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SCM Annual Report 2007

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SCM Annual Report 2007

  1. 1. SCM PUBLIC REPORT 2007
  2. 2. KEY FINANCIAL INDICATORS, SCM Assets, US $ million +75% 19,903 11,372 2006 2007 Equity, US $ million +85% 9,668 5,220 2006 2007
  3. 3. EBITDA, US $ million +71% 2,715 1,585 2006 2007 Revenue, US $ million +42% 9,563 6,719 2006 2007 Profit for the year, US $ million +94% 1,366 704 2006 2007
  4. 4. 4 SCM Group Annual Report 2007 CONTENTS CEO STATEMENT 6 KEY EVENTS OF 2007 9 SCM: IN STEP WITH THE MILLENNIUM 12 THE HISTORY OF THE GROUP 13 MISSION, VISION, VALUES 16 GROUP MANAGEMENT 18 THE GROUP’S CORPORATE STRUCTURE 34 Management Structure 34 Business Structure 38 SCM GROUP’S BUSINESSES 42 CORE BUSINESS AREAS Mining and metals 43 Energy 48 Financial services 52 ALTERNATIVE COMMERCIAL DEVELOPMENT Telecommunications 54 Real estate 56 Media 58 Clay mining 60 Retail trade 61 Petroproduct retailing 63
  5. 5. Contents 5 SOCIAL RESPONSIBILITY AND SUSTAINABLE GROWTH 64 THE SIX CSR POLICIES OF THE SCM GROUP Business and corporate ethics 67 Working conditions 68 The environment 71 Local communities 73 Social investments 75 Sponsorships and charity 77 BEST INFORMATION ANALYSIS CENTER (BUREAU FOR ECONOMIC AND SOCIAL TECHNOLOGIES) 78 SHAKHTAR FOOTBALL CLUB 79 FOUNDATION FOR THE DEVELOPMENT OF UKRAINE 80 KEY DIRECTIONS: STRATEGIC GROWTH AREAS FOR 2008-2012 82 KEY EXPECTED EVENTS FOR 2008 86
  6. 6. 6 SCM Group Annual Report 2007 CEO STATEMENT Dear Colleagues and Partners, The management model we have chosen enables us to diversify our investment priori- I am proud to present to you the 2007 Public ties across six main areas: mining and metals; Report of the SCM Group, Ukraine’s largest energy; finance; telecommunications; media diversified holding company. For SCM, this and real estate. As well as being present in year was marked by the continued restructur- each of these areas as a strategic investor, we ing of the Group and the dynamic growth and also understand the specifics of each industry strengthening of our positions in our priority and possess a wide range of resources to real- markets. From this report, you will find out ize their full potential. We paid special attention about SCM’s most important development this year to the structuring and development of milestones, achievements of the businesses we our telecommunications and media businesses, invest in, as well as our strategic plans. as well as to laying the foundation for success- 2007 was a year of tremendous growth op- ful development in real estate. portunities for SCM, of which we have taken By rigorously following our balanced diversifi- full advantage. In 2007 we have completed cation strategy, in 2007 we focused on strength- our main goal – we laid the firm foundation of ening our positions in the six priority areas our long-term sustainability that will allow us through both organic growth and new acquisi- to remain effective both in times of dynamic tions. To achieve this goal, SCM as a strategic growth, as 2007 demonstrated, as well as in investor, contributed to our target markets’ less favorable times. development financially and by soliciting the In 2007, SCM Group made a further step necessary skills and expertise from the best towards completing the large-scale corpo- professionals. rate restructuring program, launched in 2006. We also made a number of important steps in The expected results of this program, to be new business areas in 2007. As of this moment, achieved by 2008, are a transparent share- these areas are not strategic for SCM, but we holding structure for the Group, a corporate regard them as having significant long-term governance system in line with the world best growth potential. In particularly, we entered practice, and a well-balanced investment the retail sector, structured our assets in clay portfolio. mining, and began the restructuring process in petroleum products retail.
  7. 7. CEO statement 7 In 2007 SCM Group started a second pivotal process – exiting from businesses that do not meet our investment strategy. We sold our shareholding and exited the boards of sev- eral machine-building enterprises, as well as withdrawing from the baking business. We also started the preparations for withdrawal from the brewing business. To fully realize our development plans, we entered the international debt capital markets and secured syndicated loans. We did, however, remain true to our rather conservative ap- proach to soliciting external funding. The share of debt in SCM Group’s capital structure is relatively small. This year we publicly presented SCM Group’s corporate social responsibility strategy. As Ukraine’s largest company, SCM contributes to the social and economic development of its regions of presence and recognizes its respon- sibilities to Ukrainian society. We pay significant attention to advancing our social policy and reporting system, allowing us to harmonize business interests and development priorities at both national and regional levels. Within its corporate responsibility strategy, SCM Group initiated and actively participated in several public events dedicated to introduc- ing the ISO 26000 standard on CSR which is currently being developed and promoting best practice in corporate social responsibility in Ukraine. Implementing CSR best practices allows us to increase our assets’ productiv- ity. To further implement the SCM Group CSR strategy, responsible employer practices were introduced at all Metinvest and DTEK enterpris- es, including employee professional develop- ment, and performance based compensation and bonus systems.
  8. 8. 8 SCM Group Annual Report 2007 At the end of 2007 we can definitely say that Each day we discover new opportunities before SCM Group has systematically achieved the us, allowing us to build the future day by day. goals set before us in 2006. To keep up the pace We embrace the rapidly changing world around and remain focused on the key business goals, us, as well as understand the scale of those we have defined the Group’s strategic develop- changes and we are ready for the challenges ment areas for the next five years. Those entail: ahead. We are prepared to perform in any further improvement of corporate governance circumstances and – we are willing to walk the and ongoing asset portfolio structuring; devel- road to leadership together with our part- opment of the Group’s industrial businesses ners. Our goal for the next five years will be to (mining, metals and energy) and active invest- enhance SCM Group’s competitiveness and ef- ment in non-industrial, opportunity businesses; fectiveness on both a national and global scale. as well as enhancing our businesses’ manage- ment teams by recruiting leading profession- als. In addition, we are constantly aware of our responsibility to society and this motivates us to abide by the highest performance standards at all levels. OLEG POPOV Chief Executive Officer
  9. 9. Key events of 2007 9 KEY EVENTS OF 2007 JANUARY SCM became an industry partner of the World Economic Forum in Davos, the leading international talk shop for global development issues. Today, SCM is one of only two Ukrainian companies that are represented in the international economic club. SCM representatives participated in meetings with top managers of the leading mining and metal companies in the world, where discussion focused on development trends in the sector for the next 5 to 10 years. MARCH SCM signed an agreement with BNP Paribas (Suisse) for a 4-year credit line worth US $400 million. This money will be drawn on to finance the further expansion of the SCM Group’s businesses. MAY SCM and BNP Paribas (Suisse) successfully completed the first stage of credit syndication estab- lished two months earlier raising US $545 million. As a result of the syndication, four leading inter- national banks became the sub-underwriters of this loan. Those banks were: NATIXIS, Raiffeisen Zentralbank Osterreich, Standard Bank, and Bayerische Hypo- und Vereinsbank (UniCredit Group).
  10. 10. 10 SCM Group Annual Report 2007 JULY Metinvest Holding, which manages SCM Group’s mining and metal businesses, received a syndi- cated loan worth US $1.5 billion. The lead managers of the loan were the prominent international banks: ABN AMRO, BNP Paribas, Deutsche Bank, and ING. BNP Paribas was the creditor and docu- ment coordinator. This credit will be issued in two tranches, the first of which was for pre-export financing (lending collateralized by export contracts) that was transferred on July 23 in the amount of US $1.0 billion. The second tranche worth US $500 million is a revolving line of credit. This loan is unique in many aspects. Firstly, it is the largest loan ever issued to a private Ukrainian company. Secondly, Metinvest Holding received the most favorable terms ever given to a private Ukrainian company: interest on the syndicated loan is LIBOR+1.7%. AUGUST SCM became a member of the European Business Association (EBA). The EBA is one of the leading international business associations in Ukraine, bringing together around 750 European, Ukrainian, and international companies. This organization sees itself as an instrument for the open and trans- parent representation of business interests by lobbying government policy-makers. The participa- tion of a major player on the Ukrainian market, such as the SCM Group, with an active presence on European Union markets, in the EBA not only strengthens the position of this business association, but can also foster the process of European integration of Ukraine. SEPTEMBER In September, a steel company on a global scale was formed in Ukraine when SCM and Smart Hold- ing agreed to merge their mining and metal assets. During the course of negotiations concerning a joint modernization of Makeyevka Steel Plant, a decision was made to expand SCM’s cooperation with Smart Holding in the mining and metal business. As a result of the merger, Smart Holding will become the second shareholder in Metinvest Holding, in exchange for its stake in Makeyevka Steel Plant, Ingulets Mining and Enrichment Plant (InGOK) and Promet Steel in Bulgaria. The planned merger will help strengthen the position of the domestic steel industry on world markets, will sup- port the growth of Ukraine’s economy, and will give the country a higher profile in the global steel sector.
  11. 11. Key events of 2007 11 PricewaterhouseCoopers completed its review of the consolidated financial statements of SCM Group for 2006. The Consolidated Statement was presented in compliance with International Financial Reporting Standards. This is the third consolidated statement issued by SCM Group that complies with IFRS and passed an international audit (the Group issued its first such statement for 2004). OCTOBER SCM Group launched a new business - retail trading. The Ukrainian Retail company made a public presentation of its plans to develop its own chain of stores under Brusnytsya brand name. NOVEMBER А decision was made to set up a television media holding company on the basis of the TRK Ukraine Television Channel. In addition to its own channel, TRK Ukraine, the new media company will also set up specialized television channels, such as News (an information channel with an accent on social and regional issues) and Football. In November, Metinvest Holding signed an agreement with the Malacalza Group (Italy) to acquire a 100% stake in two companies: Trametal (Italy) and Spartan UK (Great Britain). The future plan is to combine the two companies with the Ferriera Valsider steelmill, which is part of the Metinvest Holding. It is also planned to consolidate milling capacities into a single company with an output capacity of more than 1 million tonnes of thick rolled steel a year for EU markets. This will improve the position of the domestic steel industry on world markets and support the growth of Ukraine’s economy. Metinvest’s long-term strategy is to form a balanced steel company that will be a major player on European and world markets. Expanding the holding’s rolling capacities will make it pos- sible to maximize the use of raw materials and the Group’s production capacities. It will also bring significant added shareholder value through synergies and a stronger global competitive edge for SCM’s business and for Ukraine’s entire mining and metal complex.
  12. 12. 12 SCM Group Annual Report 2007 SCM: IN STEP WITH THE MILLENIUM
  13. 13. SCM: in step with the millennium | The story of the group 13 THE HISTORY OF THE GROUP System Capital Management (SCM) was founded in 2000 in Donetsk. Its main purpose is to invest strategically in key sectors of the Ukrainian economy. These are primarily mining and metals, energy, telecommunications, banking, insurance, real estate, media, clay mining, retail, and petroleum retail sectors. Since its foundation, SCM has been building up its business areas based on the industrial assets it owns and making large-scale investments, both in Ukraine and abroad. Today, the history of the Group can be presented in four major stages. 2000–2002 GROWING THE PORTFOLIO The first stage of SCM’s development concentrated on expanding the Group’s investment portfolio. It was during this period that the company acquired most of its businesses and began to introduce a single standard of management across the Group. 2002–2004 INVESTING During this period, the main focus was on establishing world standards of business management at all of the company’s key assets. Meanwhile, enterprises were modernized and production indicators were raised, where possible, using experience and know-how accumulated by SCM professionals. The company began to implement its long-term growth strategy and to increase the effectiveness of its business. This meant building vertically-integrated industrial organizations at the company’s two main holdings (Metinvest and DTEK) and forming a team of world-class managers capable of running them. 2004–2006 EXPANDING Banking and insurance businesses joined the list of key areas SCM was expanding into. During the same period, SCM began actively expanding its telecom business. With this goal in mind, the company acquired Farlep Invest and Optima Telecom. A strategic investment was made in Astelit, a mobile telecoms business operating under the life:) brand. The company instituted the preparation of consolidated financial statements in accordance with international financial reporting standards (IFRS) and began the process of building a transparent business and management structure for the Group. 2007–TODAY LOOKING AT THE FUTURE SCM group continued the implementation of large-scale corporate restructuring program, launched in 2006. An expected result of this programm to be completed in 2008 will be clear and transparent group shareholder structure. SCM group has formulated a clear development strategy. The company plans to expand its business based on organic growth and also through new acquisitions in important areas of the economy and industry (metal, energy, financial services, telecommunications, real estate, retail trade, and so on). The goal is to make SCM not only the leading financial industrial group (FIG) in ukraine and a national business leader, but also a truly competitive and successful global business.
  14. 14. 14 SCM Group Annual Report 2007 KEY EVENTS IN THE EVOLUTION OF SCM 15 November 2000 System Capital Management company is registered. 30 June 2003 SCM Group acquires Pavlogradugol Mining & Extraction Complex. 28 August 2003 SCM acquires a controlling stake in the Khartsyzsk Pipe Plant. 27 January 2004 SCM gets the green light from the Anti-Monopoly Committee to acquire Vostokenergo, an energy generation utility. 19 July 2004 SCM Group acquires a controlling stake in the Northern and Central Ore Mining and Enrich- ment Plants (SevGOK and CGOK). 20 August 2004 SCM acquires three companies that were part of UkrRudProm State Joint Stock Company (Dokuchayevsk Flux and Dolomite Plant, Novotroitskoye Ore Mining (NTRU), and Krivbass- vzryvprom Explosives Company), an ore conglomerate, through privatization tenders. 25 February 2005 SCM Group increases its stake of shareholder capital in the First Ukrainian International Bank from 49% to 99%. 6 July 2005 SCM Group forms DTEK, a holding company, to manage its enterprises in the energy sector. 27 September 2005 SCM acquires a 91% stake in Farlep Invest. 10 October 2005 SCM concludes a deal to acquire Leman Commodities (Switzerland), a metal trader. 25 November 2005 SCM acquires a controlling stake in Ferriera Valsider, an Italian engineering rolled steel producer. 6 December 2005 Oleg Popov becomes General Manager of SCM. 17 April 2006 SCM purchases 100% ownership stake in Optima Telecom. 21 April 2006 SCM becomes one of the founding members of the UN Global Compact in Ukraine. 30 May 2006 SCM Group forms SCM Estate to manage its enterprises in the real estate sector, later re- named ESTA Holding. 6 June 2006 SCM Group forms Metinvest Holding to manage its enterprises in the mining and metal complex. 7 June 2006 SCM announces the merger of Optima Telecom and Farlep Invest into a single telecom group.
  15. 15. SCM: in step with the millennium | The story of the group 15 20 July 2006 SCM becomes the general sponsor of Shakhtar Football Club. 2 November 2006 For the first time, a consolidated financial statement is published for SCM Group in accor- dance with IFRS (audited by PriceWaterhouseCoopers). 21 December 2006 SCM Group purchases a 100% ownership stake in Avlita Stevedoring Company. This pur- chase expands the raw materials import opportunities for for the Group’s metal companies, as well as product export opportunities for Metinvest Holding companies. 26 January 2007 SCM Group becomes an industry partner of the World Economic Forum in Davos. 2 March 2007 United Minerals Group (UMG) is formed, to manage SCM Group’s assets in the clay mining sector. 6 March 2007 SCM signs an agreement with BNP Paribas (Suisse) for a syndicated loan worth US $545 million. 11 July 2007 SCM Group approves its long-term business development strategy and announces its inten- tions to invest more than US $6.2 billion in the expansion of its business over the next five years. 26 July 2007 Metinvest Holding signs a syndicated loan worth US $1.5 billion. 25 September 2007 SCM and Smart Holding announced the intention to combine their assets in mining and me- tals, within the framework of Metinvest Holding. 6 October 2007 Metinvest Holding is the first Ukrainian company to become a permanent member of the International Iron and Steel Institute (now the World Steel Association), the leading global association in this sector. 12 October 2007 DTEK is given a long-term credit rating of B2 by Moody’s. This offers the company direct ac- cess to world capital markets. 17 October 2007 SCM Group presents a new business venture, Ukrainian Retail, to manage a shopping chain under the Brusnytsya brand. 12 November 2007 Metinvest Holding signs a deal to acquire two steelmills, Trametal (Italy) and Spartan UK (Great Britain). 11 December 2007 Metinvest Holding completes the restructuring of its sales division. This allowes the consoli- dation of sales by region into the four channels, provided by different companies.
  16. 16. 16 SCM Group Annual Report 2007 MISSION, VISION, VALUES THE SCM MISSION: SUCCESS, TOGETHER We invest in the continuous growth and improvement of our businesses, and through this support the economic and social development of society as a whole. THE SCM VISION: CREATING THROUGH DEVELOPMENT We build effective businesses and manage them according to best world standards and practice, ensuring long-term growth in the value of our investments and participating in the multifaceted development of the regions, in which we have a presence.
  17. 17. SCM: in step with the millennium | Mission, vision, values 17 OUR VALUES: EFFECTIVENESS, PROFESSIONALISM, ACCOUNTABILITY Effectiveness as a means to achieve the best results in everything that we do. For us, effectiveness is: • reaching the goals we set • using contemporary technologies and approaches to doing business • constantly improving the processes and methods of doing business • rational allocation and use of resources • seeking new opportunities • being ready for change Professionalism in doing business, including investing in people and stimulating innovation and enthusiasm towards work. For us, there is particular importance in: • meeting the highest standards • stimulating initiative and innovation • investing in professional development • attracting and keeping highly qualified employees Accountability to our employees, our partners, our communities, and society as a whole.
  18. 18. 18 SCM Group Annual Report 2007 GROUP MANAGEMENT Roman Vodolazkyy Chief Financial Officer Ilya Arkhipov Oleg Popov Business Development Chief Executive Director Officer
  19. 19. SCM: in step with the millennium | Group management 19 Jock Mendoza-Wilson International and Investor Relations Director Nikolai Nesterenko Natalia Yemchenko New Business Roman Bugayov Public Relations and Com- Development Director munications Director Corporate Rights and Foreign Asset Management Director
  20. 20. 20 SCM Group Annual Report 2007 Oleg Popov Chief Executive Officer CEO OF SCM SINCE DECEMBER 2005. 2001-2005 – EXECUTIVE DIRECTOR. 2000 – HIRED BY SCM AS DEPUTY TO THE CEO. 1992-2000 – WORKED IN VARIOUS GOVERN- MENT OFFICES AND PRIVATE COMPANIES. CHAIRMAN OF THE BOARD FOR FC SHAKHTAR. REPRESENTS SCM INTERESTS ON THE BOARDS OF DTEK, FIRST UKRAINIAN INTER- NATIONAL BANK, DONGORBANK, UKRAINIAN RETAIL, AND ON THE METINVEST HOLDING AUDITING COMMITTEE. AREAS OF RESPONSIBILITY: TAKING AND CONFIRMING KEY FINANCIAL, INVESTMENT AND PERSONNEL DECISIONS, BOTH DIRECTLY AT SCM AND IN THE GROUP ASSETS, AS WELL AS EVALUATING THE PERFORMANCE OF THE MANAGERS OF THESE ASSETS. EDUCATION GRADUATED FROM DONETSK STATE UNIVER- SITY IN 1996. GRADUATED FROM DONETSK POLYTECHNICAL INSTITUTE IN 1990.
  21. 21. SCM: in step with the millennium | Group management 21 — WHAT EVENTS WOULD YOU SAY WERE KEY TO THE GROWTH OF THE GROUP IN 2007? — The main event was the merger of Metinvest Holding with the metallurgical assets of Smart Holding, within the framework of Metinvest Holding. This was an important launching pad for the further development of the Group’s metal business because we strengthened our position in supplying iron ore and now we have the opportunity to expand our steel making capacities. In addition, in 2007 we embarked on areas of business that were new for us: real estate and retail trade. Plus, we made a decision to get out of some of our non-core areas. For instance, we sold a minority stake in the Ukrainian Industrial Transport Company and prepared to exit the baked goods business. Altogether, 2007 was a year in which we actively worked on structuring our port- folio of assets. — WHAT, IN YOUR OPINION, IS THE MOST IMPORTANT ACHIEVEMENT IN SCM’S CORPORATE POLICY? — The most important point when we were in the midst of such major corporate transformations was that the best and the brightest professionals remained with the Group, both in SCM Company and in the holdings. We’ve been able to create a highly effective team. — WHAT ARE THE GROUP’S KEY STRATEGIC GROWTH OBJECTIVES? — First, to improve the management of Metinvest Holding and DTEK. Second, to invest in attrac- tive sectors, such as: telecom, media, real estate, and so on. Third, to decide on the future of other businesses in our portfolio, that is to continue the process of structuring. Fourth, to look for new opportunities for investing. Today, these are our four strategic growth objectives.
  22. 22. 22 SCM Group Annual Report 2007 Roman Vodolazkyy Chief Financial Officer CFO OF SCM SINCE JUNE 2005. FEBRUARY-JUNE 2005 – SENIOR FINANCIAL MANAGER (TITLE CHANGED TO CFO). 2002 – BEGAN AT SCM AS MANAGER FOR THE GROUP’S METAL DIVISION. OCTOBER 2000-SEPTEMBER 2002 – AUDITOR FOR PRICEWATERHOUSECOOPERS IN KIEV. MARCH 1999-OCTOBER 2000 – WORKED IN THE FINANCIAL DEPARTMENT OF MCDONALD’S UKRAINE. 1994-1999 – ACCOUNTANT AND CHIEF ACCOUN- TANT FOR VARIOUS UKRAINIAN COMPANIES. REPRESENTS THE INTERESTS OF SCM ON THE BOARDS OF DTEK AND FC SHAKHTAR. CHAIRS THE AUDITING COMMITTEES FOR MET- INVEST HOLDING AND DTEK. AREAS OF RESPONSIBILITY: MANAGING THE GROUP’S FINANCIAL DEPARTMENT, BUDGETING, PREPARING FINANCIAL REPORTS, TREASURY FUNCTIONS, AND INTERNAL AUDIT. UNDER HIS LEADERSHIP, SCM HAS SHOWN ITSELF TO BE A COMPANY WITH IMPECCABLE FINANCIAL REPORTING THAT HAS BEEN APPROVED BY TOP INTERNATIONAL AUDITING COMPANIES. AS RESULT, THE GROUP STRENGTHENED ITS REPUTATION IN INTERNATIONAL CREDIT MAR- KETS AND WAS ABLE TO ORGANIZE THE FIRST SYNDICATED LOAN FOR SCM AT THE HOLDING COMPANY LEVEL IN THE GROUP’S HISTORY. EDUCATION MBA FROM INSEAD (FRANCE), A TOP EUROPE- AN BUSINESS SCHOOL IN 2007, AND MEMBER OF THE BRITISH ASSOCIATION OF CERTIFIED CHARTERED ACCOUNTANTS (ACCA) SINCE 2004. GRADUATED FROM THE KHERSON STATE TECHNICAL UNIVERSITY AS A SPECIALIST IN ACCOUNTING AND COMPUTER SOFTWARE IN 1998.
  23. 23. SCM: in step with the millennium | Group management 23 — WHICH EVENTS IN 2007 WOULD YOU SAY WERE THE MOST IMPORTANT FOR THE GROUP’S DEVELOPMENT? — 2007 was a dynamic year filled with important milestones. Among the main ones, I would name two huge steps in the development of the Group. First, in 2007, SCM went to foreign credit markets for the first time, as a holding company. Second, at the end of the year, the decision was made about the merger of SCM Group’s mining and metal assets with those of Smart Holding. — WHAT KEY ACHIEVEMENTS IN THE FINANCIAL DEPARTMENT WOULD YOU SINGLE OUT FOR 2007? — First of all, the support of BNP Paribas (Suisse) SA in our bid for a syndicated loan worth US $545 million. Borrowing on foreign markets is an enormous task, and one that we were already looking at in 2006. In 2007, we started a project to automate the process of preparing consoli- dated financial reports, according to international standards. This is a very challenging task that requires serious resources, and we will continue it in 2008. — WHAT OPPORTUNITIES FOR FURTHER GROWTH DO YOU SEE? — We plan to secure a credit rating for SCM as a holding company, which should offer us much broader options for borrowing. We also intend to continue our expansion into capital markets.
  24. 24. 24 SCM Group Annual Report 2007 Ilya Arkhipov Business Development Director BUSINESS DEVELOPMENT DIRECTOR FOR SCM SINCE OCTOBER 2005. 2001-2005 – CONSULTANT, MCKINSEY & CO, MOSCOW. 2000-2001 – OPERATIONS MANAGER FOR RUSSIA’S LARGEST ON-LINE AUCTION SITE, MOLOTOK.RU FOR NETBRIDGE, AN INTERNET COMPANY. 1995-2000 – CONSULTANT, COOPERS & LY- BRAND AND PRICEWATERHOUSECOOPERS, MOSCOW. REPRESENTS SCM INTERESTS ON THE BOARDS OF FARLEP INVEST, FIRST UKRAI- NIAN INTERNATIONAL BANK, DONGORBANK, UASK ASKA, SEGODNYA MULTIMEDIA AND THE TRK UKRAINE TELEVISION CHANNEL. AREAS OF RESPONSIBILITY: PARTICIPATING IN DETERMINING THE OVERALL PORTFOLIO STRATEGY OF THE GROUP, AS WELL AS IN CORPORATE RESTRUCTURING. IN PARTICU- LAR, MR. ARKHIPOV IS INVOLVED IN DEVE- LOPING SCM’S BUSINESS STRATEGY REGAR- DING TELECOMS, BANKING AND INSURANCE SERVICES, AND THE MEDIA. EDUCATION: MBA FROM INSEAD (FRANCE), A TOP EURO- PEAN BUSINESS SCHOOL, IN 2004. GRADUATED FROM THE PLEKHANOV ACAD- EMY OF ECONOMICS IN RUSSIA AS A SPECIA- LIST IN ENTERPRISE MANAGEMENT IN 1999.
  25. 25. SCM: in step with the millennium | Group management 25 — WHICH EVENTS IN 2007 WOULD YOU SAY WERE THE MOST SIGNIFICANT IN THE HISTORY OF THE GROUP? — When it comes to SCM Group, then the most important event was the decision to merge mining and metal assets with Smart Holding. This was a major business event in Ukraine and the world of metallurgy as a whole. As to those areas that I’m in charge of, then I would say that 2007 was a breakthrough year for the development of the Group’s telecommunications business. In addition to that, our insurance busi- ness maintained its share and developed positively in a rather competitive market. We also began forming the publishing holding, Segodnya Multimedia, and we now have a centralized publi- shing business that includes one of the most popular Ukrainian papers, Segodnya, and a range of regional publications in Eastern Ukraine. — IN 2007, SCM ACTIVELY INVESTED IN THE TRK UKRAINE TELEVISION CHANNEL. WHAT ARE THE RESULTS OF THAT? — Firstly, we completed the team with top foreign specialists. Secondly, we continued to work on program content so that our channel would be interesting to a wide range of audiences. We’ve been making considerable efforts and we’ve had matching results, as the channel’s ratings have picked up considerably. — PLEASE, NAME THE MOST IMPORTANT GROWTH PLANS IN YOUR AREAS. — The main focus for television business, I would say, is on forming a media group that becomes one of Ukraine’s leaders by 2009. This means that a range of thematic channels will be estab- lished, our own production of original programming will be set up, as well as we will draw on new creative resources. In telecommunications business – it will be further securing the market posi- tions of our fixed-line operator and expansion of our geography of presence. In finances, we are also aimed at strengthening the market positions of our financial institutions, as well as expand- ing the product lines of our banks (including the introduction of retail products) and insurance companies.
  26. 26. 26 SCM Group Annual Report 2007 Nikolai Nesterenko New Business Development Director NEW BUSINESS DEVELOPMENT DIRECTOR AT SCM SINCE SEPTEMBER 2007. 2002-2007 – SENIOR MANAGER FOR STRATEGY DEVELOPMENT IN A RANGE OF THE GROUP’S COMPANIES. WITH THE GROWTH OF SCM GROUP, THIS AREA BECAME MORE AND MORE SIGNIFICANT AND A DECISION WAS MADE TO INSTITUTE THE POSITION OF DIRECTOR FOR NEW BUSINESS DEVELOPMENT. 2001 – STARTED AT SCM AS MANAGER OF THE FINANCIAL CONTROL DEPARTMENT. 1997-2001 – WORKED AT KERAMET INVEST, RISING FROM STOCK BROKER TO GENERAL MANAGER. AREAS OF RESPONSIBILITY: DETERMINING STRATEGIC BUSINESS DEVELOPMENT IN REAL ESTATE, MACHINE-BUILDING AND TRANS- PORT SECTORS AT SCM; SEEKING NEW AREAS OF INVESTMENT. GENERAL MANAGER OF ESTA HOLDING, WHICH MANAGES SCM GROUP PROJECTS IN REAL ESTATE. EDUCATION: MBA FROM INSEAD (FRANCE), A LEADING EUROPEAN BUSINESS SCHOOL, IN 2007. GRADUATED FROM THE FINANCIAL AC- COUNTING DEPARTMENT OF DONETSK STATE UNIVERSITY IN 1998.
  27. 27. SCM: in step with the millennium | Group management 27 — WHAT PROJECTS AND MANAGEMENT BODIES ARE YOU INVOLVED IN AT SCM? — My main area of responsibility at SCM is business development in real estate. Being General Manager of ESTA Holding and a member of the Investment Committee under the Holding’s Board, I have a fairly broad remit in business development in this area at SCM. — WHAT KEY ACHIEVEMENTS WOULD YOU NOTE IN THIS SPHERE? — What is most important is the consolidation of SCM property assets under the various holdings. We began this process in 2006 and we’re still working on it. We’ve put together a solid team and we’ve worked out the corporate procedures for these activities. Among 2007’s projects, I would say that three were key: developing a concept for the Pushkinskiy Multi-functional Complex in Donetsk, acquiring a 50% stake in the Leonardo project, and starting construction of a warehouse and distribution center in Dnepropetrovsk. — What are your future plans at ESTA? — We’re moving in three major directions. First, concentrating our operations in the Ukrainian market, which is promising but not fully developed. Second, we’re planning to actively develop management of outside projects, that is, managing property in the broadest sense. Third, we’re preparing the launches of a number of our own projects. It’s wonderful how many major develop- ment opportunities the Ukrainian property market represents.
  28. 28. 28 SCM Group Annual Report 2007 Jock Mendoza-Wilson International and Investor Relations Director INTERNATIONAL AND INVESTOR RELATIONS DIRECTOR AT SCM SINCE 2006. 2005-2006 – DIRECTOR OF CORPORATE COM- MUNICATIONS FOR THE SCM GROUP. 1989 – LAUNCHED HIS OWN PR CONSULTANCY IN LONDON AND ADVISED US GOVERNMENT AGENCIES ON THEIR PUBLIC DIPLOMACY PROGRAMS IN THE MIDDLE EAST. 1984 – BEGAN HIS CAREER WITH THE FORD EUROPE COMPANY. AREAS OF RESPONSIBILITY: DEVELOPING AND IMPLEMENTING COMMUNICATIONS STRATE- GIES AND PROGRAMS AIMED AT ESTABLI- SHING CONTACTS WITH BOTH GOVERNMENT OFFICES AND NGOS; DEVELOPING RELATIONS WITH INTERNATIONAL GOVERNMENTS, INSTI- TUTIONS, BUSINESSES, AND MEDIA, AS WELL AS BUILDING RELATIONS WITH THE INVEST- MENT AND FINANCE INDUSTRY. EDUCATION: GRADUATED AS AN ECONOMIST FROM HERI- OT-WATT UNIVERSITY IN EDINBURGH IN 1984.
  29. 29. SCM: in step with the millennium | Group management 29 — WHAT ARE SOME OF THE INTERNATIONAL ORGANIZATIONS SCM WORKS WITH? — As a business leader in Ukraine, SCM is involved in many global and regional initiatives. Among others, the Group signed an agreement on a strategic partnership with the United Na- tions regarding the development of corporate social responsibility (CSR) in Ukraine. SCM is also a member of the European Business Association and an industry partner of the World Economic Forum in Davos. — WHAT ARE SCM’S MAIN ACCOMPLISHMENTS IN CSR? We put considerable emphasis on developing policy and accountability in the company in terms of corporate responsibility. For us, it is not just a passing fad. We see major benefits to the manage- ment and value of our business from implementing a systematic approach to corporate respon- sibility, which we believe will lead to sustainable growth. In 2007, we prepared a CSR report that will be published in 2008, and we established a system for regular internal CSR reporting within the Group. — WHAT ARE SCM’S PRIORITIES IN THIS AREA? — One important goal for 2008 is to bring our CSR reporting in line with international standards. We will be improving and developing the principles underlying the company’s environmental policy and projects to promote health and safety in the work place.
  30. 30. 30 SCM Group Annual Report 2007 Natalia Yemchenko Public Relations and Communications Director PUBLIC RELATIONS AND COMMUNICATIONS DIRECTOR AT SCM SINCE DECEMBER 2006. 2005-2006 – PUBLIC RELATIONS MANAGER FOR SCM GROUP. 2003 – BEGAN WORKING FOR SCM GROUP AS MANAGER OF A SECTOR GROUP. 2001-2003 – DIRECTOR, KERAMET INVEST. 1998-2001 – FINANCIAL MANAGER OF KOLO, AN INVESTMENT COMPANY. CHAIR OF THE AUDITING COMMITTEE OF THE TRK UKRAINE TELEVISION CHANNEL. AREAS OF RESPONSIBILITY: COMMUNICATING WITH TARGET AUDIENCES, INCLUDING THE MEDIA, EMPLOYEES, RESIDENTS OF REGIONS WHERE THE COMPANY HAS A PRESENCE, THE GOVERNMENT, COMMUNITY ORGANIZATIONS, AND THE GENERAL PUBLIC, AS WELL AS MANAGING THE COMPANY’S REPUTATION. EDUCATION: GRADUATED FROM DONETSK NATIONAL UNI- VERSITY AS A SPECIALIST IN FINANCE AND CREDIT IN 1998.
  31. 31. SCM: in step with the millennium | Group management 31 — WHICH EVENTS DO YOU CONSIDER THE MOST IMPORTANT IN THIS REPORTING YEAR? — First of all is the restructuring of the Group’s core business areas, then the merger with Smart Holding, and the formation of holding companies for new business areas. One significant event I think was starting to work on the Brusnytsya retail chain. — WHAT ARE THE PRIORITY DEVELOPMENT AREAS FOR THE GROUP? — In its evolution, SCM holds to the principle of deliberate diversification, which means both gro- wing our industrial holdings and activating alternative areas of investment, especially our presence on the services market. Of course, we’re also talking about working effectively in capital markets. Yet another important point is improving our standards of corporate governance. Ukraine is and will remain the main ‘address‘ for SCM investments. — WHAT WOULD YOU SAY WAS SCM’S BIGGEST ACHIEVEMENT IN CSR IN 2007? WHAT SPECIFIC AREAS ARE PRIORITIES WHEN IT COMES TO CORPORATE SOCIAL RESPONSIBILITY? — Among our main accomplishments, I would distinguish the Foundation for the Development of Ukraine, under whose aegis we’ve launched a range of comprehensive charity programs, as well as simply more active corporate philanthropy and cooperation with international organizations. One of SCM’s policy priorities is ecology and an environmental program in the regions where it has a presence, ensuring on-the-job safety, as well as the development of local communities. Naturally, the company’s development strategy includes social investment not only on the national level, but also in the regions.
  32. 32. 32 SCM Group Annual Report 2007 Roman Bugayov Corporate Rights and Foreign Asset Management Director CORPORATE RIGHTS AND FOREIGN ASSET MANAGEMENT DIRECTOR AT SCM SINCE SEP- TEMBER 2007. 2005–2007 – MANAGER OF THE CORPORATE RIGHTS DEPARTMENT FOR SCM GROUP. 2003 – JOINED SCM GROUP AS AN ECONO- MIST. 2002-2003 – ECONOMIST AT KERAMET INVEST. 1996-2002 – WORKED IN THE DONETSK OBLAST OFFICE OF THE ANTI-MONOPOLY COMMITTEE OF UKRAINE AS A SPECIALIST, SENIOR SPECIALIST, THEN DEPARTMENT MANAGER. REPRESENTS SCM INTERESTS ON THE BOARD OF DTEK. SITS ON THE AUDITING COMMITTEES OF THE TRK UKRAINE TELEVISION CHANNEL AND BU- REAU OF ECONOMIC AND SOCIAL TECHNOLO- GIES (BEST) ANALYTICAL CENTER. AREAS OF RESPONSIBILITY: DETERMIN- ING AND IMPLEMENTING COMPANY POLICY REGARDING THE MANAGEMENT OF CORPO- RATE RIGHTS, ORGANIZING AND HANDLING OPERATIONS INVOLVING CORPORATE RIGHTS BELONGING TO THE COMPANY AND ITS SUB- SIDIARIES, AND ORGANIZING THE ACTIVITIES OF FOREIGN COMPANIES BELONGING TO SCM. EDUCATION: GRADUATED FROM THE DONETSK INSTITUTE OF ENTREPRENEURSHIP AS A SPECIALIST IN ORGANIZATIONAL MANAGEMENT IN 2000, WITH MAJOR IN THE ECONOMIC AND LEGAL ASPECTS OF COMMERCIAL ACTIVITY.
  33. 33. SCM: in step with the millennium | Group management 33 — WHAT WOULD YOU SAY WERE THE MOST IMPORTANT EVENTS IN 2007? — We undertook the structuring of our sectoral holdings, and I consider four events of utmost signifi- cance in this area. Firstly, handing over the bulk of corporate rights to the Group’s mining and metal businesses to Metinvest Holding. Secondly, handing over corporate rights to those of our companies that are involved in extracting and processing thermal coal to DTEK. Thirdly, setting up the UMG hol- ding, which manages companies involved in mining clay. Last, but not least, we began to work on forming a publishing holding based on the company Segod- nya Multimedia. — NAME THE KEY ACHIEVEMENTS IN THE DEVELOPMENT OF ALTERNATIVE AREAS OF COMMER- CIAL ACTIVITY. — We started the process of setting up new holdings in telecommunications, in real estate and in retail trading of petroleum products, as well as of transferring corporate rights over our compa- nies that work in those areas of business. — WHAT ARE THE PRIORITY AREAS FOR FURTHER DEVELOPMENT IN THE GROUP? — In 2008, plans are to complete the transfer of corporate rights of our mining and ore companies to Metinvest Holding. We hope to finish establishing new holdings in real estate and in petroleum products retail trading.
  34. 34. 34 SCM Group Annual Report 2007 THE GROUP’S CORPORATE STRUCTURE MANAGEMENT STRUCTURE THE GROUP’S ASSET MANAGEMENT key features and the basic principles on which SYSTEM it is built. Until the beginning of 2006, when the deci- The key features of SCM’s system of corporate sion was made to restructure the business, governance are: SCM Group saw itself as the conglomeration of different assets that were directly run by the • simplicity and intelligence, clearly-defined are- company. The program of corporate transfor- as of competence along all the links in the chain mation that was approved has the institution a • effective decision-making processes modern, understandable system of corporate governance and the switch to a targeted corpo- • suitability for the business’s target structure rate structure as its goals. for managing corporate rights SCM Group’s target business model provides, • compliance with best world standards first and foremost, for a change in the role of SCM Group’s system of corporate governance the SCM Company in the system of manage- is based on the principles of transparency and ment: a switch from operational management compliance with the law that lie at the heart of of individual enterprises to strategic manage- all its activities. ment of newly-formed sectoral holdings or Group business areas. In accordance with RESTRUCTURING SCM GROUP’S the program approved in 2006, the process of BUSINESSES combining the Group’s operational companies SCM Group undertook reform of its asset within the framework of specific sectoral hol- management structure during 2007, with the dings began. Those holdings received the right objective of increasing the effectiveness of to own and manage SCM assets in their specific enterprise management and forming focused sectors. The sectoral holdings were also tasked sectoral holdings. The Group’s holding system with managing the assets that were handed of structuring business is in line with its vision over to them, including devising and imple- of the development of SCM as a professio- menting their business development strategies. nally managed company, as well as in line with This new business structure and the important global corporate standards. change in the role of the SCM Company in the deci- sion-making system, as well as SCM’s unswerving THE SYSTEM OF CORPORATE determination to match international standards GOVERNANCE drove the switch to what was, for SCM, a funda- SCM’s system of corporate governance is mentally new system of corporate governance. oriented towards the highest international In working on formulating a target structure standards and is based on best world practice. of corporate governance, SCM studied best For this reason, SCM is able to quickly and international practice and clearly designated its effectively make the decisions necessary to en-
  35. 35. SCM: in step with the millennium | The group’s corporate structure 35 sure the dynamic growth of each of our sector of internal and external audits; and the process holdings and the Group’s business areas. of ensuring compliance with the laws and norms governing business ethics. Based on the approved program of corporate transformation, the company began a radi- The Strategy and Investment Committee cal restructuring of its business in 2006. This prepares and submits for review to the Su- particular program called for a transition from pervisory Board recommendations regarding the historical structure of managing corporate opportunities for the holdings to be involved rights and decision-making system to a new in investment projects and exit strategies for business model. One of the key components specific projects; recommendations regarding of the program was the establishment of a the strategic goals and objectives of the various contemporary, transparent, and highly effective holdings, and the implementation of agree- system of corporate governance. ments on mergers and acquisitions (M&A). As the majority shareholder and main inves- The Appointment and Compensation Commit- tor, SCM decides who will represent it on the tee recommends to the Supervisory Boards Boards of the various sectoral holdings. candidates for management positions in the sectoral holdings. With this purpose in mind, The participation of minority shareholders the Committee organizes interviews with in the governing of these holdings is also applicants for specific positions and decides executed through their representatives on the whom to recommend for those positions. The Board. Committee also prepares recommendations re- The Supervisory Board governs the sectoral garding the rotation of top managers within the holdings. For individual areas of business sectoral holdings, proposes ways to incentivize where there are no sectoral holdings, the top managers, and participates in shaping the system of corporate governance works through corporate culture and staffing, in determi- the immediate Supervisory Boards of these ning the prospects for personal development of operating companies. These Boards include managers, and so on. representatives of SCM, minority shareholders The General Manager of a sectoral holding is and independent (external) experts. The mem- appointed by the Supervisory Board in order to bers of each Board vote to elect a Chair from manage the holding’s operations. As a member among their number. The Boards determine of the Board, this person takes an active part in business development areas and the standards the strategic planning of the holding’s activities. for engaging in specific businesses; they ap- prove strategies, budgets and major contracts The Executive Council is the highest body in and oversee their implementation; they track the operational management of a holding. Each business indicators, appoint top managers, es- holding’s Executive Council is established col- tablish incentives for them, and evaluate their legially. The Chair of the Executive Council is performance. The members of the Supervisory the General Manager of the holding. Boards, together with independent experts, The Supervisory Boards of operating com- may also participate in specialized committees panies are responsible for their sustainable including: the Audit Committee, the Strategy financial and commercial growth, greater effec- and Investment Committee, and the Appoint- tiveness in their activities and increased com- ment and Compensation Committee. petitiveness. They keep track of the upholding The Audit Committee prepares recommenda- of shareholder rights, make decisions about tions for the Supervisory Boards regarding the when to hold General Shareholders’ Meetings, approval of accounting policy and procedures establish the agenda for such meetings, draft for preparing financial reports; the depth and corporate policy, and so on. accuracy of financial reporting provided by The members of the Supervisory Boards of each holding; the reliability and effectiveness operating companies are appointed by their exe- of the internal auditing system, internal over- cutives and approved by the Supervisory Board sight, and risk management; the independence of the relevant sectoral holding.
  36. 36. 36 SCM Group Annual Report 2007 CORPORATE GOVERNANCE STRUCTURE OF SCM GROUP SCM Minority shareholders Supervisory Boards of holding companies Audit Strategy and Appointment and Committee Investment Compensation Committee Committee
  37. 37. SCM: in step with the millennium | The group’s corporate structure 37 Holding company Supervisory for sectoral Boards of operating holding companies General Operating Holding Board Manager companies of holding In cases where a decision is made to form a holding company. In cases where a decision is made not to form a holding company.
  38. 38. 38 SCM Group Annual Report 2007 BUSINESS STRUCTURE CORE BUSINESS AREAS Mining and metal As part of restructuring its business, in 2007, stakes in certain of the Group’s mining and metal enterprises that belonged to SCM and its subsidiaries – SCM Ltd. (Cyprus) and USH (cyprus) – were transferred to Metinvest Holding, which handles the strategic management of SCM Group’s mining and metal business. Specifically, Metinvest Holding was given the shares of northern ore mining and enrichment plant (SevGOK), Avdeyevka coke and chemical plant (AKHZ), Yenakiyevo steel plant (YeMZ), Azovstal steel plant (AZOVSTAL), Khartsyzsk pipe plant (KhTZ), and Prometei. At the end of 2007, the restructuring of SCM Group’s mining and metal businesses remained in progress and will be completed in 2008. Energy As part of restructuring SCM Group’s business, DTEK, which manages the Group’s energy assets, was given the shares of Pavlogradugol, Oktyabrskaya and Dobropolye central enrichment plants (CEP). At the end of 2007, the restructuring of SCM Group’s energy businesses remained in progress and will be completed in 2008. Financial services Previously, the financial assets of the SCM Group were combined under the aegis of a managing company called SCM Finance. As part of the further restructuring of the Group’s business, SCM took certain steps in 2007 to strengthen its financial institutions. This process was accompanied by the delegation of a range of key functions from the holding com- pany to the Group’s financial institutions and, as a result, a change in the role of SCM Finance. These measures meant that SCM Finance was no longer at the center of key strategic decision-making, retaining only the function of corporate center.
  39. 39. SCM: in step with the millennium | The group’s corporate structure 39 ALTERNATIVE COMMERCIAL DEVELOPMENT Telecommunications In 2007, the consolidation of fixed-line telecommunications assets was begun in relation to the Group’s Farlep Optima company. The shares of all telecom assets related to the Group’s fixed line business were consolidated through Farlep Invest as the managing company. This year was spent focusing on strengthening the Group’s presence in the telecoms business by acquiring new assets. The formation of a Telecom Holding will be concluded in 2008. SCM Group is also one of the shareholders in Astelit, a company that provides mobile communications services under the brand life:) and which is among the top three mobile operators in Ukraine. Real estate To provide effective management of property assets, the SCM Estate Holding was set up in 2006. Later, it was renamed ESTA Holding. Today, SCM Group has a major portfolio of real estate properties, land bank, and developments, which have considerable investment appeal. Media In 2007, the process of organizing media assets continued, with the aim of improving the effectiveness of their commer- cial activities. Given the fundamental differences in the natures of print media and television broadcasting, the Group established two major media holdings: Segodnya Multimedia and the TRK Ukraine Broadcasting Company. Clay mining In 2007, SCM Group strengthened its presence in the clay mining business by increasing its stake in enterprises that belong to the Group. Those were consolidated into a sectoral holding called United Minerals Group, which was given the right to own and manage three clay mining assets: Ogneupornerud, Vesko, and Druzhkovskoye Mines Management. Retail trade In 2007, SCM Group began to expand into a new area of business, retailing, with the establishment of Ukrainian Retail. The development priority for the Group’s retail chain is a “neighborhood store” format, which operates under the Brus- nytsya brand. Ukrainian Retail plans to open 400 stores over the next five years in a chain that will cover all of Eastern Ukraine. Petroproduct retailing SCM Group’s companies have been successfully wholesaling and retailing petroleum products for more than 12 years. This business area is represented by a network of filling stations under the Parallel, Gefest and PitStop brand names. SCM owns 70 gas stations, mostly located in Eastern Oblasts of Ukraine and in Crimea.
  40. 40. 40 SCM Group Annual Report 2007 STRUCTURE OF SCM GROUP ASSETS AS OF 2007 * Mining & Metal Energy Financial (Metinvest (DTEK) Services Holding) MIning Coal and Coal Mining Power & Metal Coke and Generation Banking Division Division Enrichment Northern Ore Mining Krasnodonugol Pavlogradugol Vostokenergo First Ukrainian and Enrichment Plant International Bank (SevGOK) Komsomolets Tekhrempostavka Avdeyevka Coke Donbassa Dongorbank Central Ore Mining and Chemical Plant and Enrichment Plant Pavlogradskaya CEP (CGOK) Avlita Stevedoring Mospino Coal Power Inguletsky Ore Processing Insurance DIstribution Mining and Company Enrichment Plant Steel and (InGOK) Rolled Dobropolye CEP Products Service Invest ASKA Dokuchayevsk Division Oktyabrskaya CEP Flux and Dolomite Plant (DFDK) Kurakhovskaya CEP PES Energougol ASKA–Life Azovstal Novotroitskoye Steel Plant Mines Management Khartsyzk Pipe Plant Krivoy Rog Mining Equipment Ferriera Plant Valsider Krivbassvzryvprom Prometei Explosives Company Skif Shipping Sales YEMZ Group Metinvest Yenakiyevo Int. Steel Plant Metinvest Metalen Ukraine Metinvest SMTs Metinvest Eurasia
  41. 41. SCM: in step with the millennium | The group’s corporate structure 41 Clay Mining Telecom Real Estate Trade in (United Retail Trade (Farlep– (ESTA Media Petroleum Other Assets Minerals Optima) Holding) Products Group) Optima Leonardo Vesko TRK Ukraina Ukrainian Retail Parallel Telecom Television (retail chain Druzhkovskoye Channel under Brusnytsya Gefest Farlep Mines brand) Management Segodnya PitStop IP Telecom Hotels Multimedia Ogneupornerud Ucomline Vilcom Donbass Palace Opera Other Properties Under Development Heavy Sarmat Engineering** Group Druzhkovka Krym*** *The chart does not include businesses Heavy Engineering Plant where SCM Group is a minority shareholder. Lugansk Brewery*** Gorlovskiy Mashinostroitel Engineering Plant ** SCM Group’s machine-building restructuring Dnipro*** process will be continued in 2008. Donetskiy Energozavod Poltavpyvo*** Engineering Plant *** These assets are to be sold in 2008 to outside investors as part of the restructuring of the Group. Sverdlovskiy Heavy Engineering Plant
  42. 42. 42 SCM Group Annual Report 2007 SCM GROUP’S BUSINESSES
  43. 43. SCM Group’s businesses | Core business areas 43 CORE BUSINESS AREAS MINING AND METALS: METINVEST HOLDING THE MINING AND METAL COMPLEX IS THE FOUNDATION OF MUCH OF UKRAINE’S ECONOMY. METAL OUTPUT ALONE AC- COUNTS FOR NEARLY A QUARTER OF ALL OF UKRAINE’S INDUSTRIAL PRODUCTION. DURING 2006–2007, METALS WERE ONE OF THE ENGINES DRIVING UKRAINE’S ECONOMIC PROGRESS: ANNUAL GROWTH IN THIS SECTOR WAS AROUND 8–9%. THE MINING AND METAL COMPLEX IS ONE OF UKRAINE’S CONTRIBUTIONS IN THE GLOBAL ECONOMY. UKRAINE IS 8TH IN THE WORLD AMONG STEEL PRODUCERS AND IS THE THIRD LARGEST EXPORTER, AFTER CHINA AND JAPAN. FERROUS AND NON-FERROUS METALS AND METAL PRODUCTS CONSTITUTE CLOSE TO 40% OF ALL OF UKRAINE’S EXPORTS. IN 2007, THE GROWTH IN WORLD MARKETS AND FAVORABLE PRICES FOR RAW MATERIALS HAVE OPENED UP GOOD OPPORTUNITIES FOR UKRAINE’S MINING AND METAL BUSINESSES. Metinvest Holding includes all SCM Group’s as- sets in the mining and metal complex, as well as companies that service it. The Holding is the biggest vertically integrated mining and metal company in Ukraine, with a total of 110,000 employees across all its companies. Metinvest Holding is highly diversified in terms of its sales markets. This helps provide protec- tion for the company against fluctuations in any of these markets. At the same time, Metinvest Holding is focusing on the dynamic domestic market. In 2007, the share of income from the Ukrainian market in the holding’s turnover was over 33%, up from 30% in 2006. Geographic breakdown of Metinvest Holding sales in 2007 33% UKRAINE 24% EUROPE 15% MIDDLE EAST & NORTH AFRICA 13% CIS (INCL. RUSSIA) 11% SOUTHEAST ASIA 4% OTHER COUNTRIES
  44. 44. 44 SCM Group Annual Report 2007 To improve effectiveness in managing the • Dokuchayevsk Flux and Dolomite Plant assets of the vertically-integrated Metinvest (DFDK) is the largest producer of fired metal- Holding, the business is organized into three lurgical dolomite in Ukraine and the only plant divisions: producing powders for converter firebricks. Annual output capacity of the company is 7.7 • the iron ore division mn tonnes of finished product. • the coal and coke division • Novotroitskoye Mines Management (NTRU) • the steel and rolled products division extracts metallurgical alums and dolomite with annual capacity of 2.7 mn tonnes of finished THE IRON ORE DIVISION product. The main objective of the Iron Ore Division of • Krivoy Rog Central Ore Mining Equipment Metinvest is to supply the holding’s companies Repair Plant (KCRZ-KZGO) is one of the lea- with iron ore as a raw material. This division ding companies in Ukraine producing a wide manages seven assets: selection of mining, enriching and transporting • Northern Ore Mining and Enrichment Plant equipment and spare parts. (SevGOK), one of the largest mining companies • Krivbassvzryvprom Explosives Company in Europe with a closed production cycle for provides detonation services in the mining and iron ore concentrate and pellets. Annual output extraction industry and produces explosive capacity at SevGOK is 13.4 mn tonnes of iron materials. ore concentrate and over 11.0 mn tonnes of iron ore pellets. THE COAL AND COKE DIVISION • Central Ore Mining and Enrichment Plant The Coal and Coke Division provides a critically (CGOK) is a unique enterprise in Ukraine, important resource – coking coal – for holding combining opencast and shaft mining for the companies. The Division manages three key extraction of ores, and recycling enrichment assets: wastes. Annual output capacity at the CGOK is • Krasnodonugol is one of the biggest compa- 6.9 mn tonnes of iron ore concentrate and 2.2 nies in Ukraine extracting and enriching high mn tonnes of pellets. energy coal for coke production. This produc- • Inguletsky Ore Mining and Enrichment Plant tion conglomerate includes seven mines and (InGOK) uses a technology that is unique for ore plants, two enrichment plants, and service Ukraine, flotation concentration. The company departments. Total volume of extracted coal is became part of the Metinvest Holding portfo- up to 5.7 mn tonnes per year, which is nearly lio at the end of 2007, based on an agreement 20% of all coking coal extracted in Ukraine. with Smart Holding. Annual output capacity at InGOK is 14 mn tonnes of iron ore concentrate. Key indicators for Metinvest Holding 2006 2007 Change Sales volume, mn $ 5,271.0 7,425.0 +40.9% Asset value, mn $ 7,063.0 12,439.0 +76.1% EBITDA, mn $ 1,482.0 2,279.0 +53.8% Net profit, mn $ 813.0 1,321.0 +62.5% Iron ore output, mn tonnes 16.8 18.5 +10.1% Steel output, mn tonnes 8.6 9.1 +5.8% Rolled steel output, mn tonnes 9.2 9.5 +3.3%
  45. 45. SCM Group’s businesses | Core business areas 45 • Avdeyevka Coke and Chemical Plant (AKHZ) market of ferrous scrap metals. It supplies the is the largest high-technology company in holding’s companies with raw materials. Europe’s coking coal industry. Annual output of • Skif Shipping is a logistics company that pro- coke is over 3 mn tonnes. vides the entire range of services for transpor- • Avlita Stevedoring Company controls two ting, loading and documenting cargo. deep water berths in Sevastopol Bay that are • Spartan and Trametal are key players in the open all year round. The company specializes in European market for thick sheet steel: total an- handling dry cargo (metals, grains). nual capacity between the two pants is 530,000 tonnes of high-quality thick rolled sheet. Met- THE STEEL AND ROLLED PRODUCTS invest Holding reached an agreement with the DIVISION Malacalza Group concerning purchasing from The Steel and Rolled Products Division controls the family-owned Italian group 100% ownership the final links in the added-value process at stakes in Spartan and Trametal companies in Metinvest Holding: smelting steel, manufactu- November 2007. The expansion of the holding’s ring rolled products and selling finished goods. rolling capacity will provide for the most effec- This division includes both Ukrainian and for- tive usage of the Group’s mining and production eign assets: potential. As well as it will lead to significant • Azovstal Steel Plant is a modern, high-tech- growth in the Group mining and metal assets’ nology company that produces a wide assort- value due to the potential synergies and will ment of metal products and is among the top increase the competitiveness of the SCM Group three steelmakers in Ukraine in terms of output business and of the Ukrainian mining and metal volume. Annual production capacities for the complex as a whole. Approval from the Euro- company are 6.4 mn tonnes of pig iron, 6.4 mn pean Commission is expected at the beginning tonnes of steel, and 4.7 mn tonnes of rolled of 2008. steel. In 2007, Metinvest Holding completed the reor- • YeMZ Group includes Yenakiyevo Steel Plant ganization of its sales department in the Steel and the Joint Venture Limited Liability Company and Rolled Products Division. As a result, four Metalen, which have a consolidated produc- sales channels provided by four different com- tion cycle. YeMZ Group produces various types panies have been established to ensure sales of rolled steel (rods, cast billets, rolled bars, in the regions. At the same time, efforts were graded sections). Annual output capacity is 2.8 undertaken to unify standards and business mn tonnes of steel. processes across sales departments. Today, four companies handle sales of the holding’s • Khartsyzsk Pipe Plant (KHTZ) is the biggest products: producer of straight-seam electro-welded large diameter (478–1,420 mm) piping in the CIS, • Metinvest International (previously Leman which is primarily used in the oil and gas in- Commodities) is a wholesale channel, respon- dustries. Annual production capacities are over sible for external markets outside the CIS. Its 1.5 mn tonnes of piping, including up to 700,000 headquarters are in Geneva, with representa- tonnes of pipes with anticorrosion coating. tive offices in 11 countries, which allows the company to cover the largest steel markets in • Ferriera Valsider (Italy) is a plant that makes the world. structural rolled steel. Its supply of raw materi- als is 80–90% provided by the Azovstal plant. • Metinvest Ukraine is a wholesale channel that Annual production capacity is around 500,000 sells the holding’s products in Ukraine and CIS tonnes of thick sheet steel and 700,000 tones of countries, with the exception of Russia by the hot rolled coil. railcar load quantities (from 65 tons). • The Prometei Financial Industrial Company • Metinvest Eurasia is the channel for sales of is one of the largest operators on the Ukrainian the division’s steel and rolled steel in Russia.
  46. 46. 46 SCM Group Annual Report 2007 It handles both wholesale and retail sales of • Metinvest SMTs is a retail channel for the metal products in Russia, which is one of the holding’s products and those of other CIS main markets for Ukrainian steel products. companies in Ukraine and Eastern Europe. This network of companies includes 11 metal centers. IN 2007, SCM GROUP AND SMART HOLDING MADE A DECISION REGARDING THE MERGER OF THEIR MINING AND METAL ASSETS. THIS WAS THE FIRST SECTORAL AGREEMENT OF SUCH A SCALE IN THE CIS.THE JOINT COMPANY WILL TAKE SECOND PLACE IN THE CIS REGION IN TERMS OF IRON ORE OUTPUT AND FOURTH PLACE IN TERMS OF SMELTED STEEL. 2007 through the prism of Metinvest Holding’s investment projects Completed: • Construction of two new sections at the ore enrichment facility #1 at Northern Ore Mining and Enrichment Plant (SevGOK). Result: annual volumes of iron ore concentrate increased by 750,000 tonnes. Total invest- ment: $6.2 mn. • Launch of a facility for preliminary enrichment of settled sands in the slurry ponds at Central Ore Mining and Enrichment Plant (CGOK). Result: improved operational efficiency, increased production of concentrate, and increased processing of production wastes. According to the results of 2007, the project allowed to grow the volume of production wastes processing by 60%. Total investment: $5.7 mn. • Construction of the blast furnace №5 at Yenakiyevo Steel Plant (YeMZ). Result: additional output of 1.05 mn tonnes of pig iron per year. Total investment: $140 mn. • Launch of a new facility at Yenakiyevo Steel Plant (YeMZ) for production of technical oxygen from air. Result: steel production capacity growth and quality enhancement potential increased. Total investment: $45 mn. • Launch of a new facility at Azovstal Steel Plant for production of technical oxygen from air. Result: annual steel production capacity growth increased by 1.5 mn tonnes. Total investment: $72 mn. • Construction of the first part of the large diameter pipe production line at Khartsyzsk Pipe Plant (KHTZ). Such pipes are used for main gas and oil pipelines construction. Result: single-joint tubes of up to 1,420 cm in diameter can now be produced. Total investment: $24.3 mn. Launched: • Upgrade of two sections at the №1 ore enrichment facility of Northern Ore Mining and Enrichment Plant (SevGOK). Expected result: annual volumes of iron ore concentrate increased by 750,000 tonnes. Total in- vestment: $46.8 mn. Completion: Q2 2008 • Installation of the 5th stage of magnetic separation at the №1 ore enrichment facility of Northern Ore Mi- ning and Enrichment Plant (SevGOK). Expected result: better quality iron ore concentrate. Total investment: $4.6 mn. Completion: Q2 2008 • Repair of the №3 blast furnace at Azovstal Steel Plant. Expected result: greater efficiency in the blasting conversion, reduced negative impact on the environment. Total investment: $31 mn. Completion: Q2 2008 • Construction of a new №3 blast furnace at Yenakiyevo Steel Plant (YeMZ). Expected result: increased vo- lumes of smelted pig iron output, greater production efficiency, reduced negative impact on the environment. New blast furnace planned production capacity is 1 mn tones of pig iron per year. Total investment: $262 mn. Completion: 2010 • Reconstruction of the benzol scrubber in the capturing facility №1 at Avdeyevka Coke and Chemical Plant. Expected result: greater energy efficiency in the process of benzol extracting and reducing exhaust into the air. Total investment: $2.4 mn. Completion: Q1 2008
  47. 47. SCM Group’s businesses | Core business areas 47 Investment in Metinvest Holding up-to-date equipment Development Strategy Vertical integration Strengthening positions on highly Minimal costs profitable markets We are We can ensure a leader long-term in efficiency competitiveness SUCCESS We are an We are a safe and important company friendly company For employees On-the-job safety For consumers Minimal For partners environmental and investors impact Greater social responsibility
  48. 48. 48 SCM Group Annual Report 2007 ENERGY. DONBASS FUEL & ENERGY COMPANY (DTEK) THE FUEL & ENERGY COMPLEX IS A MAJOR COMPONENT IN THE INFRASTRUCTURE OF UKRAINE’S ECONOMY. AL- THOUGH UKRAINE IS A NET IMPORTER OF FUELS, THE COUNTRY HAS A STRONG ENERGY SECTOR AND RANKS 7TH IN THE WORLD FOR CONFIRMED COAL RESERVES. UKRAINE HAS ENORMOUS POTENTIAL IN TERMS OF ELECTRICITY AND IN TERMS OF THE VARIETY OF FUEL RESOUR- CES. THE RATIO BETWEEN THE VOLUMES EXTRACTED AND CONFIRMED RESERVES IS CONSIDERABLY LOWER THAN THE AVERAGE IN THE WORLD TODAY. STILL, THESE OPPORTUNITIES ARE NOT BEING TAKEN ADVANTAGE OF SUFFI- CIENTLY. EXTRACTION OF FUEL AND ENERGY MATERIALS CONTRACTED BY 2% IN 2007, AGAINST OVERALL INDUSTRI- AL GROWTH OF 10.2% FOR THE YEAR. PRODUCTION OF READY COAL SHRANK EVEN MORE, BY 4.5% IN 2007. ENERGY GENERATION IS ALSO LAGGING IN GROWTH, COMPARED TO AVERAGE INDICATORS FOR INDUSTRIAL OUTPUT. IN A SITUATION WHEN THE GLOBAL TREND IS TOWARDS HIGHER PRICES FOR FUEL AND ENERGY, IT BECOMES CRITI- CALLY IMPORTANT TO INCREASE ENERGY EFFICIENCY USING INNOVATION. THIS APPROACH IS PARTICULARLY SIG- NIFICANT FOR UKRAINE, WHOSE ECONOMY IS ONE OF THE MOST ENERGY INTENSIVE IN THE WORLD. DEALING WITH SUCH CHALLENGES IS WITHIN THE CAPACITIES OF VERTICALLY-INTEGRATED COMPANIES WITH HIGHLY EFFECTIVE MANAGERS, AS THEY ARE THE MOST INTERESTED IN MINIMIZING COSTS ON PRIMARY RESOURCES IN THEIR OWN VALUE-ADDED CHAIN. The Donbass Fuel & Energy Company combines DTEK’s TESs boast one of the lowest indicators all SCM Group’s assets in energy. This hol- for the share of gas in fuel consumed, with only ding is the first and largest vertically-integrated 1%, whereas the Ukrainian average is 9.7%. company in this sector in Ukraine. Its share In order to maximize the effectiveness of the of extracted coal is 21%, its share of energy way these assets are managed, DTEK has de- generation 27%, and its share of electricity fined three main areas of business: distribution in Ukraine is over 5%. More than 50,000 people are employed by the holding’s • coal extraction and enrichment; companies. • energy generation; DTEK’s thermoelectric generating stations • energy distribution. (TES) are protected from an anticipated increase in the price of imported natural gas in Ukraine to match European prices. Key indicators for DTEK 2006 2007 Change Sales volume, mn $ 1,000.0 1,776.0 +77.6% Asset value, mn $ 1,736.0 2,654.0 +52.9% EBITDA, mn $ 233.0 477.0 +104.7% Net profit, mn $ 98.0 236.0 +140.8% Coal extracted, mn tonnes 15.3 15.8 +3.3% Energy generated, KWH 16.3 18.1 +11.0%

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