30th Apr 2013 11:04
30 April 2013
Eurasian Natural Resources Corporation PLC
Annual Financial Report
In compliance with Listing Rule 9.6.1R, the Company has submitted a copy of each of the following documents to the National Storage Mechanism. These documents will shortly be available for inspection at www.morningstar.co.uk/uk/NSM:
·; Annual Report and Accounts for the year ended 31 December 2012;
·; Notice of Annual General Meeting ('AGM') 2013; and
·; Form of Proxy for the AGM 2013.
As required by Disclosure and Transparency Rules (DTR) 6.3.4R and 6.3.5R, the Company confirms the Annual Report and Accounts for the year ended 31 December 2012 and the Notice of AGM 2013 have been made available on the Company's website at www.enrc.com today and will be posted to shareholders, along with the Form of Proxy, shortly.
The information detailed below is supplementary to the Company's announcement of 2012 Preliminary Results released on 20 March 2013. Pursuant to DTR 6.3.5R this information is published in full unedited text through a Regulatory Information Service. This material should be read in conjunction with, and is not a substitute for, the full Annual Report and Accounts. Page and note references in the text below refer to page numbers in the Annual Report and Accounts for the year ended 31 December 2012.
Risk management
The Board is ultimately responsible for maintaining a sound risk management and internal control system.
Risk and compliance
Throughout 2012 senior management and the Board have had a regular dialogue on key risks relating to the Company's 2012 strategic objectives. We know that some of the jurisdictions in which the Group operates pose particular and often heightened risks that need to be managed appropriately. We are open to dialogue with shareholders and other stakeholders in order to communicate our position openly and effectively.
The Group continues to enhance its approach to risk management and internal controls and is committed to the further development of policies, processes and procedures where it is appropriate to do so.
We are acutely aware of our obligations with regards to compliance with all applicable laws and regulations, as well as our corporate value for fair dealing.
We have compliance officers across our operations. The number of compliance officers increased again during 2012. We continue to require all new starters across the Group in appropriate roles to undertake web‑based ethics and compliance training. This is delivered online by an independent ethics training provider as well as targeted face-to-face training on appropriate compliance topics.
Our whistleblowing hotline has been in operation for well over a year and is publicised throughout the Group. It is independently administered and operates 24 hours a day, 365 days a year, in all appropriate languages. We have a new Whistleblowing and Investigations Policy (which was introduced in early 2012) and investigate any whistleblowing reports and take appropriate corrective action.
Risk management
Risk and the Board of Directors
The Board is ultimately responsible for maintaining a sound risk management and internal control system. Our system of risk management and internal control is designed to identify, manage and mitigate the risk of failure to achieve business objectives. The system provides reasonable and not absolute assurance against material misstatement or loss.
There are ongoing processes in place for identifying, assessing, managing, monitoring and reporting on the significant risks faced by the Group. These processes are in place for the year under review up to, and including, the date of the approval of the Annual Report and Accounts.
Thirteen principal risks were considered and reviewed during the course of the current year by the Executive Committee ('ExCom') and this included two newly articulated risks related to reputation and a potential emerging Kazakhstani logistics risk and the subdivision of one pre-existing risk.
The ExCom determined that our risk environment had changed:
Positively as a result of:
·; Continued enhancement of our risk reporting and compliance framework driving further accountability and, where necessary, additional remediation plans;
·; Continued focus on 'tone from the top' to enhance our risk approach;
·; Organisational cultural shift towards arisk aware culture;
·; Implementation of key risk management action plans; and
·; Reduction in the number of acquisitions made this year and planned for the near future.
Negatively as a result of:
·; Increased external scrutiny;
·; Global pressure on commodity prices;
·; Cash flow complexity; and
·; Reputational perception.
Accordingly, the principal risks to the execution of the Group's business strategy are shown in the rest of this section. We have explained the nature of each risk, identifying the possible impact and the associated strategic priorities. In addition, we have described the mitigating activity to address those risks, as well as our plans for further enhancements
Risk: Project management | |
Context The approved capital expenditure programme is significant and includes large scale expansion projects in existing and acquired operations. Risk Failure to deliver major capital projects within the agreed time, cost and quality criteria. Possible impact Lower long-term growth profitability and reputation. Associated strategic priorities Continue expansion and development of existing reserves and capacity. | Mitigation ·; The Group Investment Policy's main principles are: - Stage gated approach to project selection; - Clear governance framework; - Accessible and wider decision-making support; - Group investment procedures; and - Investment valuation manual. ·; Risk analysis and management for projects methodology for project risk management and sensitivity modelling is being embedded into our project management process; ·; Specific project management teams; ·; A project assurance programme; ·; Quarterly review and analysis of capital projects and reporting on project progress to the ExCom; and ·; A Group project management code was developed and a training programme implemented in 2012. |
Risk: Business development | |
Context Industry consolidation continues. The Group made a number of acquisitions in 2012 and will continue to consider opportunities if appropriate to do so. Risk Failure to identify opportunities to participate in value-adding transactions, overpaying for a transaction or inaccurate business case leading to inadequate return on investment. Possible impact Lower long-term growth, profitability and reputation. Associated strategic priorities Add value and customer diversity by expanding product portfolio. Expand our asset portfolio in natural resources worldwide. | Mitigation ·; The Board defines the Group's strategy; ·; Formalised yearly strategy review process; ·; Group Investment Policy; ·; Detailed procedure, governing divestment or outsourcing of business and assets; ·; Potential transactions are subject to due diligence and analysis to ensure consistency and high standards; ·; Approved investment criteria for assessing potential targets; ·; Formal integration plans are developed for each acquisition; progress is monitored and reported to the relevant committees; and ·; The Investment Committee oversees all material acquisition activity, approves targets and supervises execution. |
Risk: Legal and regulatory breach | |
Context ENRC is an emerging markets business and is aware that some of the jurisdictions in which the Group operates pose particular and often heightened reputational issues that need to be managed appropriately. Natural resources businesses operating in emerging markets are subject to additional regulatory scrutiny. In addition, there is a general worldwide trend towards enhanced laws and regulation which affect large multinational businesses such as ENRC. Risk Failure to comply with laws and regulations regarding: ·; Anti-bribery; ·; Anti-corruption; ·; Anti-money laundering; ·; Sanctions; ·; Listing Rules, including related party requirements; and/or ·; Anti-trust. Possible impact Share price devaluation, financial penalties, civil/criminal regulatory investigations and/or prosecutions, diversion of significant management and legal time and resources, and significant remediation requirement. Associated strategic priorities Commit to high standards of corporate social responsibility and sustainable development. Expand our asset portfolio in natural resources worldwide. | Mitigation ·; The Code of Conduct is regularly revised to bring more prominence and clarity on behaviours and accountability; ·; All new starters in appropriate roles across the Group undertake web-based ethics and compliance training, as well as targeted face-to-face training on appropriate compliance topics; ·; The whistleblowing hotline has now been in operation for well over a year and is publicised by various methods throughout the Group; ·; The new Whistleblowing and Investigations Policy has been implemented during the year; ·; A counterparty due diligence policy and procedure was developed, rolled out and implemented throughout the Group during the year. Appropriate training on this new procedure was given to over 150 targeted individuals; ·; The Anti-bribery and Corruption Steering Committee (established in 2011) is being developed into a more formal committee with a wider remit, including risk, internal control and compliance matters; ·; In 2012, the first internal compliance risk assessment, a collaboration between the Risk and Compliance Departments, was carried out. The output of this assessment informed the business plan for the Compliance Department for 2013; and ·; A Group-wide risk assessment for bribery and corruption risks was undertaken by an external party in 2012. The final report will be issued in 2013 and this will also help inform future compliance activity. |
Risk: Management capability | |
Context We have acquired a number of companies in Africa and Brazil. Globally our regions require strong leadership and an experienced senior management team to integrate and operate our companies effectively. Risk Failure to attract, retain and develop key management talent. Possible impact Inability to execute long-term growth strategy, lower long-term growth, lower profitability and/or corporate reputation. Associated strategic priorities Continue expansion and development of existing reserves and capacity. Commit to high standards of corporate social responsibility and sustainable development. | Mitigation ·; Enhancement of the HR functional capability; ·; Enhancement of the Group's HR policies and procedures; ·; Our review of the Group's approach to compensation and benefits continues, clearer consistency and alignment principles are being systematically applied to Senior Executives to drive enhanced business effectiveness; ·; 150 Group Programme; ·; A new global succession planning process; ·; Strategic Leadership Programme; ·; Global Talent Management Programme; ·; Global Graduate Recruitment Programme; and ·; A group leadership conference planned for 2013. |
Risk: Organisational development | |
Context Originally the Group's operating plants were based in Kazakhstan with a Sales and Marketing function based in Switzerland. We now operate a large scale global business and it is important that our governance structures, controls and clear delegations of authority are appropriate for our new business. Risk Ineffective delegation of authority, governance structures and frameworks can impact on the delivery of the Group's strategic objectives. Possible impact Failure to deliver strategic objectives, lower long-term growth, corporate reputation and financial return. Associated strategic priorities Continue expansion and development of existing reserves and capacity. Expand our asset portfolio in natural resources worldwide. Commit to high standards of corporate social responsibility and sustainable development. | Mitigation ·; A Group delegation of authority framework has been developed and approved by the ExCom; ·; A review of the organisational structure has been carried out and an action plan is being developed; and ·; Further enhancements to our governance and policy framework are being implemented. |
Risk: Business integration | |
Context Over the last four years the Group executed a number of acquisitions and purchased businesses in Africa and Brazil. For the recent acquisition of Shubarkol Komir JSC a far more enhanced integration process was implemented. Risk The inability to integrate the operations, products, technologies and personnel of the acquired companies to achieve expected synergies and return on investment. Further, an increased risk of legal or compliance breaches if historical standards/controls of the new asset are not aligned with the Group's best practice. Possible impact Slow and poor synergies, lower return on investment, profitability and reputational impact leads to share price volatility. Associated strategic priorities Add value and customer diversity by expanding product portfolio. Expand our asset portfolio in natural resources worldwide. | Mitigation ·; Senior management oversight of all integration activities; ·; Formal integration planning and execution process; ·; For each new acquisition an integration team is established; ·; Extensive personnel meetings are organised to address possible cultural factors; ·; Regular site visits to monitor progress; ·; Alignment of standards, controls and procedures of the acquired company to the Group's best practice; and ·; Streamlining reporting lines of management at the new enterprise to the Group's regional, divisional and executive bodies. |
Liquidity | |
Context Over the last four years the Group executed a number of acquisitions and purchased businesses in Africa and Brazil. The Group has also approved a number of large scale greenfield and brownfield projects in Brazil and Africa that will require significant additional financing. The Group's credit ratings are currently BB- with S&P and Ba3 with Moody's, with both ratings on a negative outlook. It is possible that these credit ratings could restrict the Group's access to future sources of debt. Risk Failure to arrange or provide sufficient financing for the Group's operating, investment and business development activities. Possible impact Inability to meet payment obligations and restriction of the Group's ability to raise finance, or inadequate funds available to complete projects and business development activities. Associated strategic priorities Continue expansion and development of existing reserves and capacity. Add value and customer diversity by expanding the product portfolio. Expand our asset portfolio in natural resources worldwide. | Mitigation ·; The Group's Treasury Policy and procedures are updated regularly. Monitoring and reporting processes continue to be enhanced; ·; Building and maintaining relationships with financial providers and credit rating agencies; ·; Cash flow forecasts are regularly prepared and presented to the Board; ·; Annual budgeting process; ·; Quarterly forecasting process; ·; On a longer-term horizon, the five-year financing plan enables the development of a long-term funding strategy for the Group; ·; Formal CFO approval and sign-off for all major projects; and ·; Investment Committee oversight. |
Risk: Political risk | |
Context The Group is an emerging markets business and most of its operations are based in fast developing emerging market economies. The business could be adversely affected by the behaviour of, or new regulations that could be introduced by, the governments of the countries concerned, for example: ·; Re-nationalisation; ·; Controls on imports, exports and sales prices; ·; Terms of mining and other licences; ·; Restriction on foreign ownership of assets; ·; Restriction on the remittance of funds; ·; New forms or rates of taxation, duties and royalties; or ·; New policies or systems. Risk The risk of strategic, financial, or personnel loss as a result of non-market factors such as macroeconomic and social policies (fiscal, monetary, trade, investment, industrial, income, labour and developmental), or events related to political instability (terrorism, riots, coups, civil war and insurrection). Possible impact Business repatriation, significant loss of earnings, financial volatility. Associated strategic priorities Maintain and improve upon low-cost operations. Expand our asset portfolio in natural resources worldwide. | Mitigation ·; The Group's existing senior management team possesses extensive experience of operating in Eurasia, Africa and developing markets; ·; Constructive engagement with governments and external stakeholders; and ·; Appropriate investment to improve the economic and social impact of our businesses on local communities working in partnership with governments. |
Risk: Technical disaster | |
Context Technological processes within the mining and metals industry can be susceptible to incidents and disasters, which may have potentially significant consequences. Risk Large-scale technical incident leading to loss of life, environmental impact and interruption to business operations. Possible impact Corporate reputation, prospects for long-term growth, financial profitability, loss of life, environmental damage. Associated strategic priorities Commit to high standards of corporate responsibility and sustainable development. Expand our asset portfolio in natural resources worldwide. | Mitigation ·; Site safety declarations are in place for each of the Kazakhstani hazardous sites, and these examine potential incidents related to site operations and their impact; ·; Technical committees provide input into the operational and capital investment processes of the established businesses; ·; Further development of risk management and post-incident crisis management plans are under way; ·; Each Kazakhstani site has developed emergency response plans to minimise the impact of an incident; ·; A Group-wide project to enhance our business continuity planning process is currently being rolled-out; ·; Operational site risk surveys are conducted on a rotational basis; and ·; Appropriate property damage and business interruption insurance is purchased. |
Risk: Health, safety, environment and community ('HSEC') | |
Context By their very nature, mining operations can be hazardous. However, the Group's management is committed to achieving zero health, safety and environmental related incidents. There is also the potential that environmental legislation may be introduced that will impose additional costs on the business. Risk Health and safety incidents impacting on staff welfare, lost working time, community development and breaches in health, safety and environmental regulation. Environmental legislation drives additional demands, including further costs required to ensure compliance with new standards. Possible impact Corporate reputation, prospects for long-term growth, financial profitability, loss of life or injury, environmental damage, loss of licences to operate. Associated strategic priorities Commit to high standards of corporate responsibility and sustainable development. Expand our asset portfolio in natural resources worldwide. | Mitigation ·; The HSEC Committee focuses on: - Health, safety and environmental management and performance; - Review of HSEC risks and action plans; and - Changes to regulation in emerging markets. ·; The Group's health, safety and environmental policy and standards, and the Group's internal corporate accident investigation policy; ·; HSE training programmes; ·; Certified Occupational Health and Safety Management System in line with OHSAS 18001; ·; Environmental management system meeting ISO 14001 standards; ·; Process safety management; ·; Kazakhstan critical safety plans; and ·; Design and implementation of a comprehensive environmental and sustainability risk mitigation programme based on: - External reviews and best practice benchmarking; - Development of additional policies and standards where it is appropriate to do so; and - Review of HSEC risks by the Audit Committee. Further information will be available in the second ENRC Sustainable Development Report, which will be published shortly. |
Risk: Reputational risk | |
Context The Group has suffered reputational damage against its peers over the past few years due to the following market perceptions: ·; Poor corporate governance and lack of transparency regarding relationships with the Founder Shareholders; ·; Lack of clarity over corporate strategy, in particular in Africa; and ·; Negative media coverage of a DRC business partner. Risk A decision or a course of action is perceived negatively by the media, investors and/or general public, which in turn impacts the corporate reputation of the Group and its share price. Possible impact ·; Negative media coverage; ·; Share price underperformance; ·; Analysts' downgrades; ·; Rating agency downgrades; ·; Increase in the cost of doing business, i.e. availability and cost of funding/refinancing, Directors' & Officers' insurance; ·; Negative perception by the general public, industry and regulators; and ·; High staff turnover. Associated strategic priorities Commit to high standards of corporate responsibility and sustainable development. | Mitigation ·; Clear communication of the business strategy; ·; More regular communication from the Chairman to all stakeholder groups on key issues; ·; A clear and documented commitment from the Board on transparency, openness and good corporate governance; ·; The development of a clear Board risk appetite statement that will be rolled out across the business in 2013; ·; Annual governance seminar for investors; ·; Enhanced roadshow programme, enabling more contact with investors; and ·; Enhancements to the structure of the Board. |
Risk: Kazakhstan logistics | |
Context As Kazakhstan's exports grow, the rail infrastructure may not keep pace with the increased demand. Risk The inability to achieve our sales potential for the growing demand for raw materials due to logistic constraints from the lack of infrastructure and capacity with particular respect to China. Possible impact Failure to maximise potential sales opportunities resulting in loss of revenue. Associated strategic priorities Maximising shareholder value and restrictions to CAPEX projects. | Mitigation ·; Implementation of an action plan to enhance supply chain management; ·; Optimal supply chain investment plan to maximise commercial opportunities; ·; Supporting the rail authorities in improving their infrastructure; and ·; Working with governments, Kazakhstan Temir Zholy JSC and China Railway Corporation, Customs and Security to develop proposals for resolving operational, technological and regulatory issues. |
Risk: Commodity pricing volatility | |
Context The prices of our core products have been historically volatile and have fluctuated significantly in response to changes in supply and demand, market uncertainty, the performance of global and regional economies and cyclicality in industries that purchase these products. Risk A substantial decline or volatility in commodity prices could materially affect the Group's business and financial results as well as the cash flow projections. Possible impact Lower profitability, lower long-term growth. Associated strategic priorities Continue expansion and development of existing reserves and capacity. Add value and customer diversity by expanding the product portfolio. Expand our asset portfolio in natural resources worldwide. | Mitigation ·; The Group regularly monitors market prices, global sales volumes and internal levels of inventory; ·; Sensitivity analysis is performed to stress test business models; ·; The Sales and Marketing function produces regular forecasts of the sales volumes and prices for each of the Group's commodities; ·; The Sales and Marketing function discusses and agrees appropriate production and distribution plans with the management of the operating companies; and ·; Operations are able to quickly and significantly reduce costs by temporarily reducing labour and production during periods of pricing volatility. |
Statement of Directors' responsibilities
The Directors are responsible for preparing the Annual Report and Accounts, the remuneration report and the Consolidated financial statements in accordance with applicable law and regulations.
Company law requires the Directors to prepare financial statements for each financial year. Under that law, the Directors have prepared the Consolidated financial statements in accordance with International Financial Reporting Standards ('IFRS'), as adopted by the European Union, and the Parent Company financial statements in accordance with United Kingdom Generally Accepted Accounting Practice (United Kingdom Accounting Standards and applicable law). Under company law, the Directors must not approve the financial statements unless they are satisfied that they give a true and fair view of the state of affairs of the Group and the Company and of the profit or loss of the Group for that period. In preparing these financial statements, the Directors are required to:
·; Select suitable accounting policies and then apply them consistently;
·; Make judgements and accounting estimates that are reasonable and prudent;
·; State whether IFRS as adopted by the European Union and applicable UK Accounting Standards have been followed, subject to any material departures disclosed and explained in the Consolidated and Parent Company financial statements respectively; and
·; Prepare the financial statements on the going concern basis unless it is inappropriate to presume that the Group and the parent Company will continue in business.
The Directors are responsible for keeping adequate accounting records that are sufficient to show and explain the Company's transactions and disclose with reasonable accuracy at any time the financial position of the Company and the Group and enable them to ensure that the financial statements and the Remuneration Report comply with the Companies Act 2006 and, as regards to the Consolidated financial statements, Article 4 of the IAS Regulation. They are also responsible for safeguarding the assets of the Company and the Group and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities.
Each of the Directors, whose names and functions are listed on pages 60 and 61 confirm that, to the best of their knowledge:
·; The Consolidated financial statements, which have been prepared in accordance with IFRS as adopted by the EU, give a true and fair view of the assets, liabilities, financial position and profit or loss of the Group;
·; The Parent Company financial statements, which have been prepared in accordance with UK Generally Accepted Accounting Practice, give a true and fair view of the assets, liabilities, financial position and profit or loss of the Company; and
·; The Directors' report and the Business Review contained on pages 86 to 90, include a fair review of the development and performance of the business and the position of the Group, together with a description of the principal risks and uncertainties that it faces.
For further information, or to request copies of any of the documents mentioned above, please contact:
ENRC: Investor Relations | |
Mounissa Chodieva | +44 (0) 20 7389 1879 |
Charles Pemberton | +44 (0) 20 7104 4015 |
Alexandra Leahu | +44 (0) 20 7104 4134 |
About ENRC
ENRC is a leading diversified natural resources group, performing integrated mining, processing, energy, logistics and marketing operations. The operations comprise: the mining and processing of chrome, manganese and iron ore; the smelting of ferroalloys; the production of iron ore concentrate and pellet; the mining and processing of bauxite for the extraction of alumina and the production of aluminium; the production of copper and cobalt; coal extraction and electricity generation; and the transportation and sales of the Group's products. The Group's production assets are largely located in the Republic of Kazakhstan; other assets, notably the Other Non-ferrous Division, are mainly located in Africa; the Group also has iron ore assets in Brazil. In 2012 the Group's entities employed on average 78,484 (2011: 77,441) people. The Group currently sells the majority of its products to Russia, China, Japan, Western Europe and the United States. For the twelve months ended December 31 2012, the Group had revenue of US$6,320 million (2011: US$7,705 million) and profit attributable to equity holders of the Company of US$(804) million (2011: US$1,974 million). ENRC has six operating Divisions: Ferroalloys, Iron Ore, Alumina and Aluminium, Other Non-ferrous, Energy and Logistics. ENRC is a UK company with its registered office in London. ENRC's shares are quoted on the London Stock Exchange ('LSE') and the Kazakhstan Stock Exchange ('KASE'). For more information on ENRC visit the Group's website at www.enrc.com.
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