies that has shown very good growth rates… In our view, KTK’s shares are currently not fully appreciated by the market, including because of their lowThe owners have shown how a company should be built virtually from nothing… The company has liquidity. We see potential for the company’s price to grow at least 20% from the current levels by the endthe highest level of information openness in the industry… it has no rivals in this regard. of 2012. Dmitry Smolin, Uralsib Capital Sergei Filchenkov, IFC MetropolKTK, in terms of the company’s production growth, only exceeds expectations. In terms of I think that the main factor constraining the growth of capitalization is low liquidity. From the fundamentalinnovation, KTK leads the industry, despite its small size. And despite this small size, the company can afford point of view, the company is attractive, but the problem is that liquidity is fairly low and perhaps this hindersto invest heavily in enrichment…The company is fairly well positioned on the thermal coal market in Russia. growth…and results in a certain discount by multiples. In short, liquidity is one of the main problems. Kirill Chuiko, UBS Russia Denis Gabrielik, Otkritie…There are fairly few coal companies on the stock market, but I would say that compared to all of thesecompanies KTK looks very good in terms of disclosure of its business, in terms of its strategy. I wouldsay that it may be the best in its segment… The company’s strategy is aimed at improving its The main problem that the company has to deal with now is the liquidity of its shares, because…in the IPOpresence, increasing volumes and, correspondingly, increasing the share of value- very many large funds bought its shares and are sitting on them for the long-term…If we’re talking aboutadded products… The way that the company conducts itself strategically and its attitude toward investors thermal coal, right now this is the only interesting stock in the sector, because the company provides a verydeserves respect. good level of information disclosure and is always talking to investors, unlike its competitors. Ilya Makarov, Aton Oleg Petropavlovsky, BrokercreditserviceFrom the point of view of operating results, KTK is far stronger than its competitors. In terms of theachievements of management, I would say that the company stands out with the strong results The free float is around 35%, but very little is traded on the market…High volatility in the course of the dayof governance…They’ve grown from nothing and consistently shown good operating results, as promised. points to the fact that liquidity is very poor. In principle, the company itself has an interest in acquiring…moreThe resource base is good…In terms of management…how they conducted the IPO, the quality of corporate speculative investors. In any case, this will require some sort of issue in order to further increase the freedisclosure – everything is excellent, five out of five. float. Igor Lebedinets, VTB Ilya Makarov, AtonCompared to competitors, the company looks good in light of its openness for investors,transparency,… in light of the fact that the company is so far meeting all set goals, even exceeding them… The liquidity of its shares remains KTK’s main problem on the stock market: the daily turnover of thisCompared to other players on the market by the above mentioned factors the company looks pretty good… company’s shares on MICEX does not exceed $20,000-$30,000 on average, though the company’s free floatAnd its role is the role of a young, ambitious player. is 35%. Andrei Lobazov, Alfa Bank Dmitry Smolin, Uralsib Capital
  • 12. SHAREHOLDER EQUITY Delivering promises30 3 MARKET SITUATION 31Dividend history: World coal market:payments to shareholders optimism is warrantedgrowing in line with profitsThe management of the Company has an interest in increasing In June 2011, KTK held its annual Coal is the first fossil fuel usedits investment appeal. With this aim in mind, it is increasing General Shareholders Meeting, at by humans to be extracted on aninformation openness, and holding meetings with current and which shareholders decided to pay out industrial scale. It is responsible 297.8 million rubles in dividends for 2010,potential investors. In addition, the strong fundamentals of the which is equivalent to 3 rubles per share. for the industrial revolution,business combined with an effective and flexible financial policy making possible the rise of theaimed at increasing performance enable the Company to return In April 2012, the annual General first generation of machines thata substantial amount of capital to shareholders in the form of Shareholders Meeting approved the was the precursor of the moderndividends. recommendation of the Board of world. Directors to pay dividends for 2011 of 6 rubles per common share and Since then, the role of coal has declinedThe amount of dividends is determined on the basis of KTK’s financial results to set aside 595.5 million rubles for this considerably as it has been replacedRussian Accounting Standards and is equivalent to at least 25% of net profit, as purpose, which is equivalent to 29% of by other fuels such as oil and gas.stipulated in the Regulation on Dividend Policy (dated November 3, 2009). net profit for 2011. Dividends will be paid The share of coal in the global energy to shareholders within 60 days of the balance is now 30%, down from 50% date the decision to pay the dividends in the 1950s. However, there is every was made, April 16, 2012. The register reason to believe that the demand for Coal has a number of advantages over oil and natural gas of shareholders eligible to receive coal as a solid fuel resource will onlyKTK dividend history, mln RUB dividends was closed on March 14, 2012. grow in the near future. 2008 2009 2010 2011F coal reserves low reserves geography coal price KTK’s management plans to700 continue to work in the interests of First of all, in terms of global Secondly, reserves of oil Thirdly, there is price. Coal is 596 all shareholders and the Company reserves, coal exceeds and gas are concentrated a relatively cheap fuel (even600 itself. The high standards of corporate all other fossil fuels. The primarily in the Middle East taking into account the cost of500 governance adopted by KTK ensure reserves to production ratio and CIS countries, whereas mitigating its environmental400 that shareholders and investors can is currently 118 years for coal, coal reserves, while also impact), and its solid waste 59 years for natural gas and heavily concentrated, are does not require storage like 298 be confident that their legal rights and300 253 46 years for oil.1 distributed more evenly waste from nuclear energy. In interests will be observed, and make among countries in the future, the price advantage of200 it possible to improve the process of Asia-Pacific region, North coal will only grow as world100 80 making management decisions aimed America, Europe and Asia. oil and gas prices increase. at preserving assets, and maximizing This considerably reduces the0 risk of supply disruptions. the Company’s profits and marketSource: KTK OJSC capitalization. 1 Source: BP Statistics 2011.
  • 13. MARKET SITUATION Delivering promises32 33Coal prices:heavy dependenceon market situation Thermal coal Natural gas prices growth prices growth +313% +340%Most of the world’s trade in coal is done under long-termcontracts, and less is traded on the spot market. Spotcontracts are traded at current market prices, which vary for 10 years for 10 yearsdepending on the region of delivery: Australia, Japan, theUnited States, etc. +22% +30% in 2011 in 2011Electronic coal trading platforms have long-term trend on the coal market The Russian Economic Development over the three years. Natural gas prices, +17.3% +41.6%also begun to develop recently, such as indicates there is strong demand from Ministry is forecasting that the price of meanwhile, are expected to rise 150%NYMEX (New York Mercantile Exchange), consumers. Over the past decade, prices thermal coal will continue to climb in the faster over the three years – by 42%.ICE (Intercontinental Exchange), EEX for both coking and thermal coal have next three years amid steadily growing This means that the price interest in coal(European Еnergy Exchange), ASX risen nearly five-fold. The average price future period future period demand. The ministry is forecasting as an alternative energy resource will(Аustralian Stock Exchange) and of thermal coal for FOB (Australia) rose (2012-2014) (2012-2014) average annual growth of 5-6% for coal grow. Furthermore, Russia is expectedGlobalCoal. However, still less than 20% 22% in 2011 to $129.60/t , up from $35/t prices in 2012-2014, or a total of 17.3% to complete the liberalization of its gasof the coal produced in the world is sold in 2001. market in the next two years, whichon exchanges. will inevitably lead to an increase in the Price of thermal coal, FOB Price of natural gas in price of gas on the domestic marketThe market price of coal includes several Australia, $/t Russia, $/’000 m3 and give coal a chance to again becomeelements and depends on many factors. the main fuel for thermal power plants,The primary factor determining the particularly in the Asian part of the 2002 2004 2006 2008 2010 2012 2014 2002 2004 2006 2008 2010 2012 2014price is the type of coal depending on country.its application: thermal coal (for powergeneration) or coking coal (for steelproduction). The price of coking coal is, as 200 800a rule, twice that of thermal coal, whichis usually due to its scarcity on the worldmarket. Secondary factors affecting 150 600 +15% +6%price are the rank and quality of coal, +5% +5% +15%transportation costs, region of sales and 100 400 +7%so on. 50 200However, regardless of the quality 2 FOB (Free on Board), a trade term requiring the seller to deliver the goods to the port and loadcharacteristics of coal, the final price is them on the ship designated by the buyer. Thedetermined by the balance of supply and 0 0 seller bears the cost of transporting the goodsdemand at any given time. The upward Source: Indexmundi.com Source: Indexmundi.com on board the ship. 3 Source: GlobalCOAL.
  • 14. MARKET SITUATION Delivering promises34 35Demand and supply: Production by region, mln toe 1985 1990 1995 2000 2005 2010 Consumption by region, mln toebetting on emerging markets 1985 1990 1995 2000 2005 2010 4,000 4,000 3,500 3,500World coal production in 2010 slightly exceeded consumption. 3,000 3,000However, the gap is narrowing, as demand for coal in 2010 2,500 2,500grew faster that production. 2,000 2,000 1,500 1,500 1,000 1,000 500 500World coal consumption grew by 7.6% in is generated by coal. As urbanization in Since the principal factor for emerging 0 02010 to 3.55 billion tonnes of oil equivalent China and Southeast Asia continues to markets is the price of energy resources, North America S. & Cent. America Europe & Eurasia North America S. & Cent. America Europe & Eurasia(toe), the biggest increase since 2003. grow, global demand for thermal coal will there is no doubt that a considerable Middle East Africa Asia Pacific Middle East Africa Asia PacificThe Asia-Pacific region generated 67% only increase. portion of their growing demand will be Source: BP 2011 Statistical Review of World Energyof this growth. The global supply of coal, met by thermal coal, as in the decademeanwhile, grew more slowly, by 6.3% The International Energy Agency (IEA) from 2000 to 2010. The IEA forecasts supplies and reduce the dependence on Growth of global demand for energy resources, mln toeto 3.7 billion toe (89% of which came forecasts that global demand for that demand for coal will increase by at natural gas and oil suppliers (Russia and 2010 2015 2020 2025 2030 2035from the Asia-Pacific region). Market primary energy resources will increase least 600 million toe by 2035. In addition the Middle East).players believe that global demand for by a third by 2035 compared to 2010, to Asia, another important region with 4,500coal exceeded supply in 2011 (in part to 4.2 billion toe . China and India will potential demand for coal is Europe. The world’s coal companies need to 4,000due to natural disasters in Australia and account for up to 50% of this growth, and While Asian countries choose coal in invest about $1.2 trillion by 2035 in order 3,500Indonesia), resulting in a shortage of together with other emerging markets in order to save money, the main motivation to meet the growing demand for coal. 3,0009.2 million tonnes. Asia up to 65%, the IEA believes. for Europe is the desire to diversify energy 2,500 This is a small amount compared to the 2,000The share of coal in the global energy anticipated capital outlays required in 1,500balance was 29.6% in 2010, the highest competing sectors producing other types Share of total energy demand covered by various sources 1,000figure since 1970. In the decade from of energy resources (oil, gas, alternative in 2000-2010, mln toe 5002000 to 2010 coal accounted for half energy sources), confirming that coal is 0the growth in global energy demand, All the least capital intensive. Oil companies OECD Rest of the world Middle East China Gas Oil Renewables Uranium except coal Coalthe same as all other energy sources will need to invest $10 trillion over the Russia Other developing Asia Indiacombined. Coal’s growth in the energy same period, gas companies will need to Source: IEA World Energy Outlook 2011 1,600balance has been driven by its relatively spend $9.5 trillion and alternative energylow price compared to other fuels, even 1,400 companies will need to invest $17 trillion.factoring in environmental costs, as 1,200 Given the trend toward cost cutting in in March 2011. The disaster’s impact 4.5 million-6 million tonnes of additionalwell as the rapid industrial growth in 1,000 most countries of the world, this will shift on the global coal market is likely to thermal coal per year.emerging markets. Coal consumption in 800 investors’ focus toward the coal market. be felt for years to come. It resulted inAsian countries has doubled in the past the shutdown of 53 of the 54 nuclear The governments of a number of 600decade. In China, about 80% of electricity Demand for thermal coal could reactors in Japan, whose power sector other countries have also questioned 400 grow even more rapidly than the IEA will have to make up for the loss of the development of nuclear power. 200 forecasts due to the fallout from the nuclear power with thermal generation. This is particularly true in Europe, 0 where Germany and Switzerland are4 Source: BP 2011 Statistical Review of World Fukushima nuclear disaster in Japan This means the country could require Energy. Source: IEA World Energy Outlook 20115 Source: IEA World Energy Outlook 2011.
  • 15. MARKET SITUATION Delivering promises36 37considering abandoning the use ofnuclear energy altogether. The U.S. plants in the United States. Demand for thermal coal is also expected to increase growth in coal power is also forecast in a number of countries in South America Russian coal market:Department of Energy has announcedplans to build 100 coal-fired power in Canada, which will shut down several nuclear reactors once they reach the (such as Brazil) and Asia (Vietnam, South Korea and Japan). All this sets the stage a record year for the Kuznetsk Basinplants over 15 years; by 2020 coal will end of their service life and replace them for additional growth in global demandbecome the most popular fuel for power with thermal power plants. Considerable for thermal coal. Coal production in Russia grew 4% to 334.7 billion tonnes6 in 2011.Total capital investment needed in 2011-2035 by primary energy resource, in $ trillion Nearly 60% of the country’s coal has traditionally come from the Kuznetsk Basin (Kuzbass), where Kuzbasskaya Toplivnaya 0 5 10 15 20 25 30 35 40 Company operates. There are 58 deep coal mines and 36 open-pit Power Oil mines operating in the basin. Gas Coal 16.9 10.0 9.5 1.2 37.9 Biofuels Export prices for Russian thermal coal, $/t Domestic prices for Russian thermal coal, $/t Jan. 10 July 10 Jan. 11 July 11 Jan. 12 Jan. 10 July 10 Jan. 11 July 11 Jan. 12 $ 16.9 58% Generation $10.0 87% Upstream 135 60 trillion 11% Transmission trillion 3% Transport Power 31% Distribution Oil 10% Refining 55 125 50 115 45 105 40 95 35 85 30 75 25 65 20 $9.5 71% Upstream $1.2 94% Minig FOB Riga FOB Vostochny FOB Yuzhny Based on 6000 kcal/kg based on 5200-5400 kcal/kg trillion 6% LNG Chain trillion 23% Transmission and 6% Shipping FOB Mariupol DAF Ukraine based on 4500-4000 kcal/kg Gas Caol distribution and ports Production of thermal coal grew by 7% Prices for Russian coal on both the in 2011, faster than production of coking domestic and export markets moved coal and the coal market in general. Coal within the scope of the global trend, production in Russia overall exceeded rising 20-30% depending on region ofSource: IEA World Energy Outlook 2011 the level of pre-crisis 2008, while delivery and coal quality characteristics. production in the Kuzbass reached the highest level in the hundred-year history of commercial coal mining in the region, a record 192 million tonnes, 75% of which was thermal coal. 6 Source: Metcoal.
  • 16. MARKET SITUATION Delivering promises38 39Change in thermal coal production, 2011/2010, % Despite the strong market situation, Despite the difficulties caused by the >> Throughout the year, the Company >> The company shifted the most Russian coal mining companies disruptions in coal shipments in the pursued a strategy to increase marketing focus in 2011 to more–30% –20% –10% 0 10% 20% 30% 40% 50% posted a decline in coal shipments to second half of the year, KTK managed to the share of high value-added promising regions. Exports to the customers and growth of costs in 2011. achieve impressive results in 2011 and products in total sales. Processed Asia-Pacific region surged 80.2% This was due to the restructuring of meet its annual targets for production coal products increased to 72.0% to 2.92 million tonnes, and exports –23% Evraz (Yuzhkuzbassugol) railroad monopoly Russian Railways and sales, not only thanks to the strong of production in 2011 from 63.3% to Eastern Europe rose 65.6% to (RZD), which led to problems with market (the average price of coal sold in 2010. 3.53 million tonnes. –17% Sibuglemet shipping coal out of the Kuzbass at the by the Company rose 28.6% on the –12% Priargunsky Mining end of the year. The transfer of RZD’s domestic market and 21.2% on export >> Management is maintaining a railcar fleet to subsidiaries has led to markets), but also thanks to successful course toward expanding the –9% Intinskaya Coal the emergence of hundreds of new market positioning and the determined resource base and dynamic operators on the railroad transport efforts of the Company’s management. production growth. In December –7% Kuzbassrazrezugol market with their own rolling stock and 2011, the Company won an auction –3% LUTEK terms of operation. The chaotic change for the rights to explore and in the owners of railcar fleets led to an mine the Bryansky section of Severstal 1% increase in tariffs, shortages of railcars the Karakanskoye thermal coal for the most popular destinations and, field with reserves of 250 million Yuzhny Mine 1% consequently, a drop in deliveries to tonnes. SUEK 7% customers and an increase in per-unit costs. As a result, the Company increased Krasnoyarskkraiugol 8% production by 28.6% in 2011, and Among the coal companies that production per employee reached Vostsibugol 8% demonstrated the strongest production 411.3 tonnes per month, compared growth in 2011 were Siberian Business to an average of 284.6 tonnes for the Zarechnaya Coal 9% Union (up 45% year-on-year), Mechel (up Kuzbass coal industry in general Russian Coal 25% 35%), Kuzbasskaya Toplivnaya Company (open-pit mining). This highlights the (up 29%) and Russian Coal (up 25%). high efficiency of production processes КТК 29% at KTK. Mechel (Yuzhkuzbass, Yakutugol) 35% Siberian Business Union 45%Source: Metal Expert Despite the difficulties caused by the disruptions in Company’s annual Production Average production coal shipments in the second half of the year, production per KTK’s employee per employee in industry KTK managed to achieve impressive results in increased by 28.6% in 2011 and meet its annual targets for production and sales. 2011 411.3 284.6 tonnes of coal tonnes of coal
  • 17. MARKET SITUATION Delivering promises40 41Structure of coal consumption in Russia: The potential for further growth of Russian coal exports is currently Structure of thermal coal exports from Russia, 2011exports growing constrained by the throughput capacity of port and railroad infrastructure. 15% 10% UK Japan 10% Poland The growth of coal exports in the next 9% South Korea three years will be affected by a number 9% TurkeyAn important trend in recent years has been the growth of of infrastructure construction projects, 6% Chinaexports in the structure of Russian coal companies’ sales. including the construction of a new coal 5% Ukraine 3% FinlandThe proportion of coal exports from Russia has increased 2.5‑fold terminal at the Murmansk port by 2014 3% Latviain the past 10 years, largely due to shipments to emerging (three phases with annual capacity of 2% Cyprus 6 million tonnes each); the second phasemarkets in Asia and Eastern Europe amid rapid economic growth of an automated facility at the Ust-Luga 28% Otherin these countries. coal terminal with capacity of 12.4 million Source: Metal Expert tonnes reaching full capacity in 2012; and the doubling of transfer capacity atThe share of Russian coal exports rose The main export market for Russian the Nakhodka commercial seaport to The shareto 37.3% of production in 2011 from 36.2% thermal coal is still Europe, but this 5 million tonnes per year.in 2010. region’s share has been shrinking in recent of Russian coal years as exports to Asian countries have exports The structure of thermal coalThe upward trend in export growthapplies primarily to producers of cokingcoal. Exports in the thermal coal segment grown. China accounted for about 6% of Russian thermal coal exports in 2011. China’s share of exports is expected to 37.3% consumption on Russia’s domestic market did not see any major changes in 2011 compared to previous years. Power Structure of domestic thermal coal consumption, 2011are more stable and even decreased double over the next 20 years, according companies, the public utilities sectorsomewhat in 2011 (to 33.4% from 35.3% to the Program for the Development of and washing plants remain the principalin 2010), in part due to the more rapid Russia’s Coal Industry to 2030. Exports to customers. The electricity sector 63% Power companiesgrowth of domestic prices for thermal other Asian markets are also growing, with accounts for more than 63% of sales on 11% Public utilitiescoal last year. exports to South Korea up 40% for the year. the domestic market. Heat and power 4% Washing plants 4% Metals industry plants built near coal deposits in the 2% RZD Soviet era were intended to use coal with 16% Other low and medium calorific value, which isShare of exports in Russian coal production why domestic demand for high-calorie coal remains very low and most high- 2000 2001 2002 2003 2004 2005 2006 2007 2007 2007 2010 2011 CAGR of exports calorie coal is exported. 13% Source: Metal Expert40%35%30% per year25%20% Growth in share15% of exports10%5%0 2.5-foldSource: Rosinformugol, Metal Expert, Metcoal
  • 18. MARKET SITUATION Delivering promises42 43Russian coal industry today: Russian market forecast to 2030:current challenges path to the coal industry’sand how to meet them developmentDespite the rapid growth of Russia’s coal industry in recent years, The current production capacity of It is clear that the constraints mentioned above can be overcome The program elaborates on the maincoal production in the country is still far from its Soviet highs. Russian coal companies allows them only through the joint efforts of coal companies and the provisions of Russia’s Energy Strategy to increase production and cover the to 2030 that concern the development ofProduction in Soviet-era Russia peaked at 425 million tonnes in growth in demand both on the domestic government. The Russian government in January 2012 approved the coal industry. It specifies objectives,1988, which is 27% more than the country produced in 2011. and foreign markets. Only 85% of a Long-term Program for the Development of the Russian Coal timetables and expected results, sets of production capacity was utilized in 2010, Industry to 2030. necessary measures and mechanisms the Economic Development Ministry of state energy policy taking into estimates. account the further development of the partnership between the governmentCoal production dynamics One of the results of these constraining The program sets out a list of issues that need to be resolved by and businesses. Russian coal companies together with the government:mln tonnes 1988 1994 2000 2008 2009 2010 2011 factors is the low technological level of 1 2 3 4Thermal coal 352 215 197 260 242 258 265 coal production, including the low level The program estimates that theCoking coal 73 57 61 69 61 65 71 of coal processing (more than 25% of the required investment in the industry willTotal production 425 272 258 329 303 323 336 coal consumed in the country has an ash be approximately 3.7 trillion rubles, content of more than 40% and about 20% Sustainable renewal Development of Development of Increasing the of which the government intends to of the coal industry’s modern coal mining transport and port efficiency of coal has a heat value of less than 3,000 kcal). mineral resource base and washing facilities infrastructure mining, washing and finance 251.8 billion rubles. The bulk of In addition, the high level of depreciation that ensure efficient for shipping coal processing using the the government financing – 196 billion of fixed assets, which is as high as use of the sector’s that supports latest technologies rubles – is earmarked for developmentThe main constraints on production growth 70-80% at companies specializing resource potential diversification of and equipment of infrastructure (ports and railroads).and the development of companies in the industry are: markets in open-pit mining of thermal coal, 1 High logistics costs (transport costs make up 40-50% of the end price of coal), coupled increases the risk of accidents. The implementation of the measures with unpredictable railroad tariffs Furthermore, Russia’s engineering in the program is expected to reduce sector is not always capable of meeting transport costs and increase the 2 Low throughput capacity of the railroad network (particularly at border crossings) and required standards of equipment efficiency of coal shipments. The average ports reliability, so mining companies have a shipping distance for coal products is Distribution of financing for Coal Industry Development wide range of equipment from various supposed to decrease by a factor of 1.2, Program to 2030, bln RUB 3 Uneven playing field in the competition for the domestic energy resources due to the firms, which complicates maintenance including a 1.4 fold reduction on the government artificially maintaining low domestic gas prices and reduces efficiency. domestic market. In order to reduce shipping distances, local use of mined 4 Lack of incentives to improve the quality and depth of coal processing due to lack of coal will be developed in each basin; 2,267 Development of energy domestic demand for high-calorie coal efficiency & power sector (61 %) there are plans to build a number of 1,258 Development of transport power and manufacturing plants to 5 infrastructure (34 %) High capital cost of developing new deposits 25 Renewal & use support the comprehensive development of natural resources (1 %) of coal resources. Construction 150 Other (4 %) of modern washing plants will be mandatory. Source: Energy Ministry of Russia website (minenergo.gov.ru)
  • 19. MARKET SITUATION Delivering promises44 4 STRATEGY IMPLEMENTATION 45Forecast for coal production in Russia to 2030 The management of Kuzbasskaya Toplivnaya 18% 82% Company closely monitors the implementation 20% 80% of the strategic goals for the development of the 25% 75% business and strives for their maximum execution. 336 408 514 ‘000 t ‘000 t ‘000 t 2011 2020 2030 However, the Company also continually monitors changes in the current market situation and is prepared, if necessary, Thermal coal Coking coal to quickly adapt its strategy to market conditions. In a highly competitive market such flexibility is a prerequisiteSource: www.rosugol.ru for success, as it enables the Company to effectively manage costs and leads toRussia will aim to increase the overall Construction of modern washing plants will be mandatory. growth of shareholder value.level of washing to 60% from 40%,and more than 80% of mined coal Russia will aim to increase the overall level of washingwill undergo some sort of processing to 60% from 40%.(sorting, enrichment, intensiveprocessing, gasification). The Ministry of Natural Resource’s The Ministry has set up a taskforce toIntensive processing of coal, such as Program for licensing coal deposits also prepare recommendations on how toproduction of synthetic gasoline and includes long term forecasts for the improve the system for setting railroadfeedstock for high-tech plastics (phenol, development of the coal industry. This shipping rates for coal products,cresol, xylenol and other liquid products), program projects that coal production which includes representatives of coal In 2011 KTK met all of the goals that were set for the yearshould become a promising area of in Russia will total 362 million tonnes and power companies, the FTS, the and made considerable progress toward achieving its long-term objectives.development for the industry. There are (with minimal launch of new capacity) Transport Ministry, RZD and the scientificmore than 500 various products made to 400 million tonnes (maximum launch community. INCREASE THERMAL EXPAND IMPROVE APPLY DEVELOPINGin the world from coal. A viable area of of new capacity) in 2015, with thermal COAL PRODUCTION THE RESOURCE BASE THE QUALITY OF COAL INNOVATIVE OF FUNDAMENTALLYcoal processing for the Kuzbass in the coal making up about 80% of the total. PRODUCTS TECHNOLOGIES NEW PRODUCTSmedium-term is production of porous It forecasts production will then grow tomaterials for catalysts and fuel elements, 408 million-463 million tonnes by 2020,as well as ultra-clean coal (ash content depending on the launch of capacity, and to Read more on p. 46 Read more on p. 46 Read more on p. 46 Read more on p. 47 Read more on p. 47of less than 0.2%), which could become 514 million-544 million tonnes by 2030.the basis for the production of a range of DEVELOP COAL SUPPORT OPTIMIZE COSTS EFFECTIVELY IMPROVE CORPORATEindustrial carbons and special sorbents, Russia’s Energy Ministry has also shown TRANSPORT AND DEVELOP AND INCREASE MANAGE GOVERNANCEincluding for the medical industry. Russia an interest in the development of the coal INFRASTRUCTURE MARKETING EFFICIENCY THE LOAN PORTFOLIO COMPETENCIESalso needs to learn to manufacture carbon industry. The Ministry is responsible foradsorbents, which are used to clean water providing support for coal companies’and air. Meanwhile, working conditions relations with the Transport Ministry, RZD Read more on p. 47 Read more on p. 48 Read more on p. 48-49 Read more on p. 49 Read more on p. 49and the safety of mining operations are and the Federal Tariff Service (FTS) onsupposed to improve. the issue of predictable railroad tariffs.
  • 20. STRATEGY IMPLEMENTATION Delivering promises46 47Increase thermal coal Expand the resource Improve the quality of Apply innovative technologies Develop coal transportproduction, base coal products in production processes, expand the product line with fundamentally new products infrastructuregradually reaching design capacity of with acquisition of licenses in Kuzbass, by using the latest washing technology.11 million tonnes the Company’s strategic region Enter new marketsCoal production target for 2011 was exceeded In December 2011, the Company won the In order to maximize recovery of high quality KTK conducted pre-feasibility studies in All the areas of research are cutting-edge not The Company’s priorities include development ofby 7.4%, with 8.7 million tonnes produced auction for the rights to explore and mine the coal from mined ore, KTK uses steeply- 2011 into the possibility of introducing new only in Russia, but also by world standards, railroad infrastructure to support uninterruptedinstead of the forecast 8.1 million tonnes. Bryansky section of the Karakanskoye hard inclined separation technology that can yield technologies in production. and could take KTK to a whole new level coal deliveries to customers. thermal coal field with resources of 250 million about 350 kg of export quality coal from every of development by increasing productivity,Given a favorable situation on the coal market, tonnes. tonne of diluted and high-ash coal. The studies primarily focused on three areas: improving efficiency and optimizing costs. With this goal in mind, KTK and the Sibuglemetdesign capacity of 11 million tonnes is group formed Kuzbass Transport Company,expected to be achieved in the medium-term. KTK plans to begin exploration work at KTK’s first washing plant, Kaskad with >> development of a new type of fuel from All KTK projects are developed taking into through which KTK is investing heavily inIn the long-term, KTK’s production could reach Bryansky in 2012 in order to start developing capacity of 2 million tonnes per year using washed coal, so-called solid natural gas; account the strictest and latest environmental acquisition of freight cars. KTK shipped more than14-15 million tonnes with the development its fourth open-pit mine at the site. steeply-inclined separation technology, production of coal briquettes with high standards and therefore meet environmental half of its exports in its own cars in 2011. Thereof the Bryansky block acquired in December launched operations in 2010. heat value (up to 6,700 kcal) using the responsibility criteria. are plans to expand the fleet from the current2011. The Company already has the infrastructure latest technology, a product that could 3,100 freight cars to 5,000 in the next year, which needed to develop the deposit, which will yield Construction of a second plant, Kaskad-2 enable potential customers to reduce fuel will enable KTK to ship most of its coal exports in synergies in optimizing capital expenditures. with capacity of 4 million tonnes per year consumption by between a third and 50%; its own cars, the lease rate for which is fixed for The Company will only need to invest in mining using steeply-inclined and dense medium 10 years. equipment and construction of an washing gravity separation technology, began at the >> processing of high-ash coal production plant. Development of the site will increase Vinogradovsky mine in 2011 and is scheduled waste into light and strong construction The target for railcar purchases in 2011 was not production capacity from 11 million tonnes to for trial production in the fourth quarter materials; production of high-quality bricks fully met as KTK management believed prices 14-15 million tonnes per year. of 2012. that are light due to porous structure but on the market were unjustifiably high. This have a high strength rating equivalent at demonstrates management’s flexible approach to The rapid construction of KTK’s washing plants least to M75 bricks. The Company thus strategy implementation amid changing market (within a period of 1-1.5 years) attests to intends to manufacture a quality product for conditions and its determination to effectively management’s genuine interest in developing which there is guaranteed steady demand manage costs and grow shareholder value. the Company’s potential and improving product with core production waste for which there Management’s target payback period for railcars is quality. was previously no application; 10-11 years, while in 2011 prices offered a payback period of 15 years or more. As prices come down, KTK is working on entering new markets >> production of synthetic diesel fuel through acquisition of railcars will resume. The Company where there is demand for high-calorie coal gasification and synthesis; in-house already purchased about 500 railcars at the content coal, such as Japan and the Baltic production of diesel would provide a stable beginning of 2012. states. Sales are growing rapidly in South and uninterrupted supply of fuel for mining Korea, where KTK almost completely covers and transport equipment. In 2001 KTKcompleted the modernization of the the coal needs of the country’s largest cement Uba coal collection station, where railcars are plant. Kaskad-2 will enable KTK to produce KTK will continue working on all three areas sorted into trains for shipment to customers. coal that meets the high standards of foreign in 2012, and increase funding considerably. The project included construction of five lines customers. with an overhead system, as well as an office and amenities building to house the employees of Meret Freight Forwarding Company and RZhD. This enabled KTK to meet RZhD’s technical specifications and expand throughput capacity from 12 million tonnes to 16.7 million tonnes per year. Railcar turnover increased from 500 to 700 per day.
  • 21. STRATEGY IMPLEMENTATION Delivering promises48 49Support and develop Optimize costs and increase efficiency Effectively manage Improve corporatemarketing competencies the loan portfolio governanceKTK is putting ever more emphasis on marketing KTK’s costs are low compared to most Russian The Company is taking a number of steps The stripping ratio increased in 2011, but this The Company pursues a conservative financial The Company believes that transparency andand sales, and plans to develop sales in all and international competitors, and the to reduce the negative impact of higher is a short-term development due to objective policy and intends to adhere to it in future. improving corporate governance are key toaspects: in terms of products, clients and company is continuing to implement a set of prices for mining and transport equipment in factors. The optimal incline of the pit wall at long-term growth, so it will regularly take stepsgeography. measures to reduce per-unit production costs. future. KTK acquired options in 2011 to buy Cheremshansky had to be recalculated from The maximum allowable net debt to EBITDA to improve its corporate governance system mining equipment and machinery effective in 40 to 17 degrees due to appearance of cracks (earnings before interest, taxes, depreciation according to best practice.The product line will be expanded thanks to the The cost of blasting work per unit was 2011‑2013, which will mitigate price volatility in the course of extraction. The increase in and amortization) ratio has been set at 2. Aspremium segment – coal of the highest quality. It slashed by 40% in 2011 compared to 2010 with and ensure guaranteed delivery of equipment stripping of overburden in this case reduced of the end of 2011, this ratio was significantly In improving corporate governance practices,is with this goal in mind that KTK began building a the hiring of a new contractor. In addition, to mines on schedule regardless of price the risk of the mine wall collapsing. lower at 0.68. KTK follows the recommendations of thesecond washing plant in 2011 that is scheduled to KTK opened a mobile emulsion explosives fluctuations. Corporate Code of Conduct developed by theopen in the fourth quarter of 2012. The Company production facility with annual capacity of up The additional stripping of overburden of Interest payments on loans are covered by Federal Securities Commission of Russia.is also investing in the development of technology to 50,000 tonnes at the Vinogradovsky mine In addition to striving to optimize total direct 2011-2012 will be treated as stripping of profit before taxes and interest by a factorto manufacture secondary products from coal in 2011. The facility will cover part of the costs, the Company is seeking to reduce future periods, because mining operations will of 13, and the average effective borrowing In line with one of these recommendations,processing (construction materials, fuel oil, ‘solid Company’s production needs, enabling it to per-unit costs by increasing efficiency in the be conducted at this section of the pit side. rate dropped from 7.7% to 5.2% in 2011, independent directors have been appointed tonatural gas’). save on outside purchases. following ways: Therefore, in the long-term the stripping ratio which enabled the Company to save on debt the Company’s Board of Directors since 2010. should see a decline. servicing. Yury Fridman and Alex Williams have been theThe client network will be developed by improving The Company is steering a course toward >> Reducing manual labor by acquiring modern independent directors since April 16, 2012.quality of service, bolstering KTK’s regional reducing transport costs, which account high-performance mining equipment. Mine There was additional stripping at the Total debt amounts to 50% of the Company’spresence in Russia and reaching new customers for about 50% of costs. In order to reduce production per employee topped 411 tonnes Vinogradovsky mine in order to ensure a equity. KTK’s equity is high thanks to 43% The five members of the Board of Directors,abroad. KTK has the largest distribution network the risk of uncontrolled growth of railroad per month in 2011, while the average for the sufficient supply for additional capacity at the growth of retained earnings in 2011 and including the two independent directors,in Western Siberia. Two new points of sale were tariffs for coal shipments, KTK is investing Kuzbass coal industry (open-pit mining) was second washing plant to be launched in the additional paid-in capital of 2,829 million are closely monitoring how the Company’sopened in Altay in 2011, increasing the total in the acquisition of its own railcar fleet and about 285 tonnes per employee per month; fourth quarter of 2012. After analyzing the rubles following the 2010 IPO. management is achieving targets. KTKnumber of points of sale to 67. The number entering into long-term contracts with outside cost of plant construction, KTK’s management encourages the continual development ofof potential customers outside Russia should operators. Such contracts were signed in >> Using the latest coal washing technologies decided to double its design capacity from Most (93%) of the current loans raised by top management and is now working onincrease with the offering of new premium 2011 with Sibuglemet and RG Trans. In future (such as steeply-inclined and dense medium 2 million to 4 million tonnes. This will make the Company have fixed interest rates, which a three-level incentive system for seniorproducts. KTK plans to increase to 100% the share of gravity separation) in order to reduce it possible to reduce per-unit costs in future, significantly reduces the risk of a substantial executives. coal shipped in its own railcars, the leasing production losses by processing waste into and accommodate the Company’s growing increase in market rates in future.Geographically, KTK plans to maintain flexibility price for which will be fixed for 10 years. In export quality coal; resource base.in its sales structure depending on changes in the that case, growth of tariffs charged by private The Company has a reputation as a reliablemarket situation, and increase sales in regions of operators of railcars will not threaten the >> Reducing production losses thanks to the borrower, which helps to maintain effectivethe world expected to see the strongest growth Company’s stability. downward trend in the stripping ratio. partnerships with lending institutions.in demand for energy resources. KTK increasedexports by 76% in 2011, including 81% to theAsia-Pacific region and 66% to Eastern Europe.In future, the Company plans to expand into themarkets of Western Europe, South Korea, Taiwanand Japan. Russia remains the Company’s coremarket.The Company’s management believes it extremelyimportant to maintain geographic diversification ofsales, preferring sustainable business growth toa focus on a single, even if very promising market.The Company’s sales are now approximatelyevenly split between Russia, Eastern Europe andthe Asia-Pacific region.
  • 22. OPERATING RESULTS Delivering promises50 5 OPERATING RESULTS 51Production results: Production infrastructure: All three mines are part of an integrated industrial complex with annual designbetting on coal washing an integrated complex capacity of 11 million tonnes of coal. guarantees efficiency The close proximity of the mines, which are within a distance of 5 km from one another, makes it possible to conductKuzbasskaya Toplivnaya Company increased coal production An important trend is the rapid The Company strip mines coal at three open-pit mines located in many centralized operations, reducingby 28.5% to 8.74 million tonnes in 2011, becoming Russia’s growth in production of coal with high the Kuznetsk Basin, the largest coal mining region in Russia. overhead and other costs. added-valued. As demand for sized coalseventh largest thermal coal producer. The Company has >> Karakansky-South, which consists of three license properties among Russian and foreign customers (Karakansky-South, Karakansky-South 1 and Karakansky-South 2) The Company plans to begin developingmaintained double-digit growth for four consecutive years. has grown, sorting at KTK’s mobile >> Vinogradovsky, which consists of two license properties (Vinogradovsky and a fourth open-pit mine in the future crushing and screening units increased Vinogradovsky 2) that will include the recently acquired by 35.6% to 5.6 million tonnes in 2011, >> Cheremshansky, which consists of the one, eponymous license property Bryansky property, which borders theKTK’s production volumes and production of high quality washed Karakansky-South mine. The property 2008 2009 2010 2011 coal from mine waste at the Kaskad plant has estimated C2 category resources Coal production, mln tonnes 5.5 6.2 6.8 8.7 nearly quadrupled to 740,000 tonnes of 250 million tonnes of coal, and its Year-on-year growth, % 33.7 % 12.4 % 10.6 % 28.5 % from 200,000 tonnes in 2010. Production development will increase coal mining of run-of-mine coal (not sized, sorted, In addition to the mines, the KTK production complex includes: capacity from the current 11 millionSource: KTK OJSC washed, processed, etc.), meanwhile, has tonnes to 14 million-15 million tonnes per >> Coal storage facilities with sorting units been falling for two consecutive years, year. dropping by 2.4% in 2011 and 19% in 2010. >> The Kaskad washing plant with capacity of 2 million tonnes per yearCoal production by type >> A common administration and services complex All three mines produce quality The Company’s strategic plans include >> A common fleet of mining equipment and automobile transport thermal coal that is classified as 2008 2009 2010 2011 2015F increasing the share of washed D-rank (long flame) under the Russian >> Common mechanized repair shops and maintenance infrastructure high-calorie coal to 68% by 2015 from classification system. The coal mined >> Railroad infrastructure, which belongs to subsidiary Meret Freight Forwarding Company100% the current 8.5%, while the share of low by the Company has low sulfur and 47% 50% 3% 8% 68% >> Power infrastructure, which belongs to subsidiary Kaskad-Energo 60% quality run-of-mine coal should decrease phosphorous content and relatively80% 64% to just 7% in 2015 from the current 27.5%. high calorific value. This should have a positive impact on60% the Company’s profitability, because as Reserves and characteristics of produced coal40% 53% 50% the heat value of coal increases its price 37% and sales margins grow significantly. Category of reserves, mln tonnes Coal characteristics 25% These goals will be achieved by building20% 28% Moisture Mine А+В+С1 С2 Total Mine life Design capacity kcal/kg Ash content content Sulfur content additional washing facilities next to0 7% mining operations. Karakansky-South 41.4 – 41.5 15 years 3 mln tonnes 4,900–5,300 13–15 % 14–17 % 0.27–0.30 % Raw Sorted Washed Vinogradovsky 142.6 – 142.6 50 years 3 mln tonnes 4,900–5,500 14.5–18 % 14–17 % 0.27–0.30 % Cheremshansky 146.9 18.4 165.3 35 years 5 mln tonnes 5,100–6,000 17 % 12.5–15 % 0.50–0.80 %Source: KTK OJSC Total 331.0 18.4 349.4 11 mln tonnes Bryansky property 250.2 250.2 30 years 3-4 mln n/a n/a n/a n/a (to be part of fourth mine) tonnes Source: KTK OJSC
  • 23. OPERATING RESULTS Delivering promises52 53Group structure* Coal minesProduction The first mine to be launched was Karakansky-South in 2000. Its OJSC Kuzbasskaya Toplivnaya share of total KTK production has steadily declined as the Company has Company developed new properties and mines. Vinogradovsky was launched in 2004 and Cheremshansky came on stream in 2008. As a result, Karakansky-South’s share of KTK production has Vinogradovsky Karakansky-South Vinogradovsky Cheremshansky Mine based Mining Mine Mine Mine at Bryansky dropped from 100% to 37%, while coal mining Cheremshansky’s share has rapidly infrastructure division increased with average annual growth of 60% in the past three years.Marketing and Sales Transportation, Energy and Real Estate Karakansky-South and Cheremshansky now contribute about equally to total Kaskad Management Company export sales 100 % LLC Meret Freight Forwarding Company (TEKM) 100 % KTK’s coal production – 37% and 43% respectively – and Vinogradovsky railway freight company contributes 20%. Combined production KTK plans to produce the first coal at exploration and acquire the necessary at the three mines amounts to about the Bryansky property in 2015 at the mining equipment to start developing the 80% of design capacity. earliest. The company plans to complete site by that time. OJSC Kuzbasstoplivosbyt wholesale & retail coal sales 100 % in Kemerovo Region OJSC Kaskad-Energo heat and power producer 100 % Production structure by mine 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 Produced in 2011 52.04 % 8.7 LLC Transugol wholesale & retail coal sales 10 in Omsk Region 8.7 LLC Kaskad Geo land acquisition 100 % mln tonnes of coal 8 6.8 6.2 51 % 6 LLC Altay Fuel Company Rising 5.5 wholesale & retail coal sales 28.5% 4.3 4.3 4.1 in Altay Territory 4 3.1 2.3 2.4 49.98 % 2 LLC Kuzbass Transport Company associated railway freight company compare to 2010 1.3 51 % LLC Novosibirsk Fuel Corp 0.4 0 wholesale & retail coal sales in Novosibirsk Mln tonnes 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 Region Cheremshansky 1.0 2.1 2.6 3.8 Vinogradovsky 0.4 1.8 1.7 1.4 1.9 1.4 1.5 1.8 Karakansky-South 0.4 1.3 2.3 2.4 2.7 2.6 2.6 2.7 2.6 2.7 2.8 3.2* The Company also owns several auxiliary and service assets that are not part of the core business and are not included in this diagram. Source: KTK OJSC
  • 24. OPERATING RESULTS Delivering promises54 55Washing plants Mining equipmentThe Kaskad washing plant with annualcapacity of 2 million tonnes uses The Company’s fleet of mining equipment includes 22 shovels, KTK is continually updating its fleetsteeply-inclined separation technology 88 trucks, 20 dozers, 34 loaders and of mining and transport equipmentto process diluted run-of-mine and four drill rigs. This equipment comes with new, high-performance equipmenthigh‑ash coal that was previously dumped primarily from well-known firms suchas a production loss in high quality as Komatsu, P&H, Ingersoll Rand andwashed coal. Covered storage has been Belaz. Due to their proximity, mostbuilt next to the plant in order to store equipment can be used at all threewashed coal. The plant operated at nearly mines.100% of capacity in 2011 and produced740,000 tonnes of export quality coal. KTK is continually updating its fleet of mining and transport equipment withConstruction of a second plant, Kaskad-2, new, high-performance equipment.using steeply-inclined and dense medium The Company acquired two shovels,gravity separation technology, began in one grader, 22 trucks, six dozers, two2011 and is scheduled for completion in loaders and one drill rig in 2011 at athe fourth quarter of 2012. The design The increase in modern processing capacity cost of 772.5 million rubles, or aboutcapacity of the plant has been doubled to will enable the Company to accommodate 40% of the investment budget for 2011.4 million tonnes from the 2 million tonnesannounced during the Company’s IPO in future growth of its resource base The Company also acquired options2010. Management made this decision in 2011 to purchase mining machineryafter a detailed analysis of construction and equipment effective until 2013, The Company acquired new minig and transport equipment Specifications of KTK washing plantscosts showed that expenditures on the which will enable it to minimize the in 2011 at a cost of 772.5 million rubles:main construction and installation work negative impact of price fluctuations 2 1 22would not increase significantly if capacity and guarantee delivery of equipment towere doubled. The increase in capacity will mines on schedule.enable the Company to reduce per-unit Kaskad Kaskad-2construction costs and accommodate shovels grader trucksfuture growth of its resource base. Launch 2010 2012 6 2 1 Design capacity 2 mln tonnes 4 mln tonnes Calorific 5 300-5 750 kcal 5 500-5 750 kcal value of coal produced dozers loaders drill rig Technology Steeply-inclined separation Steeply-inclined + dense medium gravity separation Cost $27 mln $81 mln
  • 25. OPERATING RESULTS Delivering promises56 57Infrastructure: Meret Freight Forwarding CompanyThe coal produced by the Company TEKM had six stations (including threeis shipped from the mines to Russian loading and one coal collection station),Railways’ (RZhD) public tracks by Meret 85 km of railroad infrastructure andFreight Forwarding Company (TEKM), 12 locomotives (six owned and six leased)a unit of the Kuzbasskaya Toplivnaya at the end of 2011.Company group. TEKM carried a record 12.9 millionRaw, sorted and washed coal is taken tonnes of coal in 2011, up by 36% fromfrom production storage yards and the 9.6 million tonnes in 2010. In additionwashing plant along the Company’s to KTK’s coal, TEKM also carries coalown railroad to the internal station Uba, for third-party producers with nearbywhere cars are sorted. The trains then mines, such as Kuzbassrazrezugol,go to RZhD’s Meret station, where the Zadubrovsky Mine and Kolmogorovsky-2locomotives are replaced with RZhD Mine, amongst others.locomotives and proceed to market. TEKM carried a record 12.9 million tonnes TEKM shipments by client in 2011In 2011, KTK completed a major overhaul of coal in 2011 up by 36% from 9.6 millionof the Uba station, where railcars tonnes in 2010 75% КТКare sorted for subsequent shipment Third-partiesto RZhD’s Meret station. The projectincluded the launch of five receiving and Map of Uba Station 75% 25% 12% Kolmogorovsky-2 Mine Locomotive depot 7% Kuzbassrazrezugol Administration & servicesdeparture tracks, the second phase of 6% Zadubrovsky Minethe overhead system, an administration 0.2% Yevtinsky Minebuilding, railcar inspection building and Railcar repair depottreatment facilities, and the overhaul of 11 9the station’s electric power system. This 17 7increased coal loading capacity from 5 23 To Meret Station 3 Source: KTK OJSC500 to 700 cars per day, and expanded 1 2 26 To Pesterevo Station 25the station’s throughput capacity from 412 million tonnes to 16.7 million tonnes 6 8 TEKM freight shipments, mln tonnes 10per year. 12 14 Млн т 2010 2011 Change 16 1st rail line 18 2nd rail line 1. Shipments to RZD’ Meret station 8.973 12.265 37 % 20 3rd rail line 22 Existing overhead system Kuzbasskaya Toplivnaya Company 6.398 9.214 44 % 24 Phase-2 overhead system Kuzbassrazrezugol Coal Company 1.127 0.892 –21 % LLC Zadubrovsky Mine 0.438 0.696 59 % CJSC Yevtinsky Mine 0.29 0.024 –92 % LLC Kolmogorovskaya-2 Mine 0.72 1.439 100 % 2. Infrastructure & shipping services to other destinations 0.671 0.709 6 % KTK Belovo Regional Power Station 0.172 – – LLC Belovopromzheldortrans 0.499 0.709 42 % Total 9.644 12.974 35 % Source: KTK OJSC
  • 26. OPERATING RESULTS Delivering promises58 59Map of coal company rail lines linked to RZD’s Belovo and Meret stations Infrastructure:  Infrastructure: Infrastructure: LLC Kuzbass Transport Land resources management OJSC Kaskad-Energo Company Vinogradovskaya Kaskad By acquiring a stake in the associate, LLC Kaskad Geo manages Kuzbasskaya The KTK group includes Kaskad‑Energo, Kuzbass Transport Company, KTK has Toplivnaya Company’s land resources. a power company based in the Kemerovo gained the opportunity to obtain coal It owns land within mining allotments Region town of Anzhero‑Sudzhensk. Vilki transport services at a price based on not yet used in production by KTK, and Kaskad-Energo, formed on the Fadeevskiy a freight car leasing rate that is fixed acquires land for prospective deposits basis of the Sudzhensk combined Yevtinskaya Dunaevskaya for a period of ten years. The Company that are likely to be offered at auction in heat‑and‑power plant, is a reliable Karakan has thus been able to hedge against the future, giving the Company a competitive supplier of heat and electricity to local risk of higher freight car leasing rates advantage at such auctions and enabling utilities, social infrastructure and Cheremshanka and late delivery of export freight due to it to save on lease payments. industrial enterprises. Dorozhny shortages of cars on the market. Centralnaya Land totaling 172.8 million rubles in In 2011, there was a planned reduction Evtinskiy Kuzbass Transport Company had about value (not including VAT) was acquired in the production and sale of electricity 2,600 freight cars at the end of 2011, up in 2011. as the thermal energy is in high demand, Pesterevo from 2,200 a year earlier. The acquisition including from Anzhero-Sudzhensk of an additional 500 freight cars was town. Karakan-South completed in March 2012, expanding the fleet to about 3,100. Uba Russian Railways (RZD) Meret Freight Dachny Forwarding Company Meret Belovo Kuzbassrazrezugolto Proektnaya to Bochati Sartakinsky Coal Mine Length of rail segments, km Kaskad-Energo sales of heat and electricity Меret station Belovo station 2007 2008 2009 2010 2011 2010/2011 Thermal energyThe Meret train station is part of the Kuzbass branch of the West Belovo – major junction of the West-Siberian Railway road, withSiberian Railway. It is a cargo station. Meret station releases and a capacity of about 11 thousand cars a day. It is a cargo station. Thermal energy sales, ‘000 Gcal 208.5 211.0 219.8 267.4 276.5 3 %receives goods in small and carload shipments from non-public places Developed network of access tracks of industrial railroad transport Thermal energy sales, mln RUB 121.4 131.1 163.7 217 227.6 5 %and spur tracks. The main purpose is the formation of coal routes from enterprises servicing coal, industrial, and power plants. Developed ElectricityKarakanskaya and Inskaya connections and releasing them to the infrastructure of car and engine sheds for freight car servicing. Electricity sales, ‘000 kWh 40,734 49,755 49,062 34,949 7,601 –78 %Meret station. Electricity sales, mln RUB 27.1 36.6 39.4 19.1 8.4 –56 % Source: KTK OJSC
  • 27. DISTRIBUTION SYSTEM Delivering promises60 6 DISTRIBUTION SYSTEM 61Sales of third-party coal: Exports:reputation as a reliable trader KTK enters top fiveyields rewardsKTK increased coal sales by 24.8% year-on-year to KTK’s presence on foreign markets has been growing10.66 million tonnes in 2011. The Company produced dramatically in recent years. Exports grew to 61% of total sales8.74 million tonnes. The difference between production and sales in 2011 and exceeded domestic sales for the first time. The sharewas due to the sale of coal from third-party producers such as of exports doubled in the space of four years after growing fromSUEK, Kuzbassrazrezugol and other major coal miners in the 28% in 2007 to 36% in 2009 and 44% in 2010.Kuznetsk Basin.Structure of KTK sales by source of coal, mln tonnes The share of third-party coal shrank to Structure of KTK sales by destination market, mln tonnes Exports grew 76% in 2011 and amounted to 19.5% of KTK’s total sales in 2011 from 6.45 million tonnes, making KTK Russia’s fifth 2008 2009 2010 2011 25% a year earlier. 2009 2010 2011 largest exporter of thermal coal. Nonetheless, sales of third-party The growth of coal exports was driven12.0 100% coal continue to make a considerable primarily by their high profitability – as 4.7 4.8 4.210.0 2.1 contribution to total sales and play an in previous years, KTK’s export prices 80% 2.2 important role in KTK’s sales policy. exceeded domestic prices in 2011. Export8.0 8.7 They allow the Company to build a more 60% quality coal is of higher quality, with the 2.3 1.46.0 6.8 flexible distribution system and offset 6.5 highest heat value and, consequently, 6.2 fluctuations in production and sales of 40% commands the highest sales margin. The 5.5 3.74.0 its own coal in the course of the year. 2.7 second reason for the growth in exports Third-party coal also provides additional 20% is the Company’s drive to diversify not2.0 sales volume to maintain the Company’s only its product line (with washing of top0 0 leading positions in Western Siberia while quality coal) but also the geography of KTK coal Third-party coal allowing it to increase sales of its own Export markets Domestic market sales.Source: KTK OJSC high-calorie coal on export markets. Source: KTK OJSC
  • 28. DISTRIBUTION SYSTEM Delivering promises62 63Geography of exports:betting on promising marketsin Asia and EuropeKTK is betting on the most promising and rapidly growingmarkets, which are expected to see the strongest growth incoal consumption. The Company is working on entering themarkets of Japan and the Baltic nations.Structure of KTK sales by region, mln tonnes As it brings new washing capacity on Geography of KTK sales Korea are conducted through leading stream that will make it possible to international trader Glencore International 2009 2010 2011 produce premium quality coal with ash AG. The coal exported to Asia is used content of less than 5% and heat value 19% primarily by power companies and cement12.0 of 6,000 kcal/kg, the Company will producers, while the coal sold in Poland is 28% Russia10.0 expand on the markets of Taiwan, Japan 39% used largely by retail consumers of sorted 2.92 Eastern Europe and South Korea, as well as Western 2010 56% 2011 coal.8.0 Asia-Pacific region 1.6 European countries, which traditionally6.0 1.3 3.53 have the highest coal standards. Potential 25% Exports to Asia surged 81.2% to 2.13 1.4 demand for Russian coal in Taiwan alone 2.92 million tonnes in 2011, while exports4.0 33% 4.7 4.8 is estimated at 4.5 million tonnes. KTK’s to Eastern Europe jumped 65.6% to 4.212.0 competitive advantages on these markets 3.53 million tonnes. The breakdown of coal will be flexible organization of shipments exports between the Asia-Pacific region0 and Eastern Europe became more even and its reputation as a stable and reliable Source: KTK OJSC Domestic market Exports: Eastern Europe Exports: Asia-Pacific region supplier. at 46% and 54% respectively, resulting inSource: KTK OJSC effective diversification of total sales among KTK’s main export markets are still South three promising regions: sales in 2011 were Korea, China and Poland. Sales in Poland approximately evenly split between Russia,As it brings new washing capacity on stream that are conducted primarily through Krex Asia and Eastern Europe (not includingwill make it possible to produce premium quality Energo and Barter S. A., which have been the Company’s partners on the Polish The Company intends to continue to pursue its Russia).coal, the Company will expand on the markets market for several years. KTK opened strategy of diversifying sales in order to ensureof Taiwan, Japan and South Korea, as well as a representative office in Warsaw at the the sustainable growth of its business. beginning of 2012, which will enable itWestern european countries, which traditionally to operate on the Polish market withouthave the highest coal standards. intermediaries. Sales in China and South
  • 29. DISTRIBUTION SYSTEM Delivering promises 64 65 Sales in Russia: Sector structure of sales: strong positions direct sales to major in Western Siberia clients grow While expanding exports, KTK is continuing to strengthen Although the situation on the world The structure of domestic sales by sector changed While before retail sales accounted for coal market improved in 2010-2011, as much 70% of the total, in 2011 they its position on the stable domestic market. This strategy has dramatically in 2011. the Company is continuing to pursue shrank to 31%. The proportion of sales already proven itself in crisis-hit 2009, when it helped the a sound and cautious sales policy. to public utilities, meanwhile, more than Company to mitigate the negative impact of the steep drop Therefore, although exports supplanted doubled to 55% from 23% in 2010. Sales in demand and prices for thermal coal on world markets. some domestic sales in 2011, resulting to power companies grew to 13% of Structure of KTK domestic sales by sector in coal deliveries to the Russian domestic sales in 2011 from 9% in 2010. market dropping by 14% to 4.2 million 2010 2011 The Company is interested in growing tonnes, their share of total sales is still direct sales to major power companies considerable at 39%. 1.2 and public utilities, as wholesale shipments are more stable and, as a 1.0 Most domestic coal sales have 9% rule, based on long-term relationships. 13% Distribution of sales in 2011 traditionally been within the Siberian 0.8 23% 55% Retail sales Public utilities Federal District trought the retail The biggest buyers of coal among 0.6 69% Power companies (TGC/OGC) network, which accounted for 91% of generating companies are TGC-5, KTK’s transport flows domestic sales. The Ural, Central, 0.4 TGC-6 and TGC-9, which are part of Domestic sales Northwest and Volga federal districts the Integrated Energy Systems group, 0.2 31% Export sales account for a small but growing share and TGC-14, which is controlled by of sales. This share grew from 2.7% to 0 Energopromsbyt. KTK also sells coal to 8.3% as KTK is expanding beyond its Source: KTK OJSC its own power company, Kaskad-Energo, traditional market of Western Siberia. the main supplier of heat in the city of 4.21 Anzhero-Sudzhensk. mln tonnes Domestic market 3.53 0.11 mln tonnes mln tonnes Eastern North-West FD European Countries Moscow 0.10 3.85Railroad to mln tonnes mln tonnesthe border Urals FD Siberian FD 0.01 mln tonnes Central FD Tomsk Railroad to 0.15 Nakhodka-East port Region mln tonnes Omsk Region Volga FD 2.92 mln tonnes Novosibirsk Asia-Pacific Region Altay Source: KTK OJSC Region
  • 30. DISTRIBUTION SYSTEM Delivering promises66 67Retail sales: KTK retail network in Western Siberia Another important factor is that the Company offers the retail market sorteddynamic development Retail Subsidiary coal that is superior in quality to the raw coal common on this market. Every outletof distribution network 100% 51% Kuzbasstoplyvosbit Novosibirsk TK in the Company’s chain currently sells both raw and sorted coal, which is growing in Omsk Region 51% Altay TK popularity despite its higher price. 51% TransUgolKTK has the largest distribution network in Western Siberia. Retailsales are conducted through the distribution network of KTK 5 points KTK Share The Company plans to expand its retailsubsidiaries, which include : of sale network in regions where it already has a Novosibirsk presence, and expand sales in neighboring>> Kuzbasstoplivosbyt (100% ownership), 0.141 Region Omsk mln tonnes regions by working with outside coal>> Altay Fuel Company (51% ownership),>> Transugol (51% ownership), 26 points Kemerovo Region trading companies. KTK opened two new points of sale in Altay in 2011, confirming>> Novosibirsk Fuel Corporation (51% ownership). of sale Kemerovo its determination to further expand the 1.24 1 Novosibirsk retail network. mln tonnes 27 points of sale 9 1.431 pointsStructure of KTK sales on domestic market, ‘000 t The retail network now has 67 points of sale Barnaul mln tonnes of sales covering the Kemerovo, 0.291 Novosibirsk and Omsk regions and Altay mln tonnes 24% 76% Territory, and is the primary outlet for coal sales to households, municipal and Altay Region 3,182 Domestic sales through KTK subsidiaries regional organizations and public utilities. 1,027 Domestic sales by KTK The companies within the distribution 1 Note: Including coal resale network sold 3.182 million tonnes of coal Source: KTK OJSC in 2011, which amounted to 76% of total sales on the domestic market. The other 24%, or 1.027 million tonnes were sold by Structure of KTK sales in Western Siberia through KTK directly. subsidiaries, mln tonnes 2011Source: KTK OJSC The rapid growth of the distribution network is being driven by the demand 3.5 in Western Siberian regions for a stable 3.0 3.18The retail network now has 67 points of sales 0.14 supplier of quality coal who can provide a 1.24 2.5 Kuzbasstoplivosbyt full range of sales and delivery servicescovering the Kemerovo, Novosibirsk and Omsk to consumers. An important advantage 2.0 Altay Fuel Company Novosibirsk Fuel Corporationregions and Altay Territory, and is the primary offered by KTK is that it also has the 1.5 0.29 Transugoloutlet for coal sales to households, municipal resources to meet additional demand for coal when necessary during unusually 1.0 1.43and regional organizations and public cold winters. 0.5utilities. 0 Source: KTK OJSC
  • 31. DISTRIBUTION SYSTEM Delivering promises68 69Coal prices: KTK’s realized coal price on the domestic market rose for most ofKTK’s average realized the year – throughout the first three quarters. There was a drop of 6.9%coal price growth in the fourth quarter compared to the previous quarter, which was in large part due to the warm weather in RussiaDemand for coal continued to recover in 2011 on both the global market and in October-November 2011. Demand forin Russia. The growth of demand, the contraction of supply at the beginning thermal coal usually increases in theof the year amid natural disasters in Australia and Indonesia, as well as third and fourth quarters with the startconcerns about a future coal shortage in the wake of the nuclear disaster in of the heating season, which promotes growth of prices. In the first and secondJapan pushed up world prices for thermal coal in 2011. KTK’s realized coal quarters, as outside temperatures rise,prices rose along with world prices, though the growth was uneven due to the demand for coal usually begins to drop ascyclicity of coal sales, net back prices were also affected by changes in railroad consumers prefer to use up coal stocksshipping tariffs for coal. left over from the winter.KTK realized export prices vs. international FOB and CIF KTK’s export price also rose for most KTK average realized coal price, RUB/tonne and $/tonne The average realized price for KTK coalbencmarks, $/tonne of the year. There was only a drop of 3% rose by 25.7% in 2011 to 1,228 rubles 2009 2010 2011 ($41.80) per tonne, excluding VAT and Jan. 11 Mar. 11 May 11 July 11 Sep. 11 Nov. 11 Jan. 12 Mar. 12 in the second quarter net back price due to an increase in railroad shipping deducting out the cost of railroad tariffs costs. This increase due to the transfer 1,400 to customers. The average net back150 of RZD’s railcar fleet to subsidiaries, export price (price paid by customer less 1,200 transport costs) increased by 21.2% to130 which led to the emergence of hundreds 1,213 1,237 1,228 of new operators on the railroad $41 $42 $42 1,237 rubles ($42.10) per tonne, and the 1,000 1,021110 transport market, shortages of railcars 970 977 price on the domestic market rose by 943 $34 for the most popular destinations and an 848 $31 892 $31 $32 28.6% to 1,213 rubles ($41.30) per tonne 80090 $30 on an ex works basis net of VAT from increase in tariffs. In order to counter the $28 92.38 88.57 89.73 90.24 growth of transport costs, the Company 600 943 rubles. As a result, the gap between70 export and domestic prices narrowed increased the fleet of freight cars leased KTK – export price CIF ARA 6,000 kkal/kg FOB Indonesia 5 800 kkal/kg from Kuzbass Transport Company at 400 dramatically from previous years. One fixed rates. Average price on domestic market Average export price Average overall price of the main reasons for the more rapidKTK FCA prices vs. Russian EXW benchmark, $/tonne growth of the domestic price was the Source: KTK OJSC7 increase in the share of sized coal in KTK Jan. 11 Mar. 11 May 11 July 11 Sep. 11 Nov. 11 Jan. 12 Mar. 12 sales.4442 42.27 41.9640 40.91 41.1338 7 Here and subsequently, prices in dollars calculated at the Central Bank of Russia’s36 average exchange rate for each given period: 31 rubles/$1 in 2009; 30.38 rubles/$1 in 2010; KTK – domestic price, FCA Meret Average price EXW in Russia, based on 4,500-5,000 kkal/kg 29.39 rubles/$1 in 2011.Source: KTK OJSC
  • 32. DISTRIBUTION SYSTEM Delivering promises70 71Coal transportation: Domestic supplies Exportsa long road to the consumer Pricing Price of delivery Western destinations Price of delivery Eastern destinations = =Coal produced by KTK usually travels a long distance to reach its Export coal is shipped by rail to ports, 1) RZD tariff for providing 1) RZD tariff for providing infrastructure and locomotive haulageconsumer. In Russia, coal is delivered to customers by rail, and the and then by sea to customers abroad. infrastructure and locomotive haulage to buyer (reviewed + 2) Price of leasing freight cars of private companies The distance from Kuzbass mines once a year taking into accountaverage shipping distance for Kuzbass coal within the country is averages 4,500-5,000 km to ports on the inflation)about 2,500 km. Baltic and Black seas and 6,000 km to + 2) Price for using (leasing) freight In order to reduce the freight car component of shipping rates, KTK is investing heavily in its own fleet of freight cars. The Company expects to completely transition to using the freight cars of joint venture ports in the East. cars, provided by owner of cars Kuzbass Transport Company in the next few years. In that case, the (reviewed depending on lease leasing rate for freight cars will be fixed for 10 years, and shippingChanges in railroad tariffs for domestic and export coal Coal is first taken from the Company’s terms) costs will vary only depending on the distance and the RZD tariff storage depots and the washing plant for shipping coal. KTK’s current fleet of about 3,100 freight cars isshipments, $/t sufficient to cover about half of export shipments along its own railroad network to the Uba Jan. 10 Apr. 10 July 10 Oct. 10 Jan. 11 Apr. 11 July 11 Oct. 11 Jan. 12 internal station, where freight cars are sorted. The sorted trains then proceed Delivery terms FCA (free carrier), Meret Station, Kemerovo Region DAF (delivered at frontier) to Polish border with Belarus or CPT (сarriage paid to) Vostochny Port50 to RZD’s Meret station, where the Ukraine locomotives are switched and RZD takes Seller delivers the goods to the Seller pays for railroad delivery45 carrier named by the buyer at the Seller is responsible for delivery to named destination. Buyer pays over further shipment. The price and named place to the border and payment of for transfer and storage at port,40 terms of shipping coal differ considerably duties freight and insurance. Risks pass depending on whether the coal is bound KTK usually uses the services of from seller to buyer upon delivery Freight One for coal deliveries Buyer is responsible for customs to port35 for export or the domestic market. to customers. Freight One is clearance and delivery from Russia’s largest rail freight border to required destination30 The potential growth of Russian coal carrier and its rates are used as a benchmark by most Risks pass upon the goods Domestic market, up to 5,000 km Export Kuzbass – Baltic ports exports is constrained not only by government-funded organizations reaching the border Export Kuzbass – Far East ports Export Kuzbass – Northern ports growing railroad tariffs and the capacity that are customers of KTK Export Kuzbass – Black & Azov sea ports of the country’s railroads, but also theSource: Metal Expert throughput capacity of seaports in the Price of delivery 1,213 rubles ($418) per tonne • 1,430 rubles ($49) per tonne relating to railcar usage • 1,095 rubles ($37) per tonne relating to railcar usageUtilization of port capacity in Far East and North, % in 2011 • 2,944 rubles ($100) per tonne, • 2,317 rubles ($79) per tonne, 0 20% 40% 60% 80% 100% 120% 140% 160% 180% 200% railcar usage plus railroad tariff railcar usage plus railroad tariff Far East total 143% Source: KTK OJSC Vostochny Port 93% Daltransugol (Vanino) 175% Posyet Commercial Port 100% Nakhodka Commercial Seaport 177% Vanino Port 67% Vladivostok Sea Fishing Port 26% North total 108% Murmansk Commercial Seaport 120% 8 At Central Bank of Russia average exchange rate of 29.39 rubles/$1 for 2011.Source: Metal Expert
  • 33. DISTRIBUTION SYSTEM Delivering promises72 7 RISK MANAGEMENT 73Growth of coal shipments through selected ports, ‘000 t KTK’s business is subject to a number of risks, the most significant Baltic Far East North of which are listed below. The Company is continually taking steps to create an effective system40,00035,000 36,571 36,182 of risk management, aimed at providing a sufficient level of confidence30,000 30,474 30,184 that strategic and short-term goals will be achieved and reasonable25,000 guarantees of protection from potential losses.20,00015,00010,000 10,931 11,9465,000 COUNTRY AND REGIONAL RISKS0 2010 2011 KTK’s production activities are gas, metals) could weaken Russia’s the long-term rollback of stimulusSource: Metal Expert concentrated in the Kemerovo Region economy and reduce its investment packages in the United States and other of Russia and are therefore exposed to appeal. This in turn would impact the countries, slower growth in China, and risks related to both the situation in the Company’s performance, as it would greater volatility on commodity marketsFar East and the North. Most ports in Many private companies have also port, with capacity of 1 million tonnes. Kemerovo Region and Russia in general. dampen demand for products from due to unrest in the Middle East. Newthese regions are already operating announced plans to build major coal Sibuglemet announced plans in 2011 The current socioeconomic situation in potential customers and constrain financial shocks are possible, but theirat more than 100% of capacity, though terminals in the Far East. SUEK has to build a coal terminal with capacity of the Kemerovo Region and regulatory the Company’s ability to raise finance negative impact may be mitigated bytransshipment of coal continues to grow. plans to double its terminal at the Vanino up to 8 million tonnes in Sukhodol Bay. policy in the coal industry show that the at favorable rates and in the required the measures of the government andPorts in Russia’s Far East handled 20% Port to 24 million tonnes, and Evraz Throughput capacity will also expand region is quite stable. Gross regional amount. This was the case in 2008‑2009, financial institutions to ensure sufficientmore coal in 2011, and ports in the North Group plans to double the capacity of once the second automated complex product in 2011, according to preliminary when demand for commodities fell and liquidity to weather potential problems.handled 9% more. its Nakhodka Commercial Seaport to of the coal terminal in Ust-Luga, with 5 million tonnes per year by 2013. Mechel annual capacity for 12.4 million tonnes figures, grew 5.8%, industrial production international financial markets were rose 3.9%, average monthly wages closed for a time even for the most It is also important to keep in mindIn light of the growth of coal exports and has plans to expand cargo turnover at of thermal and coking coal, reaches full increased by 13.9% and capital reliable borrowers. that the Company exports to variousshortage of port capacity to handle them, the Posyet port from 3.3 million tonnes capacity in 2012. investment grew by 31.4% to 134 billion countries, particularly Poland, Souththe Russian government announced to 7 million-9 million tonnes in 2012, as rubles. The region is geographically There was an upturn in both the global Korea and China. Countries in whichplans at the beginning of 2012 to build well as begining construction of a new The implementation of the plans to build removed from areas of potential local and Russian economies in 2010-2011. KTK has a presence have various levelsa new port in the Far East that will be coal terminal near the Vanino Port in new and expand existing facilities could armed conflicts in other parts of Russia. The global economy grew 3.9% in 2011 of political and economic stability and,able to handle 20 million tonnes of coal Muchka Bay with capacity of 25 million completely eliminate the problem of Therefore, the probability of military and Russia’s GDP expanded by 4.3%, consequently, different degrees ofper year. Deputy Transport Minister tonnes. Independent operators have export coal congestion at Russian ports. conflicts, imposition of a state of and the IMF is forecasting growth of probability that business activities willViktor Olersky said areas around Vanino, also announced port projects in the emergency or widespread strikes in the respectively 3.5% and 3.9% for 2012. be constrained. Such constraints couldNakhodka-Vostochny and Posyet are Far East. The most ambitious of these Company’s region of operations is low. Demand on commodity markets is arise due to expropriation of assetsbeing considered as possible locations is a project by Summa Group to build recovering, including with the help of or nationalization at marked downfor the new port. Ports in the region a complex at the Vostochny Port with However, Russia is part of the global government measures. Nonetheless, prices, changes in the currency systemare currently designed to handle about capacity of 18 million tonnes (mostly economy and negative changes in the the global economy is still vulnerable to introduced by the authorities, protective40 million tonnes of coal, so capacity coal) by 2013. The Global Ports group economies of other countries and on the the following risks: the growth of budget trade barriers or other measures thatcould be expanded by 50%. also intends to build a terminal at this global commodities market (oil, natural deficits and debt in European countries, could have a negative impact on the
  • 34. RISK MANAGEMENT Delivering promises74 75 SECTOR RISKS The Company’s main sector risks are due to the recovery of demand for coal The main factors that could affect the related to a possible deterioration of the on the world market, a tightening of situation adversely, and how KTK can situation in the coal industry as a whole. supply amid natural disasters (flooding deal with these factors are listed below. Coal prices and demand on the domestic in Australia), and anticipated shortages and foreign markets depend on many of coal on the world market in the wake factors and have a direct impact on of the Fukushima nuclear disaster in the Company’s financial health. Prices Japan. in 2011 moved within an upward trend Decrease in prices for natu- Government constraints on ral gas as an alternative prices of products of coal fuel for power generation, consumers (public utilities, which would undermine power companies), leading coal’s price advantage and to artificial constraints reduce demand for coal Decline in coal prices on on growth of prices for KTK products from end consum- world and domestic markets coal ers KTK measures to manage risk KTK measures to manage risk KTK measures to manage risk KTK cannot directly influence world coal KTK is diversifying the sector structure of KTK cannot directly affect gas prices. prices. However it can mitigate the cyclicity its coal sales. Customers in the non-energy However, the Company’s coal production of prices by entering into long-term contracts sector are expected to grow following the costs are among the lowest in the world,Company’s export operations. Political diversity of markets minimizes the situation in the global economy and if coal prices are forecast to fall in future and start of production of premium coal (following which gives it a considerable edge in switch to spot deliveries if prices are forecast the launch of the Kaskad-2) washing and competing with natural gas for a place inrisks such as potential military conflicts, potential negative impact of economic protect itself from potential regional to rise. retail sales are increasing. Coal briquettes the country’s fuel balance. The Company isacts of terrorism, social unrest and risks. The Company’s sales in 2011 crises. The Company’s management is The Company can also flexibly change the could become a successful niche product on continuing to implement a set of measuresimposition of states of emergency could were approximately evenly divided continually monitoring the situation in structure of sales in favour of either exports the retail market. to further reduce per-unit costs in order toalso affect the Company’s business. among the markets of Russia, Asia countries where KTK has a presence or the domestic market, depending on where The Company mitigates the loss of revenues maintain its price advantage. Production costsHowever, the chances of such events and Eastern Europe (not including so as to fully take into account potential the realized coal price is highest. resulting from government regulation by could be reduced by increasing the amountoccurring in the medium-term are Russia). Within Russia, diversification by negative changes on world markets. tightly controlling costs, growing the share of coal shipped in the Company’s own freight of products with high added value (sorted, cars, setting up production of diesel fuel forbelieved to be small. region is also growing, though Western washed coal), partially shifting sales from internal needs, reducing the stripping ratio Siberia remains the main market. the domestic market to export markets, and so on.KTK’s efforts to manage country and The Company’s ability to flexibly change and maintaining a reliable and stable retailregional risks are aimed at diversifying the geography of its sales enables it network on the domestic market.the geography of sales. Geographic to quickly respond to changes in the
  • 35. RISK MANAGEMENT Delivering promises76 77 Lack of transport infrastructure capac-Slowdown of economic growth in China and Steep increase in the transport component of ity used in shipping coal to customers, whichother Asian countries that are leading im- costs (faster than anticipated growth of rail could constrain plans to expand coal produc- Dramatic increase in competition in the sec-porters of coal (South, Korea, Taiwan, etc.) freight tariffs, freight car leasing rates) tion torKTK measures to manage risk KTK measures to manage risk KTK measures to manage risk KTK measures to manage riskThe result of this risk being realized will be a drop in export prices for The cost of shipping coal has two components. KTK is investing in the modernization of its own railroad infrastructure. The coal industry is already fairly competitive. Due to thecoal. KTK’s actions in this case are described above in this table. 1. Payment for the use of RZD infrastructure (60-70%). The Company In 2011, KTK completed the overhaul of the Uba transfer station, where capital‑intensive nature of coal production, a dramatic increase in theIf demand for coal declines among actual KTK customers in Asia, the has no influence over RZD tariffs, as they are set by the government. railcars are sorted into trains for subsequent shipment to market. The number of new industry players is unlikely.Company can shift sales to other markets. KTK has the ability to flexibly 2. Payment for use of freight cars (30-40%). In order to reduce the overhaul resulted in an increase to the station’s throughput capacity KTK’s competitors currently include SUEK, Kuzbassrazrezugol andchange the structure of its sales thanks to its strategy of geographic freight car component of the cost the Company is expanding the fleet from 12 million tonnes to 16.7 million tonnes, boosting freight car Siberian Business Union, among others.market diversification. In addition, the Company has longstanding, well- of railcars owned by joint venture Kuzbass Transport Company, which turnover from 500 to 700 cars per day. The Company plans to invest KTK’s competitive advantages:established relationships with foreign counterparties, which helps to then leases the cars to KTK under contracts with lease rates fixed a total of 663.5 million rubles (net of VAT) in railroad infrastructure in • Reputation as a reliable coal supplier, firmly established by thereduce this risk. for 10 years. Kuzbass Transport Company’s own fleet (about 3,100) 2012-2016. Company over many years of doing businessIn the case of a more negative scenario resulting in a steep drop in currently enables it to cover about half of its export shipments. For • Diversification of business, both geographical and in terms of productdemand for coal on foreign markets, KTK would respond by rapidly the other half, the Company strives to secure long-term contracts lineadjusting its investment and production programs, which would involve with carriers. In 2011, such contracts were signed with Sibugletrans • Low production costspartial or complete suspension of individual program items until the and RG Trans. • High productivity thanks to use of modern equipment and the latestsituation improves. KTK plans to expand its railcar fleet to 5,000 and then to 10,000 so that technology the transport cost will change only depending on the RZD tariffs. • In-house railroad infrastructure and freight car fleet • High level of information openness compared to competitors.FINANCIAL RISKSThe main financial risks that the Company could face in future are the following: KTK manages financial risks by constantly monitoring and However, it should be noted that some financial risks are beyond theChanges in interest rates, a general Changes in the exchange rate could also Inflation risks could increase the analyzing the situation on financial markets, and making prompt Company’s control because they depend on the general economicincrease in interest rates in the economy would have a significant impact on KTK’s financial Company’s core costs and could impair the management decisions based on this analysis: review of financing situation in the country. In this case, the Company can only do its bestincrease the cost of servicing the Company’s performance since a large proportion of the successful implementation of the Company’s structure, optimization of expenditures, review of capital investment, to effectively adapt to changing conditions.current debt. Company’s revenue is generated on export investment and production programs. and efforts to improve turnaround of receivables. markets, in foreign currency. Gradual changes The Company has a high level of financial stability to weather in the exchange rate should not have a major In the case of a significant acceleration of inflation, for example, the short-term negative economic changes. Should there be significant impact, but a sudden strengthening of the Company can reduce the size and duration of receivables. If interest economic instability that would have an adverse impact on the rouble could reduce profits. On the other rates rise, the Company can seek more favorable lending terms Company’s business, KTK will implement a number of crisis hand, the negative impact in this case would outside of Russia. The Company has protected itself against the risk management measures to strengthen its business and minimize the be partially offset by a decrease in the cost of of higher interest rates on most of its current loans (93%) by entering negative impact on it. servicing the debt portfolio, more than 80% of into fixed-rate agreements. The Company also maintains tight control which is denominated in foreign currency. over its net debt/EBITDA ratio. The ceiling for this ratio has been set at 2, which will prevent excessive dependence on interest rates. The Company also conducts medium- and long-term planning in order to factor in potential risks as much as possible.
  • 36. RISK MANAGEMENT Delivering promises78 79Impact of financial risks on financial statement indicators LEGAL RISKS Doing business in Russia, the Company is exposed to risks related to changes in currency, tax and antimonopoly legislation, and Changes in ruble exchange customs and licensing regulations.Higher interest rates rate Higher inflationImpact on financial statement Impact on financial statement Impact on financial statement Changes in currency regulation Changes in tax legislation Changes in customs regulationsCost of borrowing would increase, which Exchange rate volatility could increase the Most costs (wages, inputs, electricity, spare Regulation of currency regulation in Russia Tax legislation in Russia is subject to frequent and dutiescould result in growth of interest payments Company’s costs and reduce profit. The parts, fuel, etc.) would increase. On the other does not currently have a tight administrative changes, and also leaves room for varying Since the commodity produced by the Companyand reduce net profit. Company’s operating costs are primarily hand, prices for sold product would rise, framework. Changes in regulation could interpretations of many terms, which can make is exported, the Company’s business is subject denominated in rubles, while a large increasing revenue. The ultimate impact on affect the Company’s operations. In order tax planning more difficult. Potential changes to customs regulation. Due to potential changes proportion of revenue is denominated net profit would depend on the relative rates to avoid potential risks, the Company’s legal in tax legislation could increase the Company’s in regulations governing customs control and in U.S. dollars (export sales). Therefore, at which revenues and costs increase. department constantly monitors for possible expenditures on payment of taxes and levies, duties, there is a risk of decisions being adopted strengthening of the dollar would increase changes in currency legislation. which could reduce net profit and cash flow. that complicate customs declaration. In order profit, but this positive impact would be offset In order to avoid such risks, the Company to avoid these risks, the Company monitors by growth in interest rates on loans when conducts tax planning and monitoring of tax customs legislation. expressed in rouble terms, as more than 80% legislation. of debt is denominated in dollars. Changes in requirements for licensing of core activities or rights Changes in antimonopoly legislation to use assets with limited transferability (including natural resources). The Russian antimonopoly legislation has been undergoing fundamental Company holds all the necessary licenses to conduct its business and has changes recently due to the tightening of control over compliance withOPERATIONAL RISKS no problems renewing these licenses. The Company complies with license requirements and takes all possible steps to minimize the possibility regulations in this area. The Company operates in a competitive market and does not benefit from a monopoly position. Furthermore, the Company of licenses being suspended or revoked. If requirements for licensing does not pursue any actions that restrict competition on the Russian coalRisks related to industrial accidents Risks related to current court Risks related to possible loss of business activities and use of assets with limited transferability are market, and competes fairly and openly. Therefore, this risk is seen asand disasters proceedings involving the Company of major customers changed, the Company will take all necessary steps to meet the amended minimal.Coal mining involves the operation of hazardous The Company is not currently involved in court The Company has an extensive client base, requirements.production sites at which the Company proceedings that could result in significant and there is no excessive dependence on oneconducts strip mining operations. Although the expenses or have a negative impact on its or several major customers. There is onlyCompany observes all laws and regulations business. However, such a possibility cannot one customer whose share of total accountsgoverning occupational health and safety, be completely ruled out due to judicial errors receivable exceeds 10%. Furthermore,it is impossible to exclude the possibility of and the unpredictability of court decisions. The the Company has longstanding and well-industrial accidents occurring due to either Company does not foresee any potential court established relationships with most of itsobjective or subjective reasons. However, the proceedings or lawsuits that could have a major wholesale customers, including coal importers,probability of such accidents is significantly impact on its performance or financial position. so these risks are low.lower than in shaft mining operations.The Company’s operations are conductedin strict adherence to plans developed byspecialized design organizations. The Companyhas special units responsible for compliancewith safety rules that conduct regularinspection patrols; workers are trained insafety protocol; and there are regular medicalcheckups as required by law. The Companyprovides accident insurance to productionpersonnel, and insures its liability as the ownerof hazardous facilities for damages to thirdparties resulting from an accident at suchfacilities.
  • 37. RESEARCH & DEVELOPMENT Delivering promises80 8 RESEARCH & DEVELOPMENT 81KTK is placing a great deal of emphasis on studying KTK management has worked out a fundamental position on future financing >> Low moisture content, which reduces heat loss to generation of steam and The Company plans to design a pilot plant with capacity of 5 tonnes tonew technologies that emerge on the world for the briquette production project. results in fuel savings fine-tune the technology, and findcoal market, and is independently investing in Demand for the new product will be >> High durability standard equipment that can be used in >> Use of KTK’s coal briquettes the process. It is also considering buyingresearch and development that is producing unique Coal briquette secured by the unique properties of this “solid natural gas.” generates total savings of 50-100%. an Australian plant, which would helptechnologies for subsequent application at units of production process >> High heat value (6,000-6,700 kcal) per accelerate the process of introducing theKuzbasskaya Toplivnaya Company. kg, significantly increasing the burning time. A 30-gram briquette can burn for The properties of the briquettes listed above are bound to generate stable technology. The plant could be built in 18 months. If the project is successful, 5 hours. Another important factor is long-term demand for this product. the Company could transition to a large the constant burning temperature The briquettes can be used by private plant that would process 300,000 to >> Environmentally friendly – the absence individuals, as well as power and utility 1 million tonnes of per year as early of any additives and minimal ash companies because they are an excellent as in two years. This is a preliminaryThe Company conducted prefeasibility studies in the following content eliminate unpleasant odors fuel for all types of boilers, including timetable that may change upon further Original materialareas in 2011. and harmful emissions (including pulverized coal-fired boilers and bed study. coal or coal fines carbon monoxide) during burning boilers (with fluidized bed and circulating >> High density, extending the burning fluidized bed). time of the briquettes and allowingDevelopment of a new type Preparation them to be stored indefinitely in humid Many companies on the Russianof fuel from washed coal conditions >> High permeability, making it possible market currently offer consumers coal briquettes, but they are produced to retrieve all of the coal’s thermal with obsolete technology and the ScreeningDevelopment of a new type of fuel from washed coal – so-called “solid natural gas.” energy. This alone results in fuel properties of the pressed coal differThis refers to small coal briquettes with higher heat value produced using the latest savings of up to 30% little from the original coal. There are Crushingtechnologies. This fuel is called solid natural gas because it burns like gas, without >> Compactness of the briquettes results no products on the Russian marketsoot, smoke or ash. in savings on transportation like what KTK plans to produce, and Pulverization These two >> Identical size of the briquettes ensures globally only two Australian plants makeThe manufacturing process for fuel briquettes, as a rule, consists of several main stages can even operation of boilers and furnaces, similar briquettes, but using a different be combinedstages: 1) screening of coal (to sort by size); 2) crushing of coal (in two stages – into one with extending their service life technology. KTK’s specialpreliminary and principal crushing); 3) reduction of coal to micron size (usually technology >> Almost complete absence of smoke Heating100‑200 microns); 4) heating of the resulting material at a temperature of 200-300°С from burning the briquettes, which Revealingly, KTK’s technology is more(so-called bertinization process); 5) pressing (without binding agent, that is without allows them to be used in residential progressive, involving mechanochemicalglue, etc.) of the resulting coal dust into briquettes, the heat value of which is about environments processing of the coal as opposed to the1,000 kcal per kg higher than that of the original coal. Pressing >> Absence of sparks when burning and thermal process used by the Australian almost complete absence of flame, plants. The former allows moreKTK and specialists from LLC Ugol-S, a company that specializes in coal washing which reduces fire hazards intensive processing and pulverizationtechnologies, have jointly developed a fundamentally new technology with fewer >> Almost complete absence of burn of the coal to 50 microns – nearly nanostages. After crushing, the coal is fed into a mechanochemical reactor that, thanks to waste. The small amount of residue particle level, while typical pulverizationits special design, pulverizes and bertinizes the coal simultaneously, eliminating the left after burning the briquettes can produces 100-200 micron particles.need for thermal processing. The resulting product is a very dry powder with 3-6% be used to make bricks (by addingmoisture content and about 1,000-1,200 kcal per kg higher heat value. The powder is cement)then pressed into briquettes. Finished product COAL briquettes
  • 38. RESEARCH & DEVELOPMENT Delivering promises82 83processing of high-ash waste from coal production of syntheticproduction diesel fuel from coalThe second potential project is their strong technical characteristics and structures require a smaller foundation The third potential project is production All areas of KTK’s research are advancedprocessing of high-ash waste from coal reasonable price. and lighter load-bearing structures. The of synthetic diesel fuel from coal based for Russia as well as by world standards.production, which is currently dumped, thermal and sound insulation ratings of on gasification of coal and synthesis. The The implementation of these technologiesinto light, strong construction materials. KTK’s bricks, comparable in quality to M75 the bricks that KTK could produce are far Company is looking at a fairly large foreign will give the Company a competitiveMineralogical tests have shown that grade bricks, can also be used in various higher than those of regular bricks. It is chemical company, the potential purchase edge and take it to a whole new level ofKTK’s washing waste (so-called cake) applications, including construction particularly gratifying that the Company of which would enable KTK to begin development by increasing productivity,can be recycled into high-quality bricks. of low-rise buildings, exterior and intends to manufacture a quality product production of diesel for its own needs that improving efficiency and optimizingSuch bricks are light due to their porous load‑bearing walls, fences, dividing walls, for which there is guaranteed steady would be superior to Arctic diesel. Arctic costs. Furthermore, all of KTK’s projectsstructure, but are fairly strong, at least as plinths and foundations. The bricks are demand with core production waste for diesel is a class A fuel that has minimal are being developed taking into accountdurable as M75 grade bricks. The grade versatile thanks to their high strength, which there was previously no application. density and viscosity and can be used in the toughest and latest environmentalof the brick indicates the material’s ability moisture and temperature resistance and extremely low temperatures (up to –55 °С) standards, giving them considerable socialto withstand stress and strain without light weight. Laying these bricks does not The timetable for the implementation of without gelling. importance.breaking. The M75 grade means that the require any special skills. this project has not been determined yet.brick is guaranteed to withstand a load of The Company plans to obtain a ruling In-house production of diesel would75 kg per 1 cm2. Given their versatility and the popularity from certification authorities concerning enable the company to significantly reduce of lightweight, strong bricks among the quality of the bricks before it makes a fuel costs, which accounted for about 7%M75 bricks are one of the most popular construction companies, there is no decision on which production line it would of production costs in 2011, and ensure abrands on the construction market doubt that there would be demand for be best to acquire and when. stable, continuous supply of fuel. Thirdly,today, both among major construction KTK’s bricks. Their light weight would imported heavy equipment will operatecompanies and private builders, due to enable builders to save money, as lighter much better on high-quality diesel, and The following projects are successful examples of KTK’s repair costs will decrease. application of new technology. >> Construction of the Kaskad-2 washing plant using technology that involves The timetable for this project has also not simultaneous use of steeply-inclined and heavy medium separation, which is new to been decided yet. The project is capital- the coal industry. The project is not only effective in economic terms, as it reduces intensive and is linked to the acquisition per-unit costs, but is also better for the environment because it reduces the use of of a large company (that has been in magnetite in production. operation for more than 10 years), new >> The launch in 2011 of an environmentally friendly pumping and filtration station that equipment and a gas generator unit. can clean runoff water to the quality of drinking water, the first of its kind in Russia’s coal industry. KTK plans to use such stations at all of the group’s units, which will Work on all three projects will continue make it possible to discharge water of high quality and minimize the Company’s in 2012, and financing will increase impact on the environment. significantly.
  • 39. HUMAN RESOURCES MANAGEMENT Delivering promises 9 HUMAN RESOURCES MANAGEMENT84 85SIZE OF WORKFORCE AND WAGES REMUNERATION AND SOCIAL SECURITY The Kuzbasskaya Toplivnaya Company The Company has a rating system for remuneration under which The Company in 2010 signed a collective group’s workforce grew by 4.5% in agreement with the union organization the wages of various categories of employees are differentiated 2011 to 3,933 at the end of the year that is recognized as the authorized as production rose and processing depending on the conditions, intensity and nature of work and the representative for all of its employees. capacity expanded. The number of difficulty of the duties performed. Under this agreement, the Company employees involved in coal production provides the following benefits and and on the payroll of Kuzbasskaya The rating system of remuneration compensation to its employees: Toplivnaya Company OJSC totaled is based on: >> Monetary compensation equivalent to 2,169 in December 2011, with the 0.5 liter of milk per shift remaining employees being employed by >> Free coal for household needs or subsidiaries. Base rates and Standard position Premiums and partial compensation for cost of skills rates for jobs salaries and job increments to base heating in the price of housing and Despite the high population density in the and occupations of descriptions rates and salaries utility services Kemerovo Region, demand for qualified workers for managers, >> Lump sum payment for years of personnel remains strong due to the specialists and service in the coal industry large number of coal mining companies other employees >> Monthly payment for years of service in the region. In order to retain >> Compensation for the cost of return employees and attract new staff the travel to a destination within Russia Company keeps wages at competitive (by any form of transport, includingAverage wage at KTK, RUB levels and provides incentives with social personal car, other than taxi) for 2007 2008 2009 2010 2011F security and other benefits. In case of permanent injury or death of an employee as a result vacation purposes once in three of an accident at work, the Company pays: years for the employee and two family Wage expenses across the group of members40,000 36,552 companies rose by an average of 20% in >> Lump sum compensation for loss of >> A lump sum benefit to each family >> Payment for medical recovery of35,000 2011 compared to the previous year, and occupational capacity as a result of member who was a dependent of the employees’ children 30,38230,000 amounted to 36,522 rubles per employee work-related injury or work-related deceased >> Payment for medically prescribed25,000 23,300 per month, compared to 30,382 rubles illness >> A monthly benefit to children of the health resort treatment (recovery) of 21,313 21,23620,000 in 2010. >> Benefits to help cover funeral deceased until they reach 18 years of employees and their children within15,000 expenses age. the scope of the allocated budget10,000 >> Moral damages to the family of the >> Lump sum payment to retiring deceased employees.5,0000Source: KTK OJSC
  • 40. HUMAN RESOURCES MANAGEMENT Delivering promises86 10 SOCIAL RESPONSIBILITY 87TRAINING AND PROFESSIONAL Kemerovo Regional Professional Development Institute of the Russian Corporate social responsibility is an integral part of KuzbasskayaDEVELOPMENT Energy Ministry, the Kemerovo branch Toplivnaya Company’s business. of the Siberian Center for Scientific The Company’s philosophy of social responsibility is rooted in the essenceThe Company aspires to create an environment that promotes the & Technical Support of Occupational, Environmental and Energy Safety, and of the coal industry itself. The electricity and heat generated with theprofessional development of employees and the realization of their the engineering and technical division of Company’s coal are essential to people’s livelihoods. In addition, byprofessional potential, and foster a corporate culture that valuesexperience, personal initiative and responsibility. the Vinogradovsky mine in the following areas: paying taxes and creating well-paid jobs the Company contributes to the development of Kemerovo Region and other regions where it has a 1. Occupational safety – 87 employees presence. 2. Industrial safety – 60 employees KTK adheres to key principles of social KTK and the Kemerovo Region 3. Resource conservation – 3 employees responsibility: Administration in February 2011 signed a socioeconomic cooperation 4. Operation of hydraulic engineering agreement for 2011. The goals of the works – 6 employees Professional Stimulating the Industrial safety agreement included: development and socioeconomic and environmental >> Cooperation in the implementation of 5. Design and safe operation of hoisting social support for development of the protection government programs in education, equipment – 46 employees people region in which it health care and housing construction operates in the Kemerovo Region 6. Certification in knowledge of standard >> Creation of favorable conditions for safety rules for explosives work – 17 the socioeconomic development of employees Kemerovo Region and the Company based on the development and 7. Industrial safety standards for implementation of joint projects transportation of hazardous Under this agreement, the Company In addition, in the fourth quarter wages >> Coordination of government andEmployees have many opportunities training at the Company’s expense at materials – 6 employees pledged to retain highly qualified for drivers of mining and transport Company action to fulfill industrialfor personal and professional growth the Belovo Polytechnic College and personnel in 2011, provide employment equipment were raised by up to 15%, safety requirementsand development. We encourage a Kuzbassrazrezugol Training Center in 8. Professional development courses in the production process and increase and bonuses were paid to employees for >> Coordination of government andpassion for learning and development various fields: mine worker, coal loader, for non-production employees – 34 the average level of wages by 10% years of service. Overall, the average Company action to implement theand seek to instill it in our management driver, road construction machinery and employees. compared to 2010. In reality, due to monthly wage across the Company rose region’s social programsculture. We work methodically to identify tractor mechanic, electrical fitter and production growth in 2011, the Company by 20.4% in 2011 to 36,552 rubles. >> Coordination of action to resolveand meet needs for training, helping so on. The Company plans to continue increased its workforce by 4.5% and issues concerning coal supplies toemployees acquire the necessary funding the education of its employees. indexed wages twice, by 10% in February consumers in the regionknowledge and skills. and 5% in October 2011. >> Ensuring full and timely payment by In addition, 257 employees underwent consumers for coal and other energyIn 2011, 447 employees from our knowledge assessments and resources supplied by the Company.core production staff underwent professional development courses in 2011 at the Belovo Polytechnic College, Kuzbass State Technical University,
  • 41. SOCIAL RESPONSIBILITY Delivering promises88 89 The Company also arranged the delivery of about 1.15 million tonnes of coal (including 395,000 tonnes of its own coal) at fixed prices to public utilities in the Kemerovo Region. The Company’s tax payments also support the region by providing a reliable and stable source of revenue for the regional budget. The Company paid a total of 857.35 million rubles in taxes (including land lease payments) to the region’s consolidated budget in 2011, which was an increase of 66% from 517.2 million rubles in 2010. KTK met all of its obligations under the 2011 socioeconomic cooperation agreement in full.Social support for employees in 2011, mln RUB KTK provided a total of 41.8 million The Company’s tax payments into the region’s consolidated budget are supposed to In February 2012, the Company signed rubles in funding for social and charity a similar agreement with the Kemerovo total 631 million rubles in 2012. The Company plans to increase social benefit payments programs in 2011, up from 25.5 million Region Administration for 2012, 8.7 Medical recovery of employees and their children to its employees and retired workers by 8% to 45 million rubles in 2012, and maintain 7.8 Nonproduction bonuses rubles in 2010. agreeing to raise average wages by up funding for regional social programs and initiatives at 22.1 million rubles. KTK will deliver 7.3 Coal allowances to 10% over 2011 by increasing labor 350,000 tonnes of coal to regional public utilities at fixed prices in 2012, and deliver 41.8 4.8 Compensation of heating costs In the area of social support for its staff, 3,500 tonnes of donated sorted coal to poor households in the Kemerovo Region. productivity. The average monthly wage mln RUB 4.8 Events, celebrations the Company is working on improving at the Company will therefore reach in total 3.2 Payment for extra travel time to work the health of employees, maternity and 40,174 rubles. 3.0 Medical recovery of retirees 2.2 Material assistance to employees child support, organizing leisure and recreational activities, social support for retired workers and veterans, retrainingSource: KTK OJSC and professional development, as well as social benefits for the best employees.Social support for the region in 2011, mln RUB At the regional level, KTK is 6.6 Funding for regional programs implementing strategic programs in 5.0 Funding for Miner’s Day celebrations areas such as employment, youth policy, 4.5 Donation of 3,500 t of sorted coal to poor households in region support for culture and sport, and aid 22.1 4.0 Renovation of kindergartens in Belovo to disadvantaged groups. The Company & Prokopyevsk districts mln RUB cooperates with local authorities under in total 1.0 New Year gifts for Kuzbass orphans these programs. KTK provided a total of 0.5 Shakhterskaya Pamyat support fund 0.5 Renovation of Olympic reserve sports school 22.1 million rubles in funding for social in Tashtagol district programs and initiatives in the Kemerovo Region in 2011.Source: KTK OJSC
  • 42. OCCUPATIONAL HEALTH & SAFETY AND ENVIRONMENTAL PROTECTION Delivering promises 11 OCCUPATIONAL HEALTH & SAFETY AND ENVIRONMENTAL PROTECTION90 91OCCUPATIONALHEALTH & SAFETYKTK is implementing its occupational The Company’s operations arehealth and safety policy by: conducted in strict adherence to>> increasing occupational health and plans developed by specialized design safety at production sites and in organizations. The Company has special operational processes units responsible for compliance with>> improving working conditions, safety rules that conduct regular taking into account workplace and inspection patrols; workers are operational risk assessments trained in safety protocol; and there>> providing workers with the latest are regular medical fitness checks, certified personal protective both in the form of health monitoring equipment (special clothing, footwear, before and after shifts, and periodic etc.) medical examinations as required>> conducting regular medical checkups by law. In 2011, company employees and providing preventative care to underwent training in occupational reduce occupational health risks safety (87 employees), industrial>> improving the system for providing safety (60 employees), operation of occupational health and safety training hydraulic engineering works and to employees hoisting equipment (6 and 46 employees>> integrating the occupational health respectively), and industrial safety and safety management system into This policy has resulted in a low level of work-related injuries and standards for transportation of As required by law, the Company Compliance with occupational the Company’s overall management illnesses, which also gives the Company a competitive advantage. hazardous materials (6 employees). provides accident insurance to safety standards is monitored by an based on best practices In addition, 17 employees underwent production personnel, and insures occupational health and safety service 2007 2008 2009 2010 2011>> strictly complying with the Russian certification in knowledge of standard its liability as the owner of hazardous that answers to the chief engineer. The Federal Law on Industrial Safety. Accidents 1 1 – 1 – safety rules for explosives work. facilities for damages to third parties deputy site manager at every mining Fatalities – 1 – 2* – resulting from accidents at such site is responsible for occupational * A motor vehicle accident that did not occur at the workplace but while employees were being hazardous facilities. safety. taken from the workplace to their place of residence. Source: KTK OJSC
  • 43. OCCUPATIONAL HEALTH & SAFETY AND ENVIRONMENTAL PROTECTION Delivering promises92 93ENVIRONMENTAL PROTECTION Environmental impact issue Company efforts to minimize negative impact Air pollution Every five years the Company receives permits from the authorities for maximum allowable atmospheric emissions, and adheres to these limits. Emissions from mining and transport equipment are included in overallThe Company’s operations involve production processes that KTK puts great emissions. The acquisition of modern, lower-emission equipment and usehave a negative impact on the environment. This is manifested indisturbance of land for mining and stripping operations, dumping of emphasis on of high quality diesel fuel reduces overall emissions. Scrubbing filters are being installed at heat and electricity generating facilities.large amounts of overburden in external dumps, air pollution and environmentally safe Discharge of polluted water The Company is working on replacing obsolete and inefficient technologyrunoff. production practices using holding ponds and rock filtering dams with treatment of water and protection of the by modern pumping and filtration stations. The first such station was launched in 2011 and can clean runoff to drinking water quality. environment. The Company plans to build another four such stations over the next few years, enabling it to discharge clean water and minimize its environmental The Company is fully aware of its impact. role in preserving the environment for future generations and is doing Hazardous production waste The Company has classified 25 types of hazardous waste (such as batteries, mercury vapor lamps, tires, etc.) for which safe disposal everything in its power to minimize its contracts have been signed with subcontractors. negative impact. Kaskad-Energo has been conducting multi-stage cleaning of turbine oil from thermal generators since 2009, thus reducing disposal of dirty oil. Land disturbance The Company reclaims land disturbed by strip mining. The area of disturbed land subject to reclamation, the nature of the reclamation and the reclamation schedule are defined in project documentation before development of mining sites begins. Before the start of any industrial work that disturbs the land surface, the layer of fertile soil is removed to a depth of 30 cm and stored at speciallyThe Company’s efforts to minimize the environmental impact of designated sites until reclamation begins. Reclamation of disturbed land is carried out in two stages: filling in the mining site and grading; andits operations include: the biological stage, which involves applying the topsoil, fertilizing it andcompliance with gradual reduction of sound management of implementation operational planting perennial grasses.current legislation, emissions and discharge natural resources of progressive, planning takingindustry and corporate of pollutants, and environmentally into compliance The technical phase of the first reclamation is scheduled to begin in 2014standards regulating expansion of the friendly technologies with established at the Karakansky-South open-pit mine.company activities in the scope and volume of environmental impactarea of environmental production waste standardsprotection recycling
  • 44. CORPORATE GOVERNANCE Delivering promises94 12 CORPORATE GOVERNANCE 95Corporate governance Corporate governance structuresystemThe continual improvement of Kuzbasskaya Toplivnaya Company’s General Shareholderscorporate governance system is a key element in the success of the KTK’s fundamental internal regulatory documents in the area MeetingCompany’s business. The corporate governance system is based of corporate governance are: >> The Charteron standards set out in Russian legislation, but the Company also >> Regulation on the General Shareholdersstrives to comply with the latest world standards in corporate Meetinggovernance and apply best world practices. >> Regulation on the Board of Directors Audit Committee Board of Directors HR & Remuneration >> Regulation on the General Director Committee (2 independent directors) >> Regulation on the Audit Committee >> Regulation on Internal Control >> Regulation on the Human ResourcesIn its efforts to improve corporate KTK’s corporate governance and Remuneration Committee >> Regulation on Insider Informationgovernance practices, KTK also adheres system is based on the following General Director >> Code of Business Conductto the Code of Corporate Conduct principles: >> Regulation on Dividend Policy.recommended by the Federal Securities >> Equitable treatment of CompanyCommission of Russia (FCSM). shareholders, observation and These documents can be found on protection of their rights in accordance Kuzbasskaya Toplivnaya Company’sThe high corporate governance with current legislation website, in the Disclosure section, at First Deputy General Director hhttp://oaoktk.ru/en/investors/disclosure/.standards adopted by KTK assure >> An effective system of internal controlshareholders and investors that and audittheir legal rights and interest will >> Information and financial transparencybe observed, and help to improve >> Observation of ethical standards of Deputy Deputy Deputythe process of making management business conduct Deputy General General General General Director, Director, Director,decisions aimed at preserving assets >> Productive collaboration with Director Sales Legal Regional Developmentand maximizing the Company’s profits Company employees in tackling socialand market capitalization. issues and providing appropriate working conditions. Deputy На сегодняшний день Deputy Deputy General General General Technical основополагающими внутренними Director, Director, Director, Director Capital Production Economics & Finance ConstructionIn line with the Federal Law On Joint Stock Companies and Kuzbasskaya Toplivnaya Company’s Charter, theCompany’s system of management bodies consists of the following levels: 1 General Shareholders Meeting 2 Board of Directors 3 General Director
  • 45. CORPORATE GOVERNANCE Delivering promises96 97General Shareholders Meeting Board of DirectorsThe Company’s highest management body is the General The Board of Directors is a collegial body that is responsible for general management of the Company’sShareholders Meeting. The Company holds an annual general business with the exception of issues that Russian legislation and the Company Charter reserve for themeeting of shareholders once a year. General shareholders authority of the General Shareholders Meeting.meetings held in addition to the annual meeting are extraordinary.The 2011 annual general meeting of They also approved the following The Company held a General Members of the Board of Directors In accordance with the Code of KTK’s current Board of Directorsshareholders was held on June 23. At documents: Shareholder Meeting in April 2012, at are elected by a general meeting of Corporate Conduct recommended by the was elected at the annual Generalthis meeting, shareholders approved the >> A new version of Kuzbasskaya which shareholders reviewed the results shareholders for a term until the next FCSM of Russia, independent directors Shareholders Meeting on April 16, 2012Company’s annual report and annual Toplivnaya Company’s Charter of 2011, and approved the annual report general meeting of shareholders. If have been elected to the Company’s and includes:financial statements for 2010, elected >> A new version of the Regulation on the and annual financial statements for 2011. the annual general meeting is not held Board of Directors since 2010.the Board of Directors and confirmed the General Shareholders Meeting They voted to pay dividends for 2011 of within the timeframe defined by theauditor to Russian Accounting Standards >> A new version of the Regulation on the 595,550,130 rubles (6 rubles per share). Company Charter, the powers of thefor 2011. Shareholders voted to pay out Board of Directors CJSC Balance Consulting Group was Board of Directors are suspended with297,775,065 rubles (3 rubles per share) >> A new version of the Regulation on the again confirmed as KTK’s auditor for the exception of the authority to prepare,in dividends for 2010. General Director 2012. Shareholders also elected a new call and conduct a general meeting of >> A Regulation on the Internal Audit Board of Directors, details on which can shareholders. Commission. be found in the section on the Board of Directors.
  • 46. CORPORATE GOVERNANCE Delivering promises98 99 Vadim Igor Eduard Yury Danilov Prokudin Alexeenko Fridman Chairman of the Board Board Member Board Member Independent DirectorMr. Danilov, born in 1968, graduated from the Novosibirsk Humanities Mr. Prokudin, born in 1955, graduated as a mining engineer from the Mr. Alexeenko, born in 1976, graduated from the Kuzbass State Mr. Fridman, born in 1944, graduated from the Kuzbass PolytechnicInstitute with a degree in Economics. Kuzbass Polytechnic Institute in 1982 and earned a PhD in economics Technical University with a major in economics and mining industry Institute in 1967 with a major in basic organic and petrochemical in 2006. management. synthesis technology and qualification as a chemical engineer. HePrior to joining Kuzbasskaya Toplivnaya Company, Mr. Danilov held earned a PhD in economics in 1987 and was named a professor in thesenior management positions as a deputy director for sales, vice In his early career he worked as a mine crew foreman, process Prior to joining the Company, from 1997 to 2000, Mr. Alexeenko worked management department in 1990. He has studied economic planningpresident for sales and general director. manager, mining district supervisor, deputy director of production and as chief engineer in the finance and economic analysis department, at Stanford University, and corporate and organizational management chief engineer at the Chernigovsky open-pit mine. From 1991 to 1995 chief economist in the financial planning and analysis department at Penn State University in the United States, as well as businessHis work in the Kemerovo Region’s coal industry has been recognized he held the post of deputy head of the Kemerovo Region administration, and as head of the financial planning and analysis department of consulting at Sema Group in Belgium.with awards for his contribution to the development of the Kuznetsk and from 1997 to 2000 he was deputy general director and vice Kuzbassrazrezugol Holding Company.Basin and business innovation, among others. president at Kuzbassrazrezugol Holding Company. Yury Fridman has been working at the Institute for Economics and Eduard Alexeenko joined state enterprise Kuzbasskaya Toplivnaya Organization of Industrial Production at the Siberian Branch of theVadim Danilov has been the Company’s deputy general director In 2004 the regional administration awarded him the honorary title Company in August 2000 as head of the finance and economics Russian Academy of Sciences since 1968 and has authored more thansince December 2002 and chairman of the company’s board since of Distinguished Miner of Kuzbass, and in 2008 the Kemerovo Region department. In 2001 he was appointed deputy general director for 200 publications in the course of his career.October 2008. Governor awarded him the Kuzbass Gold Badge. In the course of his finance at Kuzbasskaya Toplivnaya Company OJSC, the state firm’s long and productive career in the Kuzbass coal industry Mr. Prokudin successor, and in 2006 he became the Company’s deputy general He did not own any shares in the Company as of December 31, 2011.Mr. Danilov controlled 15.6% of the Company’s shares as of has also earned other awards, including in recognition of his director for economics and finance. In 2009, he was named first deputyDecember 31, 2011. He also serves as a director on the boards of contribution to the development of the Kuznetsk Basin and work in the general director.Kuzbasstoplivosbyt, Altay Fuel Company and Transugol. mining industry. His work in the Kemerovo Region’s coal industry has been recognized He holds the Miner of Russia gold badge and in March 2010 the with several awards, including for contributions to the development of President of Russia issued a decree awarding him the honorary title the Kuznetsk Basin. Distinguished Miner of the Russian Federation. Igor Prokudin has held the position of General Director of KTK since 2001. Mr. Prokudin controlled 50.01% of KTK’s shares directly or as a beneficiary as of December 31, 2011.
  • 47. CORPORATE GOVERNANCE Delivering promises100 101 Remuneration to members of the Board of Directors General Director Mr. Prokudin, born in 1955, graduated as a mining engineer from the Kuzbass Polytechnic Institute in 1982 and earned a PhD in economics in 2006. Alex The Company’s chief executive body is the General Director, who Remuneration to members of the Board of Directors amounted Williams is elected at a general meeting of shareholders for a term of five In his early career he worked as a mine crew Independent Director to 20 million rubles for 2011. Combined with salary, bonuses foreman, process manager, mining district and other incentives, compensation to members of the Board of years in accordance with the Charter. The activities of the General supervisor, deputy director of production and Directors totaled 97.3 million rubles. Director are governed by the Regulation on the General Director. chief engineer at the Chernigovsky open-pit mine. From 1991 to 1995 he held the post of deputy head of the Kemerovo Region Remuneration, other compensation paid to members of the Igor Prokudin has held the position of General Director of administration, and from 1997 to 2000 he wasMr. Williams, born in 1968, graduated from the University ofSt. Andrews with a Bachelor’s degree in theoretical physics, and Board of Directors in 2011, RUB Kuzbasskaya Toplivnaya Company since 2001. deputy general director and vice president at Remuneration 20,044,118 Kuzbassrazrezugol Holding Company.earned an MBA from City University London. Salary 47,835,280 In 2004 the regional administration awardedMr. Williams previously worked at Vostok Nafta, a major investment Bonuses 25,511,135 him the honorary title of Distinguishedfund focused on the energy sector, where he was involved in protection Commissions 0 Miner of Kuzbass, and in 2008 the Kemerovoof minority shareholder rights at a number of Russian companies, and Region Governor awarded him the Kuzbasshas also worked in the area of private equity investment in the Russian Benefits 0 Gold Badge. In the course of his long andresource sector. Earlier, he worked in the consulting department of Paid expenses 684,081 productive career in the Kuzbass coalPricewaterhouseCoopers and an auditing services group in Moscow. Other material provisions 0 industry Mr. Prokudin has also earned other awards, including in recognition ofAlexander Arthur John Williams currently serves as an independent Other 3,278,671 his contribution to the development of thedirector at a number of Russian companies in the resource sector. Total 97,353,285 Kuznetsk Basin and work in the mining industry.Mr. Williams, a citizen of the UK, did not own any shares in KTK as of Source: KTK OJSCDecember 31, 2011. He holds the Miner of Russia gold badge and in March 2010 the President of Russia issued a decree awarding him the honorary Board Committees title Distinguished Miner of the Russian Federation. In order to improve its efficiency, the Board of Directors created Igor Prokudin has held the position of General the following committees. Director of KTK since 2001. >> Audit Committee, main goal of which is to help the Board of Directors to fulfill its responsibilities and make decisions Mr. Prokudin controlled 50.01% of KTK’s shares directly or as a beneficiary as of concerning financial reporting, audits and internal control. December 31, 2011. >> Human Resources and Remuneration Committee, the purpose of which is to develop and present recommendations to the Board of Directors on in the area of human resources and remuneration for senior executives, and on the Company’s policies and standards for selection of candidates to management bodies.
  • 48. CORPORATE GOVERNANCE Delivering promises102 103Senior ManagementEduard Alexeenko Alexander Artemenko Sergey Kovalenko Maxim Skorokhodov Vladimir Frantsen Alexey AlexeevFirst Deputy General Director Technical Director Deputy General Director, Production Deputy General Director, Legal Issues Deputy General Director, Regional Director, LLC Novosibirsk Fuel Development CorporationMr. Alexeenko, born in 1976, graduated from Mr. Artemenko, born in 1954, graduated Mr. Kovalenko, born in 1954, graduated Mr. Skorokhodov was born in 1975 andthe Kuzbass State Technical University with from the Kuzbass Polytechnic Institute from the Kuzbass Polytechnic Institute graduated from the law faculty of Kemerovo Mr. Frantsen, born in 1958, graduated Mr. Alexeev was born in 1964 anda major in economics and mining industry with a major in strip mining technology and with a major in strip mining technology and State University in 1998. After graduating he from the construction faculty of the Altay graduated from the economics faculty ofmanagement. mechanization. mechanization. worked at Kuzbassenergo. Polytechnic Institute. He went on to do post novosibirsk State University in 1990. He graduate studies and earned a doctorate. began his professional career in 1992 as aPrior to joining the Company, from 1997 to Alexander Artemenko joined Kuzbasskaya Sergey Kovalenko joined Kuzbasskaya In 2000, Mr. Skorokhodov studied under He was appointed head of the Construction senior engineer and then worked as a deputy2000, Mr. Alexeenko worked as chief engineer Toplivnaya Company as technical director Toplivnaya Company in 2005 as director of the presidential management training Materials department at Altay State Technical director of finance and financial director.in the finance and economic analysis in 2003. He was later transferred to the the Vinogradovsky mine, and was appointed program. He earned a management University in 1989 and became a professor Since 1998, he has held the positions ofdepartment, chief economist in the financial position of deputy general director for deputy general director for production in diploma from the Institute of Management in 1998. Mr. Frantsen worked as deputy economic analysis department head at RATM,planning and analysis department and as development, and then again returned to the 2009. and Marketing at the Russian Government’s general director at Sibirenergouglesnab and director of economics, deputy executivehead of the financial planning and analysis role of technical director. economics Academy. from 1993 and became general director director and deputy general director fordepartment of Kuzbassrazrezugol Holding of this company in 2004. In 2006 he was economics at RATM Group. In 2000, heCompany. Maxim Skorokhodov was appointed appointed head of Altay Fuel Company, was appointed deputy general director for deputy general director for legal issues at which was set up jointly with Kuzbasskaya economics at RATM-energo, where he wasEduard Alexeenko joined state enterprise Kuzbasskaya Toplivnaya Company in 2010. Toplivnaya Company. first promoted to first deputy general directorKuzbasskaya Toplivnaya Company in August From 2005 to 2010 he worked as director for and then, in 2001, general director.2000 as head of the finance and economics Ivan Gepting Andrey Magaev legal support at Siberian Cement Holding Vladimir Frantsen was appointed deputydepartment. In 2001 he was appointed deputy Deputy General Director, Sales Deputy General Director, Economics and Company. general director for regional development in Alexey Alexeev joined Kuzbasskayageneral director for finance at Kuzbasskaya Finance 2010. Toplivnaya Company in 2007 as head of theToplivnaya Company OJSC, the state firm’s Mr. Gepting was born in 1976 and graduated Sergey Sukhanov regional development department, and wassuccessor, and in 2006 he became the from the Kemerovo State University in Mr. Magaev, born in 1958, graduated from Deputy General Director, Capital appointed director of LLC novosibirsk FuelCompany’s deputy general director for 1998 with a major in finance and credit. the novosibirsk electrotechnical Institute in Construction Corporation in 2010.economics and finance. In 2009, he was 1981 and holds a PhD in technical sciences.named first deputy general director. Ivan Gepting has held the position of deputy From 1993 to 1997 he worked at various Mr. Sukhanov, born in 1958, graduated general director for sales at Kuzbasskaya major financial institutions in novosibirsk, from the Kuzbass Polytechnic Institute inHis work in the Kemerovo Region’s coal Toplivnaya Company since 2001. He has and from 1997 to 2004 he was deputy director 1991 and has worked in the Kuznetsk Basinindustry has been recognized with several also held the post of general director at for investment and general director of the construction sector since 1997.awards, including for contributions to the management company CJSC Kaskad since RATM group in Novosibirsk.development of the Kuznetsk Basin. 2001, and sits on the boards of directors Sergey Sukhanov has been deputy at Kaskad-energo, Transugol and Altay Andrey Magaev, who joined Kuzbasskaya general director for capital construction Fuel Company. Toplivnaya Company in 2005, was appointed at Kuzbasskaya Toplivnaya Company since deputy general director for finance in 2009 2006. and became deputy general director for economics and finance in 2011.
  • 49. CORPORATE GOVERNANCE Delivering promises104 105Maxim OvcharovGeneral Director of OJSC Sergey Meshcheryakov General Director, LLC Meret Freight Control and audit elimination of violations; analyzes the results of Company audits; and preparesKuzbasstoplivosbyt, General Director of Forwarding Company proposals to improve internal controlOJSC Altay Fuel Company Internal control at the Company is implemented jointly by the procedures. Mr. Meshcheryakov, who was born in 1968,Mr. Ovcharov, born in 1977, graduated from graduated from the Omsk State Railways Board of Directors, the Audit Committee, the General Director,the Kuzbass Polytechnic Institute. In 1999, he Academy with a major in locomotives. He the Internal Control Committee and other employees to monitor External audits are conducted by independent auditors to Russianwas hired as a specialist in the distribution has been working in the Kuznetsk Basin compliance with procedures intended to achieve set goals in thedepartment of Kuzbasskaya Toplivnaya coal (Kuzbass) industry since 1989, in the and international financial reportingCompany. area of industrial railroad transport, holding following areas: standards. The auditor to Russian positions ranging from assistant locomotive >> Efficient and effective business operations accounting standards is appointed byMaxim Ovcharov has been general director engineer to freight car depot director and >> Reliable and accurate reporting the General Shareholders Meetingof Kuzbasstoplivosbyt since 2004 and was railroad transport division head. >> Compliance with regulations and the Company’s internal documents.appointed general director of Altay Fuel on the recommendation of the BoardCompany in 2010. Sergey Meshcheryakov joined Meret Freight of Directors. The auditor of financial Forwarding Company (TeKM) in 2005 and was statements prepared to international In the interests of complying with the effectiveness of the internal controlAndrey Trofimov appointed general director in 2010. listing conditions of Russia’s Moscow system, as well as monitoring of standards is appointed by the GeneralGeneral Director, Director on instructions from the Board ofLLC Transugol Pavel Rybko Exchange MICEX-RTS, based on the compliance with procedures set out in the Directors. General Director, OJSC Kaskad-Energo Russian Federal Financial Markets Regulation on Internal Control.Mr. Trofimov, born in 1970, holds three Service’s Regulation on the Organizationhigher vocational certifications. He was Mr. Rybko, born in 1957, graduated from In pursuit of the goals mentioned above, The audit of the Company’s financial of Trading on the Securities Market,appointed head of the sales department at the S.M. Kirov Polytechnic Institute the Internal Control Committee conducts statements for 2011 prepared to Russian the Company has a department thatLLP Industrial Ventilation in 1994. In 1996, in Tomsk in 1980 as an electrical Accounting Standards was done byhe moved to the Omsk branch of Inkombank, engineer. After graduation he worked in monitors compliance with internal audits and internal investigations in key areas of the Company’s financial CJSC Balance Consulting Group.and subsequently became a manager in Turkmenistan for the elektrosibmontazh control procedures: the Internal Controlthe client development department of the state trust, and from 1985 to 1991 he and business operations; analyzes the ZAO KPMG was appointed to conduct Committee, which operates on the basis ofcorporate banking division. In 1999, he was worked as a foreman and then as chief results of such audits and investigations; the audit of financial statements for the Regulation on Internal Control.appointed head of licensing at the Regional power engineer at the Anzhero-Sudzhensk maintains a record of detected violations 2011 prepared to International FinancialState Oil Inspection Office for the Omsk chemical and pharmaceutical plant. Reporting Standards.Region. In 2001, he was appointed head of the The Internal Control Committee’s and reports on such violations to the Auditfuel and lubricants department at Omsk Fuel Pavel Rybko has been general director of responsibilities include direct assessment Committee of the Board of Directors andCompany and in 2002 he became head of this the Anzhersk Combined Heat-and-Power of the adequacy, sufficiency and to the General Director; monitors thefirm. Plant, now known as Kaskad-energo, since 1991.Andrey Trofimov has been general director ofTransugol since 2004. Company auditor for Russian Company auditor for IFRS financial statutory financial statements: statements: CJSC Balance Consulting Group ZAO KPMG Russian Finance Ministry License No. Е002704 (issued Dec 10, 2002; #3035 – 18/1 Olimpiysky Prospekt, Moscow 129110 expiration Dec 10, 2012) Tel: +7 (495) 937-44-77 #2 – 21/1 Ulitsa Lenina, Novosibirsk 630004 Fax: +7 (495) 937-44-99 Tel: +7 (383) 319-18-97 e-mail: mosсow@kpmg.ru e-mail: info@balans.ru www.kpmg.ru www.balans.ru
  • 50. COMPANY HISTORY Delivering promises 13 COMPANY HISTORY106 107The Company took its current form following the restructuring ofOJSC Kuzbasskaya Toplivnaya Company after its merger with KeNoTEKin 2006. History of LLC KeNoTEK History of Kuzbasskaya Toplivnaya Company OJSCThe administrations of the Kemerovo and Novosibirsk The Kemerovo Region administration founded the wholly In 2006, KTK was restructured following its merger with In 2010, the Kaskad plant opened and produced its firstregions decided in April 1999 to set up coal mining company government-owned Kuzbasskaya Toplivnaya Company in 2000. KeNoTEK. The same year, the Company began exploration work 200,000 tonnes of washed coal. The same year, KTK heldLLC KeNoTEK in the city of Kemerovo in order to provide a at Cheremshansky, and 15.4 km of rail lines were launched that an IPO on the Russian stock market, offering investorsreliable supply of coal to households and organizations in these In 2001, this company was reorganized into an open joint stock made it possible to double coal shipments from mines in central 38.3 million shares (including 14.9 million new shares andregions. The same year, the company secured the license to the company and all its shares were bought out by management. Kemerovo Region. 23.4 million existing shares). As a result of the IPO, the majorityKarakansky-South strip mining property and began developing shareholders’ interest in the Company decreased to 65%it, including construction of rail lines linking the property to the In 2003, Kuzbasskaya Toplivnaya Company secured the In 2007, the Company completed exploration work and began from 89%.Russian Railways Ministry’s Meret station. license to the Vinogradovsky strip mining property. The same building the Cheremshansky open-pit mine. It also set up year, the Company and the Kemerovo Region Administration Altay Fuel Company to sell coal in Altay Territory. In 2011, KTK began building a second washing plant at theThe Karakansky-South mine produced its first coal in 2000. founded OJSC Kuzbasstoplivosbyt to develop retail sales, Vinogradovsky mine with capacity of 4 million tonnes, and and OJSC Kaskad-Energo was founded on the basis of the In 2008, the Company launched the Cheremshansky mine, completed a major overhaul of the Uba coal transfer stationIn 2001, the company’s management bought out the stakes held Anzhero‑Sudzhensk combined heat-and-power plant to supply the largest open-pit mine by design capacity to be opened in that expanded its throughput capacity from 12 million tonnesby the Kemerovo and Novosibirsk regions. The same year, the power to local residents and enterprises. the Kuznetsk Basin in the past 20 years. The Company also to 16.7 million tonnes. The Company also acquired the licensecompany built two railroad coal collection stations: Uba with launched 10 km of approach lines at the Cheremshansky mine to develop the Bryansky section of the Karakanskoye coal field,access to the mainline of Russian Railways and Karakanskaya In 2004, Vinogradovsky mined its first coal, and the Company and the Kaskad coal transfer station. In addition, Novosibirsk which borders on the Karakansky-South mine and holds categorySouth. Rail lines at the Karakansky-South mine totaled 10.5 km. launched 7.3 km of approach rail lines and opened the Fuel Corporation was founded to sell the Company’s coal in the С2 coal reserves of 250 million tonnes. Vinogradovskaya coal transfer station. Novosibirsk Region. KeNoTEK secured the license to the Karakansky-South-1property in 2003 and began strip mining coal at the property In 2005, the Company acquired the license to the Cheremshansky In 2009, KTK began construction of its first washing plant, Kaskadin 2005. strip mining property, as well as the licenses to develop the at the Cheremshansky mine, with capacity of 2 million tonnes per Karakansky-South 2 and Vinogradovsky 2 properties, which are year.In 2006, KeNoTEK was reorganized into an open joint stock cutbacks of the main properties.company and merged with Kuzbasskaya Toplivnaya Company.
  • 51. FINANCIAL RESULTS Delivering promises 14 FINANCIAL RESULTS108 109Key financial and operating results The average price of coal sold by the Company (both export and domestic) As revenue grew faster than costs in 2011, the Company’s gross profit The total debt amounts to 50% of the Company’s equity, which is high thanksof the group rose by 25.7% in 2011 to 1,228 rubles per tonne net of VAT and excluding railroad jumped 68% to 4.535 billion rubles from 2.703 billion rubles in 2010. to 43% growth of retained earnings in 2011 and additional paid-in capital of tariffs, from 977 rubles in 2010. The Selling, administrative and other 2.829 billion rubles following the 2010 RUB mln 2007 2008 2009 2010 2011 average price on the domestic market operating expenses rose more slowly, IPO. Coal production, mln tonnes 4.1 5.48 6.15 6.8 8.7 rose faster than the export price, so operating profit more than doubled, Change, % 34 % 12 % 11 % 29 % climbing 28.6% to 1,213 rubles per tonne growing 114% to 2.895 billion rubles in The Company continued to implement its Coal sales, mln tonnes 5.4 7.54 7.41 8.54 10.7 from 943 rubles. The average export 2011 from 1.353 billion rubles in 2010. long-term investment program in 2011. Change, % 40 % –2 % 15 % 25 % price increased by 21.2% to 1,237 rubles EBITDA grew by 83% to 3.911 billion Cash flow spent on investment in plant in 2011 from 1,021 rubles in 2010. As a rubles in 2011 from 2.134 billion rubles and equipment and intangible assets Including coal resale, mln tonnes 1.46 2.3 1.38 2.16 2.1 result, the spread between export and in the previous year. The U.S. dollar totaled 2.581 billion rubles, which was Change, % 57 % –40 % 56 % –4 % domestic prices narrowed to almost equivalent of EBITDA increased by 90% up 3.3% from 2.499 billion rubles in 2010. Revenue 3,864 8,557 10,658 14,160 23,939 zero in 2011, while in previous years it to $133 million9, which was in line with During 2011 KTK; Change, % 121 % 25 % 33 % 69 % was substantial. An important reason for management forecasts. >> acquired the license to develop the the more rapid growth of the domestic Bryansky section of the Karakanskoye EBITDA 475 2,172 2,178 2,134 3,911 price was the increase in the proportion The Company increased net profit by thermal coal field; EBITDA margin 12 % 25 % 20 % 15 % 16 % of sorted coal in the Company’s sales 145% in 2011, to 2.018 billion rubles >> began construction of a second Net profit (loss) –106 1 102 663 823 2,018 structure, the sales margin on which is from 823 million rubles in 2010. This washing plant with capacity of Net margin –3 % 13 % 6 % 6 % 8 % considerably higher. was not only due to the growth of sales 4 million tonnes; Production cash cost per tonne of coal, RUB 334 377 432 509 652 and average coal prices, but also to >> completed an overhaul of the Uba The growth in sales volume and prices the reduction of the effective profit tax sorting station; and Change, % 13 % 15 % 18 % 28 % in 2011 had a positive impact on the rate to 21% from 23%. Key profitability >> acquired modern mining and transport Net debt 3,087 3,370 3,773 1,754 2,663 Company’s financial results. Revenue equipment. indicators also grew in 2011, with the Net debt/EBITDA 6.5 1.6 1.7 0.8 0.7 grew by 69% to 23.939 billion rubles net profit margin reaching 8% and the in 2011 from 14.160 billion rubles in EBITDA margin increasing to 16%. The capital expenditures were easily 2010. However, the Company’s main covered by operating cash flowKTK increased coal production and The Kaskad washing plant, which was was driven primarily by exports, which expenses also increased. Transportation The growth in operating and financial (2.844 billion rubles) and cash flowsales in 2011, moving closer toward launched in August 2010, achieved grew to 61% of sales in 2011 from 44% in costs per tonne of coal rose 56% to results was accompanied by an from financing activities (1.906 billionachieving its long-term goals. Coal full capacity in 2011 and produced 2010. The Company exported 6.45 million 996.50 rubles from 637 rubles in 2010 as increase in the total debt, which rose rubles). As a result, the net increase inproduction rose 29% to 8.7 million 0.74 million tonnes of export quality tonnes of coal, making it Russia’s fifth coal transport tariffs increased and the to 4.547 billion rubles in 2011 from cash and cash equivalents amounted totonnes thanks to the steady growth coal, compared to 0.2 million tonnes in largest coal exporter. Due to the strong share of exports on DAF and CPT terms 2.211 billion rubles at the end of 2010. 1.440 billion rubles in 2011, compared toof extraction at the Company’s three 2010. Coal sorting at mobile crushing demand for thermal coal on international grew. Production cash costs increased The net debt grew by 52% to 2.663 436 million rubles in 2010.open-pit mines, propelling KTK into and sorting units increased by 36% markets and growth of exports, the by 28% to 652 rubles per tonne in 2011 billion rubles. However, the Company’sthe ranks of Russia’s top ten producers to 5.6 million tonnes. As a result, the Company reduced coal sales on the from 509 rubles in 2010 due to higher debt burden remains low, and theof thermal coal. The strongest growth share of run-of-mine coal not processed domestic market by 14%. Nonetheless, personnel expenses, an increase in the net debt/EBITDA ratio dropped to justwas at the Cheremshansky mine, which and sorted fell below 30% for the first in order to preserve leading positions stripping ratio and a change in mining 0.68 as of December 31, 2011 from 0.82 ahas the highest quality coal produced time, dropping to 28% in 2011 from 37% on the domestic market, particularly and geological conditions that pushed year earlier. Interest payments on loansby the Company. This mine produced in 2010. in Western Siberia, the Company up expenses on blasting work and coal are covered by profit before taxes and3.8 million tonnes of coal in 2011, up maintained purchases and resale of transportation. In addition, the price of interest by a factor of 13, and the averagefrom 2.6 million tonnes in 2010. KTK’s coal sales in all markets grew by third-party coal at approximately the coal purchased from third parties rose effective borrowing rate dropped from 25% to 10.7 million tonnes in 2011 from same level: 2.1 million tonnes in 2011 42% to 1,052 rubles per tonne from 7.7% to 5.2% in 2011, which will enable 8.5 million tonnes in 2010. The growth compared to 2.2 million tonnes in 2010. 740 rubles in 2010. the Company to save on debt servicing. 9 At Central Bank of Russia’s average exchange rate of 29.39 rubles/$1 for 2011.
  • 52. FINANCIAL RESULTS Delivering promises110 111Financial results analysis Cost of salesRevenue RUB mln 2011 2010 Change Structure, 2011 Cost of sales 19,404 11,457 69 % 100 % RUB MLN 2011 2010 Change Structure, 2011 including: Revenue 23,939 14,160 69 % 100 % Railroad tariff and transportation services 10,623 5,437 95 % 55 % Of which by segment: Production cash costs of KTK 5,702 3,462 65 % 29 % Export sales of coal produced 17,127 8,178 109 % 72 % Purchased coal 2,189 1,595 37 % 11 % Domestic sales of coal produced 4,026 3,144 28 % 17 % Depreciation 965 755 28 % 5 % Resale of third-party coal 2,227 2,273 –2 % 9 % Other costs 405 370 9 % 2 % Other operations 559 565 –1 % 2 % Change in provisions for land reclamation –20 3 –767 % Change in coal inventories –460 –165 179 %KTK’s consolidated revenue grew 69% to external markets, but the 28.6% Revenue from other operations in 2011in 2011 to 23.939 billion rubles from increase in the realized price on the was little changed at 559 million rubles,14.160 billion rubles in 2010, as the domestic market offset the drop in sales compared to 565 million rubles in KTK’s cost of sales increased by 69% is actively expanding its fleet of freight The change in mining and geologicalvolume of coal sales increased by 25% volume. Revenue also grew due to an 2010. This segment saw an increase in in 2011 to 19.404 billion rubles from cars, which KTK leases at fixed rates conditions involved the recalculationand the average realized coal price (net increase in the overall transport costs of revenue from sales of heat generated 11.457 billion rubles in 2010. This was under long-term contracts. KTK intends of the optimal incline of a pit wall fromof VAT and railroad tariffs) rose by 25.7% delivering coal to Russian customers, as at the Anzhero-Sudzhensk combined primarily due to a dramatic increase to completely transition to using freight 40 to 17 degrees due to appearancecompared to the previous year. Revenue the average shipping distance increased. heat-and-power plant by 5% year-on- in transportation costs, growth of cars leased from the joint venture, in which of cracks in the course of extraction.net of delivery costs included in the price The Siberian Federal District accounted year to 248 million rubles, and a 26% production cash costs and increase in case leasing rates will be fixed for a period This lead to an increase in the strippingof coal for end consumers grew by 57%. for 91% of coal sold in Russia in 2011, increase in storage services to 63 million the cost of coal purchased for resale. of 10 years and shipping costs will only ratio, but reduced the risk of the mine down from 97% in 2010. The other 9% rubles. Revenue from transporting coal change depending on the distance and the wall collapsing. There was additionalExports made the greatest contribution was shipped to other regions more for neighboring producers along the Transportation costs rose by 95% RZD tariff for shipping coal. The Company stripping at the Vinogradovsky mine into overall revenue growth in 2011. distant from the Kuznetsk Basin. Company’s own railroad infrastructure to 10.623 billion rubles and amounted to now has about 3,100 of its own freight order to ensure a sufficient supply forRevenue in this segment more than decreased by 17% to 141 million rubles. 55% of the Company’s total cost of sales, cars, which cover about half of its export the second washing plant to be launcheddoubled to 17.127 billion rubles in 2011 In order to preserve and strengthen up from 47% in 2010. These costs grew shipments. in the fourth quarter of 2012, the designfrom 8.178 billion rubles in 2010, as its leading positions on the domestic as the volume of coal exported on DAF capacity of which has been doubled fromexport shipments increased by 74.4% market, particularly given the reduction and CPT terms increased by 74.4% to Production cash costs rose 65% in 2 million to 4 million tonnes.and the average realized export price, in sales of produced coal in Russia, 2.79 million tonnes, RZD tariffs rose (by 2010, primarily due to higher personnelnet of transportation costs, rose by KTK maintained purchases and resale 20.1% to 1,421 rubles per tonne for export costs and growth of coal extraction The additional stripping of overburden at21.2%. Prices rose as world demand of third-party coal in 2011 at about shipments) and leasing rates increased for costs. The latter, in turn, was driven by a the Cheremshansky mine in 2011‑2012for coal recovered. Export revenue net the same level as in the previous year. freight cars to ship coal to customers. As 220% increase in the volume of stripping will subsequently be treated as strippingof transportation costs included in the Resale volume decreased by 4% and a result, transportation costs per tonne of work (which the Company outsourced), of future periods, because miningprice of coal grew 108.4% year-on-year. revenue in this segment slipped 2% sold coal rose by 56%, from 637 rubles to an increase in the price of this work operations will be conducted at this to 2.227 billion rubles in 2011 from 996.50 rubles per tonne. and higher diesel fuel prices. Cash section of the pit side. Therefore, in theRevenue from domestic sales of 2.273 billion rubles in 2010. costs were also pushed up by a 35.6% long-term the stripping ratio should seeproduced coal grew by 28% to In order to reduce the freight car increase in coal sorting volume, changes a decline.4.026 billion rubles in 2011 from Total revenue from coal sales in Russia component of the transport tariff, KTK is in the mining and geological conditions3.144 billion rubles in 2010. Coal grew 15% to 6.253 billion rubles in 2011 investing heavily in its own fleet of freight that increased the stripping ratio, anddeliveries to the domestic market from 5.417 billion rubles in the previous cars. The Company has formed the joint an increase in rock blasting and coaldecreased by 14% year-on-year as the year. Revenue on the domestic market venture Kuzbass Transport Company transport costs within the mining area.sales focus for produced coal shifted net of transportation costs included in in partnership with a leading Russian the price of coal increased by 13%. railroad transport company. This venture
  • 53. FINANCIAL RESULTS Delivering promises112 113Key production indicators affecting growth of cash costs RUB mln 2011 2010 % Consolidated cost of sales 19,404 11,457 69 % 2011 2010 % Less: Coal production, mln tonnes 8.7 6.8 29 % Cost of sales of subsidiaries –2,198 –2,261 –3 % Stripping volume, mln m3 68.1 49.5 38 % KTK cost of sales 17,206 9,196 87 % Blasted rock, mln m3 32.8 25.4 29 % Less: Stripping ratio, t/m3 7.8 7.3 7 % Depreciation –907 –687 32 % Average overburden transport distance, km 2.9 2.7 6 % Purchased coal –549 –595 –8 % Change in inventory 132 181 –27 %The 38% increase in stripping volume and in the fourth quarter, and in December This proved prescient and the expenses Railroad tariff and transportation expenses –10,180 –4,633 120 %6% increase in the average overburden paid bonuses to employees for years on repairs and maintenance justified as Total production cash costs 5,702 3,462 65 %transportation distance pushed up of service. The Company’s workforce production in the second half of the year Coal production, mln tonnes 8.74 6.8 29 %expenditures on equipment repairs and itself also grew with the launch of new grew by 30% compared to the first half. Production cash costs, RUB/t 652 509 28 %purchases of new equipment. This in equipment and operation of the Kaskadturn increased fuel expenses, both due to washing plant at full capacity (the staff The factors mentioned above increasedgreater consumption and higher prices. of the plant affected costs in only one cash costs per tonne of coal producedMarket prices for diesel fuel jumped quarter in 2010, but in 2011 for the whole by 28%, to 652 rubles per tonne from The cost of coal purchased from third positions in Western Siberia, while still electricity consumption due to increased23.4% in the fourth quarter of 2011, and year). 509 rubles. These costs were virtually parties, which amounted to 11% of cost allowing it to increase exports of its own power supplies for the washing plant.rose by 41.2% in the year overall. This unchanged as a share of total costs, of sales, increased by 37% to 2.189 billion high‑calorie coal.was compounded by a 10-15% increase The cost of spare parts and equipment remaining at 30%. rubles in 2011, net of changes in coal Coal inventories at the Company’sin fuel consumption by all mining and maintenance rose by more than 50% inventories, from 1.595 billion rubles Other cost of sales items warehouses increased by 460 milliontransportation equipment in the fourth in 2011. This was primarily due to the in 2010. The volume of coal purchases Depreciation included in the cost of sales rubles in 2011, compared to 165 millionquarter due to the switch to winter increase in the amount of equipment, from third parties was little changed increased by 28% to 965 million rubles rubles in 2010. This was due to anconsumption rates. and secondly to the Company’s efforts in 2011, so the growth of this cost item in 2011 from 755 million rubles in 2010. increase in coal purchases to form to conduct the maximum number of was due to a 42% increase in the price This growth was due to the launch of a reserves for 2012, as well as to lowerSalary expenses, which make up a scheduled repairs of mining equipment of purchased coal. The realized coal considerable amount of capital assets than expected retail sales in Decemberconsiderable share of production costs, and machinery in the second quarter in price on the domestic market rose more related to the modernization of the Uba 2011 because of the relatively warmincreased as the Company indexed wages order to reduce equipment downtime slowly, which reduced the operating coal transfer station, construction of weather.by 10% in February and by 5% in October and ensure continuous operation in the margin on sales of third-party coal. a mobile facility to produce emulsion2011, raised wages for drivers of mining third and fourth quarters in anticipation of Nonetheless, these operations are explosives, and the acquisition of variousand transport equipment by up to 15% production growth. extremely important for the Company mining and transport equipment and because they enable it to build a more machinery. Depreciation amounted to flexible distribution system and mitigate 5% of KTK’s cost of sales in 2011. fluctuations in the volume of production and sales of KTK’s own coal over the Other costs, including leasing of course of the year. Purchased coal equipment, electricity and other also gives the Company additional expenses, rose by 9% to 405 million sales volume to maintain its leading rubles, primarily driven by the growth of
  • 54. FINANCIAL RESULTS Delivering promises114 115Gross profit Distribution, administrative and other operating expenses RUB mln 2011 2010 %RUB mln 2011 2010 % As revenue grew more rapidly than Distribution, administrative & other operating expenses 1,640 1,350 21 %Gross profit 4,535 2,703 68 % costs in 2011, the Company’s gross Including:Gross margin 19 % 19 % –0.1 % profit increased by 68% to 4.535 billion Distribution expenses 654 540 21 %Of which by segment: rubles from 2.703 billion rubles in 2010. Administrative expenses 1,010 849 19 %Export sales of produced coal 2,927 1,271 130 % The gross margin remained unchanged Other operating expenses (income) –24 –39 –38 %Gross margin 17 % 16 % 1.6 % at 19%. Distribution, administrative & other operating expenses/Revenue 7 % 10 % –3 %Domestic sales of produced coal 1,078 711 52 %Gross margin 27 % 23 % 4.2 % Export sales of produced coal madeResale of purchased third-party coal 374 487 –23 % the largest contribution to gross profit: Distribution, administrative and other the expansion of the workforce due to In the case of distribution expensesGross margin 17 % 21 % –4.6 % 65% in 2011 compared to 47% in 2010. operating expenses rose by 21% the growth of sales and operation of the there is a direct link, while in the case ofOther operations 156 174 –10 % However, the highest gross margin to 1.640 billion rubles in 2011 from washing plant. Service expenses rose administrative expenses the correlationGross margin 28 % 31 % –2.9 % among the Company’s core activities 1.350 billion rubles a year earlier. by only 3.0% to 413 million rubles thanks is also evident, though to a lesser was in domestic sales of produced coal. Distribution and administrative to sound management. Expenses on degree. The margin in this segment jumped personnel costs increased by 32.2% property tax and other taxes increasedKTK gross profit by segment, RUB mln 4 percentage points to 27% in 2011, to 812 million rubles from 614 million by 18.7% to 146 million rubles, largely Despite the cost increases, the ratio of as domestic coal prices rose faster rubles in 2010 due to indexation of due to the launch of a large amount overhead expenses to revenue dropped Export sales Domestic sales Resale Other than export prices and the Company salaries by 10% in the first half of 2011 of capital assets in the course of the to 7% in 2011 from 10% in the previous of produced coal of produced coal of third-party coal operations increased the share of sorted coal and another 5% in the second half, an year. The growth of distribution and year. in total sales. The gross margin in unscheduled increase in salaries for administrative expenses was driven5,000 156 resale of purchased coal, meanwhile, selected categories of employees and primarily by growth in sales volume. 3744,000 1,078 fell to 17% from 21% in 2010 as prices for coal purchased from third parties3,000 2,927 rose dramatically. Other operations Operating profit, EBITDA and net profit – primarily electricity generation by2,000 subsidiary Kaskad-Energo and provision KTK’s operating profit more than 2.134 billion rubles in the previous year. to 2.018 billion rubles in 2011 from1,000 of coal storage and transportation doubled in 2011, growing 114% to EBITDA in the U.S. dollar equivalent 823 million rubles in 2010, as sales services – make a relatively modest 2.895 billion rubles from 1.353 billion increased by 90% to $133 million10, which volume increased and the average coal0 contribution to overall gross profit, but rubles in 2010. EBITDA grew by 83% was in line with management forecasts. price (net of VAT and the railroad tariff) have high a gross margin. to 3.911 billion rubles in 2011 from Net profit grew by an impressive 145% rose. Net profit also increased due to the reduction of the effective profit tax rate RUB mln 2011 2010 % to 21% from 23%. Operating profit 2,895 1,353 114 % Operating margin 12 % 10 % 3 % Profitability indicators rose across the Adjustments: board in 2012. The operating margin Depreciation charge 1,039 820 27 % increased to 12% from 10% in the Impairment loss –1 7 –114 % previous year, the EBITDA margin was (Profit)/loss from disposal of property, plant & up by one percentage point to 16% and equipment –22 –46 –52 % the net margin rose to 8% from 6%. EBITDA 3,911 2,134 83 % EBITDA margin 16 % 15 % 1 % Net profit 2,018 823 145 % Net margin 8 % 6 % 3 % 10 At Central Bank of Russia’s average exchange rate of 29.39 rubles/$1 for 2011.
  • 55. FINANCIAL RESULTS Delivering promises116 117Indebtedness in 2011 from 2.499 billion rubles in the year there was a net inflow of cash due As a result of these cash flows, there previous year. to a net increase in debt in the amount was a net increase in cash and cash RUB mln 2011 2010 % 0.68 as of December 31, 2011 from 0.82 of 2.204 billion rubles, and an outflow equivalents of 1.440 billion rubles in Long-term loans and credits 2,794 1,676 67 % a year earlier. A ratio of higher than 3 is Cash flow from financing activities of cash due to dividend distribution of 2011, compared to 436 million rubles Short-term loans and credits 1,753 535 228 % considered to be dangerous, while the increased to 1.906 billion rubles in 2011 298 million rubles. in 2010. Total debt, including: 4,547 2,211 106 % ceiling set by management to control the from 865 million rubles in 2010. Over the Ruble-denominated 647 228 184 % debt burden is 2. Foreign currency-denominated 3,900 1,983 97 % Balance sheet The the average effective borrowing Cash and cash equivalents 1,884 457 312 % rate dropped from 7.7% to 5.2% in 2011 Net debt 2,663 1,754 52 % RUB mln 2011 2010 Change Structure, 2011 following the restructuring of the foreign Interest expense 207 275 -25 % Non-current assets 10,455 8,852 18 % 65 % currency part of the Company’s debt. KTK’s finance department is working Current assets 5,673 2,787 104 % 35 %The Company increased its loan portfolio which enables the Company to more continually to optimize the loan portfolio. Total assets 16,128 11,639 39 % 100 %in 2011 as the scale of its business grew. precisely forecast cash flow for several The drop in debt servicing costs reduced Equity, including: 8,525 6,835 25 % 53 %Long-term debt grew by 1.113 billion years into the future. About 86% of loans interest expenses by 24.7% to 207 million Retained earnings 5,672 3,975 43 % 35 %rubles in 2011 to 2.794 billion rubles, are denominated in U.S. dollars, and only rubles in 2011 from 275 million rubles aand short-term debt more than tripled 14% are denominated in rubles. year earlier. Additional paid-in capital 2,829 2,829 0 % 17 %to 1.753 billion rubles from 535 million Non-current liabilities 3,837 2,472 55 % 24 %rubles in 2010. The Company’s total Despite the substantial increase in KTK has a reputation as a reliable Current liabilities 3,766 2,332 61 % 23 %debt stood at 4.547 billion rubles as of the loan portfolio, the Company’s debt borrower, which helps the Company to Total liabilities 7,603 4,804 58 % 47 %December 31, 2011. Long-term loans, burden remains low. The net debt maintain effective relationships with Equity and liabilities 16,128 11,639 39 % 100 %the terms of which are fixed for a long amounts to 2.663 billion rubles, and the lending institutions.period, make up 61.4% of the total debt, net debt/EBITDA ratio dropped to just The Company’s total assets stood at increased by 48% to 1.562 billion rubles shares in an IPO in 2010, proceeds 16.128 billion rubles at the end of 2011, because of VAT due for refund; and from which totaling 2.829 billion rubles up by 39% from 11.639 billion rubles a advances and prepaid expenses rose by formed KTK’s additional paid-in capital.Cash flow year earlier. 108% to 916 million rubles. In addition, The amount of additional paid-in capital cash and cash equivalents quadrupled did not change in 2011. RUB mln 2011 2010 % the construction of a mobile facility Non-current assets grew by 18% over over the year to 1.884 billion rubles, Cash flow from operations before tax on income and to produce emulsion explosives; the year to 10.455 billion rubles from 1.846 billion rubles of which was held The Company’s total liabilities excluding interest 2,844 2,321 23 % completed an overhaul of the Uba 8.852 billion rubles at the end of 2010. in a short-term deposit. Interest rates equity grew by 58% to 7.603 billion rubles Cash flow from operations 2,074 2,031 2 % sorting station; and built a plant to treat This was largely due to an increase in the on the Company’s short-term deposits in 2011 from 4.804 billion rubles in 2010. Cash flow used in investing activities –2,540 –2,435 4 % domestic and industrial waste water and value of property, plant and equipment, ranged from 5.6% to 8.5% in 2011, Non-current and current liabilities Cash flow from financing activities 1,906 840 127 % runoff. In December 2011, the Company which grew by 17.6% to 10.358 billion compared to 2.3-3.0% in 2010. increased by 55% and 61% respectively Net increase (decrease) in cash and cash equivalents 1,440 436 na acquired the license to develop the rubles from 8.804 billion rubles a year to 3.837 billion rubles and 3.766 billionOperating cash flow before income Cash flow used in investing activities Bryansky section of the Karakanskoye earlier. Non-current assets declined to The Company’s equity grew by 25% rubles. The growth was primarily driventax and interest increased by 22.5% to increased by 4% to 2.540 billion rubles coal field. Also, throughout the year 65% of total assets at the end of 2011 in 2011, to 8.525 billion rubles from by the increase of the Company’s loan2.844 billion rubles in 2011 as net profit from 2.435 billion rubles in 2010, as KTK acquired new mining and transport from 76% at the end of 2010. 6.835 billion rubles, as retained earnings portfolio, which is described in detailgrew while interest expenses decreased, the Company continued to implement equipment and machinery for its mines, increased by 43% to 5.672 billion rubles in the Indebtedness section. Liabilitieswhile cash flow from operations rose its ambitious long-term investment including 22 Belaz trucks, loaders, Current assets grew by 104% in 2011 to from 3.975 billion rubles in 2010. Equity also grew as payables increased by 11%by only 2% to 2.074 billion rubles in 2011 program: KTK began construction of dozers, shovels and drill rigs. Overall 5.673 billion rubles from 2.787 billion amounted to 53% of total liabilities at to 1.955 billion rubles with the receipt offrom 2.031 billion rubles in 2010 due to a second washing plant (Kaskad-2) cash flow spent on investment in plant rubles at the end of 2010. Inventories the end of 2011, which indicates the advances for coal deliveries in 2012.an increase in cash flow used to finance with a capacity of 4 million tonnes at and equipment and intangible assets rose by 68% to 1.275 billion rubles due to Company’s high equity ratio. This wasworking capital. the Vinogradovsky mine; completed increased by 3.3% to 2.581 billion rubles coal in storage and en route; receivables achieved with the placement of additional
  • 56. FINANCIAL RESULTS Delivering promises118 119Key financial ratios Liquidity ratios Leverage ratiosCurrent ratio Quick ratio Total debt to equity Interest coverage ratio RUB mln 2011 2010 % RUB mln 2011 2010 % RUB mln 2011 2010 % RUB mln 2011 2010 % Current assets 5,673 2,787 104% Quick assets (current assets net of Total debt 4,547 2,211 106 % Profit before interest and taxes 2,763 1,524 81% inventories) 4,398 2,028 117 % Equity 8,525 6,835 25 % Interest expense 207 275 –25% Current liabilities 3,766 2,332 61% Current liabilities 3,766 2,332 61 % Total debt to equity 0.5x 0.3x 0.2x Interest coverage ratio* 13.3x 5.5x 7.8x Current ratio * 1.5x 1.2x 0.3x Quick ratio * 1.2x 0.9x 0.3x * Profit before interest and taxes/Interest expense* Current assets to current liabilities * Quick assets to current liabilities. Turnover ratios KTK’s complete consolidated financial statementAsset turnover Inventory turnover for the year ended December 31, 2011 is available RUB mln 2011 2010 % RUB mln 2011 2010 % on the Company’s website, in the Investors section: Revenue 23,939 14,160 69% Cost of sales 19,404 11,457 69% Total assets at start of period 11,639 9,415 24% Inventory at start of period 759 405 87% http://oaoktk.ru/investors/ – Russian language, Total assets at end of period 16,128 11,639 39% Inventory at end of period 1,275 759 68% Asset turnover * 1.7x 1.3x 0.4x Inventory turnover* 19.1x 19.7x –0.6x http://oaoktk.ru/en/investors/ – English language.* Revenue / ((Total assets at start of period + total assets at end of period)/2) Inventory turnover period, days** 19.1 18.5 0.6 * Cost of sales/((inventory at start of period + inventory at end of period)/2) ** 365 days/inventory turnover Profitability ratiosReturn on Equity (ROE) Return on Investment (ROI) RUB mln 2011 2010 % RUB mln 2011 2010 % Net profit 2,018 823 145% Net profit 2,018 823 145% Equity at start of period 6,835 3,467 97% Equity at start of period 6,835 3,467 97% Equity at end of period 8,525 6,835 25% Equity at end of period 8,525 6,835 25% Return on Equity*, % 26% 16% 10% Total debt at start of period 2,211 3,859 -43%* Net profit/((equity at start of period + equity at end of period)/2) Total debt at end of period 4,547 2,211 106% Return on Investment*, % 18% 10% 8% * Net profit/((equity at start of period + equity at end of period + total debt at start of period + total debt at end of period)/2)
  • 57. Disclaimer CONTACTS This Annual Review may contain statements that are or could be considered “forward-looking statements” as defined by U.S. federal securities laws and, consequently, these statements fall under provisions of these laws that provide release from liability for acts committed in good faith. Examples of such statements include, but are not limited to, forecasts, projections, strategies, plans, targets, expectations, estimates, intentions and beliefs of the Company, including in regard to acquisitions, sales of goods or services, operating results, financial position, liquidity, prospects and dividend policy; statements concerning future production and business operations; other statements that do not strictly apply to events (facts), both past and present; and assumptions on which such statements are based.120 Forward-looking statements are inherently subject to risks and uncertainties, both general and specific, as well as risks that these statements will not be realized. In addition to other factors, forward-looking statements are based on many assumptions concerning the current and future strategy of the Company, as well as the circumstances in which theFull name: Open Joint Stock Company Contact for shareholders and Company will be conducting business in the future.Kuzbasskaya Toplivnaya Kompaniya investors: Vasily Rumyantsev The Company cautions that certain important factors could result in the Company’s assumptions being incorrect and couldAbbreviated name: Investor Relations cause actual results to differ materially from the forecasts, projections, strategies, plans targets, expectations, estimates,OJSC Kuzbasskaya Toplivnaya Tel.: +7 (495) 787 68 05 intentions and beliefs of the Company expressed in these forward-looking statements.Kompaniya Fax: +7 (495) 787 68 04 vkr@oaoktk.ru These factors include:Address: Skype: vasily.rumyantsev >> changes in political, social, legal or economic conditions in Russia as a whole or in regions of Russia where the Company4 Ulitsa 50 let Oktyabrya, conducts business, including changes in the level of spending on and demand for some or all of the Company’s goodsKemerovo 650000 Company auditor for Russian >> growth of market share of competitors, reduction of prices by competitors, unforeseen actions by competitors that couldMain State Registration number (OGRn): Statutory Financial Statements: affect market share, growth of expenses or hinder the growth of the Company1024200692009 CJSC Balance Consulting Group >> ability to conduct mergers, acquisitions, transfer of companies and shares, both present and future, and achieveTax Identification number (Inn)/ Russian finance Ministry License integration and expected benefits from joint operations and/or synergiesTax Registration Code (KPP): no. Е002704 (issued Dec 10, 2002; >> level of spending on market research, promotion of goods and innovation by the Company and its competitors4205003440/420501001 expiration Dec 10, 2012) >> ability of the Company to protect its rights to intellectual property #2 – 21/1 ulitsa Lenina, >> changes in legislation and regulations, changes in the policies of the Russian government and regional authorities,Mailing address: Novosibirsk 630004 including taxation4 Ulitsa 50 let Oktyabrya, Tel: +7 (383) 319 18 97 >> changes in the cost of resources and laborKemerovo 650000 info@balans.ru >> renewal of rights to distribution of goods and contracts on favorable terms following their expirationTel: +7 (3842) 364 762 www.balans.ru >> technological changes that could affect distribution of goodsFax: +7 (3842) 364 762 >> changes on the financial and securities markets, including significant fluctuations in interest rates and currencycompany@oaoktk.ru Company auditor for IFRS exchange rates, that could affect the Company’s access to financial resources, increase the cost of financing or affect the Financial Statements: Company’s financial resultsMoscow office: ZAO KPMG >> changes in reporting standards, applied policies and practices29 Serebryanicheskaya nab., #3035 – 18/1 Olimpiysky Prospekt, >> availability of qualified personnel, including accounting personnelMoscow 109028 Moscow 129110 >> ability to determine other risks related to the Company’s operations and avoid risks based on the above factorsTel: +7 (495) 787 68 04 Tel: +7 (495) 937 44 77ktk-moscow@oaoktk.ru fax: +7 (495) 937 44 99 This list of factors is not comprehensive. Readers of this Annual Review should carefully review these factors and other mosсow@kpmg.ru uncertainties and events that apply particularly to the political, economic, social and legal environment in which thePublic relations contacts: www.kpmg.ru Company conducts its business. These forward-looking statements are only relevant as of the date of this Annual Report,Elena Sarycheva and the Company does not assume any obligation to update or revise any of them.Head of Public Relations News and anounces on Facebook:4 Ulitsa 50 let Oktyabrya, www.facebook.com/oaoktk Readers should not place undue reliance on forward-looking statements. The Company is not making any assertions,Kemerovo 650000 assurances or forecasts that the expected results specified in such forward-looking statements will be achieved. SuchTel: +7 (3842) 364 762 Presentations on Slideshare: statements represent, in each case, only one possible case scenario and should be viewed as the more probable or standardFax: +7 (3842) 364 762 www.slideshare.net/oaoktk case scenarios.es@oaoktk.ru Video on Youtube: This Annual Review is not a solicitation or an offering of any securities. In some jurisdictions the use of information www.youtube.com/oaoktk contained in this Annual Review may be restricted or prohibited, either completely or to certain economic groups, such as persons who are not qualified investors. The reader should therefore inform themselves about any such restrictions and act accordingly.