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NEWS September 2010

5 Years and Counting Page 2

and on time as well as the sustainable use of available resources both financial and human,” Mr Popov continued. The accounts showed that the consolidated gross revenue was $8.15 billion. The consolidated profit before taxes amounted to $0.28 billion and profit tax paid was $0.19 billion.

SCM Group Key Consolidated Indicators 2009: Assets:

$18.539 bn (in 2008 - $18.075 bn)

Gross revenue:

$8.151 bn (in 2008 - $15.985 bn)  

Profit before taxes:

$0.283 bn (in 2008 - $3 bn)

Profit tax:

$0.186 bn (in 2008 - $0.805 bn)

“In the reporting period classic financial indicators such as revenue and profit faded into the background as we set somewhat different objectives,” Mr Popov added. The current composition of SCM business is primarily focussed on industrial companies (mining & metals and energy), which account for about 90% of the business, while other sectors of the Group account for 10%. To ensure sustainable growth and long-term business development, the company’s management has made a decision to further diversify SCM’s investment portfolio and develop business in new sectors. “We have established a rapidly developing company

4Oleg Popov, CEO of SCM that meets the modern vision of a successful and transparent business. We will continue improving to reach our major goal, which is to create in Ukraine a world-class business that our shareholders, partners, investors and employees, as well as the whole of Ukraine, can be truly proud of,” Mr Popov said.

Metinvest and Ilyich Agree Partnership In July 2010 the Metinvest Group and Ilyich Steel Plant announced the decision to consolidate their assets. From a strategic perspective the aggregate production potential will grow to 20 million tonnes per year.

SCM Sustainability Report Page 3

The partnership will include all businesses of Ilyich Steel Plant, with Ilyich Iron and Steel Works of Mariupol being the major assets. The Metinvest Group will join the partnership with its Ingulets Ore Mining and Processing Plant, Krasnodonugol Mining Group,

Metinvest Fast Facts Page 4

Avdeyevka Coke and Chemical Plant, Khartsyzsk Pipe Plant as well as provide investment towards the development and modernisation of the Ilyich Plant amounting to $2 billion. Following the merger, 75% of the shares will be owned by >> Continued on Page 2

Business Leadership Page 4

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METINVEST & ILYICH

According to System Capital Management’s consolidated accounts for 2009, the value of the Group’s assets has risen to $18.539 billion (from $18.075 billion at the end of 2008). The consolidated accounts were prepared to International Financial Reporting Standards (IFRS) and covered financial results of all companies in the SCM Group. The statement had been audited by PricewaterhouseCoopers. This is the sixth year running that the Group has produced a consolidated financial statement audited by an international auditing company and developed in compliance with the IFRS guidelines. CEO of SCM, Oleg Popov, commented on the financial performance in 2009: “The financial results of the year not only met our expectations but also exceeded them.” “Our major priorities in 2009 included: keeping our market positions, ensuring financial stability, increasing the efficiency of each business area of the Group, servicing our financial liabilities in full

SCM ASSET GROWTH

Assets Grow to Reach $18.5 Billion


NEWS

September 2010

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METINVEST & ILYICH

Metinvest and Ilyich Agree Partnership Metinvest Group, while 25% will remain under the control of the Ilyich Steel Plant headed by Vladimir Boyko. “The partnership with Ilyich Plant is an important step in the realisation of our long-term strategy aimed at strengthening the vertical integration of Metinvest and achieving the maximum increase in production of high-quality yet low-cost steel,” said Igor Syry, the CEO of Metinvest Holding.

In August 2010 the Metinvest Group obtained a permit from the Antimonopoly Committee of Ukraine to acquire the additionally issued shares of Ilyich Stal and Ilyich Iron and Steel Works of Mariupol as a first step in the merger process. The deal has also received approval from EU regulators. The further steps and the final format of the partnership will become clear once the legal process is completed and all clearances

4Rinat Akhmetov, SCM Shareholder, speaks with employees of Ilyich Iron and Steel Works of Mariupol

are given by the regulatory agencies in Ukraine and internationally. Investment in the mining and metals business is a strategic priority for the SCM Group. Industry analysts consider that the Ukrainian mining and metals industry has significant potential for profitable growth in the mid to long-term. The Metinvest Group has all components for the production of high-quality steel with competitive production costs, raw materials, good geographic location and highly professional specialists. Igor Syry, CEO of Metinvest Holding, commented on the prospects of the partnership with the Ilyich Steel Plant: “We expect to get strong synergies, firstly by optimising the modernisation programmes at our steel assets, raising the production efficiency and improving our market position. We estimate that the aggregate production potential is 20 million tonnes of steel per year. The merger will help to reinforce the position of the national mining and metals industry in global markets, which is a keystone to the growth of Ukraine’s economy and increased economic security.”

5 Years and Counting:

ENERGY LEADER

Energy Sector Leader DTEK Holds Strong The leader of the coal and power sector in Ukraine celebrated its 5th birthday in July, an accomplishment which has established DTEK as a vertically integrated group with a strategy to bring together the Russian, Ukrainian and European electricity generation and supply markets. During these five years the company has invested more than UAH 6 billion, increased its coal output by 17.3% to 17.64 million tonnes in 2009 and grown its market share in Ukraine to nearly 25%. As of 31 December 2009, DTEK’s credit portfolio was valued at $555.92 million with $36.33 million on available credit lines. An important milestone was also achieved with the company’s $500 million eurobond issue this April. It was the largest non-sovereign debut issue from Ukraine and the first domestic corporate issue since 2007. DTEK’s coal mining enterprises have been implementing a large scale investment programme. In 2008-09, the four mines of Pavlogradugol invested

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UAH 651.5 million in new equipment. As a result, the average output has reached 4,000 tonnes of coal per day. Pavlogradugol’s Stepnaya mine has invested UAH 351.5 million in coal plough technology, the first in the Western Donbass region, and this will help raise the mine’s output to 3,500 tonnes per day. DTEK’s power generation business, Vostokenergo, remains the thermal power generating company with the highest demand in the domestic market due to its low production cost. Vostokenergo’s installed capacity utilisation rate (ICUR) is, without fail, the highest among Ukrainian thermal power plants (TPPs) at 45% in 2009, having reached a record of 56% in 2007. In 2009, Vostokenergo maintained its leadership in the thermal power generation sector with a market share of 25.3%. In 2009, the share of DTEK’s energy distribution companies (Service-Invest and PES-Energougol) in the wholesale electricity market reached 7.7% of the

total marketable electricity supply in Ukraine. Transmission volume in 2009 totaled 12 bn kWh, up 16.2% from 2005. DTEK’s energy distribution businesses have implemented a set of large scale investment projects, including the reconstruction of the Yenakiyevo 110 kV and Konstantinovka 110 kV substations. Service-Invest has also extended its activities in the Dnepropetrovsk region and started supplying power to the Pavlogradugol and iron ore mining and processing plants Northern GOK and Central GOK. Working in cooperation with the communities in which it operates, in 2007 DTEK started implementing a social partnership programme focussed on the regions where the company has a presence. The project is second to none in Ukraine in terms of its scale and content. The company, in partnership with local communities, outlined targets for social investment: >> Continued on Page 3


NEWS

September 2010

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Investing in Renewables, Ensuring Sustainability

contemporary education, healthcare, cultural heritage, energy efficiency, and development of the local business environment. Eleven towns in Ukraine and two districts of the Dnepropetrovsk region have already joined the DTEK Social Partnership Agreement. The company also consistently invests in its people through training and development, and in 2009 established the DTEK Academy to help meet this objective. It will be a common centre for knowledge management at all enterprises of the Company, where 50,000 people work. The senior managers of DTEK and lecturers from the leading Ukrainian and European business schools will teach at the Academy. In this connection the company has signed a cooperation agreement with the London Business School.

Starting in 2008 with a wind energy development concept, DTEK identified wind power generation as a promising avenue to develop its renewable energy business, and for this purpose established the Wind Power Limited Liability Company. DTEK sees the alternative energy field as a strategically important area that can help to diversify its energy mix and increase market share in this area, due to the rapid growth of new types of energy. Currently the company’s portfolio of wind energy projects amounts to about 1,000 MW making it the leader in this energy sector in Ukraine. Now the company is actively working on wind monitoring in several regions of Ukraine. Assessing the results of research data from this work will be the next step in developing detailed feasibility studies

RENEWABLES

5 Years and Counting

4A wind turbine farm in action for the projects. Simultaneously DTEK is preparing project design documentation in line with European wind industry standards. Once these tasks have been completed, the company plans to start construction of the first advanced Ukrainian wind farm with a capacity of 200 MW.

CSR Report Highlights Responsible Business Action the Group’s approaches to implementing strategic areas of corporate responsibility such as health and safety, environment, employment and society. It also covers in more detail the commitment of the Group companies to tackle climate change and improve energy efficiency. The online version of SCM Group’s Sustainability Report 2008-2009 and CSR reports from the previous five years are available to view and download from SCM’ s website. As a confirmation of the Group’s commitment to the highest international

standards of corporate governance and responsibility, metals and mining business, Metinvest, also produced its first Social Report in accordance with the GRI reporting guidelines in January 2010, and SCM’s Energy business, DTEK, will be publishing its second Sustainability Report covering the company’s activities in 2008-2009 later this year. Because of the long-term nature of the social projects of both companies, sustainability reporting is on a biennial basis. SCM continues to report annually.

CSR REPORT

At an international CSR conference this spring in Kiev SCM presented its Sustainability Report 2008-2009. This is the second report of the company prepared in compliance with the Global Reporting Initiative (GRI) international standards of non-financial reporting. “In terms of the economic climate in Ukraine and globally, the period covered by the report was challenging. The rapid economic growth caused by the high demand for raw materials, steel and energy in the first half of 2008 quickly gave way to a no less rapid economic decline. In these challenging macroeconomic circumstances the investment plans had to be adapted to meet the harsh economic realities. However, even in the most difficult times, we remained committed to responsible business and continued to make longterm investments and report about our performance,” said at the presentation Jock Mendoza-Wilson, SCM’s Director of International and Investor Relations, who managed the reporting process. For the first time the Sustainability Report 2008-2009 covers mining and metals, energy and financial operations as well as including the company’s telecommunications, media and real estate businesses. The report outlines

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BUSINESS LEADERSHIP

NEWS Business Community Leadership During 2010 SCM has continued to play an important role in championing the international business issues important to Ukraine’s industrial and economic success. In July the Group supported a round table in Brussels organised by the EU Ukraine Business Council on the Deep and Comprehensive Free Trade Area currently under negotiation with the European Commission. SCM also became a partner of the 20th Economic Forum organised in Krynica (Poland) by the Foundation Institute for Eastern Studies. For the fifth year running SCM has been a partner of Europe Day in Ukraine. The event organised by the EU Commission’s Delegation to Ukraine looks to raise awareness of the EU and its partnership with the country.

“SCM is happy to support the Europe Day celebrations in Ukraine,” said Jock Mendoza-Wilson, “I’m confident that these celebrations help Ukrainians and Europeans have a better understanding of each other and thus make one more step to Ukraine’s integration in Europe’s economic and cultural communities.” This year SCM’s energy business, DTEK, has also been active on the international level speaking about key policy issues important to the business. In particular, DTEK supported the quarterly Energy Round Table meetings of the EU Ukraine Business Council with a strong focus on energy efficiency, renewable energy and Ukraine’s membership in the European Energy Community.

4 Yuri Ryzhenkov from DTEK, Philippe Cuisson from the European Commission and Tore

Emanuelsson of the EIB were speakers at the EUUBC’s Energy Round Table series

4 Ambassador Pinto Teixeira (left) at Europe Day 2010

4 Jock Mendoza-Wilson, Director of International and Investor Relations, SCM

Metinvest Debut Eurobond Issue Oversubscribed In May 2010 Metinvest successfully sold $500 million worth of 5-year Eurobonds on its debut offering with a yield to maturity of 10.5%. The deal was substantially oversubscribed. Two thirds of the issue were bought by European investors, one third - by investors from the US. “Despite the situation emerging around Greece and sharply deteriorated global

investment sentiments, the demand for Metinvest’s bonds remained at a high level: the issue has been considerably oversubscribed,” said Sergiy Novikov, Metinvest’s Chief Financial Officer. BNP Paribas, Credit Suisse, ING, The Royal Bank of Scotland plc and VTB Capital were mandated as joint leadmanagers and joint book-runners for Metinvest’s debut issue.

For further information, or to subscribe, please contact: Jock Mendoza-Wilson, Director of International and Investor Relations System Capital Management, 117 Postysheva st., Donetsk 83001, Ukraine ir@scm.com.ua – www.scm.com.ua

September 2010

Metinvest Fact Sheet

4Steel produced at the Azovstal plant 4Metinvest is number 28 in the World Steel

Association list 2009 of the 49 largest steel producers in the world. 4Following substantial over-subscription during syndication, Metinvest increased the amount of its pre-export facility from $300 million to $700 million in July 2010. The funds raised will be utilised to further modernise Metinvest’s assets. 4The Group is comprised of 21 industrial companies that lead the mining and steel industry in Ukraine, Europe and the United States. 4In Europe, Metinvest has four steel rolling mills: Italian re-rolling companies Ferriera Valsider and Metinvest Trametal, British carbon steel plate producer Spartan UK and Bulgarian long products manufacturer Promet Steel. 4The metallurgical companies of Metinvest manufacture a wide range of high quality products used in major steel consuming industries. The products of the Group are well marketed in more than 75 countries worldwide. 4In 2009 Metinvest enterprises mined 9.6 mmt of coking coal, produced 4.1 mmt of metallurgical coke, 17.6 mmt of merchant concentrate and 11.6 mmt of pellets; 7 mmt of crude steel and 9.2 mmt of finished steel products.

Key Financial Performance Indicators 2009: 4 Consolidated revenue 4 Consolidated EBITDA 4 margin 4 Net Profit

US$ million 6,026 US$ million 1,449 % 24.0 US$ million 334


SCM Investor Newsletter - September 2010