SCM Group Annual Public Report 2008

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SCM Group Annual Public Report 2008

  1. 1. 08 SYSTEM CAPITAL MANAGEMENT SCM Group public report Stability. Partnership. Growth
  2. 2. SCM Group Public Report 2008 CONTENTS KEY FINANCIAL INDICATORS 2008 4 CEO STATEMENT 6 SCM GROUP EVENTS CALENDAR 2008 8 SCM GROUP CORPORATE TRANSFORMATION PROGRAM 12 ABOUT SCM GROUP 14 SCM GROUP HISTORY 15 CORPORATE CULTURE: MISSION, VISION, VALUES 16 SCM GROUP MANAGEMENT 17 SCM GROUP TARGET CORPORATE GOVERNANCE SYSTEM 24 SCM GROUP ASSET MANAGEMENT SYSTEM 28 SCM GROUP APPROACH TO RISK MANAGEMENT 29 SCM BUSINESS STRUCTURE - 2008 30 SCM GROUP’S BUSINESSES 32 CORE BUSINESS AREAS 33 Mining and metals 33 Energy 41 Financial services 48
  3. 3. Contents OPPORTUNITY BUSINESSES 51 Telecommunications 51 Real estate 52 Media 53 Clay mining 55 Retail trade 57 Petroleum products retailing 58 SCM SPORT 60 ASSOCIATED COMPANIES 61 SOCIAL RESPONSIBILITY AND 62 SUSTAINABLE DEVELOPMENT KEY POST-REPORTING PERIOD 70 EVENTS – 2009
  4. 4. SCM Group Public Report 2008 Key financial indicators 2008 ASSETS, US $ MILLION 19,944 18,075 2007 2008 EQUITY, US $ MILLION 9,709 7,664 2007 2008 EBITDA, US $ MILLION 5,441 2,756 2007 2008
  5. 5. Key financial indicators 2008 REVENUE, US $ MILLION 15,985 9,563 2007 2008 PROFIT FOR THE YEAR, US $ MILLION 2,195 1,407 2007 2008
  6. 6. SCM Group Public Report 2008 6 CEO statement I am proud to present to you SCM Group’s Public Report for framework of its long-term investment strategy. In line with 2008. The year was one which I am sure all of us will remem- its strategy of exiting from the brewing business, Sarmat ber for a long time. The swift economic growth of the first six and Krym breweries were sold, and the sale of Dnipro and months gave way rapidly to a downturn of comparable scale. Poltavpivo breweries was begun. SCM sold its stakes in Kre- However, SCM Group maintained its strong position, in spite menchug Steel Plant and Slavtyazhmash Plant because, as a of the unfavorable economic conditions, due to the stability minority shareholder in those enterprises, it was not able to given by reserves it accumulated during the earlier, success- substantially influence either the strategic decision-making, ful years. or their financial and business activity. We also exited from the shareholders of Donbass Trade Fleet and Azov Shipyard, Regardless of the changes in the global economy, our fun- following the strategy of setting out investment priorities. damental approach to doing business remains unchanged: deliberate diversification and long-term investment in assets At the same time, we continued working on the integration of that have strong profitability and value growth potential, pri- SCM Group and Smart Group assets in metallurgy within the marily in businesses we understand well. We are interested framework of Metinvest. in assets that are capable of creating value at every stage of the production cycle. The new economic reality did not alter We also continued the Group’s geographical expansion, fol- our business philosophy, but did lead to adjustment in our lowing a strategy of deliberate diversification and building priorities. As a result, the short-term development plans for vertically integrated holdings. In 2008 we started negotia- all the Group’s assets were adapted to respond to volatile tions to purchase United Coal Company (USA). On comple- market conditions. We believe it was the rigorous following tion of this transaction in 2009, SCM Group will be capable of this simple recipe for success that not only enabled SCM of providing its enterprises with metallurgical coal required to survive 2008, but also will also provide us with the neces- for high quality coke production. This will provide us with an sary competitive advantage for our future growth, when the additional competitive advantage in international markets. national and the global economies begin recovery. Simultaneously with our M&A activity, we continued to invest SCM Group’s stability during this challenging year was se- in the Group’s organic growth. The largest investments were cured through our balanced approach to market analysis; made in our mining and metals and energy businesses, par- efficiency in making effective, though sometimes unpopular, ticularly in equipment modernization and increasing produc- decisions; our conservative approach to soliciting external tivity. The total investments in Metinvest and DTEK’s organic funding; a clear set of priorities; and the main factor - our growth in 2008 amounted to $679 mn and $338 mn, respec- team of talented professionals. tively. In the second half of 2008 we focused on controlling liquid- In order to provide stability for SCM assets in financial serv- ity and maximizing the effectiveness of resource allocation, ices, as well as to fulfill our obligations to clients, and to setting priorities for investment projects and implementing maintain market share, the statutory capitals of banks and the most important of these, and exiting from projects and insurance companies in SCM’s portfolio were increased by assets which did not meet SCM’s investment strategy. soliciting funding from shareholders. As result, First Ukrain- ian International Bank’s statutory capital was raised to $350 All these measures allowed us to make a range of critical mn, and Dongorbank’s statutory capital rose to $100.6 mn. tactical decisions, with the Group’s long-term development The statutory capital of ASKA Insurance Company was in- strategy remaining unchanged. creased to $18.8 mn. In 2008, SCM exited a number of businesses within the The total investments in Brusnytsya, the Group’s conven-
  7. 7. CEO statement 7 ience store chain development, amounted to $51.5 mn, achievements. We realize that some losses were inevitable, while the total investments in ESTA Group’s development but in spite of that our team was able to minimize the nega- (our real estate holding company) in 2008 exceeded $30 mn. tive impact of the recession on our enterprises and to main- tain trust in our relations with clients, financial markets, and In 2008 we completed the process of corporate transforma- local communities. I would like to thank everyone at SCM tion and continued to improve the Group’s corporate govern- Group for the outstanding performance and the tremendous ance structure. The clear and simple decision-making system effort they have shown in 2008, a year of extraordinary deci- allows SCM Group to make effective and timely decisions, sions and global challenges, as well as for their dedication which is especially important under increasingly uncertain and contribution to maintaining business stability. market conditions. Working towards long-term sustainable growth remains at the core of our strategy. Our largest businesses require con- stant and substantial capital investments. Clear and effec- tive management of our economic, environmental and social activities is our top priority, allowing us to constantly fulfill our obligations to society, government, and employees of our en- terprises. To increase the effectiveness of our social investments, we applied the international best practice of social partnership, in close cooperation with the local communities, as well as transformed the structure of the Group’s social projects. We focused our social sponsorship projects to concentrate on education, sport, and healthcare as priority directions, in which we continued to implement the most successful and effective projects. In 2009, we plan to continue to strengthen SCM’s position in key markets, with the emphasis being placed on the Group’s liquidity and effective resource allocation. We are fully aware that every downturn is always followed by an upturn and our goal is to be prepared to grow with the market, but preferably to exceed market growth dynamics. SCM Group is a strong business with significant growth po- tential. I sincerely regret that the global economic recession prevented us from fulfilling everything we planned for 2008 and forced us to review some of our investment projects. I truly believe that the responsible approach to performance of everyone of our team was the foundation of our success in 2008, and will be a building block for the Group’s further
  8. 8. SCM Group Public Report 2008 8 SCM Group events calendar 2008 January 4 Metinvest and Indistrial Union of Donbass Corporation signed a long-term agreement for supply of iron ore, flux, and dolomite products January 6 Metinvest and Zaporozhstal signed a long-term contract for supplying iron ore, flux, and dolomite prod- ucts January 14 SCM obtained the approval of the Anti-Monopoly Committee of Ukraine to concentrate a stake of more than 50% in Donetskgormash’s statutory capital January 16 Azovstal Steel Plant’s quality management system received official certification of ISO 9001:2000 January 18 Metinvest obtained the European Commission’s approval to acquire Trametal S.p.A. (Itay) and Spartan UK Ltd (Great Briatin) Steel Mills January 28 Azovstal Steel Plant’s reconstruction of converter industry facilities reached its final stage January 29 SCM formed a publishing holding under the management of Segodnya Multimedia February 8 Azovstal Steel Plant produced 2 mn tonnes of slabs during its 15 years of cooperation with South Ko- rean Dongkuk Steel Mill Co, Ltd. February 20 News Television Channel obtained a satellite broadcasting license February 29 Khartsyzk Pipe Plant received the international ISO 3834 compliance certification for its pipe welding quality March 14 SCM presented its real estate sectoral holding – ESTA Holding March 14 DTEK was rated A+ in the All-Ukrainian Rating of Socially Responsible Companies by Gvardiya Maga- zine March 18 SCM obtained the approval of the Anti-Monopoly Committee of Ukraine to concentrate more than 50% stake in Kamensky Heavy Engineering Plant (Russia) March 18 Yenakiyevo Steel Plant completed the capital repairs to its converter March 24 SCM obtained the approval of the Anti-Monopoly Committee of Ukraine to concentrate more than 50% stake in CSS Telecommunications Company (Odessa) statutory capital March 25 Metinvest SMC opens its first metal service centre abroad – in Serbia
  9. 9. SCM Group events calendar 2008 9 March 26 Krasnodonugol became Ukraine’s first coal mining enterprise to pass the Occupational Health and Safety Management Standard System audit and was granted the OHSAS 18001:2007 compliance certification April 4 SCM presented its revised CSR policies April 7 Shares in Oktyabrskaya and Dobropolskaya Coal Enrichment Plants (CEP), which initially belonged to Metinvest, were transferred to DTEK April 7 Vecherkom free newspaper entered the Kiev newspaper market April 11 Azovstal Steel Plant completed the reconstruction of blast furnace #3 April 14 Khartsyzk Pipe Plant quality management system was awarded the Russian certificate of compliance with GOST R ISO 9001-2001 standard April 16 Ukrainian Retail Company was recognized as the Best New Employer 2007 in Donetsk April 17 Pavlogradugol produced 400 mn tones of coal since the beginning of operations April 23 Yenakiyevo Steel Plant began the construction of a new blast furnace May 13 SCM exited from the shareholders of Kremenchug Steel Plant May 19 DTEK was granted a $150 mn syndicated loan May 22 SCM was rated A+ in the All-Ukrainian Rating of Socially Responsible Companies by Gvardiya Magazine May 28 Northern and Central Ore Mining and Enrichment Plants (SevGOK and CGOK) were granted the interna- tional Occupational Health and Safety Management Standard System certification, OHSAS 18001 June 9 First Ukrainian International Bank completed the procedure of the additional issue of shares worth $208 mn June 11 Azovstal Steel Plant tested its new steel slab continuous caster June 17 First Ukrainian International Bank increased the size of its net assets to $3,123 bn June 26 First Ukrainian International Bank was granted a $50 mn syndicated loan
  10. 10. SCM Group Public Report 2008 10 July 1 SCM and Metinvest received Trade Finance Magazine’s ‘Best Transaction of the Year’ awards for the syndicated loan transactions of $545 mn and $1.5 bn, respectively July 2 Azovstal Steel Plant was awarded the Russian certificate of compliance with GOST R ISO 9001-2001 standard July 3 SCM joined the national Go Green environmental campaign, initiated by the United Nations Represent- ative Office in Ukraine July 7 SCM completed the sale of 99.85% of Sarmat Brewery to SABMiller plc July 14 DTEK was granted a $79 mn stand-by loan facility July 15 Dokuchaevsk Flux and Dolomite Plant (DFDK) and Novotroitskoye Mines Management installed the business management systems, based on the SAP for Mining industrial solution July 17 SCM increased its stake in ASKA Insurance Company to 88.70% July 17 SCM exited from the shareholders of SlavTyazhMash July 22 Ingulets Ore Mining and Enrichment Plant (InGOK) installed and launched the business management system, SAP’s Mining industry solution July 25 Dongorbank General Shareholders Assembly decided to increase the bank’s statutory capital by $72 mn July 28 DTEK issued domestic bonds worth $103 mn July 29 INKOR & Co was integrated into Metinvest Coal and Coke Division August 1 SCM exited from the shareholders of Krym Brewery August 8 SCM exited from the shareholders of Donbass Trade Fleet and Azov Shipyard Plant August 21 First Ukrainian International Bank was granted a $154 mn syndication loan August 22 Metinvest Eurasia opened the retail center in Krasnodar (Russia) August 29 Metinvest paid over $800 mn in taxes during the first seven months of 2008 August 29 Metinvest SMC began warehouse sales of rolled steel in Nikolayev and Krivoy Rog
  11. 11. SCM Group events calendar 2008 11 September 11 SCM became a partner of the International Energy Forum in Brussels, dedicated to the matters of energy security September 24 SCM presented the results of Compass, the first rating of Ukrainian Higher Educational Institutions 2007-2008 September 25 DTEK signed an agreement for purchasing SAP business management solutions, in order to create a unified business management and resource planning system at the Group level September 26 Segodnya Multimedia launched a new product – Tvoe newspaper October 13 SCM Group was declared Donetsk Oblast’s best taxpayer October 15 Farlep-Optima Telecommunications Group began providing services under a unified brand - Vega October 28 DTEK paid off its first international loan of $100 mn November 11 ASKA Insurance Company General Shareholders Assembly decided to increase the company statutory capital by $6.9 mn November 11 Occupational Health and Safety Management Systems at DTEK enterprises were certified as being compliant with the international standard OHSAS 18001:2007 November 18 Football Television Channel began pilot broadcasting November 26 First Ukrainian Internatinoal Bank paid off a $90 mn syndicated loan December 9 Azovstal Steel Plant completely switched from the use of natural gas to coke in its blast furnace opera- tions December 10 DTEK was Ukraine’s first industrial company to publish the social report for 2007 December 26 SCM Company transferred the ownership to all petroleum retailing companies’ shares to Parallel Nafta (Cyprus), a daughter company
  12. 12. SCM Group Public Report 2008 12 SCM Group corporate transformation program IN THE COURSE OF 2008, SCM GROUP CONTINUED THE TRANSFORMATION OF ITS ASSET MANAGEMENT SYSTEM, AIMED AT INCREASING THE EFFECTIVENESS OF GROUP ENTERPRISE MANAGEMENT. EARLIER, AT THE BEGINNING OF 2006, THE DECISION WAS MADE TO CONSOLIDATE GROUP ASSETS UNDER SECTORAL HOLDINGS: METINVEST, DTEK, ESTA HOLDING, SEGODNYA MULTIMEDIA, AND UKRAINE TELEVISION CHANNEL. THE DECISION WAS ALSO MADE TO TRANSFER THE CORPORATE RIGHTS OF A RANGE OF ASSETS TO SPECIALLY CREATED CORPORATE CENTERS: SCM FINANCE, UMG, PARALLEL NAFTA, UMBH, AND FARLEP INVEST. THIS MANAGEMENT SYSTEM COMPLIES WITH SCM GROUP VISION OF ITS FURTHER DEVELOPMENT AS A PROFESSIONAL MANAGING COMPANY, IN LINE WITH THE INTERNATIONAL CORPORATE STANDARDS. MINING AND METALS TELECOMMUNICATIONS Metinvest obtained the approval of the European Commis- CSS Telecommunications Company (Odessa) became part of sion to purchase the controling shareholding in Trametal Farlep-Optima Telecom Group. S.p.A. (Italy) and Spartan UK (United Kingdom) steel rolling plants. These enterprises will be integrated into Metinvest Farlep-Invest-CSS Telecommunications Group started pro- Holding Italy S.p.A., whose production capacity will exceed 1 viding its services under the unified Vega brand. The main mn tones of steel plate on the EU market. benefits of the unified operator under the Vega brand are: nationwide coverage, integrated services portfolio, higher in- INKOR & Co. Scientific and Production Company was in- ternet access speed, and high quality service. tegrated into Metinvest Group’s Coal and Coke Division. This enterprise will help provide deeper raw coke and coal The decision was also made to decrease the number of com- processing and produce a competitive product with higher panies in Vega’s legal structure, from 45 to 25. It is intended added value. The main raw coke and coal supplier for INKOR that operations based on fewer companies will help Vega to in- & Co is Avdeyevka Coke and Chemical Plant. crease the effectiveness of business processes and optimize the procedures for service provision throughout the country. ENERGY REAL ESTATE Within the framework of the corporate transformation pro- gram, SCM transferred stakes in Oktyabrskaya (16.25%) SCM Group launched ESTA Holding, which will manage the and Dobropolskaya (10.62%) CEPs, owned by Metinvest, company’s interests in the real estate sector. The decision to DTEK. Earlier, DTEK has already received 40.44% and to invest in a new business area follows SCM’s strategy of 27.45% stakes in these respective CEPs. As result, DTEK has deliberate diversification and increasing the share of non- a 60.85% stake in Oktyabrskaya CEP and 60.06% stake in industrial businesses in the Group’s portfolio. Dobropolskaya CEP. ESTA Holding business is present in the following real estate market segments: commercial property (class A office cent- FINANCIAL SERVICES ers and large retail centers), elite residential property and hotels (the company owns two premium-class hotels – Don- SCM increased its stake in ASKA Insurance Company to 88.70%. bass Palace in Donetsk and Opera in Kiev).
  13. 13. SCM Group corporate transformation program 13 MEDIA OTHER BUSINESSES Television SCM obtained the Anti-Monopoly Committee of Ukraine’s approval to become the majority shareholder in Donetskgor- Within the framework of Ukraine Media Group development, mash. Digital Ventures was formed to manage a range of internet sites. In the long-term perspective, Digital Ventures intends SCM obtained the approval of the Anti-Monopoly Committee to become one of the leaders of Ukraine’s internet market. of Ukraine to become the majority shareholder in Kamensky Heavy Engineering Plant (Russia). Ukraine Television Channel obtained a satellite broadcasting license for News Channel. The channel is one of the niche SCM sold its 19.41% stake in Kremenchug Steel Plant. The television channels, planned for launch within the framework company was a minority shareholder in that enterprise and of the media group to be formed on the basis of Ukraine Tel- was not able to substantially influence neither strategic de- evision Channel. cision-making, nor financial and business activity. Therefore, having received an economically viable proposal to sell its stake, SCM made the decision to exit from the shareholders Publishing of Kremenchug Steel Plant. SCM formed Segodnya Multimedia publishing holding, to SCM sold its stake in SlavTyazhMash Plant. The company which it transferred corporate rights to a range of assets in was a minority shareholder with decision-making power di- the newspaper industry. Particularly, SCM transferred to Se- rectly related to the size of its stake. Having received a eco- godnya Multimedia a 88.69% stake in Priazovskiy Rabochiy nomically viable proposal, SCM made a decision to sell its newspaper, a 53.64% stake in Vecherniy Donetsk newspa- stake in the plant. per, and a 75% stake in Media-Press publishing company. SCM exited from the shareholders of Donbass Trade Fleet Vecherkom, a full-color free daily newspaper was launched and Azov Shipyard. SCM sold its minority stakes in these in Kiev. The newspaper is aimed at the readers between 16 companies as they did not comply with the Group’s invest- and 39. Vecherkom’s daily circulation is 80 000 copies. The ment strategy. The development of transportation busi- newspaper will feature daily news and information collected nesses is not a priority for SCM Group, and integrating the before noon and published the same day. businesses in the production chains of the existing sectoral holdings was not feasible. PETROLEUM PRODUCTS RETAILING The sale of SCM’s 99.85% stake in Sarmat Brewery to SAB- Miller plc was completed. Brewing is not a priority area for SCM transferred to Parallel Nafta, a ‘daughter’ company, its SCM Group and this was the reason for selling Sarmat Brew- stakes in its petroleum retailing businesses. Parallel Nafta ery to a large international brewer. received the stakes in Parallel-M Ltd (Parallel and PitStop gas station chains) and Gefest. As result, Parallel Nafta stake in SCM also completed the sale of its 93.98% stake in Krym statutory capital of Parallel-M and Gefest increased to 100%. Brewery in line with its strategy of exiting from the brewing business.
  14. 14. ABOUT SCM GROUP
  15. 15. About SCM Group > SCM Group history 15 SCM Group history SYSTEM CAPITAL MANAGEMENT (SCM) WAS FOUNDED IN 2000 IN DONETSK. ITS MAIN PURPOSE IS TO INVEST STRATEGICALLY IN KEY SEGMENTS OF THE UKRAINIAN ECONOMY. THESE ARE PRIMARILY MINING AND METALS, ENERGY, TELECOMMUNICATIONS, BANKING, INSURANCE, REAL ESTATE, MEDIA, CLAY MINING, RETAIL, AND PETROLEUM PRODUCT RETAILING. SINCE ITS FOUNDATION, SCM HAS BEEN BUILDING UP ITS BUSINESS, BASED ON THE INDUSTRIAL ASSETS IT OWNS AND MAKING LARGE-SCALE INVESTMENTS, BOTH IN UKRAINE AND ABROAD. TODAY, THE HISTORY OF SCM GROUP CAN BE PRESENTED IN THE FOLLOWING 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 man- agement 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 structures and forming a team of world-class managers capa- ble of running them. 2004–2006 EXPANDING During the same period, SCM began actively expanding its telecom business. Banking and insurance businesses also joined the list of key areas SCM was expanding into. The company instituted the preparation of consolidated financial statements in accordance with International Financial Reporting Standards (IFRS) and began the proc- ess of building a transparent business and management structure for the Group. 2007 – 2008 CREATING STABILITY SCM group developed a distinct business development strategy. Business expansion was based on organic growth, as well as on new acquisitions in strategically important segments of economy and industry (mining and metals, energy, financial sector, telecommunications, real estate, retailing, and others). It is during these years that the Group accumulated the necessary reserves to ensure business stability during volatile periods. The main goal for this period was to make SCM not only Ukraine’s leading financial and industrial group, but also a truly competitive and successful global business.
  16. 16. SCM Group Public Report 2008 16 Corporate culture: mission, vision, values THE SCM MISSION: SUCCESS, TOGETHER We invest in the continuous growth and effectiveness of our business, 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 returns on our investment and participating in the development of the regions in which we have a presence. OUR VALUES: EFFECTIVENESS, PROFESSIONALISM, ACCOUNTABILITY Effectiveness as a means to achieve the best results in everything we do. For us, effectiveness is: Ô reaching the goals we set; Ô applying contemporary technologies and approaches to doing business; Ô constantly improving the processes and methods of doing business; Ô rational allocation and use of resources; Ô seeking new opportunities; Ô 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: Ô meeting the highest standards; Ô stimulating initiative and innovation; Ô investing in professional development and loyalty of employees; Ô attracting and retaining highly qualified personnel; Ô fair evaluation of achievements. Accountability to our employees, our partners, our communities, and society as a whole.
  17. 17. About SCM Group > SCM Group management 17 SCM Group management Oleg Popov General Director CEO OF SCM SINCE DECEMBER 2005. 2001-2005 – EXECUTIVE DIRECTOR OF SCM. 2000 – HIRED BY SCM AS DEPUTY TO THE CEO. 1992-2000 – WORKED IN VARIOUS GOVERNMENT OFFICES AND PRIVATE COMPANIES. EDUCATION: Graduated from Donetsk State University in 1996 Graduated from Donetsk Polytechnical Institute in 1990 CAREER: Chairman of the Board for FC Shakhtar. Represents SCM interests on the Supervisory Boards of DTEK, First Ukrainian International Bank, Dongorbank, Ukrainian Retail, as well as on the Auditing Committee of Metinvest. Areas of responsibility include: taking and approval of the key financial, investment, and personnel decisions, both directly at SCM and in the Group assets, as well as evaluating the performance of top management of these assets. In 2008 we passed a serious endurance test, and, I believe, we did it suc- cessfully. The year that started with the swift economic growth, ended with the downturn of comparable scale, caused by the global economic reces- sion. However, it was the test by crisis that proved the accuracy of the development strategy we had chosen and reliability of the safety cushion we had created. Effective risk management system we built turned out to be truly invaluable during this challenging year, as well as the stability reserves accumulated during the pre-recession years. In 2008 we managed to precisely identify the external challenges and op- portunities, as well as to take efficient and effective anti-crisis decision. It was the clear focus on our priorities that allowed us to retain the trust of our clients, partners, and, what is especially important, the trust of our employees – the most valuable asset of SCM Group at all times.
  18. 18. SCM Group Public Report 2008 18 Roman Vodolazkyy Financial Director CFO OF SCM SINCE JUNE 2005. FEBRUARY-JUNE 2005 – SENIOR FINANCIAL MANAGER (TITLE CHANGED TO CFO). 2002 – HIRED BY SCM AS MANAGER FOR THE GROUP’S METAL DIVISION. OCTOBER 2000-SEPTEMBER 2002 – AUDITOR FOR PRICEWATERHOUSECOOPERS IN KIEV. MARCH 1999- OCTOBER 2000 – WORKED AT THE FINANCIAL DEPARTMENT OF MCDONALD’S UKRAINE. 1994-1999 – BEGAN HIS CAREER AS ACCOUNTANT AND CHIEF ACCOUNTANT FOR VARIOUS UKRAINIAN COMPANIES. EDUCATION: MBA from INSEAD (France), a leading European business school, in 2007. Graduated from Kherson State Technical University as a Specialist in Ac- counting and Computer Software in 1998. CAREER: Member of the British Association of Certified Chartered Accountants (ACCA) since 2005. Represents SCM interests on the Supervisory Boards of DTEK, Farlep-Invest, ASKA Insurance Company, and FC Shakhtar. Areas of responsibility include managing the Group’s Financial Department: budget- ing, financial reporting preparation, treasury functions, and internal audit. Our main achievement in 2008 was the ability to timely and effectively re- act to the rapid changes in the external environment. In order to face the economic crisis prepared, we united, established rigorous control over our expenses, timely re-evaluated and re-allocated the resources, tightened the internal discipline. Due to the efficient and the pragmatic action on our part, not only were we able to maintain our business and our team, but we also strengthened the image of SCM as the reliable business partner. We also continued the integration of SCM and Smart Group assets in min- ing and metals. The purchase of the new steel rolling facilities in Europe and the beginning of purchasing a mine in the USA significantly strengthened SCM’s positions in mining and metals business. It is also worth noting that in 2008 we significantly decreased our debt burden. Even though the share of our debt was not critical before the crisis, its further decrease provided us with the flexibility we needed in the new economic reality. We became even more conservative in terms of soliciting external funding, while rigor- ous and timely fulfillment of our credit obligations has always been and re- mains one of our top priorities.
  19. 19. About SCM Group > SCM Group management 19 Ilya Arkhipov Business Development Director BUSINESS DEVELOPMENT DIRECTOR AT SCM SINCE OCTOBER 2005. 2001-2005 CONSULTANT, MCKINSEY & CO, MOSCOW. 2000-2001 – OPERATIONS MANAGER FOR RUSSIA’S LARGEST ON-LINE AUCTION RESOURCE, MOLOTOK.RU FOR NETBRIDGE, AN INTERNET COMPANY. 1995-2000 – CONSULTANT, COOPERS & LYBRAND AND PRICEWATERHOUSECOOPERS, MOSCOW. EDUCATION: MBA from INSEAD (France), a leading European business school, in 2007. Graduated from the Plekhanov Academy of Economics in Russia as a Spe- cialist in Enterprise Management in 1999. CAREER: Represents SCM interests on the Supervisory Boards of Farlep-Invest, First Ukrainian International Bank, Dongorbank, ASKA Insurance Com- pany, Segodnya Multimedia, and Ukraine Television Channel. Areas of responsibility include: participating in determining the overall portfolio strategy of the Group, as well as in corporate restructuring. In particular, Mr. Arkhipov is involved in developing SCM’s business strategy regarding telecoms, banking and insurance, as well as media. 2008, by and large, became a ‘test’ year for the Group, which allowed us to re-evaluate our past achievements and demanded new ideas and new approaches. Our main achievement was that we entered the crisis strong and prepared to learn and change as we went along. All consolidation and business transformation efforts taken during the previous years in various industry sectors of our business paid off, and in 2008 we were certain that most of our strategies and decisions were correct.
  20. 20. SCM Group Public Report 2008 20 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 THE DECISION WAS MADE TO INSTITUTE THE POSITION FOR NEW BUSINESS DEVELOMENT. 2001 – HIRED BY SCM AS MANAGER OF THE FINANCIAL CONTROL DEPARTMENT. 1997-2001 – WORKED AT KERAMET INVEST, HAVING GROWN FROM STOCK BROKER TO GENERAL MANAGER. EDUCATION: MBA from INSEAD (France), a leading European business school, In 2007. Graduated from the Financial Accounting Department of Donetsk State Universtity in 1998. CAREER: General Director of ESTA Holding, which manages SCM Group projects in real estate. Areas of responsibility: determining strategic business development in real estate, machine-building, and transport sectors at SCM, seeking new areas for investment. As for the real estate sector, the sphere I oversee, in 2008 we introduced ESTA Holding on the international arena for the first time. ESTA was pre- sented at one of the most prestigious real estate conferences – MIPIM that is traditionally held in France. Besides, it is during that year that we fi- nalized the formation of our organization structure. Now we can definitely say that ESTA Holding corporate structure fully complies with the world’s best practice. On SCM Group level, I think, our main achievement was divesting assets that didn’t belong to our key business areas. For instance, we sold our stakes in Ship Building Plant and Donbass Trade Fleet, as well as we ex- ited the beer brewing business. However, I believe the Group’s greatest achievement in 2008 was retain- ing our business and our team, in spite of all external complexities.
  21. 21. About SCM Group > SCM Group management 21 Jock Mendoza-Wilson International and Investor Relations Director INTERNATIONAL AND INVESTOR RELATIONS DIRECTOR AT SCM SINCE 2006. 2005-2006 – DIRECTOR OF CORPORATE COMMUNICATIONS FOR SCM. 1989 – LAUNCHED HIS OWN PR CONSULTANCY IN LONDON AND ADVISED U.S. GOVERNMENT AGENCIES ON THEIR PUBLIC DIPLOMACY PROGRAMS IN THE MIDDLE EAST. 1984 – BEGAN HIS CAREER WITH FORD EUROPE COMPANY. EDUCATION: Graduated as an Economist from Heriott-Watt University (Edinburgh) in 1984. CAREER: Areas of responsibility: developing and implementing communications strategies and programs, aimed at establishing contacts with both gov- ernment offices and NGOs; developing relations with international gov- ernments, business, and media, as well as maintaining relations with the investment and finance community. There were several events in 2008 that facilitated SCM Group’s integra- tion into the global economy. The purchase of Trametal S.p.A. was the most important event of the year that secured SCM’s entrance to the new European markets. As a result of this purchase, Metinvest now possesses the production capacity of over 1 mn tonnes of rolled steel, a product with high added value, inside the European Union. This also helped Metinvest improve client service. Syndicated loans, successfully secured by SCM, Metinvest, and DTEK, were a serious achievement, ensuring those companies’ access to the international capital markets. SCM Group achieving an A+ grading and being the top rated Ukrain- ian company in terms of corporate responsibility was also a significant achievement for the company as it recognized the systematic approach taken and hard work done by our businesses in this area.
  22. 22. SCM Group Public Report 2008 22 Natalia Yemchenko Public Relations and Communications Director PUBLIC RELATIONS AND COMMUNICATIONS DIRECTOR AT SCM SINCE DECEMBER 2006. 2005-2006 – PUBLIC RELATIONS MANAGER FOR SCM. 2003 – HIRED BY SCM GROUP AS A SECTOR GROUP MANGER. 2001-2003 – DIRECTOR, KERAMET INVEST, AN INVESTMENT COMPANY. 1998-2001 – FINANCIAL MANAGER AT KOLO, AN INVESTMENT COMPANY. EDUCATION: Graduated from Donetsk National University as a Specialist in Finance and Credit in 1998. CAREER: Chairs the Auditing Committee of Ukraine Television Channel. Areas of responsibility: communicating with stakeholders, including the media, employees, residents in regions of company presence, the govern- ment, community organizations, and the general publc, as well as com- pany reputation management. 2008 was quite an eventful year for SCM. During this year everyone, including us, was operating under increasingly uncertain conditions. In terms of communications, this meant a lot of complex and challenging goals for us, as well as some new opportunities. Not only was SCM Group able to quickly adjust its plans and priorities, but also managed to focus on the most important aspects of its activity in the rapidly changing environment, such as: liquidity, effective resources allocation, and business stability. SCM was also able to maintain transparent relations with its key stakeholders based on mutual trust. We clearly and timely informed the market of the anti-crisis measures we were taking and maintained constructive dialogue with practically all our publics. As for SCM’s achievements in communications, I would like to emphasize the annual reports prepared by the Group’s largest holdings, as well as a range of other projects. Among key events of the year, I would also like to mention the launch of Compass, National rating of higher education institutions that successfully started in 2008, in spite of the economic downturn.
  23. 23. About SCM Group > SCM Group management 23 Roman Bugayov Corporate Rights and Foreign Asset Management Director CORPORATE RIGHTS AND FOREIGN ASSET MANAGEMENT DIRECTOR AT SCM SINCE SEPTEMBER 2007. 2005-2007 – MANAGER OF THE CORPORATE RIGHTS DEPARTMENT FOR SCM. 2003 – HIRED BY SCM AS ECONOMIST. 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. EDUCATION: Graduated from the Donetsk Institute of Entrepreneurship as a Specialist in Organizational Management in 2000, with major in Economic and Legal Aspects of Commercial Activity. CAREER: Represents SCM interests on the Supervisory Board of DTEK. Sits on the Auditing Committee of Ukraine Television Channel and Bureau of Economic and Social Technologies (BEST) Analytical Center. Areas of responsibility: determining and implementing company policy re- garding the management of corporate rightrs; organizing and handling op- erations involving corporate rights belonging to the company and its subsid- iaries; and organizing the activities of foreign companies belonging to SCM. The main event of 2008 was the completion of SCM corporate transfor- mation. Particularly, we formed industrial holdings in telecommunications, publishing, and real estate, as well as consolidated our assets in oil prod- ucts retailing. Besides, it is in 2008 that we made a range of important purchases – practically in all spheres of our business, from mining and metals (INKOR and Co, steel plants in Italy and UK) to telecommunications (CSS). On the other hand, in 2008 we exited from businesses that did not comply with our strategy, for instance, from brewing business. In other words, we faced the ‘economic cooldown’ consolidated and well-structured, which allowed us not only to survive this year, but also to strengthen our market positions.
  24. 24. SCM Group Public Report 2008 SCM Group target corporate governance system SCM Minority Company shareholders Sectoral Holding Supervisiory Board Appointment Health, Occupational Auditing Strategy and Investment and Compensation Safety, and Environment Comittee Comittee Comittee Comittee* * Applies only to Metinvest and DTEK
  25. 25. About SCM Group > SCM Group target corporate governance system Sectoral Supervisiory Holding Boards Managing of Operational Company companies Holding Holding Operational General Board companies Director when decision is made to create a sectoral holding when decision is made not to create a sectoral holding
  26. 26. SCM Group Public Report 2008 26 SCM Group target corporate governance system SCM’S SYSTEM OF CORPORATE GOVERNANCE IS IN LINE WITH THE HIGHEST INTERNATIONAL STANDARDS AND IS BASED ON WORLD BEST PRACTICE. IT ALLOWS THE COMPANY TO qUICKLY AND EFFECTIVELY MAKE THE DECISIONS, NECESSARY TO ENSURE THE DYNAMIC GROWTH OF ALL THE GROUP’S SECTORAL HOLDINGS AND BUSINESS AREAS. As the majority shareholder and the main inves- agement; the independence of internal and tor, SCM Group governs its sectoral holdings by external audits; and for ensuring compliance delegating its representatives to sit on the re- with the laws and norms governing business spective Supervisory Boards. The participation of ethics. minority shareholders in the governance of these holdings is also executed through their repre- Ô The Strategy and Investment Committee sentatives on the Supervisory Boards. prepares and submits for review to the Su- pervisory Board the necessary recommen- The Supervisory Boards govern the sectoral dations regarding the opportunities for the holdings. These Boards include representatives holdings to be involved in investment projects of SCM, minority shareholders, and external ex- and exit strategies for specific projects. The perts. The members of each Board vote to elect Committee also prepares recommendations a Chair from among their number. The Supervi- regarding the strategic goals and objectives sory Boards determine business development of the various holdings, as well as the imple- areas and the standards for engaging in specific mentation of agreements on mergers and ac- businesses; they approve strategies, budgets quisitions (M&A). and major transactions, as well as oversee their implementation; they track business indica- Ô The Appointment and Compensation tors, appoint top managers, establish incentives Committee recommends to the Supervisory for them, and evaluate their performance. The Boards candidates for management posi- members of the Supervisory Boards, along with tions in the sectoral holdings. With this pur- independent experts, may also participate in pose in mind, the Committee organizes inter- specialized comities including: The Audit Com- views with applicants for specific positions mittee, the Strategy and Investment Committee, and decides whom to recommend for those the Appointment and Compensation Committee, positions. The Committee also prepares rec- and the Health, Occupational Safety, and Envi- ommendations regarding the rotation of top ronment Committee. managers within the sectoral holdings, pro- poses ways to incentivize top managers, as Ô The Audit Committee prepares recommen- well as participates in shaping the corporate dations for the sectoral holdings’ Supervisory culture and staffing, and in determining the Boards regarding the approval of accounting prospects for personal development of man- policy and procedures for preparing financial agers, and so on. reports; the depth and accuracy of financial reporting provided by each holding; the reli- Ô The Health, Occupational Safety, and En- ability and effectiveness of the internal audit- vironment Committee was created to in- ing system, internal oversight and risk man- stitute the highest health and occupational
  27. 27. About SCM Group > SCM Group target corporate governance system 27 safety standards across the Group, as well The Supervisory Boards of operating companies as to control the environmental impact of are responsible for their sustainable financial the Group’s industrial enterprises. The Com- and commercial growth, greater effectiveness, mittee develops SCM Group’s strategy for and increased competitiveness of their opera- the areas of its authority; prepares budgets tions. They keep track of the upholding of share- to finance modernization of and equipment holder rights, make decisions regarding the time purchase for the Group’s industrial assets; to hold General Shareholders’ Meetings, estab- ensures the compliance of all industrial en- lish the agenda for such meetings, draft corpo- terprises with the approved health and safety rate policy, and so on. standards; as well as annually submits the Group enterprises’ quarterly management The members of the Supervisory Boards of op- reports to the Supervisory Board for review. erating companies are appointed by the Execu- tive Council and are approved by the Supervisory The General Director of a sectoral holding is Board of the relevant sectoral holding. appointed by the Supervisory Board, in order to manage the holding’s operations. As a member For individual areas of business where there are of the Board, this person takes an active part in no sectoral holdings, the system of corporate the strategic planning of the holding’s activities. governance works through the immediate Super- visory Boards of the operating companies. The Executive Council is the highest body in the operational management of the holding. Each In the course of several years, this corporate holding’s Executive Council is established colle- governance structure has demonstrated its ef- gially. The Chair of the Executive Council is the fectiveness for achieving SCM Group’s goals and General Director of the holding. is being constantly improved.
  28. 28. SCM Group Public Report 2008 28 SCM Group asset management system BY THE BEGINNING OF 2006, WHEN THE DECISION WAS MADE TO BEGIN THE CORPORATE TRANSFORMATION PROCESS, SCM GROUP SAW ITSELF AS THE CONGLOMERATION OF VARIOUS ASSETS THAT WERE DIRECTLY RUN BY SCM, THE MANAGING COMPANY. THE CORPORATE TRANSFORMATION PROGRAM IS AIMED AT INSTITUTING A MODERN, COMPREHENSIVE SYSTEM OF CORPORATE GOVERNANCE AND SWITCHING TO A NEW CORPORATE STRUCTURE. SCM Group’s target business model provides, The key features of SCM’s corporate governance first and foremost, for a change in SCM’s role in system are: the management system through a switch from operational management of individual enter- Ô simplicity and intelligence, clearly-defined ar- prises to strategic management of newly-formed eas of competence along all the links of the sectoral holdings and Group business areas. Ac- chain; cording to the Program approved in 2006, the process of combining the Group’s operational Ô effective managerial decision-making and con- companies within the framework of specific sec- trol; toral holdings began. Those holdings received the right to own and manage SCM assets in their Ô effective risk management; specific sectors. The sectoral holdings were also assigned to manage the assets that were handed Ô compliance with the target corporate rights over to them, including devising and implement- ownership structure; ing their business development strategies. Ô compliance with best world standards. This new business structure and the important change in the role of the SCM Company in the SCM Group’s corporate governance system is decision-making system, as well as SCM’s un- based on the principles of transparency and com- swerving determination to match international pliance with the law that lie at the heart of all its standards, drove the transition to what was, for activities. SCM, a fundamentally new system of corporate governance. In determining a target corporate governance structure, SCM studied best international prac- tice and clearly spelled out its key features and the basic principles on which it is built.
  29. 29. About SCM Group > SCM Group approach to risk management 29 SCM Group approach to risk management WE CREATED AN EFFECTIVE AND RELIABLE RISK MANAGEMENT SYSTEM, COMBINING WORLD BEST PRACTICE AND OUR OWN EXPERTISE. WE MANAGE RISKS EFFECTIVELY, DUE TO THE DIVERSIFICATION OF OUR BUSINESS, CONSTANTLY STRIVING FOR THE FINANCIAL STABILITY OF ALL SCM GROUP ASSETS, AS WELL AS A CLEAR INVESTMENT STRATEGY, ALIGNED WITH THE OPERATIONAL DECISION-MAKING SYSTEM. Diversification. SCM Group strives towards We carefully monitor the liquidity of our assets deliberate business diversification, though it is and rigorously manage our working capital. a long-term process, requiring a balanced ap- proach to investment. Investment strategy. SCM is a strategic, long- term investor. We do not aim to receive ‘quick’ We carefully consider the opportunities to enter profits and regard investment in our business new markets. In order for SCM Group business development from the standpoint of long-term area to be declared strategic, it must comply with value creation. We are predominantly focused on the following set of criteria: the organic growth of the Group’s assets. Ô clear long-term perspectives; In the course of the last several years, we have regularly made significant investments in mod- Ô profitability; ernization of our enterprises and increasing the industrial production, as well as improving energy Ô return on investment; efficiency. As a result – we have accumulated the reserves, necessary to withstand any structural Ô competitive advantage; changes in the market. We have enough resourc- es at our disposal to ensure that SCM Group’s Ô significance for Ukraine. long-term strategy remains unchanged. We strive for our alternative business areas to be Decision-making system. One of our strategy’s more dynamic in their development than our core core components is preparedness to change. Our ones (mining and metals, energy, finance) only in corporate governance model is not bureaucratic, this case will diversification allow us to mitigate which allows us to efficiently make the neces- the industry risks. sary decisions in the rapidly changing external environment. We are also prepared to correct our Financial stability. The share of external funding short-term plans, as needed, to adapt to the new in the SCM Group portfolio is relatively low, the economic reality. main reason for this is our recent entrance into the debt capital markets. We have always been conservative in terms of selecting the sources of finance for our projects and and mainly prefer our own funding to external finance.
  30. 30. SCM Group Public Report 2008 SCM business structure – 2008 Mining & Metals Energy Financial Telecom Media (Metinvest) (DTEK) Services Iron Ore Division Coal Mining Banking VEGA Telecom- Ô Ukraine Television Ô Northern Ore Mining Ô Pavlogradugol munications Channel Ô First Ukrainian and Enrichment Plant International Bank Group Ô Komsomolets (SevGOK) Donbassa Mine Ô Segodnya Multimedia Ô Dongorbank Ô Central Ore Mining and Ô Mospinskoye Coal Enrichment Plant (CGOK) Enrichment Plant Ô Digital Ventures Ô Inguletsky Ore Mining Ô Pavlogradskaya Coal and Enrichment Plant Enrichment Plant (CEP) Insurance (InGOK) Ô Kurakhovskaya Coal Ô Krivoy Rog Central Ore Enrichment Plant (CEP) Ô ASKA Mining Equipment Repair Plant (KCRZ-KZGO) Ô Dobropolskaya Coal Ô ASKA-Life Enrichment Plant (CEP) Ô Oktyabrskaya Coal Coke and Coal Enrichment Plant (CEP) Division Ô Avdeyevka Coke and Power Generation Chemical Plant (AKHZ) Ô Avlita Stevedoring Ô Vostokenergo Company Ô Krasnodonugol Ô INKOR & Co Power Distribution Ô PES Energougol Steel and Rolled Products Division Ô Service Invest Ô Azovstal Steel Plant Ô YeMZ Group (Yenakiyevo Steel Plant, Metalen) Ô Khartsyzsk Pipe Plant (KHTZ) Ô Trametal S.p.A. Ô Spartan UK Ltd. Ô Ferriera Valsider (Italy) Ô Prometei Ô Skif Shipping Sales Ô Metinvest International S.A. Ô Metinvest Eurasia Ô Metinvest Ukraine Ô Metinvest SMC
  31. 31. About SCM Group > SCM business structure - 2008 Real Estate Clay Mining Retail Trade Petroleum Other assets (ESTA Holding) (United Minerals (Ukrainian Retail) Products Group) Retailing Hotels Ô Vesko Ô Brusnytsya Ô Parallel Heavy Engineering Retail Chain Ô Opera Ô Druzhkovskoe Mines Ô Gefest and PitStop Ô Donetskiy Energozavod Ô Donbass Palace Management brands Engineering Plant Ô Ogneupornerud Ô Druzhkovka Heavy Engineering Plant Multi-functional Ô Gorlovskiy Centers Mashinostroitel Ô Leonardo Engineering Plant Ô Pushkinsky Ô Sverdlovskiy Heavy Ô Oktyabrsky Engineering Plant Other properties under construction ASSOCIATED COMPANIES Mining & Metals: Ô Dokuchayevsk Flux and Dolomite Plant (DFDK) Ô Zaporozhkoks (Zaporozhye Coke and Chemical Plant) Ô Donetskkoks (Donetsk Coke and Chemical Plant) Ô Novotroitskoye Mines Management Ô Krivbassvzryvprom Explosives Company Ô Krivoy Rog Iron Ore Plant Energy: Ô Dneproenergo Ô Donetskoblenergo Telecommunications: Ô Astelit Ô Multichannel Multipoint Distribution System (MMDS)
  32. 32. SCM GROUP’S BUSINESSES
  33. 33. SCM Group’s businesses > Core business areas 33 Core business areas Mining and metals. Metinvest METINVEST GROUP INCLUDES ALL SCM GROUP’S ASSETS IN MINING AND METALS, AS WELL AS COMPANIES THAT SERVICE THEM. METINVEST IS THE BIGGEST VERTICALLY INTEGRATED MINING AND METALS COMPANY IN UKRAINE AND ONE OF THE LEADING PLAYERS IN THE WORLD’S METALLURGICAL INDUSTRY. THE MAIN SHAREHOLDERS OF METINVEST ARE SCM GROUP (75% SHARES) AND SMART GROUP (25% SHARES). In 2008 Metinvest Group enterprises produced Metinvest Group includes 25 enterprises which 10.8 mn tonnes of steel, over 11 mn tonnes of are among the leaders in the coke and chemi- rolled steel, over 5 mn tonnes of coke, and over cal, coal, mining, and metallurgy industries in 40 mn tonnes of raw iron ore. This production Ukraine. In Europe, Metinvest Group is repre- capacity allows to not only completely cover Met- sented by two rolled steel plants in Italy - Ferriera invest’s business needs for raw materials, but Valsider S.p.A. and Trametal S.p.A., as well as by also makes Metinvest one of the key suppliers to the Spartan UK Ltd., rolling mill in Great Britain. the steel producers in Ukraine, Europe, Mediter- ranean region, and Asia. Metinvest Group enter- The Group’s metallurgy enterprises produce a prises employ over 89 000 people. wide range of high quality products, used in prac- tically all metal intensive consuming industries. METINVEST GROUP ENTERPRISES IRON ORE DIVISION Northern Ore Mining and Enrichment Plant (SevGOK) is one of the largest mining companies in Europe with a closed production cycle for iron ore concentrate and pellets. Central Ore Mining and Enrichment Plant (CGOK) is a unique enterprise in Ukraine, combining opencast and shaft mining for the extraction of ores, as well as recycling enrichment wastes. The enterprise specializes in min- ing, processing, and production of raw iron ore for metallurgy, such as pellets and iron ore concentrate. Inguletsky Ore Mining and Enrichment Plant (InGOK) specializes in mining and processing ferrous quartzites from Ingulets deposit, located in the southern part of the Krivoy Rog iron ore basin. The enterprise produces two types of ferrous concentrate with iron content of 63.7% and 67.5%, respectively. InGOK uses a flotation concen- tration technology that is unique for Ukraine.
  34. 34. SCM Group Public Report 2008 34 Krivoy Rog Central Ore Mining Equipment Repair Plant (KCRZ-KZGO) is one of the leading enterprises in Ukraine producing a wide selection of mining, enrichment and transportation equipment and spare parts for shaft mining and opencast mining, as well as for crushing and milling equipment. COKE AND COAL DIVISION Avdeyevka Coke and Chemical Plant (AKHZ) is the largest high-technology company in Europe’s coking coal industry. The plant’s product range includes over 30 items, with the main product being coke for metallurgy, with annual coke output of over 3 mn tonnes. Avlita Stevedoring Company controls two deep water berths in Sevastopol Bay in the South-Western Crimea that are open all year round. The company operates the necessary trans-shipment and reloading facilities for railway to road and to sea transport, from sea to road and rail transport, as well as from ship to ship. The company also provides a wide range of services, such as: customs brokerage, warehouse storage, cargo dispatch, and vessel servicing. The company processes metal and operates a grain terminal with storage capacity of 0.1 mn tonnes. The grain reloading station production capacity is 1.2 thousand tonnes per hour from railway transport, and 0.3 thousand tonnes per hour from road transport (two reloading points). The vessel loading capacity is 1.2 thosand tonnes per hour, and the equipment used at both berths consists of 23 berth cranes, 5 of which are the latest generation mobile berth cranes by Liebherr and Gottwald. Krasnodonugol is one of the biggest companies in Ukraine extracting and enriching high energy coal used for coke production. Krasnodonugol uses the coal deposits of Krasnodon geo-industrial region in Lugansk Oblast, with coal bed angles varying from 0 to 60 degrees, located 400-1,200 meters under ground. Krasnodonugol in- cludes seven mines and ore plants, two enrichment plants, and service divisions. INKOR and Co is one of the largest chemical producers in the CIS and Europe. The company specializes in processing phenol- and naphthalene-containing raw material, produced by coke and chemical plants. The largest raw material supplier for INKOR and Co is Avdeyevka Coke and Chemical Plant, which is also a part of Metinvest Group. The enterprise also buys raw material from other producers in Ukraine and Russia. INKOR and Co produces naphthalene, phenols, cresols, xylenols, boiler and furnace fuel, as well as other products at its Dzerzhinsk Phenol Plant (Donetsk Oblast), which was intergrated into the company in 2001. STEEL AND ROLLED PRODUCTS DIVISION Azovstal Steel Plant is a modern, high-technology company that is among the top three steelmakers in Ukraine in terms of product output volume, producing a wide assortment of metal products: slabs, rolled section steel, structural shapes, rails, rail fasteners, billets, steel plates, and steel slag products. Azovstal is among the top three leaders of the rating of metal and mining enterprises of Ukraine. YeMZ Group is one of the world leaders in steel billet production. The Group includes Yenakiyevo Steel Plant and Ukraine-Switzerland Joint Venture Limited Liability Company Metalen, operating on a unified production platform
  35. 35. SCM Group’s businesses > Core business areas 35 with a consolidated production cycle. YeMZ Group produces various types of rolled steel (rods, cast billets, rolled bars, graded sections). Khartsyzsk Pipe Plant (KHTZ) is the largest producer of straight-seam electro-welded large diameter (478– 1,420 mm) piping in the CIS. The pipes are primarily used in the oil and gas industries. Trametal S.p.A. is a leader in Italian and European markets for structural carbon steel plates. Spartan UK Ltd. is the only producer of high-quality steel plates in Great Britain. The enterprise offers a wide vari- ety of steel plates used in construction, heavy engineering, and other industries. Ferriera Valsider (Italy) is a steel plant producing structural rolled steel (steel plates and hot-rolled coil). Its supply of raw materials is primarily (80–90%) sourced from Azovstal Steel Plant. Ferriera Valsider’s products are used in construction, ship-building, as well as in making boilers, pressure cylinders, pipies, and railing. Prometei Financial Industrial Company is one of the largest operators on the Ukrainian market of ferrous scrap metals. It supplies the holding’s companies with raw materials. Skif Shipping is a logistics company that provides the entire range of services for transporting, loading and docu- menting cargo. Metinvest International S.A. (formerly Leman Commodities) is the wholesale business responsible for the sale and export of Metinvest Group products. The company is represented in 11 countries, which allows the company to cover the world’s largest steel markets. Metinvest International has representative offices located in Istanbul (Turkey), Beirut (Lebanon), Beijing and Shanghai (China), Milan (Italy), Santo-Domingo (Dominican Republic), Bel- grade (Serbia), Tehran (Iran), Vilnius (Lithuania), Khartum (Sudan), Ashgabat (Turkmenistan), and Singapore. The company is headquartered in Geneva (Switzerland). Metinvest Ukraine is a wholesale business selling the products of Azovstal Steel Plant, Yenakiyevo Steel Plant, and Makeyevka Steel Plant in Ukraine and CIS countries, with the exception of Russia. The products are sold by railcar load quantities (from 65 tons), and the company has 165 products in its portfolio. Metinvest Eurasia is responsible for selling the products of Azovstal Steel Plant, Yenakiyevo Steel Plant, and Makeyevka Steel Plant in Russia. Metinvest SMC is a retail company selling the products of Metinvest Group enterprisees. Metinvest SMC’s net- work of companies includes 11 steel stock holding centers in Ukraine and 1 in Serbia which deliver a local service to customers.
  36. 36. SCM Group Public Report 2008 36 Metinvest Group key indicators 2007 2008 Dynamics, % Sales volume, mn $ 7,425 13,223 +77.95 Asset value, mn $ 12,439 11,356 -8.7 EBITDA, mn $ 2,286 4,681 +104.77 Net profit, mn $ 1,321 2,803 +112.19 Raw iron ore output, mn tonnes 33,4 31,3 +6 Steel output, mn tonnes 9,115 8,241 -9.59 Rolled steel output, mn tonnes 9,468 9,223 -2.59 Metinvest is highly diversified in terms of its sales metal service centers increased by 288,000 markets. This helps the company to level out fluc- tonnes (55% growth compared to 2007). The tuations in demand from any of these markets. company is planning to further grow its presence in the CIS and international retail markets, grad- In 2008, Metinvest Group sales dynamics gen- ually increasing the sales of products with added erally reflected the world metal market trends. value and decreasing the sales of semi-finished Favorable economic conditions and rising metal products. prices in the first half of the year allowed the com- pany to effectively sell its products by expanding By the end of 2008, Metinvest Group ranked its share on the key markets. number four in terms of the world’s largest slab producers with over 8.2% share, and on the The sharp decline in global demand for metal world billets market the Group is the leader with products, starting from the 3rd quarter of 2008, a share of over 10%. The largest volumes of bil- triggered changes in regional and product sales lets were sold on Middle East and European mar- structure of Metinvest, and also led to some de- kets (37% and 26%, respectively). crease in sales volume. The acquisition of Trametal S.p.A. (Italy) and Finished product sales (excluding semi-finished Spartan UK Ltd. (Great Briatin) allowed Metinvest products – e.g. slabs and billets) amounted to to grow its presence in the EU market by 3.4%. At 4,487 mn tonnes or 46% of the total sales volume. the end of 2008, Metinvest increased its share of the steel plate market in the EU from 2.2% to In 2008 the volume of products, sold through 2.7%.
  37. 37. SCM Group’s businesses > Core business areas 37 Overall, Metinvest Group’s share of the world’s ing completion. One of the main production steel plate and structural shapes market units of the new facilities, the ladle-furnance amounts to 2%. unit, reached its full capacity. The Azovstal ladle-furnance unit was engineered using the newest technologies, with Siemens VAI (Ger- Investment many) selected as supplier. The unit will have significant positive influence on Azovstal In 2008 the total volume of Metinvest Group in- economy, as well as on the environment of vestment amounted to $690 mn. the city of Mariupol, where the Steel Plant is located, by substantially decreasing the air Ô Azovstal Steel Plant completed its integrated pollution and reducing the water waste dis- program, aimed at increasing slab production charge. The new ladle-furnance unit annual and sales volume, as well as achieving the production capacity is 2 mn tonnes of steel, targeted quality parameters. This program and the installation costs, including the infra- has been implemented since 2003, with in- structure costs, amounted to $30 mn. vestment volume amounting to $600 mn. Reconstruction of blast furnace #3 was also Ô In the blast furnace iron making facilities, completed at Azvostal, thus, delivering in- the reconstruction of blast furnace #3 were creased productivity and reduced down time. completed, within the framework of Azvostal Steel Plant’s modernization and reconstruc- Ô The reconstruction of the oxygen-converter tion program. In the course of the blast fur- facilities at Azovstal Steel Plant is approach- nace repairs, a new fettling technology was Metinvest Group 6% sales structure Other 8%CIS 2008 Sales revenue, segmented by region. 35% Ukraine 10% 100% = $13,213 mn Near East and North Africa 14% South-East Asia 27% Europe
  38. 38. SCM Group Public Report 2008 38 applied, leading to significant increase in the Ô Ingulets Ore Mining and Enrichment Plant term of equipment operation. The blast fur- (InGOK) began a large-scale program for nace is equipped with modern control equip- magnetic floatation beneficiation of iron ore ment, allowing automation of its operations concentrate worth $170 mn. The program is to the maximum extent. The new engineering intended to run untill 2011. solutions give the blast furnace an annual pro- duction capacity of 1 mn tonnes of pig iron, with Ô In order to ensure long-term, economically vi- reduced environmental impact. The total project able, and safe coal production at the Krasno- investment volume amounted to $30 mn. donugol mines, a 20-year mine development investment program was initiated in 2007, Ô Yenakiyevo Steel Plant began the construc- with total investment volume exceeding $600 tion of blast furnace #3 production facilities mn over 20 years and amounting to $64 mn which will increase the production of pig iron in 2008. and decrease the use of coking coal. The total project investment is $180 mn. Ô Novotroitskoye Mines Management and In- guletsk Ore Mining and Processing Plant Ô Khartsyzk Pipe Plant continued the construc- (InGOK) began implementing a business tion of the new production line for 711-1420 management system, based on the SAP for mm diameter pipes. It is anticipated that line Mining industry slolutions, designed spe- will increase the volume of annual pipe sales cifically for mining companies. The following by 200,000 tonnes. The total project invest- functional programs will be installed at these ment is $48 mn. enterprises: Financial Mangement, Manage- Metinvest Group Sales geography Sales Volume, mn Regional market % tonnes Europe 3,57 27 South-East Asia 1,85 14 Near East and North Africa 1,32 10 Ukraine 4,62 35 CIS 1,06 8 Other marketss 0,79 6 TOTAL: 13,21
  39. 39. SCM Group’s businesses > Core business areas 39 rial Accounting and Controlling, Inventory Metinvest’s financial stability was positively in- Management, Sales Management, Produc- fluenced by vertical integration, a moderate debt tion Management, Budgeting, Investment burden, and a sufficient level of liquidity. Management, Repairs Management, quality Management, Material Needs Planning, and To mitigate the negative impact of the economic Personnel Administration. crisis on the economy, Ukranie’s leading min- ing and metal companies, including Metinvest, Considering the significant changes on the met- signed a memorandum with the Ukrainian gov- als market in the 4th quarter of 2008, Metinvest ernment. According to the terms of the memoran- reviewed its investment programs placing the fo- dum, the state monopolies were to temporarily cus on those which added value creation along freeze the cost of their services (transportation, the production chain. Increasing current opera- energy, etc.), which allowed Ukrainian mining and tional effectiveness and product quality were metal producers to remain competitive in global declared priorities for the year, while the plans to markets. increase steel rolling and raw materials capacity were postponed until the market situation stabilizes. In order to reduce costs, the least profitable production was stopped. All excess capacity or non-competitive production capacities under- Risk Management went short- and mid- term or complete stoppage: Yenakiyevo Steel Plant ceased operation of its The contraction of steel consumption in the sec- blooming mill and blast furnace #3; Azovstal ond half of 2008 was aggravated by significant Steel Plant stopped its blast furnace #1. Cur- product overstocking and a threefold decrease in rently, Metinvest Holding is applying centralized steel prices, compared to their peak levels in July supply chain management to all its enterprises. 2008, driving the prices down to the 2005 levels. Simultaneously, the integrated programs of per- sonnel number optimization, increasing labor In the light of the decreasing demand for steel, productivity, and outsourcing of ancillary func- competition between steel producers for the tions are being implemented. product markets tightened, leading to the large product volumes sold at prime cost or lower. To cut expenditure on natural gas, Azovstal and Yenakiyevo Steel Plants completely switched to The reduction in the demand for raw materials gas-free blast furnace operation by substituting caused the significant decrease in pig iron output natural gas use with the additional volumes of and falling prices. However, higher concentration coking coal. of the raw materials and coal producers helped maintain the profitability level of this industry Additional operational improvements and cost segment. minimization were implemented, particularly, regarding: administrative, logistical, energy, and The devaluation of the national currency in the repair costs. 4th quarter of 2008 did not have a negative im- pact on the Group’s operations, due to the fact To increase and maintain the overall solvency, that the majority of revenues are generated from Metinvest instituted centralized management of export. The devaluation also enabled Metinvest liquidity levels and working capital. to reduce the production costs costs in dollar equivalent. To maintain business competitiveness, Met- invest Group took specific anti-crisis measures in
  40. 40. SCM Group Public Report 2008 40 Metinvest Group Sales structure Product Sales Volume, thousand tonnes % Sheet 1,918,2 27.1 Coil 161,4 1.7 Piping 407,0 8.4 Slab 1,893,0 15.3 Cast iron 313,4 2.0 Billet 3,082,0 24.3 Rolled section 2,000,0 21.3 TOTAL: 9,775,0 relation to all its key partners. For instance, ne- Ô improved product sales effectiveness, due to gotiations were held to reduce the prices for the the development of products and markets, as main production resources purchased outside well as due to enhanced client service. the Group (coal, ferrous alloys, etc.). To provide for the product sales with minimum profit margin, a contract was signed with the key large diameter pipes producer. Metinvest Group growth areas during the crisis period were as follows: Ô increased product competitiveness due to reduced costs at all production and service businesses; Ô increased sales volumes of raw materials to key export markets; Ô improved product quality, which was achieved without significant investment;
  41. 41. SCM Group’s businesses > Core business areas 41 Energy. DTEK DTEK IS UKRAINE’S LARGEST VERTICALLY INTEGRATED ENERGY BUSINESS, WITH 22.6% SHARE OF THERMAL COAL PRODUCTION, A 25.4% SHARE OF THERMAL POWER GENERATION, AND 6.5% SHARE OF THERMAL POWER DISTRIBUTION. DTEK ENTERPRISES EMPLOY OVER 46 000 PEOPLE. DTEK enterprises form an effective production ness, key business process optimization, and chain from coal mining to thermal power genera- adoption of the new technologies. tion and distribution. The productive cooperation of coal mining and power generating enterprises, The main consumers of thermal power, generat- the institution of advanced technologies, profes- ed by DTEK enterprises, are the largest industrial sional management, and balanced social policy, enterprises of Eastern and Southern Ukraine, have allowed DTEK to take the leadership posi- particularly: Azovstal Steel Plant, Yenakiyevo tion in Ukraine’s energy market. DTEK personnel Steel Plant, Mariupol Steel Plant named after Il- on all levels of the Group are working in unified lyich, ISTIL Steel Plant, Northern Ore Mining and teams. DTEK’s development strategy provides Enrichment Plant (SevGOK), and Central Ore for increased corporate governance effective- Mining and Enrichment Plant (CGOK). DTEK key indicators 2007 2008 Dynamics, % Sales volume, mn $ 1,776 2,461 +38.56 Asset value, mn $ 2,654 2,346 -11.61 EBITDA, mn $ 477 655 +37.32 Net profit, mn $ 236 23 -90.25 Coal extracted, mn tonnes 15,8 17,6 +11.39 Energy generated, KWH 18,1 16,8 -7.18

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