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iso4217:USD iso4217:USD xbrli:shares 213800913TPW32I84456 2017-12-31 213800913TPW32I84456 2018-12-31 213800913TPW32I84456 2019-12-31 213800913TPW32I84456 2020-12-31 213800913TPW32I84456 2018-01-01 213800913TPW32I84456 2019-01-01 213800913TPW32I84456 2020-01-01 213800913TPW32I84456 2018-01-01 2018-12-31 213800913TPW32I84456 2019-01-01 2019-12-31 213800913TPW32I84456 2020-01-01 2020-12-31 213800913TPW32I84456 2018-01-01 ifrs-full:IssuedCapitalMember 213800913TPW32I84456 2018-01-01 ifrs-full:AdditionalPaidinCapitalMember 213800913TPW32I84456 2018-01-01 ifrs-full:AccumulatedOtherComprehensiveIncomeMember 213800913TPW32I84456 2018-01-01 ifrs-full:RetainedEarningsMember 213800913TPW32I84456 2018-01-01 ifrs-full:NoncontrollingInterestsMember 213800913TPW32I84456 2018-01-01 213800913TPW32I84456 2018-12-31 ifrs-full:IssuedCapitalMember 213800913TPW32I84456 2018-12-31 ifrs-full:AdditionalPaidinCapitalMember 213800913TPW32I84456 2018-12-31 ifrs-full:AccumulatedOtherComprehensiveIncomeMember 213800913TPW32I84456 2018-12-31 ifrs-full:RetainedEarningsMember 213800913TPW32I84456 2018-12-31 ifrs-full:NoncontrollingInterestsMember 213800913TPW32I84456 2018-12-31 213800913TPW32I84456 2019-12-31 ifrs-full:IssuedCapitalMember 213800913TPW32I84456 2019-12-31 ifrs-full:AdditionalPaidinCapitalMember 213800913TPW32I84456 2019-12-31 ifrs-full:AccumulatedOtherComprehensiveIncomeMember 213800913TPW32I84456 2019-12-31 ifrs-full:RetainedEarningsMember 213800913TPW32I84456 2019-12-31 ifrs-full:NoncontrollingInterestsMember 213800913TPW32I84456 2019-12-31 213800913TPW32I84456 2020-12-31 ifrs-full:IssuedCapitalMember 213800913TPW32I84456 2020-12-31 ifrs-full:AdditionalPaidinCapitalMember 213800913TPW32I84456 2020-12-31 ifrs-full:AccumulatedOtherComprehensiveIncomeMember 213800913TPW32I84456 2020-12-31 ifrs-full:RetainedEarningsMember 213800913TPW32I84456 2020-12-31 ifrs-full:NoncontrollingInterestsMember 213800913TPW32I84456 2020-12-31 213800913TPW32I84456 2018-01-01 2018-12-31 ifrs-full:IssuedCapitalMember 213800913TPW32I84456 2018-01-01 2018-12-31 ifrs-full:AdditionalPaidinCapitalMember 213800913TPW32I84456 2018-01-01 2018-12-31 ifrs-full:AccumulatedOtherComprehensiveIncomeMember 213800913TPW32I84456 2018-01-01 2018-12-31 ifrs-full:RetainedEarningsMember 213800913TPW32I84456 2018-01-01 2018-12-31 ifrs-full:NoncontrollingInterestsMember 213800913TPW32I84456 2018-01-01 2018-12-31 213800913TPW32I84456 2019-01-01 2019-12-31 ifrs-full:IssuedCapitalMember 213800913TPW32I84456 2019-01-01 2019-12-31 ifrs-full:AdditionalPaidinCapitalMember 213800913TPW32I84456 2019-01-01 2019-12-31 ifrs-full:AccumulatedOtherComprehensiveIncomeMember 213800913TPW32I84456 2019-01-01 2019-12-31 ifrs-full:RetainedEarningsMember 213800913TPW32I84456 2019-01-01 2019-12-31 ifrs-full:NoncontrollingInterestsMember 213800913TPW32I84456 2019-01-01 2019-12-31 213800913TPW32I84456 2020-01-01 2020-12-31 ifrs-full:IssuedCapitalMember 213800913TPW32I84456 2020-01-01 2020-12-31 ifrs-full:AdditionalPaidinCapitalMember 213800913TPW32I84456 2020-01-01 2020-12-31 ifrs-full:AccumulatedOtherComprehensiveIncomeMember 213800913TPW32I84456 2020-01-01 2020-12-31 ifrs-full:RetainedEarningsMember 213800913TPW32I84456 2020-01-01 2020-12-31 ifrs-full:NoncontrollingInterestsMember 213800913TPW32I84456 2020-01-01 2020-12-31 Novolipetsk Steel None 2, Metallurgov sq., 398040, Lipetsk, Russian Federation Public joint stock company Russian Federation 2, Metallurgov sq., 398040, Lipetsk, Russian Federation 2, Metallurgov sq., 398040, Lipetsk, Russian Federation The Group is a vertically integrated steel company and the largest steel producer in Russia. The Group also operates in the mining segment Fletcher Group Holdings Limited Fletcher Group Holdings Limited ANNUAL REPORT Statement by member of the NLMK Board of Directors 2 ABOUT THE COMPANY 4 OUR TEAM 94 Strategy and business review Our results Five-year highlights 6 36 45 Stakeholder dialogue Supply chain management Human rights 96 104 112 Our employees 118 Occupational health and safety Developing local communities 138 150 CORPORATE GOVERNANCE ENVIRONMENTAL PROTECTION 46 160 Corporate governance Operational control and risk management Information for shareholders and investors 48 80 91 Environmental protection Climate change Energy eﬀiciency 162 186 202 PRELIMINARILY APPROVED BY NLMK BOARD OF DIRECTORS, MINUTES NO. 279 D.D. 22.03.2021 Appendix 212 Statement by member of the Board of Directors About the Company Corporate Governance Our Team Environmental Protection Appendix ANNUAL REPORT 2020 STATEMENT BY MEMBER OF NLMK BOARD OF DIRECTORS GRI 102-14 DEAR SHAREHOLDERS, In 2019–2020, we implemented several environmental projects at our flagship site in Lipetsk. Their controlled emission reduction effect (for substances other than СО2) totalled 9,000 tonnes (-3% vs. 2018). Upgrades at our blast furnace and steelmaking operations enabled these units to reduce their emissions by 95%. The projects involved best available technologies that can capture 99.9% of dust and reduce the Company’s environmental impact despite growing output. Here at NLMK Group, sustainable development considerations are embedded into the design of our long-term development strategy. This is how we make our contribution to the Sustainable Development Goals as a UN Global Compact participant. Substantial environmental investments ($1.3 billion since 2000) halved NLMK Group’s specific emissions: from 43.3 to 19.8 kg/tonne of steel. Total emissions decreased by 10%, even as steel output nearly doubled. Aware of the gravity of global climate change implications, We have also made significant strides in other sustainable development areas. The Company completed a planned audit of management systems for the environment, energy efficiency, occupational health, and industrial safety. NLMK Group’s Russian companies confirmed that their current management systems fully comply with all the requirements of international standards. In 2020, the Company continued to introduce new tools and programmes to improve safety. As a result, the rate of severe injuries among employees and contractors went down by 30% compared to 2019. we are committed to reducing our environmental footprint. This year NLMK Group published its first report in line with the recommendations of the Task Force on Climate-related Financial Disclosures. The report features a climate risk analysis and an updated target to reduce specific greenhouse gas emissions by 2023 (−3.5% vs. 2019). Over the past five years we have already reduced our СО2 emissions per tonne of product1 by 4%: from 1.98 in 2016 to 1.902 in 2020. The new target to cut greenhouse gas emissions is backed up by a portfolio of tangible projects designed to boost energy efficiency and reduce consumption of carbon-based fuels. In addition, we are testing out innovative NLMK Group seeks to build long-term partnerships with stakeholders. In our cooperation we are mindful of all parties complying with legislation in the field of human rights, occupational health and safety, labour relations, and environmental protection. The Company’s performance was reflected in upgrades of our ESG ratings. In the Sustainalytics rating, NLMK ranks among the top 5 out of 142 companies1. Likewise, SAM S&P Global increased our sustainable development score year-on-year2. We also ranked sixth in the World Wildlife Fund (WWF) Russia and National Rating Agency’s Environmental Transparency Rating of Mining & Metals Companies, improving our standing by three positions compared to 2019. I would like to extend my sincere gratitude to all shareholders, clients, and partners who believe in us and work alongside us. decarbonization technologies and enhancing environmental and climate cooperation with our Russian and international partners. Oleg Bagrin Member of the NLMK Board of Directors 1 Specific СО2 emissions are calculated based on steel output taking into account pig iron production, since NLMK’s commercial pig iron output increased significantly in 2020 compared to previous periods amid concurrent upgrades at steelmaking operations. Pig iron production and operations upstream of it account for the bulk of СО2 emissions. 1 https://www.sustainalytics.com/esg-rating/novolipetsk-steel/1028285007/ https://www.spglobal.com/esg/csa/yearbook/ranking/ 2 2 Specific emissions without the influence of temporary factors associated with a decrease in production. 2 3 ABOUT THE 6 Strategy and business review 36 Our results 45 Five-year highlights Statement by member of the Board of Directors About the Company Corporate Governance Our Team Environmental Protection Appendix ANNUAL REPORT 2020 STRATEGY AND BUSINESS REVIEW 2020 KEY PERFORMANCE INDICATORS OPERATING INDICATORS 2020 FINANCIAL PERFORMANCE Production Sales to third parties REVENUE, $ BN NET PROFIT, $ BN EARNINGS PER SHARE, $/SHARE − 13.2% − 7.7% − 4.5% +34.3% +54p.p. 12.0 2.2 0.37 10.6 10.1 0.24 9.2 0.22 0.21 1.5 7.6 1.3 1.2 0.16 0.9 IRON ORE 2016 2017 2018 2019 2020 2016 2017 2018 2019 2020 2016 2017 2018 2019 2020 18.5m t 0.8 m t ﬂat yoy +57% yoy EBITDA, $ BN EBITDA MARGIN, % NET DEBT / EBITDA, Х +3% +5p.p. 3.6 30 0.94 29 26 25 24 2.7 0.70 2.6 2.6 1.9 0.39 0.35 FLAT STEEL 0.25 14.7m t 14.9m t 2016 2017 2018 2019 2020 2016 2017 2018 2019 2020 2016 2017 2018 2019 2020 +8% yoy +5% yoy FREE CASH FLOW, $ BN DIVIDENDS1, $ BN DIVIDENDS / FCF, % −26.7% +6.3% 2.0 2.1 158 1.7 LONG STEEL 1.6 1.5 113 1.4 104 104 1.3 1.1 1.1 84 0.9 2.7 m t 2.6 m t −1% yoy −7% yoy 2016 2017 2018 2019 2020 2016 2017 2018 2019 2020 2016 2017 2018 2019 2020 1 Dividends accrued include Q4 2020 dividends in the amount of RUB 7.25 per share recommended by the Board of Directors for paying out on 11 February 2020 and are subject for approval by the Meeting of Shareholders. 6 7 Statement by member of the Board of Directors About the Company Corporate Governance Our Team Environmental Protection Appendix ANNUAL REPORT 2020 ABOUT THE COMPANY WHAT WE MAKE GRI 102-7 GRI 102-2 NLMK Group is the largest integrated steelmaker in Russia and one of the most NLMK is a leading supplier of high-quality steel products in key sales markets. NLMK has a balanced product mix that includes semi-finished, high value-added, and niche products. Flat steel accounts for around 85% of total output, while long steel used in construction makes up 15% of production. GRI 102-1 efficient in the world . NLMK Group’s steel products are used in various industries, from construction and machine building to the manufacturing of power-generating equipment and offshore wind turbines. NLMK SALES IN 20201 NLMK operates production facilities in Russia, Europe, and the United States. The Company’s steel production capacity is 18.5 m t per year1 . GRI 102-4 ꢀꢂꢉꢄꢊꢋ ꢍ ꢇ ꢀꢁꢂꢃꢄ ꢅꢆ ꢇꢈꢇꢂꢉ ꢊꢂꢉꢄꢊꢋ ꢌ NLMK has a highly competitive cash cost among global manufacturers and one of the highest profitability levels in the industry. In 2020, the Company generated $9.2 bn in revenue and $2.6 bn in EBITDA. Net debt/EBITDA stood at 0.94х. The Company has investment grade credit ratings from S&P, Moody’s, Fitch, and Expert RA. 1.5 3.1 8 18 28 5 Pig iron Slabs 4.9 1.0 Hot-rolled steel Hot-rolled steel plate Cold-rolled steel Galvanized steel Pre-painted steel NLMK’s ordinary shares with a 20.7% free-float are traded on the Moscow Stock Exchange (ticker “NLMK”) and its global depositary shares are traded on the London Stock Exchange (ticker “NLMK:LI”). The Company’s share capital is divided into 5,993,227,240 shares with a par value of RUB 1. 1.9 11 1.4 8 NLMK GROUP 0.5 0.3 0.3 0.3 2.0 0.3 17.5 3 Non-grain-oriented electrical steel 2 No. 1 steelmaker by volume in Russia Efficient vertical integration Cost-efficient steelmaker High profitability Grain-oriented electrical steel 2 2 Billet 11 Long products Metalware Tꢈꢇꢂꢉ 2 100 High value-added products Sustainable financial position High sustainability standards 1 Taking into account the capacity growth at the Lipetsk site following the completion of two-year large-scale repairs in the end of 2020. 1 NLMK sales to third parties (with NBH) 8 9 Statement by member of the Board of Directors About the Company Corporate Governance Our Team Environmental Protection Appendix ANNUAL REPORT 2020 OUR PRODUCTS SEMIS PLATE HOT-ROLLED STEEL COLD-ROLLED STEEL COATED STEEL ELECTRICAL STEEL LONG PRODUCTS METALWARE Share of total sales Share of total sales 28% 5% 28% 11% 11% 4% 11% 2% Description Description Pig iron and semi-finished steel products for further processing: slabs are processed into flat steel products; billets are processed into long steel products. A wide range of semis, both standard and niche products with specific chemical composition, physical properties, and dimensions Flat steel products with higher thickness than that of hot-rolled steel. A range of standard products and niche abrasion-resistant and high-strength plates. Produced at NLMK Group’s European sites from slabs supplied by NLMK Lipetsk Flat steel products that have been hot-rolled. A wide range of hot-rolled steel in sheets and coils with a variety of performance characteristics Flat steel products that have been cold-rolled. A wide range of cold-rolled steel sheets and coils with a variety of performance characteristics, including niche high-ductility products Galvanized and pre-painted steel from hot-rolled and cold-rolled flats. Coatings are applied on a production line to protect the steel from corrosive environments. Dynamo (non-grain-oriented) and transformer (grain- oriented) electrical steel. Includes a range of standard products with conventional properties, and unique Rebar in rods and coils, wire rod, and sections A wide range of low-carbon metalware. This includes wire and secondary products, with various coatings and surface finishes, nails, and fasteners high-permeability steel (HGO). Available in coils, strip, and sheets Available in coils, strip, and sheets Consumers Consumers Steelmaking, pipe industry Lifting and transport Pipe industry, steel Automotive industry, machine building, pipe industry, yellow machinery and white goods, and commercial, residential, and infrastructure Automotive industry, yellow and white goods, construction, and facing materials. Electrical machines, transformers, power engineering, and instrument making Construction Construction and machine building equipment, offshore wind turbines, drilling platforms, shipbuilding, pipelines, boilers, and tanks for aggressive environments (pressure, temperature, load, etc.) structures, shipbuilding, machine building, high- pressure vessels, yellow machinery, commercial, residential, and infrastructure construction construction Sites Sites NLMK Lipetsk, NLMK Kaluga NLMK DanSteel, NLMK Clabecq, NLMK Verona NLMK Lipetsk, NLMK Lipetsk, NLMK La Louvière, NLMK Pennsylvania NLMK Lipetsk, NLMK Strasbourg, Sharon Coating NLMK Lipetsk, VIZ-Steel NLMK Ural, NLMK Kaluga NLMK Metalware NLMK La Louvière, NLMK Indiana, NLMK Pennsylvania Market share1 Market share1 Galvanized steel NGO steel 99% 19% 11% 13% 25% 23% Pre-painted steel 22% 18% 19% (slabs) GO steel ~100% 11% 1 NLMK share in apparent consumption. Global market European market Russian market 10 11 Statement by member of the Board of Directors About the Company Corporate Governance Our Team Environmental Protection Appendix ANNUAL REPORT 2020 NLMK GROUP’S BUSINESS MODEL NLMK is a vertically integrated group with a well-balanced value chain controlling every stage of steel production, from the mining of raw materials through to finished high-tech product sales to end-users. During this process we operate with a commitment to corporate responsibility for all our people, our communities and our environment. NLMK Group’s vertically integrated business model KEY ACTIVITIES IN OUR PRODUCTION CHAIN NLMK has created a unique business model. A key factor is our ability to make the most of our strategic advantages based on the geographical location of our assets. UPSTREAM Mining and steel production (the most material- and resource-intensive aspects of the metallurgical process) are concentrated in low-cost regions, while finished products are manufactured much closer to the Group’s client base. This allows NLMK to minimize expenditure on production and logistics while at the same time swiftly and flexibly adapting to the changing requirements of our end users and the situation in local sales markets. MIDSTREAM UPSTREAM a world-class resource base with leading-edge technology for mining and processing, an optimal process environment, and the NLMK team’s high professionalism. The Company has achieved the status of one of the most cost-efficient steelmakers in the world through Up to 100% of raw materials produced are used in the steel production stage further along the value chain. DOWNSTREAM SELF-SUFFICIENCY IN RESOURCES ENERGY SCRAP COKE PELLETS IRON ORE CONCENTRATE 64% 64% 100% 95% 100% Captive electric power is generated primarily through the recovery of by-product gases from coke and blast furnace operations. NLMK’s scrap Captive coke production guarantees NLMK high-quality coke products, which boost the efficiency of operations Stoilensky is one of the most efficient iron ore producers in the world and is located 250 km from the Group’s main production facility in Lipetsk. Stoilensky's iron ore reserves are upward of 5 bn t. collection and processing network is the largest in Russia, ensuring the stable delivery of scrap to NLMK Group’s Russian steelmaking facilities. further along the value chain. 12 13 Statement by member of the Board of Directors About the Company Corporate Governance Our Team Environmental Protection Appendix ANNUAL REPORT 2020 MIDSTREAM integration, and upgraded production capacities. The production cost of Lipetsk steel in 2020 was $207/t. DOWNSTREAM Optimal production footprint: Due to the location of NLMK Group’s rolling operations in strategic markets, 60% of steel is sold in the region where it was produced. This allows the Company to meet the customers’ most challenging delivery timescales and respond promptly to fluctuations in local demand. Leading-edge equipment and finely tuned business processes enable the production of high-quality cost-efficient steel products. NLMK Group’s steel production capacity amounts to 18.5 m t per year1, 95% of which is made in Russia. Finished products are made locally Sales vs. further processing: 70% of NLMK steel is processed into finished products, while 30% is sold as semi-finished steel. NLMK produces both flat and long steel products, and our reputation as a reliable supplier ensures stable demand for the Group’s product offering. in the Company’s strategic markets of Russia, the EU, and the USA, in close proximity to consumers. With total production capacity of finished products standing at 15.3 m t, NLMK can process as much as 80% of captive crude steel at its own rolling facilities. Diversification of sales: An expansive geographical breakdown of sales and a flexible marketing policy create a global footprint, with the agility to divert sales of steel products to the most attractive market, ensuring the full utilization of production capacity throughout the value chain. High capacity utilization: An expansive product offering and availability of the Company’s rolling facilities in the regions of consumption, i.e. Russia, Europe, and the United States. Balanced product portfolio: NLMK’s extensive steel product offering, from conventional hot-rolled steel to custom electrical steels and other niche products, allows the Company to diversify sales by sector, reducing the dependency of sales volume on demand fluctuations in individual sectors. Cost leadership: NLMK is among global leaders in cost. NLMK Group enjoys sustainable cost leadership through its high utilization rates, efficient vertical High quality: The use of captive raw materials in rolled steel production guarantees consistent high quality and short lead times. The Company’s products are certified according to international standards. Optimal logistics: Production facilities located in regions with developed infrastructure and in close proximity to raw material sources lowers outlay on logistics as well as related risks. NLMK’S STEELMAKING CAPACITY ROLLING CAPACITY BOF EAF2 RUSSIA USA EU FLAT PRODUCTS LONG PRODUCTS RUSSIA USA EU 74% 26% 94% 5% 1% 83% 17% 59% 19% 22% 1 Taking into account the capacity growth at the Lipetsk site following the completion of two-year large-scale repairs in the end of 2020. Electric arc furnace. 2 14 15 Statement by member of the Board of Directors About the Company Corporate Governance Our Team Environmental Protection Appendix ANNUAL REPORT 2020 ASSETS STRUCTURE NLMK RUSSIA FLAT PRODUCTION SITES PRODUCTION CAPACITY, M T 2019/2020 ● 14.2 NLMK Lipetsk VIZ-Steel Altai-Koks Steel1 Flat products ● 6.3 ● MINING PRODUCTION, M T FUNCTIONS Coke2 Pig iron Steel Commodity semis Rolled products 6.1 6.1 +4% +9% +2% +14% +7% PRODUCTION CAPACITY1, M T Iron ore concentrate Sinter ore Pellets 2019/2020 ● 12.8 12.3 PRODUCTION SITES Produces steel, including semis for international companies, flat products and coke ● 17.9 7.1 Stoilensky Dolomit ● 1.0 ● 6.8 Stagdok PRODUCTS SALES TO EXTERNAL CUSTOMERS, M T ● FUNCTIONS PRODUCTION, M T Coke, pig iron, slabs, hot-rolled 1.5 +191% 0% steel, cold-rolled steel, galvanized steel, pre-painted steel, and grain-oriented and non-grain- oriented steel Commodity pig iron Slabs Hot-rolled steel Cold-rolled steel Galvanized steel Pre-painted steel NGOES ● 18.5 0% −4% 3.1 2.8 Covers the Group’s demand Iron ore Fluxes +11% −2% +7% −3% +6% +1% 6.4 for raw materials 1.5 0.8 0.4 0.3 0.3 PRODUCTS INTRAGROUP SALES, M T CONSUMERS ● 9.9 0% −4% 0% Iron ore concentrate, Iron ore concentrate Pellets Sinter ore GOES ● 6.7 pellets, sinter ore, limestone, and dolomite Internal: international rolling divisions External: construction, pipe 1.0 2.8 ● Limestone −3% INTRAGROUP SALES, M T 1.5 Dolomite production, automotive industry, machine building, white goods, yellow machinery, power −6% 2.6 −3% CONSUMERS Supplies to NLMK Europe ● Internal: NLMK Lipetsk External: steelmakers, SALES TO EXTERNAL CUSTOMERS, M T industry, and other sectors ● FINANCIALS, $ M 0.8 0.6 0.5 +57% −40% −33% road construction, and agriculture Iron ore concentrate Limestone Dolomite 6,788 −7% −4% −6% HEADCOUNT Total revenue EBITDA Investments 1,430 806 ● 30,600 people HEADCOUNT FINANCIALS, $ M ● 7,000 people 1,399 +6% +9% −7% Revenue EBITDA Investments 1,064 202 1 Taking into account the capacity growth at the Lipetsk site following the completion of two-year large-scale repairs in the end of 2020. 6% moisture. 1 2 Hereinafter, current capacities are based on current shifts and product mix without the impact of overhauls. 16 17 Statement by member of the Board of Directors About the Company Corporate Governance Our Team Environmental Protection Appendix ANNUAL REPORT 2020 NBH NLMK RUSSIA LONG NLMK DANSTEEL PRODUCTION CAPACITY, M T 2019/2020 PRODUCTION CAPACITY, M T Plate 2019/2020 PRODUCTION SITES PRODUCTION SITES NLMK DanSteel ● ● NLMK Vtorchermet scrap collecting facilities NLMK Ural NLMK Kaluga NLMK Metalware ● ● ● 3.3 0.6 2.9 Steel Long products 2.6 FUNCTIONS ● PRODUCTION, M T Plate Produces plates from NLMK Lipetsk and NLMK DanSteel semis PRODUCTION, M T 0.5 0.5 −8% −1% FUNCTIONS ● 2.2 +3% −2% −1% Scrap processing Steel Processes scrap for the Group’s steelmaking PRODUCTS 2.8 ● SALES, M T facilities in Russia Produces long products and metalware Niche steel semis and plates, including Q&T ● 2.4 Long products Metalware 0.3 –6% Plate CONSUMERS ● PRODUCTS Producers of heavy vehicles and loading ● SALES, M T SALES GEOGRAPHY Scrap, billets, rebar, wire rod, sections, and metalware equipment, offshore wind turbines, drilling rigs, shipbuilding sector, and producers of pipes, boilers, and reservoirs for hostile environments 0.3 0.3 +5% −9% −8% Billets Long products Metalware CONSUMERS ● 2.1 Construction and machine building HEADCOUNT 93% of sales in EU ● HEADCOUNT 400 people ● FINANCIALS, $ M 8,300 people 1,539 −12% +4% −24% Total revenue EBITDA Investments 93 38 NLMK USA NBH PRODUCTION CAPACITY, M T 2019/2020 PRODUCTION CAPACITY, M T 2019/2020 PRODUCTION SITES PRODUCTION SITES ● ● NLMK Pennsylvania NLMK Indiana Sharon Coating NLMK La Louvière NLMK Strasbourg NLMK Clabecq NLMK Verona ● ● 0.8 Steel 0.2 Steel ● ● 2.9 Flat products 2.8 Flat products ● PRODUCTION, M T PRODUCTION, M T FUNCTIONS ● Produces flat steel FUNCTIONS ● 0.6 −15% −25% Steel 0.2 +1% −3% Steel Produces flat steel from slabs coming from the Lipetsk 1.6 Flat products 2.1 Flat products PRODUCTS site and from internally produced semis ● Hot-rolled steel, cold-rolled steel, SALES, M T and galvanized steel PRODUCTS SALES, M T ● Hot-rolled steel, cold-rolled steel, galvanized steel, 0.9 0.3 0.4 −25% −31% −28% Hot-rolled steel Cold-rolled steel Galvanized steel 1.2 −4% −22% −14% −1% Hot-rolled steel Cold-rolled steel Pre-painted steel Plate CONSUMERS and pre-painted steel ● 0.03 0.3 0.6 Construction, pipe production, automotive industry, machine building, white goods, and yellow machinery production CONSUMERS ● Producers of heavy vehicles and loading equipment, FINANCIALS, $ M offshore wind turbines, drilling rigs, shipbuilding sector, and producers of pipes, boilers, and reservoirs for hostile environments, construction, pipe production, automotive industry, machine building, white goods. SALES GEOGRAPHY HEADCOUNT ● 1,086 −37% 0% Total revenue EBITDA Investments 1,100 people 76 49 +32% HEADCOUNT 1,700 people 93% of sales in EU ● 18 19 Statement by member of the Board of Directors About the Company Corporate Governance Our Team Environmental Protection Appendix ANNUAL REPORT 2020 Sales ꢀꢂꢅ ꢃ ꢄ ꢀꢂꢅ ꢃ ꢄ Home WHERE WE MAKE market AND MARKET STEEL GRI 102-4, GRI 102-6 PRODUCTION CAPACITY, M T NLMK Indiana Steel Flat 14.21 3.3 0.8 18.5 Sharon Coating NLMK Pennsylvania 6.3 3.4 2.9 12.6 Long 2.6 Russia Long Russia Flat Europe USA STEEL PRODUCTION, M T Russia 15.1 USA 0.6 0.2 Europe Sales ꢀꢁꢂꢁ ꢃ ꢄ ꢅꢂꢆ ꢃ ꢄ External market ꢅꢂꢅ ꢃ ꢄ Home market SALES2 IN 2020, M T 0.4 SALES STRUCTURE BY LOCAL / EXPORT MARKETS, % 0.4 0.4 Russia EU 1.9 6.7 34 38 Altai-Koks North America Middle East (incl. Turkey) LATAM Russia EU USA NLMK Ural VIZ-Steel NLMK Vtorchermet 2.2 ꢀ00 ꢀꢁꢂꢃ ꢄ ꢅ Export CIS Asia & Oceania Other regions NLMK DanSteel 2.4 NLMK Кaluga NLMK Lipetsk 13 15 3.1 NLMK Clabecq NLMK La Louvière Stoilensky NLMK Strasbourg NLMK India 0ꢂꢀ ꢃ ꢄ External market 1 Accounting for the Lipetsk site capacities growth following the completion of major repairs in the end of 2020 Sales with NBH 2 NLMK Verona Sales 2ꢂꢅ ꢃ ꢄ Upstream assets BF & BOF Operations Rolling assets EAF Slab supplies from Lipetsk to NLMK USA and NLMK Europe Intragroup raw material flows in Russia 2ꢂꢇ ꢃ ꢄ Home market Sales of steel to third parties on home and export markets Intragroup international supplies 20 21 Statement by member of the Board of Directors About the Company Corporate Governance Our Team Environmental Protection Appendix ANNUAL REPORT 2020 In December 2020, three laboratories developing new coatings were opened at the La Louvière site, enabling a broad spectrum of physical, chemical, and analytical studies, simulation of various technologies and application modes, and tests of end products (coated steel). OUR INNOVATIONS TOP RESEARCH AND DEVELOPMENT PRIORITIES UNTIL 2022 As a modern, high-tech company, NLMK Group’s development is inextricably linked to innovation. For us, innovation is a means of attaining strategic goals. The Company focuses its resources on seeking and quickly integrating new technologies that boost the efficiency of business processes. Examples of innovative solutions and technologies that the Company adopted in 2020 include 3D printing, photographic mapping via drones, and new wear-resistant materials for mining and steelmaking. We have also taken the first steps to integrate robotics into the Group’s production processes. Over 40 innovation projects are already being implemented. Introduce product innovations Apart from researching new In mid-2020, we launched the NLMK Innovation Lab online portal (https://lab.nlmk.com/en/). This new platform creates a simple and quick channel enabling all developers of innovative products and technologies to communicate with their end customers at NLMK. All projects are thoroughly evaluated, and efficient ones can then be implemented at NLMK Group sites. The portal has operated for less than six months and has already received over 100 applications, of which 50 are currently being analysed in-depth. products, we also carry out studies in the domain of sustainable development. In December 2020, the Company became a member of K1-MET, Europe’s leading metallurgical competence centre, and commenced a joint project with Voestalpine to process zinc-containing dust and sludge. Our industrial waste recycling project was backed by Establish a diversified product portfolio for the automotive, heavy engineering, energy, and industrial and civil construction industries NLMK Group’s approach to innovation is based on quick project implementation and tolerance for the risk inherent in testing potential solutions and technologies. This approach helps reduce project implementation costs, catalyse the development and adoption of innovative solutions, and minimize innovation-related risks. In 2020, we developed, patented, and produced a number of innovative steel grades: Ultra-high-strength cold-rolled steel with a tensile strength of over 1,000 MPa for safer car bodies High-strength ultra-low-carbon (non-ageing) steel with highly homogeneous properties manufactured using a cassette technology and annealed in bell-type furnaces for the production of extra-deep-drawing automotive parts and undercarriages Steel with an anti-corrosion coating of zinc, aluminium, magnesium, and a polymer finish, 2–3 times more durable than standard zinc coatings ● NLMK expands use of drones the Austrian government through the COMET programme (Competence Centers for Excellent Technologies). ● NLMK Group has established a centre to process and analyse data collected using unmanned aerial vehicles (UAVs) at its mining facilities. Drones will be used in the open-cast mine for prospecting and monitoring the condition of the roads, heat networks, power lines, and other infrastructure elements. The gain from expanding the use of UAV technology is estimated at RUB 100 million per year. Innovation projects are pursued and implemented across all of the Company’s main business processes: steel production, technologies and materials for repairs, customer service improvement, sustainable development, logistics, energy, HR. NLMK interacts actively with the innovation ecosystem, creating mechanisms for cooperation with venture funds, development institutions, and technology parks both in Russia and abroad. The goal of these efforts is to create a constant flow of ideas and projects for ● ● High-strength steel plate for manufacturing the nodes of heavy-duty vehicles, ensuring the equipment’s operation under high static and dynamic loads and in temperatures below -50°С RESEARCH AND DEVELOPMENT ● Plate for construction equipment with a strength of up to 1,200 MPa, high plasticity One of the formats that NLMK is The Company develops new products to respond to market demands, analyzing technological progress trends in the industry and determining the vector of innovation development. The life cycle of a new product development project includes computer and physical simulations and the use of advanced tools and methods to test laboratory prototypes before starting full-scale experiments on industrial equipment. This approach helps reduce project implementation costs, catalyse the development and adoption of innovative solutions, and minimise innovation- related risks. subsequent integration and piloting at Group sites. The Company’s main body in charge of innovations is the Innovation Projects Committee led by NLMK’s CEO (Chairman of the Management Board). The Committee has been in operation since 2018. and toughness ● developing to seek out new ideas is open innovation: building up partnerships with universities, venture funds, development institutions, and technology parks both in Russia and abroad. Innovation- related changes are systemic in nature, shaping the culture and the innovation ecosystem that unites NLMK Group with its partners. High-strength hot-rolled steel with good formability and increased resistance to cracking for structural car body elements NLMK DanSteel supplies steel heavy plates for next-generation ﬂoating oﬀshore wind farm In 2020, the number of projects NLMK DanSteel has supplied its heavy plate for the Wind Float Atlantic project, the first semi-submersible floating wind farm in the world, located off the north coast of Portugal. NLMK DanSteel’s high-quality steel is used in the production of floating platforms and foundations. To achieve the Strategy 2022 goals, the Company has set up an R&D department and a corporate Centre for Research and Development (R&D Centre) as part of its innovation activities. The department and centre possess the core capabilities and resources required to create digital and physical prototypes of new products and manufacture them at the Group’s facilities. The R&D department operates in Russia and Belgium. The main laboratory research facility is located at the Lipetsk site, while computer modelling and premium coating development capabilities are based in La Louvière (Belgium). in our research and development portfolio tripled. The portfolio primarily focuses on product innovations on the 2030 horizon. The goal is to ensure the Company’s competitive advantage and steady technological development. Additionally, NLMK sees innovation projects as a way to develop and fulfil our team’s potential. Wind Float Atlantic comprises three wind turbines of 8.4 MW each, mounted on floating platforms. The wind farm will be able to generate enough energy to supply 60,000 households in Portugal and save almost 1.1 million tonnes of CO2 emissions per year. Any employee can participate in such projects. The Company encourages initiative and provides opportunities for experimentation by simplifying the processes and mechanisms of innovation project implementation. The open innovation format also facilitates our employees’ professional growth: partnerships with leading universities and venture funds open up new sources of ideas and access to one-of-a-kind projects. The Company’s efforts to expand its product portfolio are anchored in the R&D development strategy, which was approved by the NLMK Board of Directors in 2018. The Company is actively developing its process base to regulate project management approaches in order to successfully implement R&D and innovation projects. In February 2020, microstructural analysis laboratories were opened at the Lipetsk site. Their purpose is to analyse the properties of steel produced during physical simulation and industrial experiments. The unit draws together unique research competencies and state-of-the-art measurement equipment. Several dozen high-precision devices support more than a thousand types of microscopy and chemical analysis measurements. This multi-method research will facilitate the development of new steel grades and products for the automotive, energy, and construction sectors. With the aim of participating in such innovative offshore projects, NLMK DanSteel has improved its production process and developed a special chemical composition of high-strength steel that ensures strong performance under high static and dynamic loads at low temperatures. Together with the American Bureau of Shipping (ABS), the plant has successfully completed product certification. 22 23 Statement by member of the Board of Directors About the Company Corporate Governance Our Team Environmental Protection Appendix ANNUAL REPORT 2020 DIGITALIZATION efficiently clean emissions from harmful impurities. We have also integrated a digital system for environmental impact monitoring. Sales development. Our digital tools and services, including our online sales platform, ensure prompt customer interaction, increase loyalty, and shorten feedback loops with our customers. In-depth analytics allow us to build the sales system around customer experience, reduce order lead times, and create competitive advantages. CYBERSECURITY ● The development of information technologies and digital solutions is an essential tool for attaining NLMK Group’s strategic goals. Dozens of cross-functional teams are engaged in the development of over 90 digital products for production sites and corporate functions. Every digital solution is designed to achieve our first-priority goals and to eliminate faults. The Company employs machine learning and machine vision, advanced analytics, Industrial Internet of Things, unmanned aerial vehicles, additive and other technologies that are most relevant to every given task. The digital ecosystem we have established ensures effective “ground rules” for cross-functional teams, sustainable solutions, knowledge accumulation in the Company, and a seamless collaboration environment with over 30 partner companies specializing in various subjects and technologies. In terms of digital ecosystem development, NLMK Group has reached two key objectives in 2020: ● Stabilizing the organizational model of digital product creation and development. The model is based on the iterative work of cross-functional teams comprising employees of specialized production units and functions along with technology, IT, and data specialists. The teams focus on identifying the digitalization potential of a given production unit or function and are in charge of the entire life cycle of the solutions they create. Dedicated teams work on end-to-end cross-functional digital products. The teams are reasonably autonomous, which means that they are able to experiment with innovative solutions and to engage and develop high-potential specialists. Digitalization in the context of Strategy 2022 ● ● Leadership in efficiency. Every year, Creating a machine learning platform, which ensures that the dozens of Company NLMK Group increases its investment into the automation of production processes. Our teams create solutions that involve AI technologies operate consistently and continue to develop. Our DSML (Data Science and Machine Learning) platform is a single environment for data scientists. It creates a feedback loop between mathematical models. solutions to boost the efficiency of production, repairs, logistics, and energy. We are successfully implementing a one-of-a-kind set of calendar planning and scheduling programmes, which will enable reduced lead times for customers and higher capacity utilization. Mobile devices are used for planning and executing production equipment repairs. Over the course The Company is actively introducing digital and mobile services for employees. Such solutions support the full HR cycle: planning vacations and business trips, training, objective management, performance reviews, career track selection, and much more. NLMK Group follows a unified approach to countering cyber threats. To this effect, the Company has established a comprehensive information security system that has proven its reliability during the rollout of the remote work practice. This provides confirmation that the Company’s cybersecurity management has taken effective measures, based on the principle of the top management’s involvement in ensuring integrated and centralized information security management and risk-based approach implemented by the Risk Assessment and level of information security processes is also regularly evaluated in accordance with the COBIT 5 standard to make sure that the Company is well on track towards its target. As for the level of the corporate network’s resilience to potential attacks, the Company plans to carry out regular external penetration testing (Pentest). The digitalization of Stoilensky has allowed for an increase in iron ore output and an optimisation of the mine development plan With a view to counteracting man-made cyber threats, all NLMK employees, when they join the company, are familiarized with internal regulatory documents on information security through the electronic document management system and the corporate portal. The Company also regularly carries out awareness-raising activities (including informing about incident-related procedures), which include online learning courses, phishing email recognition tests, publications on cybersecurity matters, and e-mail newsletters. Calculating the optimal opencast mine development plan is always a challenge. The ore is not hosted evenly, and its ferrum content varies. We have built a digital 3D model of the mine, visualized the deposit structure and the ore bedding conditions, and used the model to develop a mining scenario for thirty years to come. Based on this data, we put together yearly and monthly plans with replacement tasks and adjust them automatically. of the current strategy cycle, initiatives involving digital solutions will contribute at least $50 million to the operational efficiency goal. ● Development of low-cost steel production. Our active use of BIM technologies in major investment projects has allowed for a significant decrease in the number of project collisions, optimization of construction timeframes, and the elimination of unforeseen risks related In addition, an optimizer system manages the transport flows in the mine. It sends messages to every driver, specifying where to load and unload their truck. The routes are distributed so that ores with different ferrum content levels are mixed together, forming a homogeneous mass. Each employee is personally responsible for compliance with the applicable information security requirements. Employees may be subject to disciplinary or other action for their violation. Management team. The Company has adopted a practice of regular internal audits of compliance with trade secret and personal data processing requirements. The maturity NLMK Group sets ambitious strategic goals for the development and digitalization of its operations, in which countering cyber threats will undoubtedly be of high importance. The Company will continue to focus on this area to improve the established information security risk management process. The digitalization of NLMK’s BOF operations has helped optimize ferroalloy consumption to construction and installation works. Sustainable development. ● The Company harnesses new NLMK produces hundreds of steel grades. In order to manufacture a particular grade, we need to ensure a certain concentration of the required chemical elements in the composition, which means adding the right amount of ferroalloys. Our ferroalloy consumption optimizer service determines the optimal composition and calculates the precise amount of the required additives. Through a user- friendly interface, it recommends the right amounts to the steel caster, which can add just enough ferroalloys for producing the steel grade in question. If there are several options, the most cost-effective one will be selected. technologies to increase production safety, reducing human participation in dangerous operations, improving automotive and railway transport safety, and providing employees with convenient tools for risk identification when executing dangerous work. In our efforts to deal with environmental concerns, we use technologies that help us more The solution is expected to generate a gain over RUB 90 million per year. 24 25 Statement by member of the Board of Directors About the Company Corporate Governance Our Team Environmental Protection Appendix ANNUAL REPORT 2020 STRATEGY IN ACTION OUR STRATEGY Operational efficiency STRATEGY 2022 Goal: Target EBITDA gain by 2023 Reduce cash cost and increase output across the entire integrated value chain +$570 m pa Strategy 2022 is predicated on enhancing NLMK Group’s competitive advantages through boosting operational efficiency across the entire production chain, growing cost-efficient steel production, enhancing vertical integration into key raw materials, increasing sales of high value-added (HVA) products, and pursuing environmental, safety, and human capital development programmes. Strategy 2022 targets net gains of +$1.25 bn to EBITDA. Results: Total EBITDA gain in 2020 (vs. 2019) +$176 m The structural gain to EBITDA from operational efficiency programmes amounted to $176 m vs. the 2019 base EBITDA GAIN BY SEGMENT IN 2020, $ M These achievements were largely due to the development of NLMK Production System (NPS). In the reporting year NPS was rolled out to all Russian sites. At key sites, such as Sintering & Ironmaking and Stoilensky, projects were implemented to increase NPS maturity with a focus on consistent growth of ideas with an economic effect. Despite the pandemic, last year’s number of initiatives was surpassed already in mid-November. Altogether, approximately 27,000 initiatives were submitted in 2020. The number of initiatives with an economic effect increased by 50%. 98% of ideas with gains exceeding RUB 100,000 were submitted by blue collars and line managers, which ensures the system’s stability. 2 5 18 $1.25 bn BY STRATEGIC GOALS $1.25 bn BY TOOLS 19 ꢀꢁꢂꢃ 132 Using the Control Charts NPS tool, the pelletizing and induration area of the Stoilensky Pellet Plant stabilized speciﬁc gas consumption per tonne of pellets 0.68 0.50 Leadership in efficiency 0.30 0.45 0.57 Operational Efficiency NLMK Russia Flat Mining NLMK Russia Long NLMK USA Leadership in low-cost steel production Leadership in strategic markets Investment While analyzing control charts, specialists at the plant noticed that gas consumption rates went beyond the control limits, leading to significant overconsumption. This was due to a malfunction causing the induration unit to operate at the wrong speed. The speed of pallet cars is regulated by sensors that measure layer height. The incorrect readings of these sensors led to the machine’s speed increasing above normal, causing the induration unit to stop. Measures were taken to determine and formalize the maximum levels of pellet layer height, and the sensors were recalibrated. This enabled the stabilization of pallet car speed. Specific gas consumption at the pelletizing and induration area has become more stable and manageable. NLMK EU NLMK Russia Flat (+$132 m): lower expenses on coal charge structure; additional output of slabs, hot-rolled steel, and galvanized steel; optimization of metallic charge consumption; logistics and energy projects. Significant improvement in the surface quality of commercial grain-oriented steel. KEY ELEMENTS OF STRATEGY 2022 1. LEADERSHIP IN OPERATIONAL EFFICIENCY 2. GROWTH IN LOW-COST STEEL PRODUCTION Production System at NLMK Vtorchermet Goal: Goal: Focus on operational efficiency and working towards best production practices; global leadership in the cash cost of steel production Growth of steel output at NLMK Lipetsk; maintaining 100% self-sufficiency in iron ore; growth in energy self-sufficiency at NLMK Lipetsk; decrease in coal consumption, including deficit grades Stoilensky (+$19 m): increased output of concentrate and pellets. In 2020 the managing company and four operation companies of NLMK Vtorchermet implemented the first wave of the NPS development project. This project has the most unique geography of all NPS projects in the Group: it involves 12 scrap collection facilities in the Ural region, Siberia, and Central Russia. NLMK Russia Long (+$18 m): lower metallic charge consumption at NLMK Kaluga and NLMK Ural; process optimization at NLMK Metalware. Target structural EBITDA gain: $0.5 bn Target structural EBITDA gain: $0.3 bn In 2020, a total of 47 initiatives were submitted (vs. 33 in 2019) with a confirmed economic effect of RUB 168 million (vs. RUB 43.5 million in 2019). Capex over the strategic period: $0.05 bn Capex over the strategic period: $1.0 bn NLMK USA (+$5 m): increased steel output; lower metallic charge consumption at the Indiana plant. 3. WORLD-CLASS SALES PORTFOLIO 4. LEADERSHIP IN SUSTAINABILITY AND SAFETY Operation companies that collect, process, and ship scrap mostly use standard technological processes and equipment, which enables the roll-out of related best practices across all NLMK Vtorchermet sites. The improvement projects will result in higher productivity and increased equipment reliability and safety. Goal: Goal: Growth of steel product sales; growth of high value-added (HVA) product output and sales Minimizing environmental footprint and ensuring safe operations NLMK EU (+$2 m): increased efficiency at the Verona plant. Target structural EBITDA gain: $0.45 bn Capex over the strategic period: $1.1 bn 26 27 Statement by member of the Board of Directors About the Company Corporate Governance Our Team Environmental Protection Appendix ANNUAL REPORT 2020 STRATEGY IN ACTION Investments Leadership in sustainability and safety Target EBITDA gain by 2023 +$680 m pa Goal: Goal: Growth in low-cost steel production and growth of premium product output and sales Minimize environmental footprint and ensure safe operations Total EBITDA gain in 2020 (vs. 2019) +$85 m ● EBITDA GAIN BY SEGMENT IN 2020, $ M NLMK has relaunched Blast Furnace No. 4 (BF-4) following a large-scale upgrade. As a result, the maximum output of the furnace increased by 8% to 3.4 million tonnes of pig iron per year. A new air treatment system captures 99.9% of dust particles, keeping residual dust content at the level of best available technologies (BAT) of 5 mg/m3. All of the blast furnace gas formed as a by-product in the manufacturing of pig iron is used for energy generation at NLMK’s cogeneration plant, while blast furnace slag is processed into construction materials. The total CAPEX for the project amounted to over RUB 35 billion. The furnace is equipped with an advanced automated control system with built-in artificial intelligence components. The system is able to autonomously select optimal process parametres, boosting blast furnace performance. NLMK has relaunched its Basic Oxygen Furnace No. 3, a steelmaking facility with a capacity of over 3 million tonnes per year, following an overhaul. The launch of a new dust and gas collection system in line with best available technologies (BAT) was tied in with the relaunch of the BOF. At NLMK Lipetsk, a new facility for the production of steel products, a continuous casting machine (CCM-9) was launched. The productivity of CCM-9 is 1.8 million tonnes of steel per year. The company plans to use the equipment to master the production of a premium mix of products that will be used to make wind turbine parts, marine vessels, oil drilling rigs, and large-diameter pipes. Leadership in sustainability and safety remains a priority for NLMK Group. Priority areas include: 2 6 ● Further minimization of our environmental footprint, including a reduction in specific emissions per tonne of steel at NLMK Russia to the level of the EU best available technologies 8 9 ꢀꢁꢂ ● Further reduction of injury rate 60 to LTIFR1 0.5 for our own employees and contractors ● ● Mining ● High level of social protection and Long products Flat products NLMK EU employee engagement NLMK USA Over 90% of all gains were obtained at the Group’s Russian companies: Stoilensky (+$60 m): launching the additional beneficiation section. Altai-Koks has launched coal stamp charging unit at an operational coke battery NLMK Russia Long (+$9 m): commissioning new power complexes built in 2019. Power complexes are a new-type of mini power plants providing NLMK Russia Long sites with heating, hot water, and chemically purified water for processes, as well as captive electricity. Instead of using the top charging method, stamp charging involves feeding already compacted coal briquettes into the oven horizontally. The technology has been introduced at Coke Battery No. 5, the most advanced coke oven battery at Altai-Koks. It has a production capacity of 1.1 million tonnes of coke per year. The new unit is equipped with an advanced and efficient gas treatment system. NLMK to increase galvanized steel production capacity NLMK Russia Flat (+$8 m): operation of the briquetting plant, which launched in May 2019; launch of the new logistics complex at the Lipetsk site. NLMK Lipetsk has embarked on a project to construct a new continuous hot-dip galvanizing line (HDGL-5) with a capacity of 450,000 tonnes of steel per year. The new line will produce high-quality steel for the construction, automotive, and white goods industries. In addition, a number of major Stoilensky ﬁnished hot testing at new additional beneﬁciation section projects were completed in 2020, and we expect to see their positive impact in 2021–2022. For example, NLMK Group completed a project to increase steelmaking capacities at the Lipetsk site by 1 million tonnes, up to 14.2 million tonnes per year. Hot testing was performed at three new concentrate grinding lines. The commissioning of the new additional beneficiation section will enable Stoilensky to increase its concentrate output from 17.5 million tonnes to 20 million tonnes per year and its ore processing capacity from 37 million tonnes to 42 million tonnes by 2021. 1 Lost Time Injury Frequency Rate. 28 29 Statement by member of the Board of Directors About the Company Corporate Governance Our Team Environmental Protection Appendix ANNUAL REPORT 2020 SUSTAINABLE The relevant functions are set in regulations on Committees, which were approved at NLMK’s General Meeting of Shareholders. For more information, see the Corporate Governance section. SUSTAINABILITY MANAGEMENT DEVELOPMENT POLICY In 2019, NLMK’s Board of Directors OUR APPROACH TO SUSTAINABILITY MANAGEMENT Sustainability management is integrated into NLMK Group’s corporate governance approved the Company’s Sustainable Development Policy (the “Policy”). This Policy defines the Group’s Leadership in sustainability and safety is one of the four main goals of NLMK Group’s Strategy 2022, and the changes that have been implemented will contribute to the successful achievement of this goal. The changes are in line with best international practices and stakeholder requirements, and confirm NLMK Group’s commitment to the principles and objectives of the UN Global Compact, to which the Company is a party. system and is carried out at all the Group’s companies, including international ones. Sustainability issues consistently feature on the agenda of NLMK Group’s leadership. The Board of Directors, the Board’s committees, CEO (Chairman of the Management Board), and the Management Board determine strategic growth priorities and ensure overall sustainability management. principles, goals, and objectives in matter concerning sustainable development as well as the mechanism for managing the relevant agenda at the level of the Board of Directors. In particular, the Board’s Strategic Planning Committee is responsible for determining the Company’s goals and strategy for minimizing its environmental footprint, including greenhouse gas emissions, and reviewing and approving the relevant investment programme. The Board’s Audit Committee monitors the integrity of the disclosure of sustainable development information. As one of the largest international producers of steel and steel products, NLMK Group is aware of its responsibility towards society, nature, and future generations. Our team is united by corporate values that shape NLMK’s approach to responsible leadership. Vice presidents of functional units are responsible for identifying specific tasks and initiatives to manage the social, economic, and environmental aspects of the Group’s activities and monitor their implementation. Departments responsible for developing approaches and implementing measures in matters concerning sustainability report to these vice presidents. INTEGRATED MANAGEMENT SYSTEM In 2020, NLMK Group approved its Integrated Management System Policy (IMS Policy). This Group-wide document lays out the Company’s intentions in the areas of quality (ISO 9001), environmental protection (ISO 14001), energy efficiency (ISO 50001), and occupational health and safety (ISO 45001). The Policy, approved as part of integrated management system development, complies with international standards and reflects best global practices of sustainable development. The full text of the Policy is available on the Company’s website via this link. A number of NLMK Group’s internal documents regulate sustainability measures. A more detailed list of these documents can be found further in the text of this Report. The Group’s functional departments and teams are directly responsible for executing the tasks assigned to them and for the local management of sustainability issues at the Group’s companies. The detection, monitoring, and management of sustainability risks is an integral part of the corporate risk management system (see the Operational Control and Risk Management section for more details). ORGANIZATIONAL STRUCTURE FOR MANAGING SUSTAINABILITY ISSUES AT NLMK GRI 102-20 NLMK GROUP’S VALUES GRI 102-16 Value Description Strategic Planning Committee Continuous improvement of processes Continuous improvement of processes and technologies to ensure the sustainable production of steel products that help improve the quality of life Client-oriented approach Production of unique premium quality steel products and development of engineering solutions that help our customers be on the cutting edge of innovation and be leaders in their markets Human Resources, Remuneration, and Social Policy Committee Internal Audit Service Board of Directors Absolute priority of the health and safety of our employees Unwavering commitment to protecting the health and safety of our employees and contractors and ensuring favourable working conditions that allow our employees to fulfil their potential for professional and personal growth Audit Committee Investment Committee Risk Management Committee Ensuring equal opportunities for employee development Ensuring equal opportunities for the professional and personal growth of our employees and motivating our employees to be proactive and innovation-driven CEO (Chairman of the Management Board) Sustainable use of resources Sustainable use of resources and the pursuit of the best available environmental and energy efficiency standards, which we also expect our partners to comply with Management Board Active approach to social responsibility Active approach to social responsibility and care for cultural legacy in the regions where we operate Functional units and teams at the Group’s Russian and international companies 30 31 Statement by member of the Board of Directors About the Company Corporate Governance Our Team Environmental Protection Appendix ANNUAL REPORT 2020 ● Integrated Management System objectives: To be a global leader in adopting best practices to make our operations more energy-efficient, and to reduce energy consumption and cost of production as far as is technologically and economically feasible To ensure efficient production with zero accidents, incidents, and near misses through global excellence in occupational health and safety and continuous development and promotion of a safety culture among NLMK Group’s employees and contractors To ensure our operations do no harm to the environment or the climate, and to respond to changing environmental and climate conditions by balancing them with social and economic needs CONTRIBUTION NLMK Group supports the Sustainable Development Goals adopted by the UN General Assembly in 2015, which aim to address significant economic, social, and environmental issues faced by the global community. TO THE ACHIEVEMENT OF THE SUSTAINABLE DEVELOPMENT GOALS ADOPTED BY THE ● ● ● To be a global leader for the quality of our steel products and raw materials by continuously upgrading and expanding our product mix with the aim of increasing our customers’ competitiveness We believe that the Group makes a valuable contribution to the achievement of global sustainability goals by engaging in responsible business and targeted activities that aim to reduce its environmental footprint, support local communities, and ensure safe and decent working conditions. UN GENERAL ASSEMBLY ● To comply with industry best practice concerning the rational use of material and technical resources and the safety of our production processes for both human health and the environment Integrated Management System objectives and management liabilities are published at NLMK Group’s website. NLMK GROUP’S CONTRIBUTION TO ACHIEVING UN SUSTAINABLE DEVELOPMENT GOALS UN Goal NLMK Group’s contribution Ensure healthy lives and promote wellbeing for all at all ages SUSTAINABILITY AGENDA MANAGEMENT AT THE BOARD OF DIRECTORS LEVEL ● Implementing programmes aimed to help employees stay healthy and increasing the availability and quality of medical services for employees ● Informing the Group employees and contractors about occupational safety rules Board Committees Key aspect of sustainability ● Implementing training programmes in occupational health and safety ● ● ● Implementing initiatives aimed at reducing water consumption, pollutant emissions, Strategic Planning Committee Sustainable development risk assessment Environment: and overall waste — Air emissions See the following chapters of the Report: Our team, Developing local communities, Occupational health and safety, Human rights, Supply chain management, Environmental protection — Discharges and waste — Use of resources — Biological diversity — Climate change Ensure inclusive and equitable quality education and promote lifelong learning opportunities for all ● Implementing training and development programmes to enhance professional skills ● ● Human Resources, Remuneration, and Social Policy Committee Integration of sustainable development KPIs in the remuneration system Social and employment: — Operational health and safety — Training and development — Social policy — Diversity and equal opportunities — Non-discrimination — Local communities of employees ● Implementing external social programmes aimed to support education in the regions where the Company operates ● Cooperating with educational institutions to improve the quality of training programmes and vocational training for future employment opportunities See the following chapters of the Report: Our team, Developing local communities Ensure availability and sustainable management of water and sanitation for all ● ● Audit Committee Performance monitoring and sustainability reporting ● Introducing water recycling systems Board of Directors, Corporate governance: — Corporate governance — Business ethics ● Implementing water treatment technologies Human Resources, Remuneration, and Social Policy Committee, Audit Committee ● Reducing water intake through equipment upgrades Monitoring and disclosing information on the use of water resource ● — Anti-corruption See the following chapters of the Report: Environmental protection Ensure access to affordable, reliable, sustainable, and modern energy for all ● Improving energy efficiency ● Transitioning to captive energy generation ● Consuming energy from secondary resources Monitoring and disclosing information on the volume of energy consumed ● See the following chapters of the Report: Energy efficiency 32 33 Statement by member of the Board of Directors About the Company Corporate Governance Our Team Environmental Protection Appendix ANNUAL REPORT 2020 UN Goal NLMK Group’s contribution UN Goal NLMK Group’s contribution Promote sustained, inclusive, and sustainable economic growth, full and productive employment, and decent work for all Promote peaceful and inclusive societies for sustainable development, provide access to justice for all, and build effective, accountable, and inclusive institutions at all levels ● Fulfilling tax obligations ● ● ● ● ● ● ● ● Countering corruption and fraud and preventing conflicts of interest ● Ensuring equal access for all Group employees to social benefits and creating equal Introducing NLMK employees to the Code of Corporate Ethics and Anti-Corruption Policy Introducing counterparties to the Supplier’s Code of Business Conduct Creating and continuously improving efficient corporate governance practices Creating and developing a system of government relations Ensuring human rights protection opportunities for high performance, professional growth, and the development of creative potential Creating jobs in the regions where we operate Implementing training and development programmes to enhance employees’ professional skills Ensuring decent and safe working conditions Developing NLMK Group’s human rights policy prohibiting forced and child labour, ● ● Complying with applicable laws, including occupational practices Openly interacting with stakeholders and informing stakeholders about the Company’s positive and negative impacts ● ● recognizing the right to a minimum wage, outlawing discrimination, and guaranteeing safe working conditions ● ● Creating feedback channels Monitoring and regular reporting on the management of environmental aspects and disclosing information about legal non-compliance, including with environmental protection and labour laws ● Ensuring the transparency of procurement procedures ● Supplier’s Code of Business Conduct, which is binding for all counterparties ● Evaluating supplier compliance with applicable occupational health and safety standards See the following chapters of the Report: Corporate governance, Operational control and risk management, Information for shareholders and investors, Environmental protection as part of auditing and qualifying suppliers and contractors ● Implementing initiatives to minimize the Group’s environmental footprint Strengthen the means of implementation and revitalize the global partnership for sustainable development See the following chapters of the Report: Our team, Developing local communities, Occupational health and safety, Human rights, Supply chain management, Environmental protection ● Cooperating with government authorities to ensure that the interests of local Ensure sustainable consumption and production patterns communities are taken into account in decision-making ● Increasing the efficiency of natural resource usage ● Disclosing information about payments to the state budgets ● Recycling ferrous scrap ● Concluding partnerships with NGOs to implement programmes which aim to develop local ● Implementing a series of measures aimed at improving energy efficiency and the efficiency communities of resource use and reducing the environmental footprint of operations ● Supporting sustainability initiatives implemented by Russian and international industry ● Upgrading equipment and improving technology in order to minimize their negative impact organizations on human health and the environment ● Strengthening partnerships with other companies in the industry See the following chapters of the Report: Environmental protection See the following chapters of the Report: Stakeholder dialogue, Developing local communities, Environmental protection, Supply Chain management, About the Report Climate change ● Implementing a set of measures to reduce specific greenhouse gas emissions ● Sales of products that enable lower emissions on the consumer side ● International cooperation on projects aimed at reducing greenhouse gas emissions See the following chapters of the Report: Environmental protection, Climate change 34 35 Statement by member of the Board of Directors About the Company Corporate Governance Our Team Environmental Protection Appendix ANNUAL REPORT 2020 measures to protect employees’ interests. Additionally, in August, at the live phone-in event with the CEO, he spoke about the way that the Company coped with the crisis period, and employees could pose their questions to him directly. used it during the overhaul of a continuous casting machine in BOF Shop No. 2. OUR RESULTS The service is designed to oversee construction works, including those at remote facilities, compare the actual construction with the 3D project models, and collect retrospective data for subsequent analysis of the construction process. The pandemic gave further impetus to the Company’s digitalization process, stimulated the development of the corporate volunteer movement, with more volunteers joining its ranks at Company level, and shifted the focus of charitable activities towards supporting healthcare. COVID-19 RESPONSE Many of our business processes have undergone changes. NLMK had two main goals: employee safety and production continuity. The Company was successful in adapting to the new conditions. The Company focused all of its efforts on ensuring employee safety during the pandemic. In view of the epidemiological situation, When it comes to the Company’s economic and financial performance, the pandemic had an adverse impact on overall business activity in Q2 2020, leading to significantly weaker steel demand at our traditional sales markets and to lower steel product prices. In April 2020 we had to reduce output at our Long Products Division. a comprehensive programme to mitigate the impact of COVID-19 was initiated in March 2020. The programme covered all Group companies, whose total headcount exceeds 50,000 For instance, the NLMK Innovation Lab began holding its idea generation and project exploration sessions in an online format. In 2020 the Lab and the Sessions & Conferences department of the Corporate University organized four in-person events for Sintering & Ironmaking, Rolling Operations, Steelmaking, and the Procurement function. In order to sustain high capacity utilization at NLMK’s flagship Lipetsk site, we adjusted our regional sales structure (in particular, increasing supplies to Asian markets in April and May) and diversified our product portfolio. NLMK Group’s flexible business model enabled it to redirect its supplies, mainly to China, where steel demand had already started to recover. people, as well as certain categories in the communities of the regions where the companies operate, such as socially vulnerable groups and medical workers. The Group’s Russian companies instituted an obligatory remote work mode for all employees over the age of 60. Approximately 5,000 people switched to working from home. The Company provided the necessary protective equipment and preventive medication, and organized regular tests both for employees and We navigated the crisis with confidence by relying on our diversified product line-up and flexible supply chains. The Company proceeded with its main investment projects planned for 2020. In this difficult period, our financial performance remained stable. The pandemic became a professional challenge for our IT departments, which had to urgently lay a technical foundation for effective remote work. It took the IT infrastructure team only two weeks to deploy remote access services on a mass scale. In 2020, the total programme budget for various measures to combat the pandemic amounted to more than RUB 4.7 billion, including RUB 4.1 billion — for internal expenses (measures to reduce the risk of the spread of infection, social support for employees, etc.), RUB 0.6 billion - for external social expenses (support for the regions of presence). contractors. NLMK Group prohibited all mass gatherings, events, and meetings with over 15 people, and placed limits on business trips. New requirements included wearing masks, practising social distancing, measuring temperature, and obtaining a negative COVID-19 test result before returning to work after a long absence (vacation or sick leave). In addition, NLMK initiated supplementary assistance programmes in the regions where it operates, working in close cooperation with the municipal and regional authorities. Stoilensky provides assistance to Stary Oskol medical professionals In order to continuously develop our employees’ qualifications, we transferred most training activities into an online format. The Corporate University team adapted the contents of its programmes accordingly. Stoilensky Mining and Beneficiation Plant, an NLMK Group company, provided three ventilators to medical facilities in Stary Oskol. In order to curb the spread of COVID-19, the plant assisted the city in purchasing masks, gloves, and disinfectants for a total of RUB 1.5 million. NLMK’s social partner, the Miloserdiye Charity Fund, provided 500 protective suits to health professionals on the frontlines of the fight against the virus. Employee safety Social assistance The pandemic also spurred changes in the processes related to major repairs at NLMK’s flagship Lipetsk site. We piloted the Virtual Line Walk system for monitoring construction and installation works and successfully ● ● Over 100,000 COVID-19 tests for employees 5,000 employees switched to working remotely >35,000 PPE units for employees Limiting business trips and in-person meetings, maximizing online training 67 ventilators 46 oxygen concentrators 4 PCR labs equipped >530,000 PPE units provided In order to sensitize local communities on how to prevent the spread of COVID-19, Stoilensky placed banners with information about key prevention measures around the city. ● ● ● ● ● ● to medical facilities Vehicles for hospitals, X-ray ● The Company attached particular importance to informing its employees about the current pandemic situation in a timely manner. One of NLMK’s first response measures was the creation of a COVID-19 call centre that employees could contact in case of infection risk, as well as a crisis centre to prevent the spread of COVID-19. When the epidemiological situation was at its most difficult, NLMK Group’s CEO published weekly addresses to employees on the corporate portal, providing them with the latest information about the pandemic and the Company’s machines, and other medical equipment 1,000 families of employees ● ● ● ● Changing work schedules to reduce workplace density More buses and routes to deliver employees to work RUB 30,000 in additional payments to staff to compensate for pandemic-related expenses that have three or more underage children or are raising children with disabilities received financial support ● 25,000 food parcels were provided to elderly people, veterans, families with three or more underage children, and single parents in the regions where the Group operates 36 37 Statement by member of the Board of Directors About the Company Corporate Governance Our Team Environmental Protection Appendix ANNUAL REPORT 2020 GLOBAL STEEL PRODUCTION, BN T PRICE TRENDS MARKET REVIEW Average global coal prices decreased by 29% yoy in 2020 due to weak demand from the steel industry during the pandemic and China’s restrictions on imports 1.87 1.83 1.81 1.73 1.63 The COVID-19 pandemic has had a significant impact on the global steel industry in 2020. A high level of uncertainty, restrictions to contain the spread of the infection, partial suspension of production chains, and turbulence on raw material markets have led to substantial supply and demand imbalances, changing the structure of global trade flows in all key regions. US MARKET of Australian coal. Iron ore prices grew by 15% yoy due to high demand from Chinese steelmakers amid forecasts of lower raw material supplies from Brazil and Australia. Market prices for flat products in the US were down by 2% yoy, hitting a local minimum in early Q3 2020 and later rebounding sharply to multi-year highs. The decrease in European prices averaged 5% yoy, but starting from early Q3 the region saw dramatic growth as well. Dollar-denominated steel product prices on the Russian market decreased by 9-13% yoy following global prices and a weaker ruble. In 2020 steel output in the US decreased by 17% yoy to 73 m t. Capacity utilization rates averaged 67%, and remained lower than pre-crisis levels at the end of the reporting period. Steel consumption in 2020 went down by 19% yoy to 86 m t amid limited demand from manufacturers due to the COVID-19 pandemic. Demand was recovering in the automotive and construction sectors towards the end of the reporting period, but steelmakers’ lead times reached record highs: long-term contracts were prioritized and there was practically no steel supply on the spot market. 2016 2017 2018 2019 2020 GLOBAL RAW MATERIALS PRICES, $/T STEEL PRODUCTION BY REGION, % 200 150 100 50 250 200 150 100 50 The first country where business activity began to recover was China. A large- scale state programme to stimulate the economy and finance major infrastructure projects led to a surge in internal demand for steel products and, consequently, an increase in steel product prices globally. Steel imports in 2020 decreased by 21% yoy to 20 m t, while exports were down by 4% yoy to 6 m t. 5 2 2 4 6 EU MARKET 8 58 Steel output decreased by 12% yoy to 139 m t. By the end of the year steel output bounced back to almost pre-crisis levels as production became highly marginal. Capacity utilization rates during the pandemic went down to nearly as low as 50%, but recovered to 70% by the end of the year. 0 0 16 Feb Apr Jun 2019 Aug Oct Dec Feb Apr Jun Aug Oct Dec 2020 Worldsteel Association estimates that in 2020 global steel production decreased by 1% yoy to 1.83 bn t, which was almost entirely offset by China’s all-time-high steel output (+5% yoy, to 1.05 bn t). Average global steelmaking capacity utilization stood at 82%. China Asia, excl. China EU-28 North America Russia Middle East South America Others Iron ore (CFR China) Coal (FOB Australia, right axis) Coal (CFR China, right axis) Apparent steel product consumption in the EU was down by 12% yoy to 142 m t in 2020, as demand was low due to the COVID-19 pandemic and capacities had to be suspended. At the end of the reporting period demand was recovering in the automotive and machine building sectors. HOT-ROLLED STEEL PRICES, EXW, $/T Imports of flat and long steel were down by 17% yoy to 21 m t, while exports decreased by 13% yoy to 18 m t. 1,100 Global apparent demand decreased by 2% yoy, to 1.75 bn t, while in China it grew by 8% yoy to 1.02 bn t. 900 700 500 300 EXPORTS FROM CHINA, M T At the same time, exports from China went down by 17% yoy to 54 m t. RUSSIAN MARKET 109 In 2020 apparent consumption of finished steel products decreased by 3% yoy due to limited demand for flat and long products. Demand for coated steel grew by 4% due to an uptick in construction and renovation of country houses during the COVID-19 pandemic. Internal demand was supported by the state programme of discount mortgages and subsidies for the automotive industry. 76 70 64 54 Feb Apr Jun 2019 Aug Oct Dec Feb Apr Jun Aug Oct Dec 2020 Steel output in Russia remained flat yoy in 2020, totalling 72 m t. Meanwhile, steel imports were down by 18% yoy to 5.1 m t, and finished steel exports increased by 6% yoy, reaching 13 m t. Russia EU USA China 2016 2017 2018 2019 2020 Source: Bloomberg Sources: Bloomberg, Worldsteel, Eurofer, Metal Expert. Preliminary data. 38 39 Statement by member of the Board of Directors About the Company Corporate Governance Our Team Environmental Protection Appendix ANNUAL REPORT 2020 OPERATING PERFORMANCE FINANCIAL RESULTS Steel output grew by 1% yoy to 3.9 m t (+3% yoy) following the increase in productivity. NLMK Lipetsk capacity utilization rate remained high at 98%. Russian Long Products capacities were running at 84%. The utilization rate of NLMK’s European companies was 79%. REVENUE NET PROFIT Revenue reduced by 12% yoy to $9.2 bn, due to a reduction in steel product prices and an increase in the share of semi-finished products in total sales. Net profit reduced by 8% yoy to $1.2 bn mainly due to the recognition of the NBH investment value impairment in the amount of $120 m in Q2 2020. Without the impact of this non-cash transaction, net profit would have stood at $1.3 bn. The share of semi-finished products in the revenue grew by 30% yoy to 4 p.p. due to higher pig iron and billet exports; the share of finished products decreased by 3 p.p. to 65%. The share of high value-added products decreased by 2 p.p. to 36%. FREE CASH FLOW Consolidated sales grew by 3% yoy to 17.5 m t supported by a three-fold yoy increase in pig iron sales to 1.5 m t amid higher steel output during BOF overhauls at NLMK Lipetsk. Sales of semi-finished products to third parties grew by 25% yoy to 4.9 m t due to higher pig iron and billet exports. Slab sales to NBH totalled 2.1 m t (flat yoy). Finished rolled steel sales declined by 5% yoy to 10.5 m t amid weak demand in April-May 2020 and sales redistribution to semi-finished products. Free cash flow decreased by 28% yoy to $1.1 bn due to working capital financing as receivables grew. Cash outflow from working capital totalled $16 m due to: 1. − $177 m: an increase in receivables due to higher prices and increased slab sales to NBH 2. + $117 m: a decrease in raw material and finished product stocks 3. + $46 m: an increase in payables The share of the Russian market in the revenue totalled 41% (flat yoy). The EU and US share decreased to 17% and 15% accordingly (−1 p.p. yoy; −3 p.p. yoy). INVESTMENT The Group’s investment went up by 4% yoy to $1.1 m in line with the previous guidance. The increase of investment was due to the completion of large-scale upgrade projects at the NLMK Lipetsk blast furnace operations and active phase of investment programme implementation in line with Strategy 2022. Sales on ‘home’ markets reduced by 6% yoy to 10.7 m t, which was mostly due to lower sales of NLMK USA. Sales in Russia remained flat year-on-year at 6.7 m t. Sales on export markets grew by 17% yoy to 6.8 m t, due mainly to higher pig iron and billet exports. EBITDA1 EBITDA reached $2.6 bn (+3% yoy). Strategy 2022 programme gains, the accrued refund from the US Department of Commerce in line with the settlement agreement, and a weaker ruble fully offset the narrower slab/uncoated flat steel spread and the negative impact of the incident at Stoilensky in September 2020. to NLMK Group and NBH companies totalled 2.7 m t (-12% yoy) due to lower slab demand from NLMK’s European companies and suspended slab supplies to NLMK USA. DIVIDENDS NLMK Russia Long Products segment sales went down by 7% yoy to 2.6 m t due to lower demand for long products in 2020. Sales of long products in Russia went down by 12% yoy to 1.8 m t amid the COVID-19 pandemic. Export sales increased by 4% yoy to 0.9 m t due to higher billet sales to Turkey, China, and African markets. On 11 February 2021, the Board of Directors recommended that shareholders approve the payment of Q4 2020 dividends in the amount of RUB 7.25 per share (for a total of $570 m). Consequently, the Company can accrue 12M 2020 dividends in the amount of RUB 21.64 per share. Sales in the NLMK Russia Flat Products segment increased by 7% yoy to 13.4 m t as export sales of pig iron grew, along with hot-rolled steel sales on the Russian market. sales of finished steel reached 6.1 m t (+5% yoy) amid the completion of repairs at NLMK’s Hot Strip Mill. Sales of semis to third parties went up by 27% yoy to 4.6 m t, driven mainly by higher export sales of pig iron. Sales of semis Performance of NLMK’s international companies was influenced by the COVID-19 pandemic: NLMK USA sales stood at 1.6 m t (-27% yoy). NLMK Dansteel Sales went down by 1% yoy to 0.52 m t. NBH deliveries decreased by 5% yoy to 2.1 m t sales. Commercial expenses totalled $845 m (flat yoy). General and administrative expenses decreased by 2% yoy to $346 m. DEBT MANAGEMENT Total debt in 2020 grew by 31% yoy to $3.5 bn. Iron ore sales from the Mining segment remained flat year-on-year at 18.4 m t. Sales of iron ore to third parties totalled 0.8 m t (+57% yoy). Net debt increased by 40% yoy to $2.5 bn due to cash outflow to dividend payments and increase of investment. Net debt/EBITDA was 0.94x. 1 EBITDA used in NLMK’s financial releases is calculated as operating profit before equity share in net losses of associates and other companies accounted for using the equity method of accounting, impairment and write-off of assets, adjusted to depreciation and amortization. EBITDA is not an indicator of operating profit, operating activity or liquidity under IFRS, and NLMK discloses it because equivalent indicators could be used by investors and analysts. That said, NLMK’s EBITDA should not be viewed on a standalone basis, or in place of profit before tax, or cash flows from operations, as defined by IFRS, or as an indicator of operational efficiency, or as the sum of free cash funds that NLMK can invest into business development. NLMK’s EBITDA margin and EBITDA might not be comparable to similar indicators disclosed by other companies as there are no commonly accepted rules for calculating them. For instance, NLMK’s EBITDA is calculated similar to what is termed as ‘Adjusted EBITDA’ in other companies, as NLMK’s EBITDA excludes other profit/loss items in addition to interest payments, income tax, depreciation and amortization. 40 41 Statement by member of the Board of Directors About the Company Corporate Governance Our Team Environmental Protection Appendix ANNUAL REPORT 2020 SUSTAINABILITY MANAGEMENT GENERATING ECONOMIC VALUE By implementing its activities in various areas of sustainable development, NLMK Group generates additional value for its stakeholders. In 2020, the volume of distributed economic value amounted to $ 9,230 m1. GRI 201-1 ECONOMIC VALUE GENERATED AND DISTRIBUTED, $ M Indicator Stakeholder group 2017 10,104 10,065 2018 12,069 12,046 2019 10,578 10,554 2020 9,274 9,245 Generated direct economic value Revenue Revenue from financial investments 29 10 21 2 18 6 18 11 Wide range of stakeholders Income from sale of assets Distributed economic value (9,773) (11,565) (11,111) (9,230) Operating expenses Wide range of stakeholders Employees (6,994) (7,967) (7,516) (6,201) Employee wages and other payments and benefits paid to employees SEGMENT RESULTS (960) (979) (970) (909) NLMK Russia Flat Products EBITDA decreased by 4% yoy to $1.4 bn amid narrowing price spreads and higher personnel costs due to additional one-off payments to employees as part of the COVID-19 pandemic support. Payments to providers of capital (1,354) (1,285) (69) (1,946) (1,890) (56) (2,169) (2,120) (49) (1,702) (1,638) (64) including dividends paid Shareholders and investors NLMK Russia Long Products EBITDA grew by 4% yoy to $93 m due to operational efficiency programme gains and a weaker ruble, as the share of billet exports increased. including interests paid to creditors Mining and Processing of Raw Materials EBITDA increased by 9% yoy to $1.1 bn due to higher iron ore prices, a weaker ruble, and gains from investment and operational efficiency programmes that offset production losses associated with the September 2020 incident. Payments to government Community investments Government authorities Local communities (454) (11) (662) (11) (445) (11) (372) (46) 44 NLMK USA EBITDA grew to $76 m, vs. −$37 m in 2019. Without the accrued refund in line with the settlement agreement with the US Department of Commerce, the Segment’s EBITDA was −$21 m amid lower output and sales. Non-distributed economic value 331 504 (533) NLMK DanSteel and plate distribution network EBITDA decreased to −$4 m (vs. $8 m the previous year) due to lower plate prices. JV performance (NBH) EBITDA totalled −$93 m vs. −$134 m the previous year. Losses in the Segment were due to low prices for end products coupled with a decrease in output and sales amid the COVID-19 pandemic. The relative decrease in losses vs. the previous year was due, among other factors, to last year’s accrual of non-operating provisions for NLMK Clabecq restructuring. 1 Calculated as required by GRI Standard 201. 42 43 Statement by member of the Board of Directors About the Company Corporate Governance Our Team Environmental Protection Appendix ANNUAL REPORT 2020 SUSTAINABLE DEVELOPMENT RATINGS FIVE-YEAR HIGHLIGHTS The high positions of NLMK Group in the ratings of the leading international ESG agencies reflect the efforts of the NLMK Group management in the field of sustainable development. Indicators 2016 2017 2018 2019 2020 Financial performance,1 $ m Revenue 7,636 935 10,065 1,450 2,655 26% 12,046 2,238 3,589 30% 10,554 1,339 2,564 24% 9,245 1,236 2,645 29% Net profit2 EBITDA 1,943 25% EBITDA margin Operating cash flow Investment 1,699 559 1,899 592 2,741 680 2,623 1,080 1,786 2,281 1,124 2,495 1,103 – 45/100 – score in 2020 The score increased by 12 points yoy – to a level higher than the industry average 28/100 – score in 20202 The score improved by 3.3 points yoy. NLMK is in the top-5 among 140 metals & mining companies analysed by the agency Net debt 761 923 891 Free cash flow 1,092 0.1535 1,266 0.2383 2,027 0.3525 1,523 Dividends, $ per share Operating performance,2 ‘000 t Steel output 0.2630 16,438 16,641 15,925 10,211 16,850 17,076 16,469 10,759 10,650 17,285 17,493 17,591 10,762 10,573 15,531 15,696 17,069 11,056 11,376 15,667 15,833 17,520 10,535 10,744 Steel output (with NBH) Steel product sales Finished steel sales Sales to home markets Sustainability performance NLMK Group headcount, '000 people 3,5/5 – score in 2020 BBB – score in 2019 and 2020 (where CCC – the lowest score, ААА – the highest) NLMK’s rating is at the industry average level. NLMK’s assessment is higher than the industry average. The Company’s shares continue to be part of the FTSE4Good index following the June 2020 revision. 10,225 54.0 482 20.0 1.76 53.2 502 19.5 1.73 53.4 503 18.9 1.70 52.8 448 51.9 461 Labour productivity, t of steel/pers., NLMK Lipetsk Specific air emissions, kg/t of steel 20.2 (18.9)3 1.75 19.8 (18.6)3 1.72 Specific CO2 emissions, t/t of steel + merchant pig iron (Scope 1) CONTACTS We will be happy to answer additional questions regarding this Report as well as to receive feedback from our stakeholders in order to further develop and improve the content of the Company’s future public reports Contact person Dmitry Kolomytsyn, CFA, Corporate Finance and Investor Relations Director Ekaterina Kokareva, CFA, Head of Investor Relations Email: [email protected] GRI 102-53 . NLMK Representative Office in Moscow 119017 40-3, Bolshaya Ordynka St., Moscow GRI 102-3 1 Excluding NBH, unless otherwise specified. Net profit attributable to NLMK shareholders. Specific emissions without influence of temporary factors associated with steel output reduction. 2 3 1 The lower the score, the better the company manages sustainability issues. 44 45 CORPORATE 48 Corporate governance 80 Operational control and risk management 91 Information for shareholders and investors Statement by member of the Board of Directors About the Company Corporate Governance Our Team Environmental Protection Appendix ANNUAL REPORT 2020 CORPORATE GOVERNANCE CORPORATE GOVERNANCE SYSTEM CORPORATE GOVERNANCE IN ACTION NLMK’S CORPORATE GOVERNANCE STRUCTURE GRI 102-18 NLMK Group’s corporate governance system plays a key role in the Company’s operations, its successful sustainable development, risk management, and in balancing the rights and interests of shareholders, the Company management, and other stakeholders. The system is built on best international practices, the requirements of the prevailing Russian legislation and laws of the countries where the Group companies operate, the OECD Principles of Corporate Governance, the listing rules of the Moscow and London stock exchanges, GRI information disclosure standards, and provisions of the Corporate Governance Code recommended for useby the Central Bank of Russia. STRATEGIC PLANNING COMMITTEE GENERAL MEETING OF SHAREHOLDERS BOARD OF DIRECTORS HUMAN RESOURCES, REMUNERATION, AND SOCIAL POLICY COMMITTEE INDEPENDENT AUDITOR CORPORATE SECRETARY AUDIT COMMITTEE CEO (CHAIRMAN OF THE MANAGEMENT BOARD) INTERNAL AUDIT SERVICE The functioning of a well-developed corporate governance system that secures the rights of shareholders and potential investors is considered a driving force for enhancing NLMK’s efficiency and investment appeal. 3. Equal treatment of all shareholders, including non-Russians and minority shareholders 4. Commitment to ensure reliable and effective registration of title to shares and guarantee the opportunity to alienate them freely and without encumbrances 5. Compliance with existing laws, principles of the Corporate Governance Code recommended by the Bank of Russia, and international corporate governance standards 6. Observing the rights of third parties, including creditors and NLMK employees, as required by the law, the Charter, and other regulatory documents 7. Adherence to a common corporate policy in respect of subsidiary companies, affiliates and other legal entities in which NLMK is the founder, a participant, or a member 8. Open and transparent communications, including by disclosing full and up-to-date information about the Company to give shareholders and investors an opportunity to make informed decisions, as well as by providing documents (information) related to the Company upon shareholders’ request CORPORATE GOVERNANCE of the Company’s activities, excluding issues that fall within the purview of the General Meeting of Shareholders according to the NLMK Charter Committees of the Board of Directors, which were established to tentatively review key matters concerning the Company’s activities The CEO (Chairman of the Management Board) and the Management Board, which manage the Company’s day-to-day activities and ensure its efficient operation, while implementing the objectives set by the Board of Directors The Company’s Corporate Secretary, who handles interaction with shareholders, coordinates the Company’s activities that aim to protect shareholders’ rights and interests, and supports the Board of Directors STRUCTURE ● Key principles at the core of our corporate governance According to internal Company documents, NLMK’s corporate ● governance structure includes: ● 1. Sustainable development and long-term growth of return on equity investment The General Meeting of Shareholders, ● which is the Company’s supreme governing body that makes decisions on key business issues The Board of Directors, which handles the overall management 2. Equal and fair treatment of all shareholders when they exercise their right to be involved in management processes, receive dividends from the Company, participate in meetings, vote on issues on the agenda, and get up-to-date information on the activities of the Company and its governing and controlling bodies ● ● The Internal Audit Service, which oversees the Company’s financial and economic activities 9. Complying with business ethics in conducting operations All documents regulating corporate governance practices and principles are available on NLMK Group’s official website. 48 49 Statement by member of the Board of Directors About the Company Corporate Governance Our Team Environmental Protection Appendix ANNUAL REPORT 2020 ● IMPROVING CORPORATE GOVERNANCE In December 2020 the Board of Directors approved the Internal Control and Risk Management Policy, a top-level document regulating the functioning of the Company’s internal control and risk management system and serving as the basis for further development of internal methodological, organizational and administrative documents regulating the organization and implementation of risk management and internal control. In February 2020 the Board of Directors approved a new revision of the Corporate Governance Code to align it with the changes adopted earlier at the Extraordinary General Meeting of Shareholders to the Regulations on the Board of Directors regarding the removal of the list of standing committees, which will allow the Board of Directors, within its competence defined by the NLMK Charter, to set up and reorganize committees efficiently in accordance with the Company’s current needs. GENERAL MEETING OF SHAREHOLDERS PRACTICES IN 2020 In 2020, the Company continued to improve its corporate governance system to ensure it complies with international standards. ● In accordance with best Russian and international corporate governance practices, the following steps were taken: ● In March 2020 the Board of Directors approved a new revision of the Regulations on Insider Information, which takes into Based on its 2020 results, NLMK complies with all principles of the Corporate Governance Code: 69 principles (87%) are fully observed and 10 principles are partially observed. The Company uses the recommendations of the Bank of Russia on preparing a report on compliance with the Corporate Governance Code as a methodology to assess compliance with corporate governance principles. account the recommendations and requirements of Russian and EU legislation. The revision of the insider information management system included updating the list of insider information and the Regulations on access to insider information, the rules of protecting its confidentiality and of internal control over compliance. At meetings held in 2020, the Company continued to employ an electronic voting service, which allows shareholders to vote regardless of where their shares are registered. The total number of shareholders to have used the service in 2020 has doubled since 2019. In accordance with Federal Law No. 50-FZ dd. 18.03.2020 and a resolution of the Board of Directors, the Company’s Annual General Meeting of Shareholders on 2019 performance was held by absentee ballot. COMPLIANCE OF THE GROUP’S CORPORATE GOVERNANCE TO CORPORATE GOVERNANCE CODE RECOMMENDATIONS In 2020, the number of NLMK shareholders increased by 1.7 times, and by the end of the year it exceeded 114,000 (+70% growth over the year). The Company strives to ensure equal and fair treatment of all shareholders when they exercise their right to The Company’s internal documents stipulating the General Meeting procedure contain, among other things, provisions relating to: The option for the Company's shareholders to participate in the Meeting 10 ● PLANS FOR 2021 AND THE MEDIUM TERM participate in the management of NLMK. of Shareholders online The option to discuss agenda items and make decisions on issues put to a vote ● In 2021, NLMK will continue to analyze the best corporate governance practices and evaluate them in terms of their introduction into the Company’s activities. Further steps in relation with the external evaluation of the Board of Directors and an analysis of its results are planned in order to improve the efficiency of the corporate governance system. As always, attention will be paid to the analysis ofrankings and benchmarking, which allow to assess issuers’ achievements objectively and to identify practices that might bring the greatest benefit to the Company and are important for its stakeholders. NLMK shareholders are given an equal and fair opportunity to participate in the Company’s profits by receiving dividends on equal terms. while being absent from the venue where the voting takes place The option to complete electronic ballots online ● The notice about the General Meeting of Shareholders and documents (materials) to be provided to persons entitled to participate in the General Meeting of Shareholders are published in Russian and in English on NLMK’s website according to the procedure and within the timeframe established by the NLMK Charter and Russian legislation, at least 30 days before the meeting. Compliance ensured Partial compliance 69 NLMK'S GENERAL MEETING OF SHAREHOLDERS PROCEDURES In addition to the mandatory materials required by law, the Company provides its shareholders with additional information and materials pertaining to the agenda items of the General Meeting of Shareholders in line with the recommendations of the Corporate Governance Code recommended by the Central Bank of Russia. For instance, the Company posts a map of how to get to the General Meeting of Shareholders, a sample form of a proxy that shareholders may issue to their representative for participation in the meeting, and information on certifying such proxy. The General Meeting of Shareholders is NLMK’s supreme governing body that functions based on the legislation of the Russian Federation, the NLMK Charter, and the Regulations on the General Meeting of Shareholders. The Federal Law ‘On Joint-Stock Companies’ and the NLMK Charter establish the General Meeting’s The Company also publishes all this information in English to ensure the equal treatment of all shareholders, including international ones. competence. The procedure for preparing, convening, holding, and summarizing the results of NLMK’s General Meeting of Shareholders is set forth in the Regulations on NLMK’s General Meeting of Shareholders published on the Company’s official website. The Company’s independent registrar functions as the counting commission of the General Meeting of Shareholders. The voting results and resolutions passed by the General Meeting of Shareholders are disclosed in accordance with the requirements of Russian legislation and published on the Company's website. 50 51 Statement by member of the Board of Directors About the Company Corporate Governance Our Team Environmental Protection Appendix ANNUAL REPORT 2020 ACTIVITIES IN 2020 a resolution to pay (declare) Q1 2020 dividends on ordinary shares in the amount of RUB 3.21 per ordinary share, including out of retained earnings. BOARD OF DIRECTORS Five General Meetings of Shareholders were held in 2020. At the NLMK Extraordinary General Meeting of Shareholders held on 25 September 2020, shareholders passed a resolution to pay (declare) H1 2020 dividends on ordinary shares in the amount of RUB 4.75 per common share, including out of retained earnings. NLMK BOARD OF DIRECTORS PROCEDURES The Regulations on the Board of Directors establish the procedure of preparing for and holding meetings of the Board of Directors, as well as the procedure for the nomination and selection of potential Board members NLMK’s Annual General Meeting GRI 102-24 . of Shareholders on 2019 performance was held on 24 April 2020 by absentee ballot. It was attended by shareholders and shareholder representatives holding a total of 88.72% of NLMK’s equity, which meets the quorum requirements. During the meeting, resolutions were passed on the issues envisaged by Item 1, Article 47 of the Federal Law ‘On Joint- Stock Companies’. The resolution on the payment of FY 2019 dividends was not passed (it was later passed at the Extraordinary Meeting At the NLMK Extraordinary General Meeting of Shareholders held on 18 December 2020, shareholders passed a resolution to pay (declare) 9M 2020 dividends on ordinary shares in the amount of RUB 6.43 per common share, including out of retained earnings. They also voted to approve NLMK’s membership in the Tsentrisiskaniya Self-Regulatory Organization (Central Association of Organizations for Engineering Construction Survey). A key component of the Company’s corporate governance system, the Board of Directors determines its strategic vectors, lays down the principles of and approaches to the risk management and internal control system, monitors the activities of executive bodies, and has other key functions within the Company. NLMK’s Board of Directors reports to the Company’s shareholders and is elected by a resolution of the Company’s General Meeting GRI 102-26 Members of the Company’s Board of Directors have sufficient time to fulfil their obligations efficiently and in good faith, including for participation in meetings of the Board of Directors and its committees. The requirement for members of the Board of Directors to have sufficient time for efficient participation in the Board’s work is enshrined in NLMK’s Corporate Governance Code. Meetings of the Board of Directors are held on a regular basis at least six times a year in accordance with the approved schedule. Detailed information on the voting results and resolutions passed by the General Meetings of Shareholders in 2020 is available on the Company’s website. The format of NLMK Board meetings is determined based on the importance of the agenda items. The most important items within the Board’s remit are resolved at in-person meetings, and as a rule, are first reviewed by the Board’s committees, thereby ensuring their thorough consideration and informed decision-making. Amid the pandemic, the prevailing meeting format was via videoconference, which enabled members to consider agenda items without compromising discussion quality. The effectiveness of the Board of Directors is facilitated by the following components: on 29 May 2020). NLMK'S GENERAL MEETINGS OF SHAREHOLDERS HELD IN 2020 NLMK’s 2020 Extraordinary General Meetings of Shareholders were held by absentee ballot. of Shareholders . General Meeting of Shareholders by status (format) Number In addition to the main functions of the Board of Directors stipulated by legislation and NLMK’s Regulations on the Board of Directors, key importance is attached to such goals and objectives as assessing political, financial, and other risks, ensuring compliance with corporate governance and sustainable development principles, and monitoring compliance with Annual meeting (absentee ballot using e-voting technology) ● Planning its activities by approving the meeting schedule Optimal Board composition that is balanced in terms of qualifications and 1 ● At the NLMK Extraordinary General Meeting of Shareholders held experience Extraordinary meeting (absentee ballot using e-voting technology) 4 ● on 29 May 2020, shareholders passed a resolution to pay (declare) FY 2019 dividends on ordinary shares in the amount of RUB 17.36 per ordinary share, including out of previous profits. Taking into account the interim dividends paid in the amount of RUB 14.24 per ordinary share, the outstanding amount for payment was RUB 3.12 per ordinary share. Inclusion of independent directors on the Board Induction procedures for newly elected members of the Board of Directors Annual assessment of the Board of Directors and its committees Ensuring the succession of the Board of Directors by regularly rotating its ● ● ● NLMK'S EXTRAORDINARY GENERAL MEETINGS OF SHAREHOLDERS HELD IN 2020 composition while preserving its purview and best practices the Sustainable Development Policy. The NLMK Charter and the Regulations on the Board of Directors published on the Company’s official website govern the procedures of the Board of Directors. Date Number of votes held by the General Meeting participants,% 29.05.2020 30.06.2020 25.09.2020 18.12.2020 89.02 89.19 Members of the Company’s Board of Directors ensure the reliability and stability of the Company’s operations, facilitate the adoption of balanced decisions by management, and make objective independent judgements and decisions that serve the interests of the Company and its shareholders. Information on the activities of NLMK’s Board of Directors, including information on its composition, its committees, meetings, and decisions is disclosed on the Company’s official website. 89.44 90.22 At the NLMK Extraordinary General Meeting of Shareholders held on 30 June 2020, shareholders passed 52 53 Statement by member of the Board of Directors About the Company Corporate Governance Our Team Environmental Protection Appendix ANNUAL REPORT 2020 COMPOSITION OF THE BOARD OF DIRECTORS GRI 102-22 The composition of the Company’s Board of Directors is balanced in terms Мembers of the Board of Directors have ample work experience as CEOs, partners, and management body members of major international companies. The Company pays particular attention to the diversity of the Board’s composition and the share of independent directors. The Board of Directors includes a woman and citizens of various states, ensuring sociocultural and gender diversity. of qualification, experience, knowledge, business acumen, and diversity. Members of the Board of Directors have an impeccable business reputation, knowledge, skills, and experience in steelmaking, mining, finance, investment, corporate governance, and other areas that are important for governing the Company successfully. VLADIMIR LISIN OLEG BAGRIN THOMAS VERASZTO MARJAN OUDEMAN STANISLAV SHEKSHNIA BENEDICT SCIORTINO Chairman of the Board of Directors Member of the Board of Directors Member of the Board of Directors, Independent director Member of the Board of Directors, Independent director Member of the Board of Directors, Independent director Member of the Board of Directors, Independent director Member of the Strategic Planning Committee and member of the Human Resources, Remuneration, and Social Policy Committee Chair of the Audit Committee and member of the Strategic Planning Committee Member of the Audit Committee and member of the Strategic Planning Committee Member of the Strategic Planning Committee and member of the Human Resources, Remuneration, and Social Policy Committee Chairman of the Human Resources, Remuneration, and Social Policy Committee and member of the Audit Committee Chairman of the Strategic Planning Committee and member of the Human Resources, Remuneration, and Social Policy Committee DIRECTORS’ EXPERTISE IN THE STEEL SECTOR DIRECTORS’ LENGTH OF TENURE1 COMPOSITION OF THE BOARD OF DIRECTORS BY DIRECTOR STATUS1 3 3 3 3 4 6 NIKOLAI GAGARIN SERGEY KRAVCHENKO JOACHIM LIMBERG > 20 years 10–20 years < 10 years < 4 years 4–10 years > 10 years Independent directors 2 3 Member of the Board of Directors Member of the Board of Directors, Independent director Member of the Board of Directors, Independent director Non-executive directors Member of the Audit Committee Member of the Strategic Planning Committee and member of the Human Resources, Remuneration, and Social Policy Committee Member of the Strategic Planning Committee and member of the Human Resources, Audit Committee 1 As of 31 December 2020. 54 55 Statement by member of the Board of Directors About the Company Corporate Governance Our Team Environmental Protection Appendix ANNUAL REPORT 2020 CHAIRMAN OF THE BOARD OF DIRECTORS The fact that the governing body includes independent directors increases the level of confidence in the Company among shareholders and the investment community. Independent directors, who have made up the majority of the Company’s Board since 2016, make a decisive contribution to discussions and decision-making on issues that may affect the interests of shareholders, including devising the Company’s development strategy, assessing the conformity of its activities with the Company’s chosen strategy, preventing and resolving corporate conflicts, assessing the quality of work performed by the executive bodies, establishing an efficient incentive system, and conducting performance assessments to ensure that the Company’s activities are in the interest of all its shareholders. In addition, independent directors play a key role in the operation of the Board’s committees. GRI 102-23 The Chairman of the Board of Directors ensures the efficient functioning of the Board of Directors, arranges for the preparation of the Board’s schedule, supervises the execution of resolutions passed by the Board, compiles the agenda, and makes sure that the most efficient decisions on the agenda items are made. The Corporate Secretary regularly conducts a preliminary analysis and assessment of the Board members’ compliance with independence criteria. The Chairman of the Board also plays a key role in organizing the Board’s activities and ensuring that the committees of the Board of Directors function efficiently. NLMK’s independent directors fully meet the independence criteria stipulated by the Regulations on the Company’s Board of Directors and the Corporate Governance Code recommended by the Bank of Russia. The Chairman of the Board is elected by its members among themselves by a majority vote of the total number of Board members. In some exceptional cases, the Board of Directors may recognize the independent status of a member of the Board of Directors in the assessment process, despite them having some formal criteria of being affiliated with the Company, as long as such affiliation does not affect the individual’s ability to exercise independent, impartial, and fair judgement. The Chairman of NLMK’s Board of Directors has extensive experience, professional expertise, and authority among the Company’s shareholders, members of governing bodies, and employees. In the course of the independence assessment of Board members, conducted by the Board of Directors in 2020, five out of six directors were deemed to be fully compliant with the independence criteria defined by the Regulations on the Company’s Board of Directors, while one director, who has a formal relationship with NLMK (Mr. Benedict Sciortino has been a member of the Board for more than seven, but less than twelve years), was recognized as independent due to the formality of his affiliation and the fact that it does not influence the director’s decisions and his work on the Board of Directors. MEMBERS OF NLMK BOARD OF DIRECTORS AS OF 31 DECEMBER 2020 Board member Position Tenure, years Status Member of the Strategic Planning Member of the Audit Committee Member of the Human Resources, Remuneration, and Social Policy Committee Committee INDEPENDENT MEMBERS OF THE BOARD OF DIRECTORS COMPOSITION OF THE BOARD OF DIRECTORS Vladimir Lisin Chairman of the Board of Directors Non-executive director 24 16 5 ✔ Chair ✔ ✔ ✔ ✔ In order to ensure that the Board of Directors effectively performs its functions, including those related to the protection of shareholders’ interests and risk management, the Company’s Board of Directors includes independent directors. Their participation in the Board’s activities contributes to the formation of objective opinions on the items discussed, improves management efficiency, and has a positive impact on the Company’s image. GRI 102-22 The share of directors matching the independence criteria stands at 67%, Oleg Bagrin Member of the Board of Directors Non-executive director which is one of the best ratios among public Russian companies with advanced corporate governance practices. Thomas Veraszto Member of the Board of Directors Independent director As of 31 December 2020, the Board of Directors elected at the Annual General Meeting of Shareholders on 24 April 2020 consisted of nine members, including six independent directors. In order to maintain the balance of key competencies, experience, and the optimal Board composition, including the optimal number of independent directors on the Board, the Company continuously ensures succession on the Board of Directors. In 2020, Sergey Kravchenko was elected as a new independent director. Nikolai Gagarin Member of the Board of Directors Non-executive director 19 ✔ Sergey Kravchenko Member of the Board of Directors Independent director 1 ✔ ✔ Joachim Limberg Member of the Board of Directors Independent director 2 3 6 9 ✔ ✔ ✔ Chair ✔ Marjan Oudeman Member of the Board of Directors Independent director Stanislav Shekshnia Member of the Board of Directors Independent director Chair Benedict Sciortino Member of the Board of Directors Independent director ✔ ✔ 56 57 Statement by member of the Board of Directors About the Company Corporate Governance Our Team Environmental Protection Appendix ANNUAL REPORT 2020 COMPOSITION OF NLMK BOARD OF DIRECTORS IN 2020 BIOGRAPHIES OF MEMBERS OF THE BOARD OF DIRECTORS Composition of NLMK Board of Directors from 19 April 2019 until 24 April 2020 Composition of NLMK Board of Directors elected on 24 April 2020 VLADIMIR LISIN Dr. Lisin started his career in 1975 as an electrical fitter. At Tulachermet, he worked his way up from assistant steelmaker to deputy shop manager. In 1986, he went to work in Kazakhstan, first as Deputy Chief Engineer and later as Deputy CEO of the Karaganda Steel Plant. He has been a member of boards of directors at several leading Russian steel companies since 1993. Member of the Board of Directors Position Member of the Board of Directors Position Year of birth: 1956 Member of the Board of Directors since 1996, Chairman of the Board of Directors since 1998 Vladimir Lisin Oleg Bagrin Chairman of the Board of Directors Member of the Board of Directors Vladimir Lisin Oleg Bagrin Chairman of the Board of Directors Member of the Board of Directors Dr. Lisin graduated from Siberian Metallurgic Institute, where he majored in ferrous and non-ferrous foundries. In 1990, he graduated from the Higher School of Commerce under the Foreign Trade Academy. In 1992, he graduated from the Academy of National Economy with a major in economics and management. He holds a Ph.D. in engineering and economic sciences and is a professor. He won the USSR Council of Ministers Prize for Science and Technology, is an Honorary Metallurgist of the Russian Federation, and is a holder of the Order of Honour and the Order of Alexander Nevsky. He serves as President of the International Shooting Sport Federation. Member of the Board of Directors, independent director Member of the Board of Directors, independent director Thomas Veraszto Thomas Veraszto Member of the Strategic Planning Committee and member of the Human Resources, Remuneration, and Social Policy Committee Member of the Board of Directors, independent director Member of the Board of Directors, independent director Joachim Limberg Nikolai Gagarin Karen Sarkisov Joachim Limberg Nikolai Gagarin Member of the Board of Directors Member of the Board of Directors Member of the Board of Directors Member of the Board of Directors, independent director Sergey Kravchenko Member of the Board of Directors, independent director Stanislav Shekshnia Benedict Sciortino Marjan Oudeman Stanislav Shekshnia Benedict Sciortino Marjan Oudeman Member of the Board of Directors OLEG BAGRIN Member of the Board of Freight One. Director and member of the Board of Directors of Fletcher Group Holdings Limited. Member of the Board of Directors, independent director Member of the Board of Directors, independent director Year of birth: 1974 Oleg Bagrin graduated from the State Management University with a major in mathematical methods and operations research in economics. He has a postgraduate degree in economics and a degree in business administration from the University of Cambridge, UK. CEO (Chairman of the Management Board) from 2012 until March 2018. Member of the Board of Directors since 2004 Member of the Board of Directors, independent director Member of the Board of Directors, independent director KEY COMPETENCIES OF THE NLMK BOARD OF DIRECTORS Chairman of the Strategic Planning Committee and member of the Human Resources, Remuneration, and Social Policy Committee GRI 102-27 Competency Number of Board members Board Strategic Planning Audit Committee (5) Human Resources, Remuneration, and Social Policy Committee (5) of Directors (9)1 Committee (7) THOMAS VERASZTO Dr. Veraszto was a Partner and Managing Director with the Boston Consulting Group (BCG) in 2014–2015, serving primarily clients in the industrial goods sector on strategy, organizational development, and operational improvement. He continues to be a Senior Advisor for BCG in this area. Year of birth: 1962 Knowledge of industry Corporate governance Strategy 7 8 7 9 7 8 5 4 6 7 6 7 7 6 6 5 3 5 3 5 3 5 3 5 2 2 4 4 4 4 5 5 4 3 3 3 Member of the Board of Directors since 2016, independent director Dr. Veraszto has held senior management positions at large industrial and consulting companies such as McKinsey & Company, where he spent 15 years serving clients in various industries. Member of the Strategic Planning Committee and member of the Human Resources, Remuneration, and Social Policy Committee Finance and investment HR management Dr. Veraszto earned a doctorate in law and a master’s in philosophy in Slavic languages in 1984 and 1985, respectively, both from the University of Graz (Austria). In 1988, he also received a diploma from the Bologna Center of the School of Advanced International Studies at Johns Hopkins University (USA). Risk management Customers and sales Digitalization and IT Sustainability NIKOLAI GAGARIN In 2003, as a Managing Partner, Mr. Gagarin was appointed Chairman of the Board at Reznik, Gagarin, Abushakhmin, and Partners Law Offices. He has been Chairman of the Board and a Managing Partner at Reznik, Gagarin, and Partners Law Offices, Moscow, since 2009. Year of birth: 1950 On 14 December 2020, Benedict Sciortino, who was previously not an NLMK shareholder, acquired 6,900 global depositary shares (equivalent to 69,000 ordinary shares) making up 0.00115% of NLMK’s charter capital. Member of the Board of Directors since 2001 Nikolai Gagarin has extensive experience in corporate law, foreign investment, taxation, finance, real estate, contract law, arbitration proceedings, and civil litigation. Member of the Audit Committee Other Board members are not NLMK shareholders. He is a graduate of Lomonosov Moscow State University with a major in law. 1 The number in brackets indicates the number of Board members who sit on the executive body. 58 59 Statement by member of the Board of Directors About the Company Corporate Governance Our Team Environmental Protection Appendix ANNUAL REPORT 2020 SERGEY KRAVCHENKO President of Boeing Russia/CIS since 2002. MARJAN OUDEMAN Ms. Oudeman served as President of the Executive Board of Utrecht University (The Netherlands) from 2013 until June 2017. Year of birth: 1960 Dr. Kravchenko is in charge of developing all of Boeing’s business areas in Russia, Ukraine, and the CIS countries. He leads a team consisting of regional department heads from every company sector. In 2017 he was appointed Innovation Accelerator Leader at Boeing Global Services. Year of birth: 1958 From 2010 to 2013, Ms. Oudeman was a member of the Executive Committee of AkzoNobel, where she was responsible for HR and organizational development. Member of the Board of Directors since 2020, independent director Member of the Board of Directors since 2018, independent director From 2007 to 2010, Ms. Oudeman served as a member of the Executive Committee of Corus Group, and Executive Director of the Corus Strip Products Division. Member of the Strategic Planning Committee and member of the Human Resources, Remuneration, and Social Policy Committee Before joining Boeing in 1992, Dr. Kravchenko worked as professor and lead scientist at the Russian Academy of Sciences. He also taught in Moscow and worked as a visiting professor and research consultant in the United States, Sweden, and South Korea. Chair of the Audit Committee and member of the Strategic Planning Committee She also held the positions of CEO at Corus Nederland BV and Managing Director of Corus Strip Products Ijmuiden from 2004 to 2007, and Managing Director of Corus Packaging Plus from 2000 to 2004. Dr. Kravchenko graduated from Moscow Polytechnic University, obtaining his doctorate degree in engineering in 1991 and his title of professor in 1992. He has published more than 70 research papers and holds more than 20 patents in various areas of engineering. Before joining Corus, Ms. Oudeman worked for Hoogovens Group NV, where she held various corporate staff positions in legal, corporate finance, and controlling, culminating in 1998–2000 as a Member of the Management Board of the Steel Division of Hoogovens Group NV and Managing Director of Hoogovens Packaging Steel. He is an independent director at TMK Group. Dr. Kravchenko is a member of the Russian Academy of Engineering, member of the American Institute of Aeronautics and Astronautics, and Doctor Honoris Causa of the Georgian Technical University. In 2007 he was elected to the Board of Directors of the American Chamber of Commerce in Russia. In 2009 Dr. Kravchenko was awarded the Businessman of the Year prize by the American Chamber of Commerce. Ms. Oudeman holds positions in the governing bodies of a number of entities: she is a member of the Boards of Solvay SA, SHV Holdings, Aalberts NV, and UPM-Kymmene Corporation. She has extensive experience as a line manager in the steel industry and considerable financial and international business experience. Ms. Oudeman has a law degree from Rijksuniversiteit Groningen in the Netherlands and an MBA in Business Administration from the University of Rochester, New York, USA and Erasmus University, Rotterdam, the Netherlands. JOACHIM LIMBERG Mr. Limberg was Chairman of the Management Board of the Materials Services Business Area, CEO and Chairman of the Executive Board of thyssenkrupp Materials International GmbH from October 2009 until 31 December 2018. He was responsible for the Materials unit in Germany, North America, Eastern Europe, and Western Europe/Asia Pacific, Materials Processing Europe, Materials Trading, the Special Materials units (special steels) of AST and Distribution Stainless, as well as the Special Services units of Plastics Europe, Aerospace, and Technical Services. Year of birth: 1954 Member of the Board of Directors since 2019, independent director KAREN SARKISOV Aide to the Chairman of the Board of Directors on External Economic Relations and a member of the Board of Directors of NLMK International B.V. Year of birth: 1963 Member of the Strategic Planning Committee and member of the Audit Committee From 2006 to 2007, Mr. Sarkisov served as the Chairman of the Board of Directors of VIZ-Steel. From the early 1990s to 2008, he worked at steel trading companies, where he held various executive positions at a number of international metal trading entities. Mr. Limberg began his career in 1976 at Klöckner. He then spent several years as managing director/CEO of various small and medium-size companies. In 1995, he joined thyssenkrupp Group, initially as head of the Product Management Steel and Materials Management departments at thyssenkrupp Schulte. In 1998, he was appointed to the Executive Board. From 2002 to 2005, he served as Chairman of the Executive Board of thyssenkrupp Schulte GmbH. On 1 April 2001, Mr. Limberg was appointed to the Executive Board of thyssenkrupp Materials AG, later thyssenkrupp Services AG. Member of the Strategic Planning Committee He is a graduate of Tashkent State University, where he majored in oriental studies. Until 24 April 2020, Mr. Sarkisov served as a member of the NLMK Board of Directors and Audit Committee. He continues to sit on the Strategic Planning Committee. In January 2002, he was made additionally responsible for the North American operations of thyssenkrupp Materials N.A., of which he was chairman. With the establishment of thyssenkrupp Materials Europe GmbH on 1 June 2005, he took over as Chairman of the company’s Executive Board and continued in this position after the company was renamed thyssenkrupp Materials International GmbH. From October 2006 to September 2009, he was Vice Chairman of the Executive Board of thyssenkrupp Services AG, where he was primarily responsible for strategic corporate development. One of his particular focuses was on developing activities in North America, Eastern Europe and South America, as well as establishing the aerospace and services business as core activities. This also included business actions in Asia, which he was in charge of for several years while located in Hong Kong. Mr. Limberg is a professional exporter. He obtained a degree in economics (DIPLOM-ÖKONOM) from the Open University of Hagen and has extensive financial experience. 60 61 Statement by member of the Board of Directors About the Company Corporate Governance Our Team Environmental Protection Appendix ANNUAL REPORT 2020 BOARD OF DIRECTORS’ ACTIVITY IN 2020 STANISLAV SHEKSHNIA In 1991–2002, Dr. Shekshnia held senior executive positions at Russian and international corporations, including HR Director of Otis Elevator in Central and Eastern Europe, President and CEO at Millicom International Cellular in Russia and the CIS, COO at VimpelCom, and CEO of Alfa-Telecom. He has extensive financial experience. He served as Chairman of SUEK, Russian Fishery Company, and Vimpelcom-R and as a board member of a number of Russian and Ukrainian companies. Dr. Shekshnia was an independent director at DTEK BV, Ilim Timber Industry, Naftna Industrija Srbije (NIS), and Ener1. Currently, Dr. Shekshnia is Chairman of the Board of the Samolet Group. In 2002, he co-founded Zest Leadership International Consultancy. Year of birth: 1964 In 2020, NLMK’s Board of Directors held nine meetings, seven of which were held by absentee ballot. 28 items were considered at the meetings. Member of the Board of Directors since 2015, independent director MAIN ISSUES EXAMINED BY THE GROUP’S BOARD OF DIRECTORS IN 2020 Chairman of the Human Resources, Remuneration, and Social Policy Committee and member of the Audit Committee Questions Resolutions Stakeholders ● ● Strategy and priority areas Status of NLMK Group’s 2018-2022 Strategy and approval of the consolidated budget for 2021 Investors and shareholders From April 2007 until July 2019, Dr. Shekshnia was a Senior Partner of LEADERSHIP VECTOR, a talent equity consulting practice. He focused on leadership, leadership development, corporate governance, and business in emerging economies. He is now a Senior Consultant at Ward Howell. Dr. Shekshnia also provides personal coaching to business owners and corporate executives. ● Consumers Suppliers Government authorities Employees Local communities ● ● ● ● ● ● ● Appointments and remuneration Reviewing proposals on the nomination of candidates to NLMK’s governing bodies (the Board of Directors, NLMK CEO (Chairman of the Management Board)) and inclusion of the nominees in the voting list of people to be elected to these governing bodies Providing recommendations to the Annual General Meeting of Shareholders regarding the payment of remuneration to Board members Election of the Chairman of NLMK’s Board of Directors Forming the committees of NLMK’s Board of Directors Recognition of the independent status of nominees to NLMK’s Board of Directors Investors and Dr. Shekshnia is an Affiliate Professor of Entrepreneurship at INSEAD. He has over 15 years of graduate-level teaching experience in Russia, France, and the United States, and is the author, co-author, or editor of ten books, numerous articles, executive commentaries, interviews, and case studies on entrepreneurship, leadership, people management, intercultural management, and business and management in Russia. shareholders ● ● Government authorities Employees ● ● ● Dr. Shekshnia has a master’s degree in economics, a Ph.D. from Moscow State University, and an MBA from Northeastern University in Boston. ● ● Performance evaluation of NLMK’s Board of Directors Performance reports of the committees of NLMK’s Board of Directors BENEDICT SCIORTINO From 1977 to 1995, Mr. Sciortino worked as an attorney-at-law and a partner with Baker & McKenzie, New York. He served as a member of the Board of Directors of Duferco S.A., where he was responsible for Duferco Group North American and South African business, overseeing trading operations, financial and legal matters, and mergers and acquisitions. Mr. Sciortino serves as a director of several companies. Year of birth: 1950 ● ● ● Corporate governance Convocation of NLMK's General Meetings of Shareholders Approving the agendas, draft documents, and measures necessary for preparing for and holding the Annual General Meeting of Shareholders Providing recommendations to NLMK’s Annual General Meeting of Shareholders regarding profit distribution/dividend payment Providing recommendations to NLMK’s Annual General Meeting of Shareholders regarding NLMK’s membership in the Tsentrisiskaniya Self-Regulatory Organization (Central Association of Organizations for Engineering Construction Survey) Approving the 2019 NLMK report on interested-party transactions Approving the 2019 NLMK Draft Annual Report Providing recommendations to the Annual General Meeting of Shareholders regarding the approval of NLMK’s Auditor and remuneration to be paid for the Auditor’s services Investors and shareholders Government authorities employees Member of the Board of Directors since 2012, independent director ● ● ● ● Member of the Audit Committee and member of the Strategic Planning Committee Since March 2013, he has served as CEO and member of the Board of Directors of DXT Commodities SA (formerly Dufenergy Trading SA). He graduated from Queens College, New York with a BA degree and received JD and LLM degrees from New England School of Law (Boston, MA) and New York University Law School, New York. Mr. Sciortino has extensive financial experience. ● ● ● ● ● Approving the meeting schedule for NLMK’s Board of Directors Approving the following revised documents: Corporate Governance Code, Regulations on Insider Information, Internal Control and Risk Management Policy ● ● Financial reporting Approving the Company’s annual accounting (financial) statements for 2019, as well as NLMK’s IFRS 2019 annual consolidated financial statements Investors and shareholders Consumers ● ● ● ● ● Suppliers Government authorities Employees Local communities 62 63 Statement by member of the Board of Directors About the Company Corporate Governance Our Team Environmental Protection Appendix ANNUAL REPORT 2020 PARTICIPATION OF MEMBERS OF THE BOARD OF DIRECTORS IN ITS MEETINGS AND THE MEETINGS OF ITS COMMITTEES PERFORMANCE ASSESSMENT OF THE NLMK BOARD OF DIRECTORS Key goals Assessment tools A systematic performance assessment of the Board ensures: Board member Independent director Participation in the Board meetings1 Audit Human Resources, Remuneration, and Social Policy Committee Strategic Planning Committee in the reporting year Committee ● ● ● Achieving a common Online survey of members An opportunity to make timely adjustments to the plans and working methods of the Board of Directors and its members Greater shareholder confidence in the Board of Directors and the Company An increase in the Company’s investment appeal The possibility of using understanding of the Board’s strengths and weaknesses Progress assessment to develop an improvement plan of the Board of Directors, as approved by NLMK’s Human Resources, Remuneration, and Social Policy Committee Oleg Bagrin 9 (9) 9 (9) 9 (9) 9 (9) 3 (3) 9 (9) 9 (9) 9 (9) 9 (9) 6 (6) 4 (4) 4 (4) 5 (5) 5 (5) ● ● Thomas Veraszto Nikolai Gagarin ✔ ● 5 (5) ● Compliance with Discussion at the Board meeting the recommendations and best practices of the Corporate Governance Code Clarification of the goals and priorities of the Board of Directors Balance of independence and qualification on the Board of Directors Optimization of each member’s contribution to the Board’s activities Improvement of the Board’s work and communication with the management Recommendations for developing the expertise of the Board of Directors Identification of areas for the training and development of Board members Identification of the Board’s staffing requirements Development of the target profile for candidates held in person Vladimir Lisin 4 (4) 4 (4) 5 (5) 5 (5) ● ● Karen Sarkisov2 Stanislav Shekshnia Benedict Sciortino Marjan Oudeman Joachim Limberg3 Sergey Kravchenko4 2 (2) 5 (5) 5 (5) 5 (5) 3 (3) Scope of assessment ● ● ● ● ● ● ✔ ✔ ✔ ✔ ✔ the results of the evaluation as grounds when electing a new Board at the Annual General Meeting of Shareholders Leveraging the strengths of the Board of Directors and developing areas that require attention 5 (5) 5 (5) 5 (5) 4 (4) ● Board of Directors ● Committees of the Board ● of Directors 2 (2) 2 (2) ● Individual Board members ● Corporate Secretary ● ● Analysis of changes in Evaluated components the Board’s nature Board of Directors succession planning In addition, a seminar on sustainability was organized for Board members in March 2020. This event aimed at enhancing the Board’s ESG competence underscores the Company’s focus on sustainability. and best international practices, the Company has been conducting an annual assessment (self-assessment) of the Board of Directors’ performance since 2016. The formal assessment procedure does not only cover the Board of Directors as a whole, but also assesses the work of the Board’s committees, Chairman and each individual member. The assessment includes an analysis of the Board’s composition and qualifications, its agendas, meeting efficiency, and interaction with management and the Corporate Secretary. ● Professional and personal qualities of Board members ● Independence, coherence, and degree of personal ● ● participation of Board members ● Process of the Board BOARD OF DIRECTORS PERFORMANCE The main purpose of the assessment is to determine the efficiency of the Board’s performance as a collective governing body and enhance its role in achieving the Company’s goal of successful development. The assessment of the Board’s performance helps to determine the focus and changes in the performance of the Board of Directors and its committees, get a comparative analysis of their contribution to the Company’s successful development, and identify areas for the continuous improvement of the Board’s procedures. of Directors ● Board meeting agendas ● to the Board of Directors Constructive justification of required changes Introduction of advanced technologies and approaches to the organization of work Interaction of the Board ASSESSMENT ● ● of Directors with Company management Other factors affecting GRI 102-28 The Board of Directors ● is one of the key bodies in the Company’s corporate governance system. The quality of the Company’s the performance of the Board of Directors governance depends on the efficiency of its activities, and its decisions directly affect the Company’s market capitalization. The assessment of the Board of Directors’ performance is an effective tool for improving the corporate governance system, each component of which is related to the work of the governing body. If necessary, based on the results of the Board’s performance assessment, the Chairman of the Board of Directors and the Human Resources, Remuneration, and Social Policy Committee put forward proposals that aim to improve the work of the Board of Directors and its committees. Individual assessments of Board members identify aspects that need to be developed and strengthened. Recommendations as well as individual training programmes (training sessions) may be offered to improve the skills of individual Board members. meetings and control over the execution of instructions, the contribution of the Board Chairman, and the Corporate Secretary’s performance. Recommendations were issued on developing certain competencies of the Board of Directors, introducing certain practices, prioritizing several issues that are of strategic importance to the Company, and using additional formats for engaging with the management. The results of the Board’s performance assessment and recommendations on further improving the work of the Board, its committees, and individual Board members were reviewed at the in-person Board meeting in March 2020. In 2020 the activities of the Board and the Corporate Secretary were focused on implementing the recommendations resulting from the assessment. The Board’s strengths and areas for improvement were analysed as part of an annual assessment carried out in January 2020 in the form of an online survey of its members in the format approved by the HR Committee. The assessment confirmed the effectiveness of the Company’s Board of Directors and its committees in 2019. Board members commended the meeting agendas, approaches to holding In line with the recommendations of the Corporate Governance Code recommended by the Bank of Russia Guided by current trends and recommendations of normative bodies, the Company engaged an independent consulting firm, Spencer Stuart, to carry out an independent assessment of the Board’s performance. The external assessment of the Board’s activities included questionnaires, individual interviews with directors, analysis of the agendas, practices, and internal documents of the Board and its committees, and a benchmark against the advanced corporate governance practices of international companies. 1 The number in brackets denotes the number of meetings of the Board of Directors or the Board’s committee held during this director’s tenure. Karen Sarkisov was a member of the Board of Directors, the Audit Committee, and the Strategic Planning Committee until 24 April 2020 (he continues to sit on the Strategic Planning Committee). Joachim Limberg was a member of the Human Resources, Remuneration, and Social Policy Committee until 24 April 2020. He was elected to the Audit Committee at the 24 April 2020 Board meeting. Sergey Kravchenko was elected to the Board of Directors at NLMK’s Annual General Meeting of Shareholders. He was elected to the Strategic Planning Committee and the Human Resources, Remuneration, and Social Policy Committee at the 24 April 2020 Board meeting. 2 3 4 64 65 Statement by member of the Board of Directors About the Company Corporate Governance Our Team Environmental Protection Appendix ANNUAL REPORT 2020 INDUCTION PROGRAMME FOR NEWLY ELECTED MEMBERS OF NLMK'S BOARD OF DIRECTORS AND THE ONBOARDING PROCESS COMMITTEES OF THE BOARD OF DIRECTORS GRI 102-22 An induction course for newly elected members of NLMK’s Board of Directors was developed and approved by the Human Resources, Remuneration, and Social Policy Committee, in compliance with best corporate governance practices to ensure the efficient functioning of the Board of Directors. In order to improve The status, goals, objectives, and functions of the committees, as well as the procedures for their composition, formation, and operation are set out in Regulations on Committees, which are approved by the Company’s Board of Directors and published on NLMK’s official website. the efficiency of the decisions taken by the Board of Directors, ensure the preliminary examination and study of the most essential matters in the Company’s activities, and prepare the appropriate recommendations, the Board of Directors has set up the following standing committees: In order to balance approaches to problem solving with respect to risk management and the protection of shareholders’ interests, in two out of three committees the majority of members, including their chairpersons, are independent directors. ● Strategic Planning Committee Audit Committee Human Resources, Remuneration, ● The programme of the induction course includes an introduction to NLMK Group’s key operational and financial indicators and its systems of risk management, internal control, and corporate governance. STRATEGIC PLANNING COMMITTEE ● and Social Policy Committee The Strategic Planning Committee provides support to the Board of Directors in resolving matters that involve enhancing the efficiency of the Company’s activities in the long-term and promoting asset growth, profitability, and investment appeal. The Committee defines the goals for minimizing the Company’s environmental impact, including greenhouse gas emissions, and reviews and approves the appropriate investment programme. The committees are structured around the most important Board activities. Their composition is determined with the most effective application of the members’ expertise and professional experience in mind. Meetings with the CEO (Chairman of the Management Board), members of the Board of Directors, members of the Management Board, and other senior executives of the Company are arranged as part of the course. The newcomers also have an opportunity to get acquainted with the Company’s core facilities, processes, and products. decisions based on all available information without any conflict of interest and taking into account the equal treatment of shareholders, the Company has developed anumber of measures to prevent conflicts of interests. As part of these requirements, members of the Board of Directors shall: Committee members as of 31 December 2020 The committees of the Board of Directors report to the Board of Directors and serve as its advisory bodies. The resolutions of the committees are advisory in nature. The Strategic Planning Committee includes five independent directors. All members of the Committee, including those who are not members of the Board of Directors, have the right to vote on the Committee’s agenda items. ● Notify the Board in case there is a potential conflict of interest (including an interest in the Company making a transaction) and put the Company’s interests above their own under all circumstances Refrain from any acts that will or may lead to a conflict between their personal ● The Committee’s composition changed in 2020. interests and those of the Company Promptly inform the Board of Directors of any conflict of interest and the grounds for it before the start of a discussion on the item with respect to which the Board member has a conflict of interest at a Board Meeting or a Board Committee meeting ● Due to the need for a comprehensive discussion of the issues under consideration, the committees are composed of Board members with specialized knowledge and skills. Committee composition is balanced to ensure optimal application of the members’ competencies and professional experience. Committee’s activities in 2020 PREVENTING A CONFLICT OF INTEREST AMONG BOARD MEMBERS In 2020, the Strategic Planning Committee held five meetings. The Committee reviewed and passed resolutions on the following issues: ● ● Abstain from voting on items in which they have a conflict of interest. Where Development of NLMK Group’s functional areas and key projects of its divisions Updated СО2 emission reduction targets for 2023 Status of NLMK Group’s investment programme and 2021 investment budget Strategic Planning Committee schedule for 2020 ● Members of the Board of Directors must act in good faith and reasonably in the interests of the Company and its shareholders based on sufficient awareness and with due care and discretion. Given that the reasonable and good-faith actions of the Board members require the adoption of the nature of the item discussed or the specific aspects of a conflict of interest so require, the Board member experiencing said conflict of interest should not be present at the Board meeting when the item is discussed. ● ● According to the information available to the Company, there was no conflict of interest among the members of the Board of Directors in 2020 (including none related to their participation in the governing bodies of NLMK’s competitors) Plans for 2021 If necessary, a committee chair may engage experts and consultants to work with their committee on a temporary or permanent basis with no right to vote during decision-making on issues within the committees’ remit. In 2021, the Strategic Planning Committee plans to actively determine development areas for the new strategy cycle beyond 2023, which includes reviewing the first draft of NLMK Group’s long-term climate strategy. The Committee will also analyze the implementation of its instructions and the progress of NLMK Group’s investment programme. GRI 102-25 . 66 67 Statement by member of the Board of Directors About the Company Corporate Governance Our Team Environmental Protection Appendix ANNUAL REPORT 2020 STRATEGIC PLANNING COMMITTEE MEMBERS IN 2020 Audit Committee’s activities in 2020 “In an era of fast-paced adoption of new technologies, business models, and growing uncertainty in the world, the Company’s risks are growing more than ever. Today large companies realize that the strategy of sustainable development has become an absolute must, and their business objectives go beyond just making profit: they also include obtaining long-term benefits associated with the enablement in the field of environmental and socio-economic sustainable development. Committee members from 19 April 2019 to 24 April 2020 Committee members as of 24 April 2020 In 2020, the Audit Committee held five meetings. The Committee reviewed and passed resolutions on the following key issues: Member of the Board of Directors Position Member of the Board of Directors Position Oleg Bagrin Chair of the Committee Oleg Bagrin Chair of the Committee ● Accounting (financial) statements Thomas Veraszto Helmut Wieser Joachim Limberg Vladimir Lisin Member of the Committee Member of the Committee Member of the Committee Member of the Committee Member of the Committee Member of the Committee Member of the Committee Member of the Committee Member of the Committee Thomas Veraszto Helmut Wieser Member of the Committee Member of the Committee Member of the Committee Member of the Committee Member of the Committee Member of the Committee Member of the Committee Member of the Committee Member of the Committee Member of the Committee with respect to the consideration of the relevant draft documents Risk management, internal control, In order to meet the growing expectations of the business, internal audit needs to maintain a high level of innovation adoption in its processes, expand its role from following a reactive approach to focusing on the future of the company, from protecting assets to supporting value creation by developing methods of continuous audit and transferring innovations to the business. ● Joachim Limberg Vladimir Lisin and corporate governance, as well as other reports related to asset protection and management of the Company’s significant risks Marjan Oudeman Karen Sarkisov Grigory Fedorishin Benedict Sciortino Sergey Filatov Marjan Oudeman Karen Sarkisov Grigory Fedorishin Benedict Sciortino Sergey Filatov As it fulfils its task of ‘driving the development of a mature risk management system’, internal audit needs to strive to become a reliable advisor and business partner. ● Mitigating the risks associated with COVID-19 ● ● External and internal audits, including non-audit services provided by the independent auditor Non-financial results of NLMK Group’s activities prepared in accordance with GRI standards and quality assessment of the preparation of the disclosed GRI indicators The focus of the Audit Committee is expanding to consider the efficiency of the Company's top risk management, corporate governance practices, business processes of international companies, business continuity management issues and improving the company's overall resilience to external threats.” Sergey Kravchenko Marjan Oudeman, Chair of the Audit Committee GRI 102-32 . AUDIT COMMITTEE to disclosure of the Company’s information about sustainable development Since 2019, one of the Audit Committee’s responsibilities is monitoring performance and considering reports related to sustainable development, including matters of GRI 102-29 The Audit Committee drafts and submits recommendations to the Board of Directors on matters concerning the Board’s active involvement environment and occupational health and safety . RISK MANAGEMENT reports, key findings, and recommendations are submitted to the Committee throughout the year to ensure that the actions taken by the executive management are efficient. AND INTERNAL CONTROL The Committee analyzes and evaluates the Company’s information disclosure in the supervision of the Company’s financial and business activities. These include recommendations on annual independent audits of NLMK’s accounting (financial) statements, the quality of services provided by the auditor, compliance with the requirements forauditor independence, the process of the independent appraisal of property in cases stipulated by Russian legislation and other cases, as well as issues related system on sustainable development issues and monitors its completeness, accuracy, and reliability. The Audit Committee exercises control over the reliability and efficient functioning of the risk management, internal control, and corporate In an effort to ensure independence, the Audit Director reports directly to the Board of Directors. The Audit Director has the right to raise any matter that he/she deems to be important, reports to the Audit Committee, including on audit results above a certain materiality threshold, and/or in line with other obligatory disclosure requirements, and meets with the external auditors as required. Committee members as of 31 December 2020 governance systems, and the drafting of proposals on their improvement. In fulfilling its oversight responsibilities, the Committee reviews reports on the performance of the internal control and risk management system prepared by the external auditor, Internal Audit Service, and the Group’s other bodies responsible for fulfilling the risk management, oversight, and compliance functions. The Committee holds regular meetings with the Audit Director and the external auditor’s team. The Audit Committee is chaired by an independent director. Most of the Committee members are also independent directors. In addition, the Audit Committee includes independent directors with a background in the preparation, analysis, evaluation, and audit of accounting (financial) statements. The Internal Audit Service undergoes regular independent external quality assessments (at least once every five years). The results of these assessments are submitted to the Audit Committee for consideration. The most recent assessment was in 2017. The Committee’s composition changed in 2020. External audit AUDIT COMMITTEE MEMBERS IN 2020 AO PricewaterhouseCoopers Audit (PwC) has been the Group’s Auditor since 2003. Committee members from 19 April 2019 to 24 April 2020 Committee members as of 24 April 2020 NLMK Group companies hire PwC from time to time to provide non-audit services. NLMK management is certain that these services do not impair the auditor’s independence and are not related to the preparation of financial statements. In 2020, the share of non-audit services was at an acceptable level of no more than 30% of the total services provided by PwC. PwC regularly rotates key audit staff (at least once every 7 years) to ensure compliance with independence requirements. Member of the Committee Marjan Oudeman Position Member of the Committee Marjan Oudeman Position Internal Audit Chair of the Committee Member of the Committee Member of the Committee Member of the Committee Member of the Committee Chair of the Committee Member of the Committee Member of the Committee Member of the Committee Member of the Committee Karen Sarkisov Joachim Limberg The Audit Committee is responsible for monitoring the operation and evaluating the efficiency of the internal audit function. This is done via discussions with the Audit Director and approval of the annual internal audit plan. Progress Nikolai Gagarin Nikolai Gagarin PwC submits quarterly reports to the Audit Committee, and members of the Committee review and discuss key audit issues with external auditors. As a result of this review, the Committee concluded that the external audit process is proceeding effectively. Stanislav Shekshnia Benedict Sciortino Stanislav Shekshnia Benedict Sciortino 68 69 Statement by member of the Board of Directors About the Company Corporate Governance Our Team Environmental Protection Appendix ANNUAL REPORT 2020 ● HUMAN RESOURCES, REMUNERATION, AND SOCIAL POLICY COMMITTEE Appointment of members of the Company’s management and other key employees and the training of succession candidates for their positions Performance assessment of the Company’s management and other key employees Remuneration of the Company’s management and other key employees Social policy of the Company “In 2020, the Human Resources, Remuneration, and Social Policy Committee reviewed a number of key matters within has an impeccable reputation and international expertise in corporate governance. ● ● ● Spencer Stuart’s experience will lend a fresh perspective on the Board’s development prospects and ways to enhance its practices, further strengthening its performance. The main purpose of the Human Resources, Remuneration, and Social Policy Committee is conducting preliminary reviews and developing recommendations for the Board of Directors to ensure the efficient its remit and developed relevant recommendations for the Board of Directors. Members of the HR Committee as of 31 December 2020 It should be noted that during the pandemic the Committee addressed new challenges encountered by the Company. At the same time, the Committee continued to operate with maximum effectiveness, as its members, who have extensive competencies and international experience, used modern means of communication and remained highly engaged in the consideration and discussion of the agenda items. All this ensured in-depth exploration of the relevant issues discussed and fruitful collaboration with management, facilitating the adoption of quality resolutions and instructions, effective follow-up of their implementation, and introduction of best practices into the Company’s activities.” The Committee is chaired by an independent director. Most of the Committee members are also independent directors. The Human Resources, Remuneration, and Social Policy Committee includes an independent director who is knowledgeable in matters concerning motivational management and personnel administration. The Committee reviewed the execution status of NLMK Group’s HR Strategy, oversaw the implementation of earlier instructions, and systematically tackled related issues. operation of its decision-making on the following issues: The Committee's composition changed in 2020. One important outcome is engaging the Spencer Stuart consulting firm to participate in the independent assessment of the Board. The firm HUMAN RESOURCES, REMUNERATION, AND SOCIAL POLICY COMMITTEE MEMBERS IN 2020 Stanislav Shekshnia, Chair of the Human Resources, Remuneration, and Social Policy Committee Committee members from 19 April 2019 to 24 April 2020 Committee members as of 24 April 2020 Member of the Committee Stanislav Shekshnia Vladimir Lisin Position Member of the Committee Stanislav Shekshnia Vladimir Lisin Position Chair of the Committee Member of the Committee Member of the Committee Member of the Committee Member of the Committee Chair of the Committee Member of the Committee Member of the Committee Member of the Committee Member of the Committee CORPORATE SECRETARY Thomas Veraszto Oleg Bagrin Thomas Veraszto Oleg Bagrin NLMK’s Corporate Secretary ensures efficient day-to-day interaction with shareholders, coordinates the Company’s activities to protect shareholders’ rights and interests, and supports the efficient operation of the Board of Directors. the Management Board), the Corporate Secretary is appointed and dismissed by the CEO (Chairman of the Management Board) based on a resolution of the Board of Directors. Joachim Limberg Sergey Kravchenko The Corporate Secretary oversees the Corporate Secretary’s Office. Valery Loskutov has been the Company’s Corporate Secretary since 2005. ● Committee’s activities in 2020 Review of proposals to the NLMK Board of Directors on the amount of remuneration to be paid to Board members Progress against target KPIs by the NLMK Group CEO (Chairman of the Management Board) in 2019 and approval of target project KPIs for 2020 Progress against target KPIs by Company management in 2019 Implementation status of Committee instructions Managerial competency model ● NLMK’s Human Resources, Remuneration, and Social Policy Committee held four meetings in 2020, including two in the form of absentee voting. The Committee reviewed and passed resolutions on the following issues: The Corporate Secretary’s activities, rights, and obligations are regulated by the Regulations on the Corporate Secretary, developed in accordance with the Corporate Governance Code recommendations of the Bank of Russia. In line with these recommendations, the Corporate Secretary is also in charge of the induction course for newly elected members of the Company’s Board of Directors, corporate ● ● ● ● ● VALERY LOSKUTOV Year of birth: 1969 Labour productivity improvement Development of professional competencies ● Eligibility of nominees proposed Mr. Loskutov graduated from the Lipetsk Polytechnic Institute and the Academy of National Economy under the Government of the Russian Federation with an MBA. for independent directors to be voted on at the Annual General Meeting of Shareholders on the Company’s 2019 results In 2020, the Committee continued to analyze and evaluate the implementation of the Company’s HR Strategy, the performance of key executives, and the execution of the Committee’s instructions. The Committee considered the implementation status of the labour productivity improvement programme and professional competency development programmes. For more than twenty years, he has been a member of the governing bodies of a number of Russian companies. Mr. Loskutov has been with NLMK since 1998 and has served as NLMK’s Corporate Secretary since 2005. He has been Secretary of the Human Resources, Remuneration, and Social Policy Committee since 2017. ● Professional background of nominees to the Board Directors proposed at the Annual General Meeting of Shareholders on the Company’s 2019 results governance in subsidiaries and affiliates, working with insiders, and accounting for affiliates of the Group’s companies. All these functions enable the establishment of a dynamic and balanced corporate governance system that ensures efficient interaction between the Company’s shareholders, Board of Directors, and management. Mr. Loskutov is a co-founder of the National Association of Corporate Secretaries. He was elected to the Board of the National Association of Corporate Secretaries on 20 December 2019. He won the 8th Director of the Year national award in the Corporate Governance Director/Corporate Secretary category. Mr. Loskutov ranked first in the Best Corporate Governance Director in Metals and Mining category of the 21st Top 1,000 Russian Managers annual rating by the Russian Managers Association and Kommersant Publishing House. Functionally subordinate to the Board of Directors and administratively to NLMK’s CEO (Chairman of 70 71 Statement by member of the Board of Directors About the Company Corporate Governance Our Team Environmental Protection Appendix ANNUAL REPORT 2020 COMPOSITION OF THE MANAGEMENT BOARD ● ● ● MANAGEMENT BOARD PROCEDURES In its efforts to reach this objective, the Management Board is guided by the following principles: Fair, timely, and efficient execution of the decisions of the General Meeting of Shareholders and the Board of Directors Cooperation with trade unions comprised of the Company’s employees in order to take into account the employees’ interests Cooperation with government agencies and local authorities on the most important issues The list of issues in the Management Board’s remit is regulated by the NLMK Charter and Regulations on the Management Board, which are available on the Company’s official website. The Management Board is in charge of managing the Company’s day-to-day operations and implementing the approved strategy and specific resolutions of the General Meeting of Shareholders and the Board of Directors. The main objective of the Management Board is to ensure that the Company is operating efficiently. ● Efficient and objective decision- making that favours the interests of the Company and its shareholders GRIGORY FEDORISHIN TATYANA AVERCHENKOVA MIKHAIL ARKHIPOV SERGEY LIKHAREV EVGENY OVCHAROV SERGEY CHEBOTAREV CEO (Chairman Member of the Management Board Member of the Management Board Member of the Management Board Member of the Management Board Member of the Management Board of the Management Board) Vice President, HR and Management System Vice President, Logistics Vice President, Energy and Environment Vice President, Operational Efficiency Vice President, Risk Management Member of the Strategic Planning Committee COMPOSITION OF THE MANAGEMENT BOARD CEO (CHAIRMAN OF THE MANAGEMENT BOARD) The CEO (Chairman of the Management Board) is the permanent sole executive body, whose main responsibility is to manage the Company’s day-to-day activities, arrange for the execution of resolutions passed by the General Meeting of Shareholders and the Board of Directors, organize the work of the Management Board, and ensure the timely adoption of resolutions by the Management Board. NLMK Group’s Management Board consisted of nine members as of 31 December 2020. The current composition of the Management Board was approved by the Board of Directors at a meeting held on 24 October 2019. The rights and obligations of the CEO (Chairman of the Management Board) stipulated by the existing legislation of the Russian Federation as well as the CEO’s contract with the Company. ILYA GUSCHIN BEN DE VOS SHAMIL KURMASHOV The CEO (Chairman of the Management Board) is elected by the General Meeting of Shareholders for a period lasting until the next Annual Meeting unless otherwise stipulated by a resolution of the General Meeting of Shareholders. Member of the Management Board Member of the Management Board Member of the Management Board Vice President, Sales Vice President, International Operations Vice President, Finance According to the prevailing corporate documents, the CEO (Chairman of the Management Board) cannot simultaneously be the Chairman of the NLMK Board of Directors. Grigory Fedorishin has been the CEO (Chairman of the Management Board) since 12 March 2018. 72 73 Statement by member of the Board of Directors About the Company Corporate Governance Our Team Environmental Protection Appendix ANNUAL REPORT 2020 BIOGRAPHIES OF MEMBERS OF THE MANAGEMENT BOARD SERGEY LIKHAREV Year of birth: 1964 Mr. Likharev holds a Ph.D. in physics and mathematics and a master’s of business administration from Cornell University, USA. From 1990 to 1993, he worked as a researcher at Lomonosov Moscow State University. GRIGORY FEDORISHIN Mr. Fedorishin graduated from the State Finance Academy in Moscow. He holds a master’s degree in business administration from INSEAD business school in France and Singapore. He is member of the Certified Financial Analysts (CFA) association. Year of birth: 1979 Vice President, Logistics. Member of the Management Board since 2014 Mr. Likharev joined NLMK in October 2013. From 2012 to 2013, he served as Aviation Business Director at Russian Machines Group and Chairman of the Board of Directors of the Aviacor Aviation Plant. Member of the Strategic Planning Committee. CEO (Chairman of the Management Board) since March 2018 Mr. Fedorishin was Senior Vice President and Deputy Chairman of the Management Board from March 2017 until March 2018, and Vice President for Finance (CFO) from 2013 until 2017. In 2016, he also headed NLMK Group’s Russia Long Products Division. After serving as CEO of Aviacor Aviation Plant in Samara from 2004 to 2007, he worked as CEO of the Basel Aero airport group from 2008 to 2012. From 2011 to 2013, Mr. Fedorishin served as NLMK’s Strategy and Business Development Director. From 2009 to 2011, he served as an investment manager at Libra Capital, a Moscow-based investment management company. From 2001 to 2009, he worked for the PricewaterhouseCoopers consulting company, where he held positions up to director for business restructuring practice. From 1993 to 2004, he held senior positions at Interros, Ostankino Meat Processing Plant, Golden Telecom, Cannon Associates, and Coopers & Lybrand. EVGENY OVCHAROV Mr. Ovcharov is a graduate of Lipetsk State Technical University and holds a Ph.D. in economic sciences. TATYANA Ms. Averchenkova graduated from Lipetsk State Technical University with a major in economics and management. Year of birth: 1977 AVERCHENKOVA Mr. Ovcharov joined NLMK in 1998. He served as Director for Internal Control and Risk Management and Head of Corporate Finance, and held senior management positions at the Department of Economics and Finance. In 2016, he was appointed Vice President for Risk Management. Vice President, Risk Management. Member of the Management Board since 2018 Year of birth: 1979 Ms. Averchenkova has been with NLMK since 2001. She served as Director for Controlling and held various senior management positions in the Strategy Department. In 2016, she was appointed Vice President for Operational Efficiency. Vice President, Operational Efficiency. Member of the Management Board since 2017 MIKHAIL ARKHIPOV Mr. Arkhipov graduated with honours from the Faculty of Sociology at Lomonosov Moscow State University. Year of birth: 1982 ILYA GUSCHIN Mr. Guschin graduated from the Faculty of Economics at Lomonosov Moscow State University. He holds a Ph.D. in economics. Mr. Arkhipov joined NLMK in January 2018 as Vice President for HR and Management System. From 2013 to 2018, he was a member of the Management Board and Vice President for HR at MTS Group. From 2009 to 2013, he held various positions in the HR Department at SIBUR up to HR Director. From 2004 to 2009, Mr. Arkhipov worked in senior management positions in HR at SUN InBev and KPMG. Vice President, HR and Management System. Member of the Management Board since 2018 Year of birth: 1976 Mr. Guschin joined NLMK in 2013. From 2009 to 2013, he worked for SIBUR Group, including as head of SIBUR International, the group’s export division. Vice President, Sales. Member of the Management Board since 2014 From 2008 to 2009, he served as Financial Director at Skolkovo School of Management in Moscow. From 2002 to 2007, he held various positions at Microsoft. SERGEY CHEBOTAREV Mr. Chebotarev graduated from Lipetsk State Technical University with a major in applied mathematics. He holds a Ph.D. in engineering sciences. Year of birth: 1980 BEN DE VOS Mr. de Vos holds a bachelor’s degree with a major in electrical engineering (supplementary training programme) and a master’s degree with a major in process engineering from the University of Pretoria. Mr. Chebotarev joined NLMK in 2000 as an economist in the Fuel and Energy Industry Department. He served as Head of Energy Policy Management and Director for Energy Efficiency and Energy Markets, before being promoted to Vice President for Energy in 2016 and Vice President for Energy and Environment in 2020. Vice President, Energy and Environment. Member of the Management Board since 2018 Year of birth: 1967 Vice President, International Operations. Member of the Management Board since 2016 From 2011 onwards, he has served as Director of NLMK Belgium Holdings as well as a number of its subsidiaries. He is CEO and Chairman of the Management Board of NLMK International B.V., leading the turnaround and operating efficiency programmes. SHAMIL KURMASHOV Mr. Kurmashov graduated from Moscow State Institute of International Relations (MGIMO University), and holds a Ph.D. in economics from the Central Economics and Mathematics Institute (CEMI RAS). Year of birth: 1978 Mr. de Vos joined Duferco La Louvière in Belgium in 2004 and served as a Management Board member of the NLMK/Duferco JV from 2007 to 2011. Vice President, Finance. Member of the Management Board since 2019 He is a member of the Board of Directors at NLMK International B.V. After starting his career as a production and development engineer in 1990, he held various management positions at Iscor and Saldanha Steel (now ArcelorMittal South Africa) between 1995 and 2003, ending with export sales. From 2009 to 2018, he was Deputy CEO for Commerce and Finance at Aeroflot. From 2007 to 2009, he served as Deputy CEO for Finance and Investment at Sistema, where he was also in charge of the group’s investment activities. He has held executive positions at Norilsk Nickel and Wimm-Bill-Dann. 74 75 Statement by member of the Board of Directors About the Company Corporate Governance Our Team Environmental Protection Appendix ANNUAL REPORT 2020 REPORT ON REMUNERATION PAID TO GOVERNING BODIES The level of remuneration the Company pays to members of governing bodies is sufficient to attract, motivate, and retain persons with the expertise and qualifications NLMK seeks. of remuneration paid to the Board members and govern all types of compensation and benefits offered to them. The remuneration system for members of the Board of Directors serves to align their financial interests with the long-term financial interests of shareholders. Remuneration is paid to members of the Board of Directors for reasonably and faithfully exercising their rights and duties in the interests of the Company. Remuneration to members of the Board of Directors consists of basic remuneration and a bonus. REMUNERATION AND COMPENSATION PAID TO MEMBERS OF THE BOARD The amount of the basic remuneration was approved on 5 June 2015 by a resolution of the Annual General Meeting of Shareholders in the amount of $160,000 OF DIRECTORS GRI 102-36 . GRI 102-35 The Company's policy of remuneration to members of the Board of Directors serves to align the financial interests of directors with the long-term financial interests of shareholders. Members of the Board of Directors are entitled to basic remuneration if they participated in over half of the Board of Directors meetings over the reporting period. Members of the Board of Directors are also paid remuneration for performing the functions of the Chairman of the Board of Directors, a member of one or more committees of the Board of Directors, or for chairmanship in one or more committees of the Board of Directors. ACTIVITIES ACTIVITIES OF THE MANAGEMENT BOARD IN 2020 Members of the Board of Directors are paid remuneration during the period in which they perform their duties, and they also receive reimbursement of expenses related to the performance of their duties as members of the NLMK Board of Directors. The Regulations on Remuneration for Members of the Board of Directors, which was approved by the General Meeting of Shareholders, establish the amount of remuneration and determine the terms and conditions as well as the procedure GRI 102-37 OF THE MANAGEMENT BOARD IN 2020 Member of the Management Board By member of the Management Board A member of the Board of Directors may receive a bonus that shall not exceed the amount of two basic remuneration packages. The amount of bonuses is determined based on the member’s contribution to the work of the Board of Directors and its committees and the recommendations of the Human Resources, Remuneration, and Social Policy Committee. The Management Board functions in accordance with the approved meeting plan or as necessary. The CEO (Chairman of the Management Board) determines the format of the Management Board’s meetings. Grigory Fedorishin Tatyana Averchenkova Ilya Guschin 41 (41) 41 (41) 41 (41) 41 (41) 41 (41) 41 (41) 41 (41) 41 (41) 41 (41) Remuneration is paid based on a resolution of NLMK’s General Meeting of Shareholders. Regulations on the Remuneration of Members of the NLMK Board of Directors outline the rules for reimbursing Board members’ work-related expenses. The following expenses are considered to be reimbursable: Ben de Vos In 2020, the Management Board held 41 meetings, including 13 by absentee ballot. The following issues were considered at these meetings: Sergey Likharev Evgeny Ovcharov Mikhail Arkhipov Sergey Chebotarev Shamil Kurmashov ● for remuneration payment . Transportation expenses of Board members incurred while travelling to and from The Regulations are available on the Company’s official website. meetings ● ● Achievement of the Group’s Accommodation costs incurred while attending meetings Hospitality expenses Costs associated with obtaining the professional advice of experts on issues under ● key performance indicators ● in occupational health and safety Execution of NLMK Group’s budget The Group’s participation in and The Regulations contain transparent ● mechanisms for determining the amount consideration at Board meetings ● withdrawal from other companies Execution of NLMK Group’s Strategy: ● NLMK Management Board members had no conflict of interest in 2020. REMUNERATION FOR MEMBERS OF THE NLMK BOARD OF DIRECTORS updates on the development and implementation of the investment programme projects; updates on the execution of the HR and Social Strategies, Occupational and Industrial Safety programmes; operational efficiency improvements; sales portfolio management; development of maintenance and repair services Development programmes for functional areas and production facilities On 19 March 2020, Grigory Fedorishin, who was previously not an NLMK shareholder, acquired 35,678 of the Company’s global depositary shares (equivalent to 356,780 ordinary shares) making up 0.00595% of NLMK’s charter capital. Remuneration category Remuneration amount Basic remuneration $160,000 Additional remuneration to the Chairman of the Board of Directors, taking into account their functions related to organizing the work of the Board of Directors Up to 50% of the basic remuneration package On 15 December 2020, Grigory Fedorishin sold 17,839 of the Company’s globaldepositary shares (equivalent to 178,390 ordinary shares) making up 0.00298% of NLMK’s charter capital. After that 17,839 of the Company’s global depositary shares (equivalent to 178,390 ordinary shares) making up 0.00298% of NLMK’s charter capital remained in his ownership. Additional remuneration to a member of any committee of the Board of Directors (who participated in over half of its meetings) Up to 25% of the basic remuneration package, and up to 50% of the basic remuneration package for a member of two or more committees ● Additional remuneration to the Chairman of any committee of the Board of Directors (who participated in over half of its meetings) Up to 40% of the basic remuneration package, and up to 80% of the basic remuneration package for the Chairman of two or more committees Other Management Board members are not NLMK shareholders. ● Non-core assets portfolio management 76 77 Statement by member of the Board of Directors About the Company Corporate Governance Our Team Environmental Protection Appendix ANNUAL REPORT 2020 The maximum amount of a Board member’s expenses reimbursed by NLMK during the reporting period is determined by a resolution of the General Meeting of Shareholders and shall not exceed 30% of the basic remuneration package. Compensation shall only be paid if the member of the Board of Directors participated in more than half of the meetings held by the Board of Directors. The Company does not have other forms of remuneration, including short-term or long-term incentive programmes that depend on financial performance, or stock option programmes. APPROACH The KPIs used to determine rewards for senior management are related to NLMK’s TO REMUNERATION AND COMPENSATION FOR MANAGEMENT BOARD MEMBERS AND OTHER financial and operating performance and are intrinsically linked to shareholder value. They include operational performance, social responsibility, occupational safety, and organizational development indicators. KPIs for the CEO (Chairman of the Management Board) include annual financial indicators, as well as long-term indicators of strategy implementation, such as the Company’s sustainable development targets. The Annual General Meeting of Shareholders on the results of 2019, which was held on 24 April 2020, resolved to pay remuneration to members of NLMK Board of Directors in the amount of $2.272 m. TOP EXECUTIVES Top executives, including heads of NLMK Group’s main production sites, have KPIs related to reducing air emissions and СО2 emissions, as well as increasing their share of recycled waste. In addition, energy efficiency KPIs are set for the relevant executives, including heads of sites and the Vice President for Energy and Environment. For top executives, KPI data is recorded as financial gains from implementing the corresponding operational efficiency projects. GRI 102-35, GRI 102-36 The material interest of members of the Management Board in achieving the Company’s strategic goals is ensured by short- term and long-term incentive systems. Short-term incentives are based on the existing system of key performance indicators (KPIs). The amount paid to members of the Management Board in bonuses depends on their achievement of KPIs. The variable part of remuneration for Management Board members amounts to approximately half of the total yearly remuneration. REMUNERATION TO BOARD MEMBERS1, ‘000 RUB The Company also has a long-term incentive (LTI) programme for members of the executive bodies and other senior executives of the Company. The current programme adopted in March 2019 covers the 2019–2023 strategic management cycle. Indicator 2018 152,482 145,564 92,259 53,305 – 2019 179,066 170,693 108,186 62,507 – 2020 169,522 167,846 106,381 61,465 – Total payments Remuneration, incl.: Basic remuneration Bonuses Long-term incentive programme payments are made to Management Board members depending on the Company’s economic performance on the five-year horizon and the attainment of NLMK’s strategic goals. If KPIs are achieved, all Management Board members, including the CEO, receive the first advance payment three years after the programme commences. The final payment net of the advance sum is made depending on performance after 5 years. Salary Commission – – – REMUNERATION TO MANAGEMENT BOARD MEMBERS1, ‘000 RUB Reimbursed expenses Other types of remuneration 6,918 – 8,373 – 1,676 – Indicator 2018 524,553 205,195 312,510 – 2019 535,032 238,764 295,455 – 2020 Total payments, incl.: Salary 530,830 INDIVIDUAL AMOUNT OF REMUNERATION TO BOARD MEMBERS1, ‘000 RUB 235,295 Bonuses2 295,455 Member of the Board of Directors Vladimir Lisin 2018 20,705 17,427 19,293 12,982 15,633 16,309 16,423 15,881 17,446 383 2019 24,041 21,655 21,948 15,026 18,031 19,248 400 2020 23,640 19,503 19,503 14,775 17,730 17,730 - Commission - - Benefits – – Stanislav Shekshnia Oleg Bagrin Reimbursed expenses Other types of remuneration 1,481 813 69 12 5367 – Nikolai Gagarin Karen Sarkisov Thomas Veraszto Helmut Wieser Marjan Oudeman Benedict Sciortino Franz Struzl 20,848 18,935 – 19,503 17,730 - Joachim Limberg Sergey Kravchenko – 18,934 – 17,730 - – 1 Data for 2018 is represented in the actual amounts and may differ from previously published estimated liabilities by the amount of liabilities for achieving the Company’s strategic objectives under the long-term incentive programme. 2 The bonus amount for 2018 does not include a part of the amount paid in 2019 for the long-term incentive programme. Bonuses to members of the Management Board for 2019–2020 include obligations to pay bonuses based on a preliminary calculation reflecting their performance in the reporting year. 1 Data for 2018-2019 is represented in actual amounts. Remuneration to members of the Board of Directors for 2020 is determined based on preliminary calculations in accordance with the Regulations on Remuneration for Members of NLMK’s Board of Directors. 78 79 Statement by member of the Board of Directors About the Company Corporate Governance Our Team Environmental Protection Appendix ANNUAL REPORT 2020 OPERATIONAL CONTROL AND RISK MANAGEMENT INTERNAL CONTROL AND RISK MANAGEMENT SYSTEM BOARD OF DIRECTORS (AUDIT COMMITTEE) NLMK pays special attention to and internal factors that may hinder the achievement of strategic and business goals. MANAGEMENT BOARD (RISK MANAGEMENT COMMITTEE) the development of its risk management system in a bid to protect its assets and ensure timely response to external The goal of the Company’s risk management and internal control system is to ensure that the Company successfully adapts to technological, economic, social, and any other changes. Internal control and risk management INTERNAL CONTROL AND ВНУТРЕННИЙ Internal Audit OHS RISK MANAGEMENT SYSTEM Environmental management Operations Compliance management NLMK Group’s approach to operational control is based on a clear segregation of authority and functions between the entities involved in its internal control and risk management system; it also provides for ‘three lines of RISK MANAGEMENT COMMITTEE Legal support The Management Board’s Risk Management Committee is a standing collegial body that ensures effective functioning of the internal control and risk management system, as well as the promotion of business ethics and anti-corruption principles. At least once a year the Committee reviews reports on changes in NLMK Group's risk profile, approves key risk management principles and approaches, and exercises overall control over the implementation of risk management measures and GRI 102-11 Corporate security Information security defence’. Control procedures are used in the Group’s Russian and international operations and are an integral the strengthening of the internal control system . component of key corporate decision- making activities and processes. First line of defence Second line of defence Third line of defence The management in various functions identifies risks and implements controls Management within centralized functions that define risk management standards for The main principles and approaches to the organization of risk management are enshrined in the Internal Control and Risk Management Policy developed in accordance with the recommendations of the Central Bank of the Russian Federation, professional standards, and best corporate practices, and approved by the Board of Directors. BOARD OF DIRECTORS’ AUDIT COMMITTEE Provides independent verification of the control environment's efficiency The Audit Committee exercises general oversight over the risk management effectiveness and reviews the risk report, which includes an overview of the risk profile, a summary of significant changes in the profile, and the risk management GRI 102-30 the entire Group efficiency analysis . RISK MAP EXAMPLE OF THE THREE-LINE DEFENCE MODEL: MANAGING THE RISK OF EQUIPMENT FAILURE The Company has developed a Risk Map to systematize its approach to identifying, analyzing, and monitoring risks. The Risk Map is regularly updated to reflect the strategy, changing operations, and external context. In 2020, the Risk Map was significantly expanded, pressured by external circumstances (due to the COVID-19 pandemic some risks (health, retirement of key competencies, supply continuity, IT) have increased), and in connection with the Group’s heightened focus on internal measures to ensure business continuity, operational efficiency, security and comfort of employees, and protect its business reputation. First line: Second line: Third line: the operations staff of the first line is responsible for identifying deviations in the process parameters of the equipment, monitors the degree of wear of individual components, forms requests and sets the timing of scheduled repairs. determines the criticality of equipment condition from the main production chain perspective, develops appropriate strategies for its maintenance, and controls the accuracy and completeness of the work performed. the internal audit evaluates the efficiency of tools for identifying deviations in the processes of production, planning, and carrying out repairs. 80 81 Statement by member of the Board of Directors About the Company Corporate Governance Our Team Environmental Protection Appendix ANNUAL REPORT 2020 RISK FACTORS OCCUPATIONAL AND INDUSTRIAL SAFETY RISKS IT AND INFORMATION SECURITY RISKS Disruption of business continuity due to unavailability of IT systems, data transmission network following technical and software failures, non-fulfillment of obligations by service providers, faulty or intentional actions of the Company's employees, actions of third parties. Risks of industrial and fire safety, risks of emergency situations, occupational risks. Why is this risk important? NLMK Group is a manufacturing company. Our activities involve operating hazardous production facilities and using a large amount of mechanical equipment, which creates risks related to the health of employees and contractors, as well as the risks of accidents, fires, equipment breakdown, the decay of buildings and structure, floods, and other natural disasters. Damage caused by unauthorized access of third parties to trade secrets. Why is this risk important? The Company's business processes and their efficiency directly depend on IT systems and the security of confidential information in all its forms. Threats Management ● Regular audits of the state of production facilities (observations, inspections, surveys) Threats Management ● Ensuring safe working conditions and preserving the life and health of employees ● Ensuring the reliability of hazardous production facilities ● If cyber threats Intrusion and anomaly detection, security analysis of IT resources, collection and ● Carrying out industrial and fire safety trainings for employees, including the non-operations materialize, they can disrupt business correlation of information security events employees ● Conducting audits for compliance with the legal requirements in the field of personal ● Investigating the causes of accidents/ incidents, analyzing the possibility of their recurrence and production data protection at similar facilities ● processes, damage the environment, and tarnish the Company’s business reputation. Testing the skills of IT system users for bogus phishing attacks ● Identifying relevant natural risk factors, accounting for seasonal factors for each production company ● Developing an action plan for the prevention and elimination of natural and man-made emergencies, ensuring annual plan updates, organizing employee training PERSONNEL-RELATED RISKS ● Implementing Cardinal Safety Rules (10 fundamental principles of safe production developed by the Company) for employees and contractors Risks of loss of key competencies necessary for business processes. ● Developing corporate injury prevention programmes, including: LOTO (the procedure for the safe use of energy sources during equipment maintenance, repair, or cleaning), safety at height, eye protection, protection against cuts, protection against falling/slipping Why is this risk important? Human capital is just as important a resource for achieving the Company's strategic and operational goals as its production facilities. ● Verifying the qualification certificates of employees of contracting organizations, setting knowledge test following the introductory briefing ● Implementing pre-work hazard analysis and dynamic risk assessment Threats Management ● Developing a response system for emergency medical care, medical evacuation, first aid, ● The loss of key Development of the workforce planning process by employee profile and resuscitation, including appropriate training of employees ● competencies can lead to downtime, increased costs, and shifts Setting up a talent pool for senior positions ● HEALTH SAFETY RISKS Tracking employee motivation and satisfaction levels ● Establishing relations with basic educational institutions to improve the quality Why is this risk important? in project deadlines. of personnel training, incentivizing future graduates to join the Company Due to the specifics of the Company processes, the operations at the Group's sites is associated with the impact of harmful factors. The production operations can lead to the release of substances that pollute the air, water, and soil. Taking into account the COVID-19 pandemic, there are additional risks for the health of employees, both related to the disease itself and to its consequences for the body. ● Developing individual employee training and development plans FINANCIAL RISKS Risks associated with the Group's financial activities: liquidity risks, currency and price risks, tax risks, credit risks. Threats Management Why is this risk important? The key factor determining the size of the Group's revenue are global steel prices. Since most of the Group’s revenue is denominated in foreign currencies and most of expenses are denominated in rubles, the Group faces currency risk. In addition, some of the Group's products are sold with deferred payment, which creates credit risk. For the Group to meet its obligations to employees, customers, and suppliers, it should have sufficient financial reserves and a balanced cash flow. ● Early diagnosis and prevention of diseases, development of a conscious attitude of employees to their health, voluntary medical insurance, insurance against accidents and critical illnesses, health resort treatment ● Ensuring the availability of high-quality food and dietary regime ● Promoting healthy lifestyle Threats Management ● Upgrading corporate medical institutions (purchase of medical equipment, training of medical ● personnel) If financial risks Creating a risk reserve of unencumbered cash ● ● Organizing various forms of rehabilitation treatment for workers who have suffered from materialize, the Group's financial performance may deteriorate, and it may not be able to fulfil its obligations to suppliers, contractors, and customers. Securing confirmed credit lines with first-class Russian and foreign financial institutions ● COVID-19 and viral pneumonia, on the basis of corporate medical facilities Natural hedging of price risk by currency risk, maintaining an optimal open currency position Using formula-based pricing, concluding long-term contracts Government relations and relations with expert communities Control of supply contracts with deferred payment, contracts for the purchase of goods/ services with advance payments Determining the credit limit based on internal scoring and external ratings Using risk transfer tools: bank guarantee, insurance limit, letters of credit, factoring Applying a portfolio approach to similar requirements, monitoring the portfolio limit ● ● ● ● Implementing a set of measures to counteract the spread of COVID-19 at the Company's production facilities, including mass laboratory tests ● Voluntary vaccination against seasonal flu and pneumococcal infection in all regions where the Company operates ● ● ● ● Handing over medical diagnostic and therapeutic equipment to medical facilities in the regions where the Company operates ● Additional payments to medical workers’ payroll and organizing catering for them 82 83 Statement by member of the Board of Directors About the Company Corporate Governance Our Team Environmental Protection Appendix ANNUAL REPORT 2020 The Company also identifies the following risks: Environmental risks 2020 PERFORMANCE COMPLIANCE ● The COVID-19 pandemic has significantly increased the likelihood of most of the key risks. The Company is actively developing its compliance system, which aims to ensure that NLMK's operations comply with applicable legislation and internal documents. The functioning of the compliance system is ensured by the Compliance Division, established in 2020, as well as profile divisions. (see the Environmental Protection and Climate Change sections for details) In line with the current internal control and risk management system, measures have been developed and are being implemented to reduce the impact of these risks on the Company's business continuity and financial performance. ● Reputation risks and stakeholder engagement (including contractors) risks (see the Stakeholder The events that took place in 2020 confirmed the need to shift the Company's focus from managing individual risks to organizing business continuity and overall resource protection, regardless of the sources of threats. Engagement section for details) Investment project management risks Equipment failure risks Inventory risks Operational efficiency risks Supply continuity risks Free trade restriction risks Corruption and fraud risks, compliance ● ● The Compliance Division: ● ● Implements anti-corruption ● RISK STRATEGY AND PLANS FOR 2021 AND THE MEDIUM TERM programmes and activities Implements antitrust risk ● ● ● management programmes Coordinates the implementation ● ● NLMK has introduced the practice of regularly updating the internal control and risk management system. Three main areas of the Company's development for the next three years were approved in 2020: risks, and legal and contractual risks (see the Compliance section for details) of other compliance procedures 1. Business continuity management ANTITRUST COMPLIANCE EMERGING RISKS Systematic work on continuity management is one of NLMK’s priorities in its risk minimization activities. In view of this approach, a project is underway to organize a Business Continuity Management System (BCMS) in accordance with the Business Continuity international standards and best international practices. NLMK Group continues to improve its antitrust compliance system, taking into account changes in the legislation and law enforcement development trends. The Company has introduced the practice of continuous monitoring of antitrust legislation, antitrust The Group pays special attention to monitoring emerging risks. These are risks, the impact and probability of which cannot be reliably and fully assessed based on statistics or other available information. Completely new risks monitoring, which did not reveal significant changes in the Company's antitrust risk map, and regular consultations on antitrust matters for employees. The antitrust compliance manager participated in the business processes most exposed to antitrust risks (shaping the trade and sales policy, concluding contracts, interacting with counterparties). The Company is committed to preventing the negative impact of possible business interruptions due to external and internal factors, to ensure stability in crisis situations and to fulfill its obligations to stakeholders. practices and the experience of other companies in preventing antitrust risks. or previously known risks in a rapidly changing context can be emerging risks. In 2021, the Company plans to complete the resource and process criticality analysis at the Group's key sites, and update its business continuity plans. Employee training is a key element of the compliance system. In 2020, a pilot training on antitrust requirements was carried out for employees, and a map of the Company’s key positions was developed for continuous training and testing. Part of the training was held online expanding the reach to more employees across different regions. NLMK Group regularly shares information about antitrust requirements with its employees using various formats to achieve maximum effect. With a view to ensuring antitrust compliance, the Company has established a number of control procedures and produced educational and data analytics materials for employees. In 2020, all mandatory procedures enabling effective Emerging risks tend to be external in nature. At the moment, we identify geopolitical, social, demographic, and climate risks, as well as the risks of rapid technological change. With their development, emerging risks can be reconsidered as current risks, which are managed according to the standard approaches and practices adopted in the Group. One example of such a risk is the risk of information security. 2. Process maturity NLMK is consistently increasing the maturity level of its internal control and risk management system to ensure the achievement of project and process targets. This includes: improving existing control procedures by analyzing them, identifying areas for development, redesigning controls; eliminating redundancy; developing key risk indicators and defining their boundaries; developing approaches to joint risk modelling, stress testing, and scenario analysis. The Company’s Antitrust Policy declares ‘zero tolerance’ to violations of the antitrust law. The Company continues to improve its antitrust risk prevention system, and in 2020, it was included in the Legal Support function. functioning of the programme were implemented. They included risk In 2021, the Group plans to approve its risk appetite for key risks, develop a system of key risk indicators, and synchronize them with the goal-setting system. Since there is not enough information to assess the probability of emerging risk, the Group has chosen the following strategy: for the most clearly shaped risks, it conducts a scenario analysis of their impact on the Group's goals, and also increases the stability of the Group's business to any events, regardless of their nature. 3. Corporate culture of risk awareness The Company is committed to creating a risk awareness culture that meets the principles of engagement, responsibility, and risk prevention. As part of this commitment, NLMK plans to develop educational solutions, conduct trainings, raise awareness of employees about the internal control and risk management system, as well as about communication channels for sharing risk-related information. Risk management requires specific knowledge and often involves data processing and modelling. In order to cope with specific local tasks in business units, the Risk Lab competence centre is being created, which will develop innovative methods and tools for quantifying risk and making decisions in conditions of uncertainty. 84 85 Statement by member of the Board of Directors About the Company Corporate Governance Our Team Environmental Protection Appendix ANNUAL REPORT 2020 INTERNAL AUDIT Internal audit is a source of independent and reasonable guarantees to the Board of Directors and management and it is involved in improving the Group's performance by: Internal audit is a centralized function that fully encompasses the core activities of NLMK Group companies, including international companies. The unified management of the internal audit function allows for the use of uniform standard approaches to planning, auditing and reporting, and also ensures an effective exchange of information between specialists of the Internal Audit Service and with key stakeholders. ● Conducting objective audits in line with the risk-based approach Giving recommendations following the results of audits and knowledge sharing The Internal Audit Service performs the following key functions: ● ● Assessment of the internal control system Evaluation of the risk management system’s effectiveness ● ● Assessment of corporate governance The Group’s internal audit function is built in line with legal requirements and the recommendations of professional standards and the Bank of Russia’s Corporate Governance Code, and meets the requirements of best international practices. In addition, the Internal Audit Service performs consulting activities by providing professional opinions to internal customers on certain matters concerning financial and business operations. The Company’s internal control and risk management system is evaluated taking into account the principles set forth in international standards for risk management and internal control, including ISO 31000:2018, COSO ERM:2017, and COSO 2013. PRINCIPLES OF THE INTERNAL AUDIT SERVICE AND THEIR ENFORCEMENT The main internal document of NLMK Group governing the Internal Audit Service functions is the Regulations on the Internal Audit Service. The Regulations have been approved by the Board of Directors and are available on the Company's official website. 2020 PERFORMANCE Principle of the Internal Audit Service Tools and mechanisms for enforcing the principles Independence and objectivity Audit Director functionally reports to NLMK’s Board of Directors Audit Director is appointed (dismissed) by a resolution of NLMK's Board of Directors Audit Director has the right of direct and free access to the Chairman of the Board of Directors, Chairman of the Audit Committee, and CEO (Chairman of the Management Board) to provide information on significant risks that have been identified Third parties are prohibited from interfering in the process and the results of the audit In 2020, the Internal Audit Service continued to implement the Internal Audit Development Strategy through to 2022 and approved by the Audit Committee. A number of planned activities were carried out with the following key results: ● Evaluation of the effectiveness of the risk management system Assessment of the risk management system’s effectiveness Assessment of the internal control system’s effectiveness for end-to-end ● ● The Head of the Internal Audit Service, as part of their activities, submits reports to the Audit Committee on the audit results of the actual state, reliability, and effectiveness of the internal control and risk management system. processes at NLMK Group: Maintenance, Procurement: Raw materials, Operational efficiency, Qualification, tender, and contract approval, etc. Local audits of process control efficiency Systematic and consistent approach The Internal Audit Service is guided by a risk-based Audit Plan Resources are distributed between targeted (limited scope) and comprehensive audits of processes and subsidiaries in devising the Audit Plan The Internal Audit Service prepares recommendations taking into account the costs/value ratio. Priority is given to systemic measures Regular monitoring of the execution of post-audit recommendations ● PLANS FOR 2021 AND THE MEDIUM TERM ● Assessing the reliability and functioning of risk management and internal control for NLMK Group’s key business processes according to the Internal Audit Plan, including the study of end-to-end processes in the Company’s international assets Improving compliance with the requirements of antitrust, anti-dumping, and anti- corruption legislation Efficient use of resources Lead auditors are appointed from among the most qualified auditors Engagement of internal and external experts (consultants) Timely status updates to the Company's management about the requirements (limitations) for the resources needed to conduct audits ● ● Assessment of corporate governance effectiveness Professionalism and a professional approach to work Internal auditors have special knowledge, skills, and expertise needed to carry out practical professional activity in the Company; continuous professional development and improvement of the said knowledge, skills, and other expertise through assessment, training, and sharing experience; continuous development of expertise in IT systems as the key source of information during audits Continuous audit quality improvement Annual internal and periodic external (once every five years) assessments of the internal audit function to determine whether the activities of the Internal Audit Service and auditors comply with the definition of internal audit, the International Standards or the Professional Practice of Internal Auditors, and the Code of Ethics of the Institute of Internal Auditors (IIA), with a view to further improve it. After its 2017 independent quality assessment, Deloitte provided NLMK with a positive opinion stating that the Internal Audit Service’s activities are generally in line with International Standards for the Professional Practice of Internal Auditors and the IIA Code of Ethics. 86 87 Statement by member of the Board of Directors About the Company Corporate Governance Our Team Environmental Protection Appendix ANNUAL REPORT 2020 The anti-corruption and fraud system efficiency assessment is performed as part of audits by the Internal Audit Service. 2020 PERFORMANCE ANTI-CORRUPTION ACTIVITIES In 2020, more than 3,000 employees underwent the conflict of interest declaration procedure and confirmed that they had reviewed the provisions of the Code of Corporate Ethics, Anti-Corruption Policy, and Regulations on the Prevention, Detection, and Settlement of a Conflict of Interest. The rest employees were made aware of the provisions of these regulations when they were amended, by publishing the wording of the documents on NLMK's corporate portal. A total of 42 employees individually took a Conflict of Interest distance learning course (2,458 employees GRI 205-2 NLMK Group is guided by high ethical standards, principles of business transparency, and zero tolerance to any form or manifestation of corruption in its day-to-day operations. The Company engages in targeted work to prevent and counteract corruption and fraud. The Company’s management constantly devotes attention to timely detecting and GRI 102-16 Risks associated with corruption and fraud are identified, analysed, and assessed at all levels of management GRI 205-1 and at all the Group’s companies . in total since the launch of the course) . Experts from the Compliance unit together with other departments are consistently working to identify the sources of fraud and corruption risks and prevent them from GRI 205-1 All the Group’s business partners are informed about the principles of good conduct in the qualification process and when a contract is concluded. In 2020, 14,463 business GRI 205-2 partners were informed . responding to wrongdoings . materializing . Each report about corrupt practices or intentions received through feedback channels is thoroughly checked in accordance with the Regulation on Conducting GRI 205-2, GRI 205-3 The Company has adopted the Code of Corporate Ethics and Anti-Corruption Policy. Whenever a new version of the Code of Corporate Ethics or Anti-Corruption Policy comes into effect, all employees of the Company review latest version and sign GRI 102-16 The efficiency of NLMK Group's Code of Corporate Ethics is assessed as part of the Internal Audit Service's audits. In 2020, following the test of the conflict of interest declaration procedure among employees, investigations were conducted against 31 employees. As a result, one real conflict of interest situation and nine potential ones were identified. Corrective measures are taken for the identified shortcomings. Official Investigations and Inspection . NUMBER OF OFFICIAL INSPECTIONS/INVESTIGATIONS INITIATED AFTER REPORTS VIA FEEDBACK CHANNELS IN 2020 an acknowledgement form . 10 The Company also expects its business partners to adhere to basic values and principles of good business conduct. The Company’s business partners familiarize themselves with the provisions of the Code of Corporate Ethics during the qualification and selection of a counterparty as well as the conclusion of a contract. The Group imposes a mandatory requirement on all business partners that an anti-corruption clause must be included in the contract, or an Agreement on Anti-corruption GRI 102-16 20 45 Anti-corruption e-mail Direct request Hotline The main mechanisms and tools employed by the Company to combat corruption 15 GRI 102-17, GRI 205-2 and fraud are : PREVENTION ● The drafting, communication to all stakeholders, and implementation of internal corporate documents AND RESOLUTION OF CONFLICTS OF INTEREST Instances of corruption and fraud that were confirmed in 2020 included, among other things, the unfair behaviour of suppliers, the provision of false information, unethical behaviour as well as deliberate actions taken against property and resources GRI 205-2 ● ● Informing and training employees about anti-corruption issues Efficient feedback mechanisms for collecting and analysing information, including an anti-corruption hotline and continuous informing of employees about available feedback channels More than 3,000 employees of the Group working in the areas most exposed to the risks of fraud and corruption are required to undergo the conflict of interest declaration procedure annually. While other employees have the opportunity to declare conflict of interest via an electronic questionnaire at their own initiative. All situations with signs of a conflict of interest, declared by employees or identified by control services, are promptly analysed in accordance with the procedure adopted in the Group. If necessary, measures are taken to resolve them. As part of this procedure, employees are also required to confirm that they have reviewed the provisions of the Anti-Corruption Policy, Code of Corporate Ethics, and Regulations on the Prevention, Detection, and Settlement of a Conflict GRI 205-2 for personal gain . ● ● The identification, assessment, and management of corruption and fraud risks within business processes and mitigating these risks The inclusion of the requirement to comply with the provisions of the Anti-corruption Policy and the Code of Ethics in the job descriptions of employees and agreements with counterparties Based on the results of official inspections and investigations in 2020, the total share of confirmed claims was 36%, seven facts of fraudulent actions were revealed, five of which were committed with the participation of the Company's employees. GRI 205-2, GRI 205-3 Terms must be signed . The Audit Committee of the Board of Directors, the CEO (Chairman of the Management Board), and the Risk Management Committee of the Management Board all play a key role in establishing an anti-corruption system that functions efficiently The Vice President for Risk Management is in charge of implementing anti- corruption programmes and countering corruption within the Company. The Compliance unit implements anti-corruption programmes and GRI 102-16 Employment relationships were terminated with 140 employees . A total of 599 potential suppliers were rejected in the qualification of supplier counterparties in 2020 by the corporate security criteria GRI 205-2 . The Company has introduced a number of feedback mechanisms for collecting and analysing information about any instances of corruption, fraud, unethical or unfair behaviour, or other wrongdoing that could take place or have taken place. The most well-known mechanisms are the anti-corruption hotline and the e-mail for whistleblowers (including anonymous). Contacts are available on the Company's GRI 102-17, GRI 205-2 During the year, no corruption-related legal proceedings were initiated against NLMK GRI 206-1 Group or its employees . website . PLANS FOR 2021 AND THE MEDIUM TERM All requests are promptly analysed in accordance with the procedure in place at the Group, and corrective measures are taken if necessary. Any information that is corroborated about instances of corruption is anonymized and published on the corporate portal. This procedure serves to inform employees about the result of the inspections/investigations initiated by hotline reports and to remind employees that corruption is strictly prohibited (Article 4 of the Anti-Corruption Policy) The Company’s plans for countering corruption and fraud and introducing good business practices include further developing all existing procedures and improving the efficiency of existing measures. activities . GRI 102-17, GRI 205-2 . of Interest . 88 89 Statement by member of the Board of Directors About the Company Corporate Governance Our Team Environmental Protection Appendix ANNUAL REPORT 2020 INDEPENDENT AUDITOR INFORMATION FOR SHAREHOLDERS AND INVESTORS The Company hires an independent audit organization to audit and confirm the accuracy of NLMK Compliance with the auditor's independence principle Group’s IFRS (International Financial Reporting Standards) consolidated financial statements, and NLMK’s RAS (Russian Accounting Standards) accounting (financial) statements. In April 2020, NLMK’s Annual General Meeting of Shareholders approved PricewaterhouseCoopers Audit (PwC) as the Company’s auditor. In order to comply with the requirements for audit independence and ensure a high level of professionalism, PwC has several systems that ensure audit independence and maintain a high level of professionalism and the quality of the services provided. For example, PwC rotates key audit personnel on a regular basis (at least once every seven years) with the latest rotation in 2020. ORDINARY SHARES The Group’s share capital is divided into 5,993,227,240 shares with a nominal value of RUB 1 each. NLMK shares are traded on the Moscow Stock Exchange as well as in the form of Global Depositary Shares (GDS) (1 GDS = 10 ordinary shares) on the London Stock Exchange (LSE). The volume of GDS issued by NLMK and traded on the London Stock Exchange amounted to 7.52% of share capital as of 31 December 2020. The Company’s depositary bank is Deutsche Bank Trust Company Americas. In addition to providing audit services to confirm the reliability of financial statements, NLMK Group’s companies may hire PwC and other PwC companies to provide consulting (non-audit) services. The management of NLMK Group and, in particular, the Audit Committee, performs the necessary procedures and are certain that these services do not affect the independence of the auditor and are not related to financial reporting. In 2020, the share of non-audit services in the total volume of services provided by PwC was at an acceptable level and did not exceed 29% of the total volume. London Stock Exchange (London) Ticker Code Moscow Stock Exchange (Moscow) Ticker Code Bloomberg Ticker Code NLMK NLMK The independent auditor is selected from among recognized independent auditors with an impeccable professional reputation. The main criteria for selecting an independent auditor are the qualifications of the audit organization, the quality of the services provided as well as compliance with the audit independence requirements. The candidate for an independent auditor is reviewed by the Audit Committee of the Board of Directors and the Board of Directors, and is approved by NLMK’s Annual General Meeting of Shareholders. NLMK LI1 NLMKq.L2 Reuters Ticker Code REMUNERATION OF INDEPENDENT AUDITOR INDICES THAT INCLUDE NLMK SHARES NLMK’s Board of Directors has determined the value of remuneration for the provision of audit (review) services of NLMK’s 2020 interim and annual IFRS consolidated financial statements as well as for the audit of the 2020 RAS statements in the amount of RUB 59,100,000 (VAT excluded). General indices 14. STOXX Global Total Market ESG indices Price Index 1. RTS Index 2. RTS Metals and Mining Index 3. MOEX Russia Index 15. STOXX All Europe Total Market Price Index 16. STOXX BRIC 400 Price Index 17. STOXX Global 3000 Price Index 18. STOXX Emerging Markets 1500 Index 19. Russian Depositary Index USD 20. S&P Emerging BMI 21. S&P Global LargeMidCap 22. S&P Global BMI Materials USD 23. DAXglobal Russia+ Price Index EUR 24. DAXglobal Steel EUR Price 25. Dow Jones Emerging Markets Select Dividend Index USD 26. MOEX RSPP Sustainability Vector Index 27. MOEX RSPP Responsibility and Transparency Index REMUNERATION PAID TO NLMK GROUP'S INDEPENDENT AUDITOR FOR 2020, $ '000 (VAT EXCLUDED) 4. MOEX Metals and Mining Index 5. MOEX Broad Market Index 6. MSCI Russia Index 7. MSCI Emerging Markets 8. Bloomberg World Index 9. Bloomberg World Iron/Steel Index 10. Bloomberg Europe Iron/Steel Index 11. Bloomberg EMEA – World Index 12. FTSE Russia IOB Index PwC has been the auditor of the Group since 2003. The Board’s Audit 28. MSCI Emerging Markets Choice ESG Screened 5% Issuer Capped Index 29. FTSE Emerging Markets ESG Index 30. FTSE4Good Emerging Total Return Index Committee, which is responsible for evaluating the efficiency of the current independent auditor, was satisfied with the quality of the services provided. In 2019 it recommended that the Board of Directors and the General Meeting of Shareholders re-appoint PwC Types of services Audit and reviews Non-audit services Remuneration 1,498.1 624.3 13. FTSE Emerging Markets Index as the Group’s auditor for 2020–2022. SHAREHOLDER NUMBERS In 2020, the number of shareholders increased by 73%, reaching 114,000 people. The number of online voting participants increased to 677 people by the end of the year (+57% yoy). NUMBER OF NLMK SHAREHOLDERS AND ONLINE VOTING PARTICIPANTS Indicator As of 25.11.2019 66,045 As of 23.11.2020 114,181 Variance, % Total shareholders Online voting participants 73 57 431 677 1 NLMK LI for GDS traded on the LSE; NLMK RX for shares traded on the MICEX platform of the Moscow Exchange NLMK LI for GDS traded on the LSE; NLMK.MM for shares traded on the MICEX platform of the Moscow Exchange 2 90 91 Statement by member of the Board of Directors About the Company Corporate Governance Our Team Environmental Protection Appendix ANNUAL REPORT 2020 ● SHARE PRICE MARKET CAPITALIZATION If Net Debt/EBITDA exceeds 1.0x: results on a quarterly basis. The annual report is published in electronic form on the Group’s website, www.nlmk.com, on the day of its official publication. The Company announces its publication in a special press release. A hard copy of the annual report is available upon request in the office of the Company. the payout amount shall be equivalent to or above 50% of the free cash flow, calculated based on the Company’s IFRS consolidated financial statements for the reporting period In 2020, the Company’s average market capitalization on the London Stock Exchange was $14 bn (−7% yoy). At the end of 2020, NLMK share prices stood at $2.8 per share (or $27.74 per GDS), which is consistent with a capitalization of $16.63 bn (+20% yoy). NLMK GLOBAL DEPOSITARY SHARE PRICE ON THE LONDON STOCK EXCHANGE, $ EQUITY STRUCTURE Indicator 2019 22.9 23.0 28.3 19.3 2020 23.0 27.7 29.3 12.3 Change, % Dividends are paid annually. Start of year End of year Maximum Minimum 1 20 3 If financially stable conditions are maintained, NLMK will strive to pay interim dividends on a quarterly basis. NLMK uses the normalized investment level of $700 m per year to calculate the free cash flow for dividend payments if actual investments are above this level. Stock share owned by governing bodies members is less than 0.01%. TAXATION1 EQUITY STRUCTURE AS OF 31 DECEMBER 2020, % −36 −10 Legal entities 20.7 Average 23.4 21.0 Chapter 25 ‘Tax on Organizations’ Profit’ of the Russian Tax Code governs the tax treatment of organizations’ revenues received as dividends on shares. Dividends paid to organizations that are Russian taxpayers are subject to a 0% or 13% income tax (clauses 3.1 and 3.2, Article 284 of the Russian Tax Code); foreign organizations are subject to a 15% income tax (clause 3.3, Article 284 of the Russian Tax Code) in line with international taxation agreements of the Russian Federation. ORDINARY NLMK SHARE PRICE ON THE MOSCOW STOCK EXCHANGE, RUB The amount to be paid as dividend for a specific period is approved by the Company shareholders in line with the Board of Directors’ recommendations. Fletcher Group Holdings Limited2 79.3 Other free-floating shares3 Indicator 2019 157.4 143.7 183.2 123.4 151.9 2020 143.7 209.1 223.8 101.1 Change, % Start of year End of year Maximum Minimum −9 45 22 −18 1 Dividends on GDS CONTACTS FOR SHAREHOLDERS Any dividends paid on shares certified by GDS will be declared and paid to the Depositary in rubles or foreign currency, converted into US dollars by the depositary (in the case of dividend payments in a currency other than US dollars), and distributed to the holders of GDS, net of fees and depositary expenses. Registrar Contacts The register of holders London: +44 (20) 7547-6500 New York: +1 (212) 250-91-00 Moscow: +7 (495) 642-06-16 Email: [email protected] of NLMK securities is maintained by the Regional Independent Registrar Agency (RIR Agency). Registered address: 10b, 9 Maya St., Lipetsk, Russia, 398017 Telephone: +7 (4742) 44-30-95 Email: [email protected] Average 152.8 Individuals NLMK SHARE PRICES ON THE MOSCOW STOCK EXCHANGE AND LONDON STOCK EXCHANGE IN 2020 Corporate Secretary Valery Loskutov Telephone: +7 (4742) 44-49-89 Email: [email protected] The personal income tax rate for Russian residents is 13% for income under RUB 5 million and 15% for income over RUB 5 million in a calendar year (clause 1, Article 224 of the Russian Tax Code; Section 3, Article 2 of Federal Law dd. 23/10/2020 No. 372-FZ), and 15% for non-residents (clause 3.2, Article 224 of the Russian Tax Code). 250 210 170 130 90 32 Website: http://www.a-rnr.ru/ 28 24 20 16 CORPORATE DOCUMENTS Depositary bank Deutsche Bank Trust Company Americas Corporate Finance and Investor Relations Telephone: +7 (495) 504-05-04 Email: [email protected] The Group’s corporate documents, including the NLMK Charter, are available at www.nlmk.com. GRI 102-53 New York Headquarters 60 Wall St., New York, NY 10005 USA 12 Jan Feb Mar Apr May Jun 2020 Jul Aug Sep Oct Nov Dec DIVIDENDS FINANCIAL REPORTING AND DISCLOSURE London Office Winchester House 1 Great Winchester St. London EC2N 2DQ UK GDS price on LSE (right axis), $ Share price on MOEX (left axis), RUB Dividend Policy The Group posts announcements of financial results on the London Stock Exchange website via the regulatory news service (RNS) and on the Interfax Corporate Disclosure Centre website, and then publishes them on the Group’s website in the form of press releases and distributes them to the media. The Company publishes its financial According to the current1 dividend policy, dividends are determined as follows: NLMK SHARE INDEX AND MOSCOW STOCK EXCHANGE INDEX IN 2020 ● If Net Debt/EBITDA is 1.0x or less: 1.8 1.6 the payout amount shall be equivalent to or above 100% of the free cash flow, calculated based on the Company’s IFRS consolidated financial statements for the reporting period 1.4 1.2 1.0 0.8 0.6 1 Information on taxation is provided for general Jan Feb Mar Apr May Jun 2020 Jul Aug Sep Oct Nov Dec information purposes only. Potential and current investors should consult with their own advisors regarding the tax consequences of investing in the Company’s shares, including GDS. 1 As of 31 December 2020. 2 The Company’s beneficiary is Vladimir Lisin, according to the definition of ‘beneficiary’ in Russian legislation. 3 MOEX Russia Index NLMK share index on MOEX Including GDS traded on the London Stock Exchange (Deutsche Bank Trust Company Americas is NLMK’s depositary bank) and shares traded on the Moscow Exchange. 92 93 96 Stakeholder dialogue 104 Supply chain management 112 Human rights 118 Our employees 138 Occupational health and safety 150 Developing local communities OUR Statement by member of the Board of Directors About the Company Corporate Governance Our Team Environmental Protection Appendix ANNUAL REPORT 2020 NLMK STAKEHOLDER MAP IN 2020 STAKEHOLDER DIALOGUE ig OUR APPROACH TO STAKEHOLDER ENGAGEMENT VO Government authorities Shareholders Investment community Clients Stakeholders Suppliers and contractors Employees Local communities Trade unions GRI 102-40 NLMK Group’s sustainable development is built on a foundation of transparent, trust-based stakeholder engagement GRI 102-16 NLMK’s key stakeholder groups are: ● ● ● ● ● ● ● ● Shareholders Company clients Foreign, national, and regional government authorities Investment community Company employees Trade unions Suppliers and contractors Local communities over the long term . In developing our approach to managing stakeholder engagement, we are guided by international and corporate standards, and we are committed o to identifying and taking into account the interests and needs of the Company’s key stakeholders. The general principles for our communication and engagement with stakeholders can be found in our Corporate Ethics Code, Corporate Governance Code, Supplier Code of Conduct, Anti-Corruption Policy, Human Rights Policy, and other NLMK corporate documents, published on NLMK’s website NLMK maintains a list of stakeholders and prioritizes them according to mutual influence and convergence of interests. The Company’s stakeholder map is based on the needs and interests of stakeholders and NLMK, as well as expert assessments from the Company’s management, and is regularly reviewed and updated as necessary. In 2020, the stakeholder map did not undergo any GRI 102-42 Internal stakeholders Business partners Other external stakeholders Stakeholder target development area significant changes . NLMK uses various means to engage with stakeholders, thereby enabling the Company to promptly identify risks and new opportunities when working together with its stakeholders. In 2020, the Company continued to maintain GRI 413-1 GRI 102-43 . an active dialogue with all of its stakeholders . 96 97 Statement by member of the Board of Directors About the Company Corporate Governance Our Team Environmental Protection Appendix ANNUAL REPORT 2020 RESULTS OF STAKEHOLDER ENGAGEMENT GRI 102-44, GRI 102-21 CONSUMERS EMPLOYEES Importance for NLMK The consumers of NLMK products include manufacturers from various regions of the world and industrial sectors: steelmaking, construction, automotive industry, machine and shipbuilding, and pipe manufacturing. By openly engaging with consumers, we are able to increase their satisfaction and loyalty and help grow sales of NLMK products. NLMK strives to create a client-centred system that allows us to track and predict changes in consumer demand and satisfy our clients’ changing needs. In order to increase customer satisfaction, NLMK Group established a claim consideration procedure that is fully in compliance with international standards for quality management systems (ISO 9001:2015 and IATF 16949:2016). All consumer claims are registered in an electronic filing system with set consideration deadlines. Customers receive constant feedback on the status of claim consideration and settlement. NLMK staff undergoes specialized training to enhance the technical service level. All deficiencies detected by consumers are registered and analysed in order to elaborate corrective measures and to develop actions for continuous quality and service improvement. Another principle guiding the Company’s activities is preventing any potential risk of harm related to the use of our products or packaging. This principle concerns chemical, radiation, fire, and phytosanitary safety. The framework we use to determine the safety characteristics of our products includes European Union directives and regulations (RoHS2, ELV, WEEE, and REACH). Importance for NLMK Our employees are essential to the Company’s stability, ensuring that the business can operate and grow successfully. Creating a highly qualified and motivated team is a key goal of our engagement with staff and an integral factor behind NLMK’s leading position in the industry. The Human Resources Department works with employees across all NLMK units. NLMK provides decent working conditions for its employees and continues to develop financial and non-financial incentive systems. The Company runs various employee training programmes, including those organized as part of the NLMK Corporate University. The Company seeks to increase employee engagement by improving feedback channels, conducting team-building activities, and offering social support. Effective employee dialogue is supported by the internal corporate communications system. This system successfully: ● Explains the Group’s strategic goals and values to employees ● Facilitates the inclusion of every team member in the process of continuous improvements Strengthens the Group’s employer brand Delivers information in a timely manner and provides a feedback mechanism Ensures convenient access to corporate services Develops horizontal links between colleagues ● ● ● ● The Company employs a variety of sales channels, including rapidly growing online sales. Sales managers in all units work with the Company's clients on a daily basis. ● Stakeholder interests Decent salaries and an incentive system in place ● Opportunities for professional development and career growth ● ● Stakeholder interests Compliance with contractual obligations Comfortable, safe workspaces Compliance with employment laws and other regulations ● ● High-quality products ● Development of a product line policy ● Forms of engagement Offering continuing education, training, and staff development programmes. ● Competitive pricing For more information on employee training, see the Training and Development section. ● Timely and reliable deliveries ● Organizing regular safety training sessions and implementing programmes ● Forms of engagement Developing a sales channel network to improve workplace conditions. ● Monitoring customer satisfaction For more information on the results of these activities, see the Occupational Health and Safety section. ● Holding coordinating councils Addressing customer claims ● ● Implementing measures to provide social support for employees, their families, and ● Holding and participating in public events, business meetings, and negotiations retirees (former employees). ● ● Raising public awareness through materials in the media and on our website Holding regular meetings with management at various levels. ● ● Customer service. In the current strategic cycle, NLMK has set and is monitoring Monitoring and sustaining employee engagement. ● the following key customer service indicators: — Delivery terms, including OTIF In 2020, our corporate NLMK Pulse Survey had a coverage of over 20,000 employees, which constituted around 74% of the full-time headcount at the Group’s Russian sites. The survey highlighted our strong suits as well as areas for development. See the Social Policy section for more. — Product support (new product and service development, technical support, consideration of claims/complaints) — Customer interaction (electronic document flow, order status information, etc.) — Net Promoter Score (NPS) and Customer Satisfaction Score (CSAT) ● Informing employees about the Company’s activities and opportunities for professional growth through corporate newspapers, magazines, NLMK TV, and social media. ● Informing employees about the COVID-19 pandemic situation. Amid the pandemic, NLMK seeks to maintain a high level of transparency and provide timely information to employees about the current situation and the measures taken within the company. When lockdown measures were at their peak, NLMK’s CEO addressed employees on the corporate portal every day. 98 99 Statement by member of the Board of Directors About the Company Corporate Governance Our Team Environmental Protection Appendix ANNUAL REPORT 2020 SHAREHOLDERS AND THE INVESTMENT COMMUNITY GOVERNMENT AUTHORITIES Importance for NLMK Importance for NLMK Shareholders own our business and influence the course of NLMK’s development. The Company is committed to safeguarding their interests. As a major global manufacturing company that has a presence in seven countries and five regions of the Russian Federation, NLMK encounters government regulations in various areas of its operations every day. Given the intense competition and market volatility, it is essential to have a stable regulatory environment that provides opportunities for long-term planning and stable business management. To ensure that NLMK remains an attractive investment, the Company provides the investment community with information about our performance that is as complete and up-to-date as possible. A key goal of our engagement with the government authorities is to identify and manage risks in order to ensure the Company’s continuous operation and development. We also strive to assist in the creation of a regulatory environment that would enable the Company to meet its obligations before society. As represented by its Government Relations Department, the Company thus engages on an ongoing basis with state authorities, as well as social, industry, and expert organizations in each country and region where it operates. For the purposes of regulatory agenda setting, NLMK participates in the formulation and consolidation of the business community’s position, presenting it at state authority platforms and participating in industry-specific meetings. The Company also represents and defends its interests on the internal and external markets through government and public forums, such as the World Trade Organization, the Russian Union of Industrialists and Entrepreneurs, the Russian Steel Association, public councils and advisory bodies of federal and regional authorities, and with the government authorities. The key goals of our engagement with investors and shareholders are to establish and maintain long-term connections and to provide timely information on the Company’s financial and non- financial performance, as well as its development plans. The unit in charge of engaging with the investment community is the Corporate Finance and Investor Relations Department. ● Stakeholder interests Consistent improvement in the Company’s financial and non-financial performance ● Growth in the Company’s shareholder value ● Transparency and disclosure Investment appeal and stability ● ● Forms of engagement Disclosing information in various public sources: in 2020 the Company continued to publish its operating and financial performance reports on a quarterly basis ● Official visits for current and potential investors to the Group’s sites: due to the COVID-19 A key component of the Company’s approach is providing assistance to its functional units on issues concerning the formulation of the Company’s position when engaging with government authorities. This helps functional experts work more efficiently, respond to various state authority demands in a more effective and informed manner, and put forward the necessary regulatory initiatives. pandemic, investor visits to sites were suspended in the reporting year to ensure the safety of employees and investors ● Participating in Russian and international investment conferences ● Holding business meetings, both one-on-one and in groups: we held about 450 meetings with investors in various formats ● Stakeholder interests Forms of engagement Compliance with legislative requirements For more information about shareholder and investor engagement, see the Information for Shareholders and Investors section. ● Meeting tax obligations ● Monitoring and assessing normative legal risks ● Developing initiatives to improve the Company’s regulatory activities ● Developing local communities ● Enhancing social engagement in areas where the Company operates ● Reducing the environmental footprint ● Meetings with representatives of foreign, national, regional, and municipal state authorities ● Participation in advisory bodies, expert working groups, and public hearings ● Engagement through industry-specific and public associations ● Annual disclosure of information about payments to governments ● Involvement in policy-making processes in accordance with the procedures stipulated by law 100 101 Statement by member of the Board of Directors About the Company Corporate Governance Our Team Environmental Protection Appendix ANNUAL REPORT 2020 SUPPLIERS AND CONTRACTORS Importance for NLMK LOCAL COMMUNITIES Importance for NLMK The timely and accurate delivery of quality goods and services by suppliers and contractors has a direct impact on the quality of our products and the stability of NLMK’s production processes. The long-term stability of NLMK’s business is largely dependent on the social and economic stability of the regions where it operates. NLMK’s contribution to developing local communities has a positive impact on stakeholder loyalty and the Company’s overall reputation. Strong and mutually beneficial relationships with reliable suppliers and contractors are essential if the Group is to sustain its operations and fulfil its obligations. NLMK Group enterprises are some of the largest employers and taxpayers in the regions where they operate. The unit responsible for working with suppliers and contractors is the NLMK Procurement Service. The Group’s priorities are to ensure that goods and services are of high quality, that the right goods are purchased at the right time, and that procurement is as competitive and transparent as possible. The Company has an interest in improving the living standards of local people and involving them in the Group’s social and environmental initiatives. NLMK holds public hearings, conducts surveys of local people to identify their needs, and organizes various volunteer and charity programmes. The effectiveness and coverage of these programmes increases each and every year. The local community development activities are organized by the HR Department together with the Government Relations team. Most of the Company’s tender procedures are conducted electronically using the SAP SRM and SAP Ariba Network systems, ensuring the transparency of procurement activities. The Company seeks to develop mutually beneficial long-term relationships with its business partners, based on the principles of transparency, ethics, and fairness. The fundamental collaboration principles are contained in the Supplier Code of Conduct, which indicates what we expect from our suppliers and highlights our aspiration to attain a high level of fairness, ethical behaviour, and responsibility in all of our business areas. The Code also stipulates compliance with the requirements of occupational safety, anti-corruption, and conflict-of- interest management. ● Stakeholder interests Company involvement in addressing the problems of local communities ● Jobs for local people ● Safe production practices and reducing environmental footprint A conscientious approach to doing business ● ● Forms of engagement Engaging in a dialogue with local representatives to inform them about the Company’s activities in the regions where it operates Publishing corporate reports Publishing information in the media and on the Company’s website Holding thematic conferences and events For more information on the results of local community engagement, see the Developing Local Communities section. ● ● Stakeholder interests Forms of engagement Transparent competitive procurement procedures for goods and services ● ● Fulfilment of contractual obligations ● ● An effective system for processing feedback and complaints ● A risk management and anti-corruption system ● Conducting prequalification of suppliers TRADE UNIONS ● Developing competitive procurement procedures for goods and services ● Developing electronic data interchange with EDI suppliers Importance for NLMK Trade unions are important partners for NLMK in providing workers with social welfare and employment-related guarantees. A key focus of NLMK’s work with trade unions is the conclusion of collective bargaining agreements. These agreements are designed to guarantee the provision of decent working conditions and a bonus and compensation system. NLMK’s effective engagement with trade unions helps to strengthen its employer brand. ● Negotiating with potential partners ● Organizing the work of category managers ● Offering a feedback form and a digital assistant based on the QUBO dialogue platform on the corporate portal for contractors ● Conducting business meetings with suppliers and participating in conferences and industry associations ● ● Stakeholder interests Forms of engagement Compliance with employment legislation and protection of employee interests Organizing online conferences for suppliers to present NLMK Group’s procurement ● Compliance with the sectoral tariff agreement strategy and inform them of their role in the strategy ● ● Compliance with the terms of collective bargaining agreements Carrying out assessments and audits of suppliers and contractors in order to confirm their reliability, status as suppliers, production capacity, and compliance with occupational health and safety, industrial safety, and environmental requirements ● Conducting collective bargaining: in 2020, we continued a series of collective negotiations with the trade union organisations of NLMK Group companies. Steps were taken to harmonize the basic benefits provided under collective bargaining agreements Concluding collective bargaining and other agreements and signing joint resolutions: For more information on the results of supplier and contractor engagement, see the Supply Chain Management section. ● in 2020, the terms of collective agreements were renegotiated for the Stoilensky Mining and Beneficiation Plant and VIZ-Steel. Previously, in 2019, collective bargaining agreement terms were renegotiated for nine NLMK Group sites ● Working jointly on various commissions and committees ● Holding employee conferences 102 103 Statement by member of the Board of Directors About the Company Corporate Governance Our Team Environmental Protection Appendix ANNUAL REPORT 2020 SUPPLY CHAIN RUB 153 billion MANAGEMENT1 total volume of goods and materials procured from third parties by NLMK's Russian companies MAJOR THEME SUPPLIER ENVIRONMENTAL ASSESSMENT KEY EVENTS IN 2020 ● Expanded use of electronic document management with suppliers Part of investment procurement process automated via SAP Ariba Sourcing 33 ● ● ● ● Interactive category reporting implemented audits Claim management automation project introduced Vice President of Procurement recognized as the best Professional in Competitive Procurement at the main professional competition among procurement experts in Russia of suppliers of goods and services conducted over the year UNITED NATIONS GLOBAL COMPACT PRINCIPLES ● Principle 8. Businesses should undertake initiatives to promote greater environmental responsibility Principle 10. Businesses should work against corruption in all its forms, ● including extortion and bribery GLOBAL SUSTAINABLE DEVELOPMENT GOALS 1 Information on procurement practices is presented for the Group’s Russian companies. 104 105 Statement by member of the Board of Directors About the Company Corporate Governance Our Team Environmental Protection Appendix ANNUAL REPORT 2020 The Group’s efficient supply chain is crucial to its sustainable operation and the fulfilment of NLMK’s commitments. The Group regularly partners with more than 3,500 suppliers of goods and materials as well as contractors from which it procures a wide range of goods and services, including equipment, ferroalloys, non-ferrous metals, The main principles governing the Group’s procurement activities are: SUPPLIER MANAGEMENT PROCESS WITHIN NLMK GROUP ● Focus on goals, objectives, and outcomes Integrity and transparency Mutually beneficial cooperation Continuous improvement Qualified and motivated staff Teamwork and commitment to a company-oriented spirit ● ● SUPPLIER RELATIONSHIP MANAGEMENT (SRM) ● ● ● ● Proactive approach Supplier efficiency management Supplier qualification Supplier segmentation Supplier evaluation refractory products, and spare parts, among other things. Preliminary audits and audits of existing suppliers Quality control and identification of risks Distribution of suppliers by group relative to their importance to the business Ensuring continuous improvement of suppliers’ work to meet NLMK’s requirements Supplier performance assessment associated OUR APPROACH TO SUPPLY CHAIN MANAGEMENT with supply of products RISK MANAGEMENT The procurement process at the Group is coordinated by a dedicated team and designed in such a way as to ensure that high-quality goods are procured in a timely and accurate manner and that the procurement process is as transparent and competitive as possible. Systematic monitoring of potential risks associated with the work of suppliers, taking measures to minimize threats and losses In order to ensure a reliable and uninterrupted flow of goods and materials to the Group’s companies, the procurement team has developed over 50 category-based strategies. Procurement strategies for certain categories of goods are developed to take into account potential risks and determine scenarios depending on the level of risk and potential losses, and they also include plans to prevent any risks from arising. result. These contractors are excluded from the list of suppliers and are not allowed to participate in tender procedures in the future. As a result of the evaluation, 28 suppliers were assigned the D status in 2020. The procurement team’s main goal is to meet the expectations and needs of specific groups of NLMK stakeholders, including shareholders, employees, customers, internal customers, and regulatory bodies. The procurement team’s key objectives are to unify and standardize procurement systems and processes, ensuring that they all have the same level of maturity. The bulk of the Group’s procurement is carried out centrally, with local procurement classified in a separate category and supervised by the heads of local procurement departments. The centralized procurement support office in Lipetsk ensures the efficiency of procurement processes. Having a single service centre for processing transactions will reduce costs, improve levels of internal customer satisfaction, and speed up procurement procedures. The Group is particularly focused on digitalizing and automating procurement activities. Most key procurement processes have been automated, and the majority of the Group’s tender procedures are carried out electronically using the SAP SRM (Supplier Relationship Management) system. NLMK’s achievements in automating procurement activities were recognized within the broader professional community. In 2020, NLMK Group Vice President of Procurement was recognized as the best Professional in Competitive Procurement at the main professional competition among procurement experts in Russia. Managing risks associated with The main documents governing procurement activities at the Group are: the late, incomplete, or incorrect supply of goods and services is key to ensuring a reliable supply chain and the continuity of the Group’s operations. In 2020, a project to automate claim management was launched. ● Supplier Code of Conduct Contractor Audit Regulations Corporate-level regulations ● ● describing liaising with contractors: — Contractor Qualification Regulations — Contractors Selection Regulations — Contractor Assessment Regulations — Regulations on Contractors Selection in Cooperation with the Tender Commission, etc. Category strategies The organizational structure of the Group’s procurement team consists of centralized Procurement service managers actively participate in corporate training programmes, which aim to develop competencies in a period of change, that would enable employees to prepare for challenges in a situation of uncertainty and turbulence, to form skills and ambition to be a role model, to learn the tools that support the Company in its strategic development in new economic conditions, and to develop expertise in the field of innovation, strategy, and inspiring leadership. and decentralized components, which helps make the procurement process and cooperation with suppliers as efficient as possible. Interrelated procurement structures, policies, and procedures ensure that the approaches taken across all of the Group’s companies are consistent. Each year, suppliers of goods are evaluated and then divided into A, B, C, and D groups. Group D includes those suppliers that have proven to be unreliable based on the evaluation The Opex Procurement and Capex Procurement teams are represented by category managers, who are responsible for the entire procurement process, from the moment that a procurement request is received from an internal customer to the moment that a supplier is selected. ● 106 107 Statement by member of the Board of Directors About the Company Corporate Governance Our Team Environmental Protection Appendix ANNUAL REPORT 2020 ASSESSING As part of efforts to increase responsibility across the supply chain, NLMK focuses on: Cooperating with suppliers and contractors with a strong commitment tosustainable CONCILIATION COMMITTEE ● PERFORMANCE development strategy Assessing occupational health and safety risks among contractors Ensuring that suppliers of goods used in the production of automotive body sheet Indicator 2019 18 2020 15 ● A system of key performance indicators (KPIs) is used to monitor and control the performance of suppliers and procurement staff, eliminate losses sustained in procurement processes, and achieve savings for the Group. The KPIs, which are approved on an annual basis, include the following: Number of suppliers on which partnership restrictions were imposed ● hold certificates of compliance under ISO 9001:2015, IАTF 16949, and ISO 45001 Assessing contractors that provide waste collection services Reducing waste through reusing and recycling, as well as through the utilization Number of suppliers with which NLMK Group decided to temporarily suspend relations Number of suppliers with which NLMK Group decided to terminate relations 6 7 ● 11 13 ● of recycled and recovered products and materials Conducting systematic audits of suppliers and contractors that provide services to the Group’s Russian companies is another important tool for managing partnerships with contractors. When drawing up annual audit plans, the Group’s specialists take into account critical areas that affect the continuity and safety of production and product quality, including, among others: When auditing suppliers of goods, the Group pays special attention to the counterparty’s compliance with obligatory standards in matters concerning occupational safety and reducing its environmental footprint. Audits of contractors include a more detailed review of issues related to safe working conditions and compliance with environmental regulations. ● Availability Cost-efficiency Cost avoidance Inventory turnover SELECTION AND QUALIFICATION OF SUPPLIERS AND CONTRACTORS ● ● ● An efficient and reliable supply chain is essential to the stable operation of all divisions within the Group. The Group carefully selects and screens suppliers and contractors, and sets high requirements for its counterparties in terms of complying with deadlines, OTIF (on-time in-full) requirements, and quality standards for the goods and materials it supplies. All suppliers and contractors that work at hazardous production facilities at NLMK companies have to be qualified. ● On-time deliveries When auditing contractors that conduct hazardous work or large volumes of work, or companies that are the Group’s main contractors, the Group considers the following aspects in detail: The Procurement team holds regular meetings with internal customers to identify the main supply issues. The Procurement staff also conducts regular satisfaction surveys of major internal customers in order to improve the quality of the procurement process. Survey results are collected and carefully analysed, and measures are then developed to further improve the team’s work. ● Availability of equipment Provision of human resources Provision of technical resources ● ● The contractor’s technical equipment Staff competence levels Quality control measures Maintenance and repairs ● ● In order to work with NLMK Group, it is imperative that suppliers and contractors operate ethically and conscientiously. In this regard, all potential counterparties are invited to familiarize themselves with the Supplier Code of Conduct at the screening stage and to confirm that they agree with its provisions. ● ● Issues related to occupational health and environmental protection, etc. ● ● Compliance with legal requirements Audits of contractors involve checking that the necessary documents are in place and authentic. They also include directly monitoring the work of contractor employees and ensuring that they meet the requirements stipulated on the screening check-list. The contractor’s status is determined and a report is prepared on the basis of the audit results. The report should specify the measures needed to eliminate and prevent the reoccurrence of any of the issues that have been identified. In 2020, the number of audits declined, due to the pandemic. for occupational health and safety and environmental protection, etc. The Group also expects its suppliers and contractors to comply strictly with all applicable legal requirements, including environmental protection and occupational health and safety regulations. The check-list developed by the Group for assessing potential contractors reflects state requirements for occupational safety and environmental protection, and suppliers and contractors operating at the Group’s sites must meet these requirements. SUPPLY CHAIN RESPONSIBILITY As a large consumer of a number of goods and services, the Group is able to have a positive impact on reducing social, environmental, and production risks within the supply chain. NUMBER OF SUPPLIER AND CONTRACTOR AUDITS CONDUCTED EVALUATING AND AUDITING SUPPLIERS AND CONTRACTORS Subject of audit Goods and materials Services 2016 22 1 2017 35 2018 39 2019 34 2020 13 The Group annually assesses the quality, efficiency, and reliability of all current suppliers and contractors. It also monitors compliance with delivery deadlines throughout the year. If the Group has a negative experience with a supplier, the Group’s Conciliation Committee may decide to discontinue its partnership with the supplier or to impose restrictive measures. The procurement team can also work with the supplier to create a development plan aimed at improving the supplier’s performance. 21 17 24 20 The Group seeks to cooperate with suppliers of goods and contractors that demonstrate a commitment to sustainability principles. In addition, in accordance with NLMK Group’s Procurement Policy, the Group is committed to purchasing goods and services that have as few negative impacts on society and the environment as possible during their lifecycle. For more detailed information about supplier and contractor environmental assessments, see the Supplier Environmental Assessment section of the Environmental Protection chapter. Conciliation Committee The Conciliation Committee is NLMK Group’s collegial body that was set up to review situations involving inappropriate, unethical, or unreliable supplier behaviour. Some of the issues that fall within the remit of the committee include violations of the pricing policy, occupational health and safety rules, and environmental protection requirements. 108 109 Statement by member of the Board of Directors About the Company Corporate Governance Our Team Environmental Protection Appendix ANNUAL REPORT 2020 2020 PERFORMANCE PLANS FOR 2021 AND THE MEDIUM TERM The Company continued to actively improve its procurement processes and centralize the procurement of basic materials, raw materials, and services. NLMK Regulations on Category Strategy Development were updated. and equipment were diversified. The procurement team and internal customers’ efforts helped to avoid the negative impact of the pandemic on production performance. The Group intends to continue with its work to further automate procurement processes and to centralize the procurement of global categories of materials and raw materials. More specifically, the Group’s plans include: There were no significant changes in the Group’s supply chain structure during 2020 GRI 102-10 . Due to the COVID-19 pandemic, suppliers of basic raw materials In the reporting year, procurement from local suppliers for the Russian companies accounted for 82%, or RUB 126 billion GRI 204-1 . ● Expanding the practice of signing PROCUREMENT FROM SUPPLIERS OF GOODS AND MATERIALS DATA ON PROCUREMENT VOLUME BY KEY PROCUREMENT CATEGORY IN 2020, RUB M (VAT EXCLUDED) purchase orders in electronic form Automating purchase order drafting Expanding the practice of using supplier catalogues and managing them, which will enable internal customers to choose the necessary items themselves Enhancing the efficiency of interaction with suppliers through the digital assistant functionality Expanding SAP Ariba Sourcing functions to other categories of investment procurement Robotization of standard procurement procedures ● GRI 102-9 ● BY SUPPLIER COUNTRY, Goods and materials category Coal and coal concentrates Provision of repairs and maintenance Raw materials (without the main raw material categories) Refractory products Procurement volume GRI 102-9 % OF TOTAL 45,523 34,413 24,742 15,145 8,352 5,980 5,677 4,016 0.9 0.8 1.9 3.2 11.0 ● ● RUꢀ ꢁꢂꢃꢄꢅ ꢆꢇꢈꢈꢇꢉꢊ Process equipment Provision of technology Coatings ● 82.3 Russia (2,0771) Europe (139) Kazakhstan (8) Ukraine (17) China (11) Other countries (39) Iron ore (concentrate, pellets, and ore) Fuel and lubricants 2,016 Rolls 2,002 1,448 Coke and chemical raw materials, fluxes Information technologies Electrode coke 1,406 1,349 Other 1,356 Total 153,425 1 Number of suppliers. Note: data on purchases of goods and materials from third parties for Russian companies. The amount does not include transporation and handling expenses and customs duties. 110 111 Statement by member of the Board of Directors About the Company Corporate Governance Our Team Environmental Protection Appendix ANNUAL REPORT 2020 HUMAN RIGHTS 0 MAJOR THEMES violations NON-DISCRIMINATION of human rights FREEDOM OF ASSOCIATION AND COLLECTIVE BARGAINING recorded during PROHIBITION OF CHILD LABOUR the reporting year PROHIBITION OF FORCED OR COMPULSORY LABOUR KEY EVENTS IN 2020 NLMK Group presented its human rights management practices at the Respect for Human Rights as a Corporate Responsibility Indicator conference organized by the Russian Union of Industrialists and Entrepreneurs and attended by representatives of the Office of the United Nations High Commissioner for Human Rights (OHCHR), the International Labour Organization, relevant ministries, and Russian and international companies. UNITED NATIONS GLOBAL COMPACT PRINCIPLES ● Principle 1: Businesses should support and respect the protection of internationally proclaimed human rights. Principle 2: Businesses should make sure that they are not complicit ● in human rights abuses. Principle 4: Businesses should uphold the elimination of all forms ● of forced and compulsory labour. Principle 5: Businesses should uphold the effective abolition ● of child labour. GLOBAL SUSTAINABLE DEVELOPMENT GOALS 112 113 Statement by member of the Board of Directors About the Company Corporate Governance Our Team Environmental Protection Appendix ANNUAL REPORT 2020 MANAGING HUMAN RIGHTS ISSUES INTEGRATING FUNDAMENTAL HUMAN RIGHTS PRINCIPLES INTO NLMK GROUP’S ACTIVITIES ● Respecting human rights is a key underlying principle in all of NLMK’s operations. In its activities, the Company does not tolerate human rights violations related to discrimination based on gender, age, religion, race, ethnicity, physical traits, or identity, or any other form of discrimination. NLMK also devotes special attention to ensuring the right to freedom of association and collective bargaining, as well as to issues concerning child labour and forced or compulsory GRI 407-1, GRI 408-1, GRI 409-1 The UN Global Compact Fundamental principles Areas of activity ● ● ● Transforming our World: the 2030 Agenda for Sustainable Development (UN) The ISO 26000 Guidance on Social Responsibility The laws of the Russian Federation and other countries in which NLMK Group companies operate Prohibition of forced labour and child labour NLMK Group only signs employment contracts with individuals that meet the minimum age requirements stipulated by prevailing legislation. The Company does not make use of child labour. The Company also forbids the use of forced labour, penal and military labour, slavery, and human trafficking. All employment at the Company is exclusively voluntary in nature. Along with international norms, our human rights efforts are regulated by internal corporate documents: NLMK Group’s Corporate Ethics Code, Anti-Corruption Policy, and collective bargaining agreements. One important component in the Company’s approach to managing these issues is NLMK Group’s Human Rights Policy. The goal of the policy is to ensure that human rights are observed in the Group’s activities everywhere we operate. Prohibition of discrimination Prohibition of discrimination NLMK Group does not tolerate discrimination based on gender, religion, or any other grounds in its staff management activities, including hiring, and adheres to the same principles when determining wages. For additional information, see the Our Employees section. Respect for the right to a minimum wage Ensuring decent working conditions, including competitive salaries, and providing both employees and retirees with a social benefits package are key priorities for NLMK Group. For additional information, see the Our Employees section. labour . NLMK’s efforts to protect human rights in all the regions where it operates are coordinated by the HR Department, covering 100% of the Company’s assets. If necessary, experts from other functional areas of the Company are invited to participate (in particular, the Occupational Health and Safety team) in order to safeguard its corporate interests and to manage risks. The Company’s senior GRI 412-1 Our corporate ethics dictate that we consistently adhere to the generally accepted principles and norms of international law, as well as applicable employment laws in all countries of the world, regardless of the business practices in those countries. In its activities, NLMK is governed by the provisions of the following documents: Support for freedom of association and collective bargaining NLMK Group fulfils all of the requirements set forth in collective agreements, and regularly engages with trade unions. The Company also ensures that conditions are in place to facilitate the creation of associations to represent the interests of NLMK employees by making corporate communications tools available and by supporting employee volunteering initiatives. For additional information, see the Our Employees, Stakeholder Dialogue, and Corporate Communications sections. management team is always involved in making important decisions . The Company shares its Human Rights Policy with stakeholders, including employees, subcontractors, and business partners GRI 412-2 . Provision of safe working conditions In organizing production, the Company prioritizes the health and safety of its employees above all. The Company’s management team monitors and reduces risks associated with hazardous working conditions, increasing safety levels at the production sites of every NLMK company from year to year. The Company is continuously improving its approaches to environmental policy and energy management, with a view to reducing the negative impacts of production on the environment and on the health of stakeholders. The Company welcomes information from all stakeholders about any activities that violate human rights. Employees, clients, suppliers, subcontractors, and other stakeholders can use any feedback channel, including in languages other than Russian, listed on the official NLMK website. ● The International Bill of Human Rights The main conventions of ● the International Labour Organization (ILO Conventions) The UN Guiding Principles on Business In 2020, NLMK received no communications regarding human rights violations GRI 102-17 For additional information, see the Occupational Health and Safety and Environmental Protection sections. ● . and Human Rights Respect for the rights of indigenous peoples NLMK Group estimates that there are no indigenous populations in the regions where its GRI 411-1 companies operate . NLMK’S HUMAN RIGHTS PRINCIPLES HUMAN RIGHTS REPORTING CHANNELS Respect Provision of safe working conditions Feedback forms on the NLMK website Prohibition of forced labour Prohibition of discrimination Prohibition of child labour for the right to a minimum wage Telephone hotline Anonymous text messages Anonymous email NLMK intranet portal 114 115 Statement by member of the Board of Directors About the Company Corporate Governance Our Team Environmental Protection Appendix ANNUAL REPORT 2020 All messages and complaints are recorded in an aggregated database accessible via the NLMK corporate portal. Each specific instance is examined separately to ensure that decisions are made on a case-by-case basis. The individual that sends a complaint always receives a written response with an explanation, except in the case of anonymous messages. of business with contractors. This implies that suppliers and counterparties must confirm that they adhere to and respect the human rights principles envisaged by the Russian law and international legal instruments at the time of signing a contract. Obligatory compliance is required for the following human rights: PLANS FOR 2021 AND THE MEDIUM TERM ● Support for freedom of association The right to liberty and security of person Respect for the prohibition of child labour and forced labour, and the prohibition ● ● of discrimination Given the international nature of NLMK’s operations and stakeholders’ interest in protecting human rights, the Company will continue to enhance its approach to human rights issues. ● Ensuring the occupational health and safety of workers, as well as safe working conditions Respect for the right to a minimum wage ● During the reporting period NLMK recorded no cases of discrimination related to human rights violations In 2020, NLMK Group shared its human rights management experience at the Russian Union of Industrialists and Entrepreneurs conference dedicated to the 70th anniversary of the Universal Declaration of Human Rights and the 75th Anniversary of the United Nations. Conference participants included representatives from the Office of the United Nations High Commissioner for Human Rights (OHCHR), the International Labour Organization, relevant ministries, and Russian and international companies. The companies invited to present their practices at the conference all have extensive experience in managing human rights issues and initiatives. In future reporting periods we plan to perform a number of activities aimed at implementing the provisions of NLMK’s Human Rights Policy in the operations of all Group companies, including those outside Russia. Another task will be to develop methodological approaches to assessing how well our activities comply with the principles set out in NLMK’s Human Rights Policy. Company representatives will also continue to play an active role in important events dedicated to protecting human rights. GRI 406-1 , including violations of the right to freedom of association and collective bargaining or violations concerning child labour and forced or compulsory GRI 407-1, GRI 408-1, GRI 409-1 labour . NLMK is committed to improving its competency in human rights, drawing on best practices from colleagues in various industries and international organizations to introduce responsible, fair business principles into our corporate culture. NLMK participates in organizations that support and foster human rights principles. For example, the Company is a member of the Committee on Corporate Social Responsibility and Demographic Policies of the Russian Union of Industrialists and Entrepreneurs. In 2019, NLMK Group joined the UN Global Compact, an international United Nations initiative to promote sustainable development and corporate social responsibility. By signing the Compact, NLMK Group reaffirmed its commitment to the 10 fundamental principles of the initiative, including those related to human rights. In 2020, the Company continued its efforts to integrate human rights provisions into the standard terms 116 117 Statement by member of the Board of Directors About the Company Corporate Governance Our Team Environmental Protection Appendix ANNUAL REPORT 2020 OUR EMPLOYEES RUB 1,383 MAJOR THEMES million SAFE WORKING CONDITIONS DEVELOPMENT OF MANAGERIAL SKILLS invested in staﬀ training and development ENGAGEMENT OF EMPLOYEES IN CONTINUOUS IMPROVEMENT DEVELOPMENT OF PROFESSIONAL SKILLS LABOUR PRODUCTIVITY IMPROVEMENT 3.2 KEY EVENTS IN 2020 ● Developing online trainings, introducing new professional training formats Working on an international project to create competency maps and million man-hours ● assessment tools for key steelmaking professions of training ● Internships for students of basic educational institutions The annual HeadHunter1 rating of employers in Russia placed NLMK among ● the Top 5 Russian employers in the Production category UNITED NATIONS GLOBAL COMPACT PRINCIPLES 6 % voluntary ● Principle 3: Businesses should uphold the freedom of association and the effective recognition of the right to collective bargaining. Principle 6: Businesses should uphold the elimination of discrimination staﬀ turnover rate at NLMK Group ● in respect of employment and occupation. Women account for 48 % of management and administrative staﬀ Women account for 25 % of the total number of employees GLOBAL SUSTAINABLE DEVELOPMENT GOALS 1 The largest Russian online recruitment company operating in Russia, Belarus, Kazakhstan, and Ukraine. 118 119 Statement by member of the Board of Directors About the Company Corporate Governance Our Team Environmental Protection Appendix ANNUAL REPORT 2020 qualified employees, building systems to reward and motivate them, and developing their professional skills. NLMK GROUP STAFF1 BREAKDOWN BY SEGMENT IN 2020, THOUSANDS OF PEOPLE OUR APPROACH TO STAFF MANAGEMENT GRI 102-8 1.1 2.1 2.8 In its HR activities, NLMK Group is guided by the following internal and external documents: 7.0 NLMK Russia Flat Products ● NLMK Russia Long Products Mining division Our key personnel management goals are to attract and retain the best professionals in their field and engage them in the process of continuous improvement. To do this, NLMK Group needs to remain as progressive as possible and attentive to safety, talent, and innovation. NLMK has built up a mechanism that allows employees and their representatives to address top management directly. For instance, during the live call-in with the NLMK Group CEO any employee can ask a question to the head of the Company. We also foster a culture of ‘open doors’ and availability of management to address operational issues during strategy sessions or live call-in events for functional areas. In addition, NLMK has an internal corporate portal, where employees can communicate with management of any level. The discussions on the portal are grouped by theme. The Constitution and Labour Code of the Russian Federation International declarations, including the Universal Declaration of Human Rights and the ILO Declaration on Fundamental Principles and Rights at Work ꢀꢁꢂꢃ Service and auxilliary companies NLMK Europe NLMK USA ● 30.6 8.3 NLMK Group’s Corporate Ethics Code Collective bargaining agreements General corporate regulations on staff management NLMK GROUP STAFF1 BREAKDOWN BY REGION ● ● ● GRI 102-8 IN 2020, % In order to achieve these goals, the Group continued to work actively in the following key areas of the HR policy: In order to maintain the high qualification level of employees we are constantly enhancing training at NLMK and ensuring its continuity. For many professions, employees are required to take a range of courses within a certain timeframe, including courses on the rules of access to equipment and operation of networks, communications, or complex units. If an employee does not complete the course in time, they may be not allowed to proceed with their work in line with regulatory requirements and for safety reasons. That is why we have transferred professional course training and training aimed at receiving and prolonging OHS permits into a remote format as a matter of priority. 2.2 0.4 4.1 ● Labour productivity improvement Development of managerial skills Development of employee initiative ● OUR EMPLOYEES ● Russia and engagement in the process of continuous improvement Development of the vocational NLMK Group’s average 2020 headcount was 51,900 people, of whom 48,500 (93.4%) were employed at the Company’s Russian companies, 2,100 (4.0%) at European divisions, 0,200 (0.4%) at international auxiliary companies, and 1,100 (2.2%) in the United States EU USA 93.2 ● India, Turkey, Switzerland training system Creating a system for independent ● employee qualification assessment Developing practices of mentorship and NLMK opens a multidisciplinary qualiﬁcation assessment centre in Lipetsk NLMK GROUP STAFF2 BREAKDOWN BY CONTRACT TYPE ● GRI 102-7 GRI 102-8 knowledge sharing on production sites Working with young specialists and high-potential employees Further integration of international companies into the Group's HR processes Digitalization and implementation of best practices in HR processes Increasing the share of employees transferred to open positions within the Group Developing internship programmes and increasing intern hiring rates Increasing employer brand NLMK Lipetsk, the flagship site of NLMK Group, has opened the first multidisciplinary qualification assessment centre for the manufacturing industry in Russia. The centre will independently assess whether the skills and abilities of NLMK Group employees conform to the requirements of uniform professional standards. . IN 2020, % ● Approximately 97% of NLMK Group employees work under permanent contracts, and around 3% under fixed-term contracts. 3 ● ● Irina Efimchuk, NLMK Group Training and Development Director, said: “In line with the changes in federal legislation, all Russian sites are obliged to gradually shift to an independent assessment of their employees’ ualifications. NLMK Group actively participates in the activities of industry councils on professional qualifications, updating professional standards, and developing the methodological foundations of independent qualification assessments. By opening this centre we are facilitating the formation of a base for the state policy of qualification development in the regions where the Company operates.” The nature of the steel industry is such that the proportion of men in NLMK Group (75%) outweighs the proportion of women (25%) – this has always been the case historically. As for administration and management staff, women account for 48% of all specialists, including 50% of specialists and office employees, 22% of office managers and 4% of shop-floor (revenue-generative) managers (the total share of female managers is 15%). ● 97 Permanent contract Fixed-term contract ● NLMK GROUP2 STAFF BREAKDOWN BY GENDER AND ● GRI 102-8, GRI 405-1 attractiveness CATEGORY IN 2020, % One of the main focus areas of the HR strategy is increasing labour productivity. We achieve this goal by optimizing business processes, ensuring the automation and mechanization of labour, and developing processes that utilize the expertise of contractors and suppliers. Shop-floor (revenue-generative) managers Office managers 96 4 22 Another notable area of activity is NLMK’s collaboration with basic educational institutions, with internship programmes organized for students. Internships are an integral part of their studies. They enable students to develop practical skills in an actual production environment, gain experience with operating equipment and production processes, and learn to work in a team. Approximately 2,000 students from various educational institutions intern at NLMK Lipetsk every year. 2020 was an exceptional year due to the pandemic: in-person internships were suspended in March, and students were no longer allowed on site. Certain elements of the internships were taken online. In addition, we help our basic educational institutions in the development of the educational and material base, improve the qualifications of the teaching staff. We also support the process of involving experts from NLMK departments in training students. 78 78 Specialists and office employees Shop-floor employees Tꢀꢁꢂꢃ NLꢄꢅ ꢆꢇꢀꢈꢉ 50 50 22 The average work experience of men and women at NLMK companies is at a comparable level. 75 25 Men Women Administrative and management staff A positive driver is the NLMK Production System project, which focuses on increasing the Group's efficiency through continuous improvement, loss reduction, occupational safety, respect for each employee, and NLMK employees represent various age groups, which attests to the lack of age discrimination in NLMK Group’s HR policy. In 2020, 23% of all employees were aged over 50, 61% were aged between 30 and 50, and 16% were under 30. Of those in management positions (shop-floor managers and We are committed to applying a unified approach to managing human resources issues, including at our international companies. NLMK Group’s Human Resources Department is responsible for all staff-related issues, including hiring and retaining 1 the development of a regular dialogue between management and employees. Average headcount. Headcount as of 31.12.2020. 2 120 121 Statement by member of the Board of Directors About the Company Corporate Governance Our Team Environmental Protection Appendix ANNUAL REPORT 2020 office managers), 75% were aged between 30 and 50, and 21% were aged over 50. AVERAGE WORK EXPERIENCE STRATEGIC PLANNING Training programmes developed specifically for this purpose facilitate the successful adaptation of employees with low social status and no formal education or qualification. OF NLMK GROUP EMPLOYEES1 IN 2020: BREAKDOWN BY GENDER, YEARS FOR LABOUR RESOURCES In strategic planning for labour resources, our key objectives are to determine the qualitative and quantitative employee composition to ensure site productivity and to formulate a request for in-demand specialists on the 3–5 year horizon for student admissions to specialized educational institutions. NLMK is committed to supporting Amid the COVID-19 pandemic, NLMK Group focused on digitalizing recruitment processes: Men 11 gender diversity within its governance bodies in a way that takes into account the specific nature of the Company’s activities. In 2020, NLMK Group’s Board of Directors and Management Board were made up of both men and women. ● Video interview technologies based on the Sever.AI platform were introduced Women 12 to assess candidates and interns. A SAP SF solution for worker selection was further rolled out. The Group’s careers page, NLMK.team, runs on the SAP RMK module, enabling ● ● NLMK GROUP1 STAFF BREAKDOWN BY GENDER AND CATEGORY prompt publication of 100% of vacancies for external users. GRI 102-8, GRI 405-1 IN 2020, % Resource planning work in 2020 was carried out jointly with the Lipetsk region community of employers – the RUIE1 HR Club. The project ‘HR Club of Lipetsk Region employers as a tool for managing the regional qualifications market’ received special recognition for its contribution to the region’s development in the HR project of the year category of the Crystal Pyramid 2020 prize. Every year A project to provide the service of filling in a questionnaire to become a candidate for employment at NLMK Lipetsk was implemented jointly with the Authorized Multifunctional Centre for the Provision of State and Municipal Services. The questionnaires are directly uploaded into the recruitment database so that relevant candidates can be considered. LABOUR PRODUCTIVITY Shop-floor (revenue-generative) managers Office managers 4 5 76 75 20 20 21 NLMK pays special attention to increasing labour productivity. This strategic goal encourages the implementation of effective technological and management processes within the Group, as well as the use of advanced technical solutions. Specialists and office employees Shop-floor employees 16 18 16 63 In 2020, 3,755 people (7% of the average headcount) joined the NLMK team, 25% of them GRI 401-1 women. 94% were hired by the Group’s Russian companies . 59 61 23 23 Tꢀꢁꢂꢃ NLꢄꢅ ꢆꢇꢀꢈꢉ In 2020 labour productivity across NLMK Group stood at 305 tonnes of steel per person, growing year-on-year as major investment projects were implemented to upgrade the sites’ main equipment. The changes vs. previous years are due to preliminary hiring and personnel training in anticipation of higher output in 2021 (+2 million tonnes at the Lipetsk site vs. 2020). NLMK GROUP NEW HIRES BY REGION IN 2020, PEOPLE NLMK GROUP NEW HIRES BY AGE GROUP IN 2020, PEOPLE Under 30 30–50 years Over 50 Administrative and management staff this competition identifies the leaders in human capital management. 50 123 40 222 STAFF RECRUITMENT GENDER COMPOSITION OF NLMK GROUP GOVERNANCE BODIES The Company understands 1,556 GRI 405-1 AS OF 31.12.2020, PEOPLE the importance of attracting and retaining experienced and highly qualified staff in its efforts Management Board Board of Directors 8 8 1 1 to achieve a strong performance. 3,542 1,977 TURNOVER When assessing applicants, the Company does not tolerate discrimination based on gender, age, or any other factors. NLMK always complies with applicable legal requirements, particularly with respect to the employment of women in hazardous roles. For example, Russian legislation2 places restrictions on the use of female labour in hazardous conditions and in situations involving the movement of heavy weights. The Company adheres strictly to these requirements. Russia USA EU India, Turkey, Switzerland Under 30 30–50 years Over 50 Men Women In 2020, voluntary staff turnover decreased year-on-year to 6.0%. EMPLOYEE VOLUNTARY TURNOVER3 AT NLMK GROUP GRI 401-1 LABOUR PRODUCTIVITY, TONNES OF STEEL/PERSON The Company created more than 600 jobs in 2020, the majority of which were linked to the launch of investment projects. 4992 461 4972 448 502 503 482 7.0 6.9 6.8 NLMK is committed to boosting employment in the regions where it operates, thus we prioritize local applicants during the recruitment process. 3252 305 328 321 3222 297 308 6.0 NLMK implements targeted employment projects for people with disabilities. In 2020 the share of people with disabilities employed by the Company was 0.1% (29 people) of the total headcount. Due to the specific nature of roles in the steel industry, which involve working in hazardous conditions, recruitment specialists pay particular care and attention to the employment of people with disabilities. The Company complies with all respective legal requirements in this area. In its efforts to provide social support to the communities of the regions where it operates, NLMK pays attention to employing representatives of low- income and socially vulnerable groups. NLMK Group Lipetsk site 2017 2018 2019 2020 2016 2017 2018 2019 2020 1 Headcount as of 31.12.2020. Labour productivity without reduction of output at the Lipetsk site associated with large-scale BF and BOF repairs. Voluntary staff turnover occurs when employees leave their positions voluntarily, including retirement. Involuntary staff turnover occurs when employees leave their positions due to termination or death. In 2020, involuntary turnover stood at 4.4%, with overall turnover at 10.3%. 2 3 1 Russian Union of Industrialists and Entrepreneurs. 2 Labour Code of the Russian Federation dd. 30 December 2001 No. 197-FZ (11 October 2018 edition), Art. 253: Labour restrictions for female employees. 122 123 Statement by member of the Board of Directors About the Company Corporate Governance Our Team Environmental Protection Appendix ANNUAL REPORT 2020 CAREER GUIDANCE ASSESSMENT AND REMUNERATION NLMK is launching and implementing new projects aimed at actively engaging young people into the Company’s NLMK Group employees receive competitive remuneration. companies, remuneration is determined based on collective bargaining agreements and employment legislation, and also includes annual income indexation. operations. We introduce schoolchildren and their parents to world of professions (Kids Inc.), offer a mobile application where users can build up their future carer track in the Company (NLMK Navigator), and inform schoolchildren and students about the influence of the Lipetsk plant on the city’s We annually collect and analyse data on industry peers and in the regions where the Group operates as well as the purchasing power of remuneration by personnel categories and individual professions to assess the competitiveness of our remuneration. AVERAGE EMPLOYEE SALARY AT NLMK GROUP’S RUSSIAN COMPANIES, RUB '000 GRI 202-1 70.9 10% 64.5 6% 60.8 7% 56.6 9% 52.0 environmental situation (Green City). Financial remuneration for employees consists of a basic salary and a bonus. The NLMK remuneration system has been developed in accordance with best Russian and international practices. The Company also takes the views of trade union organizations into account when drafting local remuneration regulations. PERSONNEL TRAINING IN SPECIALIZED EDUCATIONAL 2016 2017 2018 2019 2020 INSTITUTIONS In order to increase the share of highly qualified specialists on the labour market, NLMK collaborates with over 30 specialized educational institutions (vocational schools and universities) in the regions where it operates. Our future employees receive in-depth training in competencies that are relevant for NLMK, do internships and traineeships at NLMK Group sites, implement actual work tasks, and participate in the Company’s projects. In addition to their degrees and specializations, graduates are trained for up to three professions, enabling their swift The Company does not tolerate any form of discrimination on grounds of gender or other factors when implementing or further developing its remuneration system. In the reporting year, in order to further expand the disclosure of the remuneration structure, NLMK Group provides data on the average monthly salary of entry-level employees by gender and category. The methodology for calculating this indicator implies taking into account the actual payroll by initial grades in each of the categories of workers. Remuneration management in the Group is based on employee performance evaluation. For many years, NLMK Group was using a ‘flat’ approach to annual indexation: all employees’ salaries were increased by the same percentage. The current approach introduced in 2019 enables the Company to further encourage the best of the best, while maintaining a competitive level of salary indexation for all employees. This way a more dynamic increase in the salaries of high-performing employees will help strengthen the principles of external competitiveness and the internal equity of remuneration across the Group’s companies, while unlocking the potential and stimulating the professional activity of each employee. In 2020 this system covered 96% of NLMK Group’s Russian company employees. PLANS FOR 2021 AND THE MEDIUM TERM NLMK’s personnel training and development programmes represent a full cycle of continuous professional and personal improvement: from vocational social projects to niche educational solutions for specific production purposes. AVERAGE MONTHLY SALARY OF ENTRY-LEVEL EMPLOYEES BY GENDER AND CATEGORY AT RUSSIAN NLMK GROUP COMPANIES IN 2020, RUB ‘000 The Company plans to further roll out its best practices of career guidance using modern digital technologies, with production experts personally participating in teaching schoolchildren and students of specialized educational institutions. GRI 202-1 Women Men 73,402 73,266 46,901 50,648 42,617 48,884 professional and career growth at NLMK. In order to address the need for engineering talent and specialists with higher education, in 2021 we will launch a new internship programme for university students and graduates, the Steel Opportunities Academy. Candidates from over 600 leading specialized universities in Russia will be considered for internship positions, and the selected applicants will be gradually immersed in NLMK’s corporate culture and production system. ACKNOWLEDGEMENT AND RECOGNITION PROGRAMMES Management Engineers and technicians Blue collars In 2020, three NLMK Group sites – NLMK Lipetsk, Altai-Koks, and the Mining Division – simultaneously held the Foreman of the Year corporate competition. Over 160 employees competed in the event. The objective was to form a progressive team of middle managers and boost In 2021 the Company will continue to implement a number of projects aimed at personnel development and increasing labour productivity. We will prioritize supporting talents, developing a mentorship system, and building individual career routes under NLMK’s updated unified employer brand. The Company also continues to develop an end-to-end management system that aims to achieve the Group’s goals (Management by Objectives (MBO)). More than 9,500 employees receive their annual bonus based on their achievement of key performance indicators (KPIs). All employee KPIs are linked in a single cascade of the Group’s strategic goals down to functional area goals. The average salary of NLMK Group employees at Russian companies in 2020 was RUB 70,900, a 10% increase versus 2019. The increase was significantly ahead of the inflation rate due to additional measures to support employees during the COVID-19 pandemic. At our international The Company intends to further develop acknowledgement and recognition programmes for young specialists, foremen, and mentors. We will also expand the system of financial and non-financial incentives for production personnel involved in occupational safety programmes and production system improvements. Bonuses for employees not covered by the MBO system are also determined monthly based on the performance indicators of their unit or position. motivation to develop managerial and professional competencies. In 2020, 47,497 employees of NLMK Group, or 91% of all staff, underwent an official performance assessment GRI 404-3 . 124 125 Statement by member of the Board of Directors About the Company Corporate Governance Our Team Environmental Protection Appendix ANNUAL REPORT 2020 FEATURES OF PROPORTION OF NLMK GROUP EMPLOYEES WHO RECEIVED A REGULAR PERFORMANCE AND CAREER DEVELOPMENT REVIEW, BY CATEGORY AND GENDER AS OF 31.12.2020, TRAINING AND DEVELOPMENT THE МВО SYSTEM ● GRI 404-3 Objectives are discussed and agreed PERSONS between the manager and their employees Constructive two-way feedback throughout the year and at the end of the year Employee development plan that allows them to improve their managerial and professional skills year by year Employee proficiency and qualifications are an important factor in ensuring sustainable development at NLMK. A key objective for the Company vis-à-vis staff development and training is to ensure that employees receive the necessary level of training in vocational knowledge and skills so that they can perform at a high level. The Company also makes active use of the Leaders Train Leaders approach (see the NLMK Corporate University section for more information). ꢀꢁ ꢂꢃꢄꢅꢆꢇꢈꢁ ● Of total white collars1 Of total blue collars ꢀꢁ ꢆꢅꢉꢊꢅꢈ 86% 93% 14,01256 38,342 63 ● Of total men 90% 91% 39,028 13,340 Of total women An active dialogue between managers and their teams allows each employee to better understand their goals and achieve better results. According to the MBO system, annual performance is assessed using a scale of ambition: when a KPI is exceeded, the bonus also increases. The maximum possible bonus for a KPI can reach 150%. Each employee who has expressed a desire or accepted an offer for relocation receives an appropriate relocation package and the opportunity to move his/her whole family to a new and interesting place of work. NLMK invests considerable resources in the training and development of its employees. Investment allocated to staff training and development measures in 2020 amounted to RUB 1,383 million, including 1,112 million alocated to 360/180 APPRAISAL By 2022, NLMK Group plans to extend the MBO system to cover 100% of employees at all levels, including blue collars. Since 2018, the Company has been using the 360/180 personnel appraisal system. It involves surveying employees using the 360-degree method on SAP Success Factors. The responses are strictly anonymous and are presented as average data. The appraisal results are strictly confidential. construction of Corporate University campus in Lipetsk, RUB 249 million to training measures and RUB 22 million to in-house coaches payroll. Incentive systems for individual groups of employees are also being developed: incentives for participating in project activities, incentives for initiatives, etc. All of them are coherently linked to the main remuneration systems, complement each other, and expand the opportunities for salary growth. The criteria used in the 360-degree surveys mainly stem from NLMK’s model of corporate and managerial competencies, as well as the Leader Standard Work practice. Subject to approval by their direct superior, any employee may request this competency model survey and include respondents at their own discretion: their manager, colleagues, subordinates, clients, and partners. Before the survey, employees undergo specialized training. The appraisal results are used to determine development goals and may not serve as grounds for HR decisions (termination, bonus reduction, etc.). In 2020, the NLMK employees received a total of 3,173,228 man-hours of training (including OHS training), with 169,542 of them delivered The overall time of OHS training in 2020 was 661,379 hours (594,877 hours GRI 404-1 . of centralized training and 66,502 hours in the Corporate University) to NLMK Group’s Russian companies via the Corporate University. Divided by NLMK Group’s average headcount, this implies 61.1 hours of training per person (65.1 hours divided by the average headcount of the Russian companies). NLMK Lipetsk employees also provide trainings on the Company's professional competencies to students of basic educational institutions. These trainings promote the development of the mentors themselves as well as potential employees for NLMK Group. Therefore, in the reporting year, an additional 706,658 man-hours were included in the total amount. The staff training and development process features a number of stages, which include not only educational programmes for the Company employees, but also work with potential future employees, such as students from secondary and higher educational institutions. NLMK has a policy of personnel relocation. The Company is interested in allowing employees to move freely to new jobs in any regions where we operate, thereby enhancing opportunities for career and professional growth. In 2020, 360-degree surveys were carried out for over 800 employees. INVESTMENT IN NLMK GROUP’S COMPANIES, INCLUDING FOREIGN ASSETS, BY TYPE OF TRAINING PROGRAMME GRI 404-2 Starting with 2021, we plan to regularly implement 360/180 appraisals based on the competency model for all managers, specialists, and office employees. In addition, employees with an individual development plan will have access to an annual survey on the competencies they are developing. IN 2020 2% 18% RUꢀ ꢁꢂꢃꢄꢃ ꢅꢆꢇꢇꢆꢈꢉ Corporate University campus construction Training measures, incl. foreign assets 80% In-house coaches payroll 1 White collars are managers, specialists, and office employees 126 127 Statement by member of the Board of Directors About the Company Corporate Governance Our Team Environmental Protection Appendix ANNUAL REPORT 2020 COOPERATION STAFF TRAINING AND DEVELOPMENT AT NLMK NLMK CORPORATE UNIVERSITY GRI 404-2 The Leaders Train Leaders approach WITH EDUCATIONAL INSTITUTIONS Senior and middle managers and key experts at the Group assist in the development of the Corporate University programmes, and they also deliver training as in-house coaches for at least four days every year. Company vice presidents act as trainers at programmes for foremen and line managers in various functional areas. The Leaders Train Leaders approach is the foundation of training in the Corporate University, enabling: As part of its cooperation with NLMK Corporate University (CU) was established in 2016 in order to introduce a unified management training system throughout the Group. schools and supplementary education centres, the Company implements a broad spectrum of informational and educational initiatives. These include organizing tours of production sites and encouraging students to study technical disciplines via corporate career guidance projects (steelmaking camps, School of Professional Skills, NLMK Class, the Steelmaking for the Curious community, the NLMK Career Guidance group on the VKontakte social network, thematic meetings dedicated to the Company, training school students for blue-collar jobs). 5. Mentoring, corporate programmes for the development of high-potential employees and the talent pool ● An engaging environment and unity of meanings via sharing personal experiences An exchange of views, which ensures an effective two-way feedback channel ● The mission of the Corporate University is to make the Company more competitive by helping to develop the leadership skills of managers and talent pool candidates, and to develop the Company’s ecosystem (representatives of client, partner, and contractor companies). during training ● Managers’ development with the help of in-house coaches via repeated internalization of programme contents 4. Upskilling, corporate competitions and programmes to identify high-potential employees and the best professionals All in-house coaches undergo special training and receive support from professional trainers in order to ensure that educational programmes are taught according to high quality standards. Over 300 employees act as the Company’s in-house coaches. Objectives: The Leaders Train Leaders approach is developed by scaling up a single methodology of in-house coach training and development both within the Company and in its ecosystem (partner companies). ● Development of NLMK managers NLMK works closely with vocational training and higher education institutions, proposing changes to course content to reflect NLMK practices, organizing various types of work experience at the Group’s sites, operating scholarship programmes for students, and conducting additional and dual education programmes. at all levels, enhancing the management system by instilling unified working standards, uncovering managers’ leadership potential, developing managerial competencies 3. Orientation 3. Vocational training and orientation Educational solutions (programmes) and internships All Corporate University educational solutions represent a synthesis of the knowledge and best practices of NLMK Group’s experts and cutting-edge international developments. ● Identifying and rolling out NLMK’s RECRUITMENT best practices, including via leaders’ participation in training course development At present the Corporate University portfolio includes 150 educational solutions that are differentiated into the following streams: ● ● Supporting organizational changes Value strategy and management Production system ● The Company also organizes NLMK ReSolve, a corporate case championship for students of higher educational institutions and vocational schools aged 16 to 30. In 2019/2020: 2. Work with students from secondary and higher educational institutions and strategic projects by creating an integrated information environment and focusing on cooperation and teamwork Developing NLMK Group’s leadership capital, creating an environment of engaging leadership ● ● ● ● ● ● People and teams Innovation and change Level-specific programmes Onboarding (as the Company CEO) Development of in-house coaches Training solutions for the NLMK ecosystem ● LABOUR MARKET ● Over 100 student participated in the championship 23 technological development ● 1. Career guidance for schoolchildren projects were proposed when resolving the cases 35 NLMK experts acted as team The target audience for the NLMK Corporate University consists of more than 6,300 Company executives and talent pool candidates for senior positions. Level-specific programmes are a new stream that was added to the Corporate University portfolio of educational solutions in 2020. A level-specific programme is a product that develops knowledge and skills and forms certain attitudes of the target audience at one management level (usually the talent pool) in order to achieve business goals in the most efficient way. In 2020, the Corporate University ran three level-specific programmes. ● mentors and experts evaluating the case solutions 20 best students were invited to do ● VOCATIONAL TRAINING GRI 404-2 an internship/receive a promotion 3 finalists joined the Russian national NLMK Corporate University allows managers of any level to take at least four training courses every year. The recommended percentage of managerial training for one employee is approximately 5% of their working hours annually. ● One of them is DREAM 100 executive development leadership (for the top management’s talent pool), a joint development with INSEAD Business School. The first stream of DREAM 100, which gathered 49 participants, took place in February–November 2020. team at Metal Cup, the international steelmaking case championship Vocational training and onboarding programmes for NLMK employees, including specialized ones, play a significant role in the training process given the nature of the Company’s operations. These programmes include training that qualifies employees to access production sites and work with equipment as well as specialist vocational training. Training takes place at NLMK sites or in collaboration with certified third-party training institutions. For example, NLMK Lipetsk has an educational centre that holds state-licensed training sessions in over 300 occupations. Effective cooperation with schools as well as secondary and higher education institutions not only allows NLMK to attract young professionals who are already familiar with the working life at NLMK, but also to ensure that the Company is perceived as an attractive employer in the regions where it operates. The programme is aimed at training top managers with developed management competencies who are able to implement the Company's ambitious strategy in a changing environment. On average, employees receive 20.7 hours of training. NLMK devotes considerable attention to other areas of training that are valuable for business. During the reporting period the Company proceeded with its corporate programme of English language training. In-house mentors participate in creating specialized glossaries for the programmes so that the participants can learn industry-specific vocabulary and terms. During the training, DREAM 100 participants work in project teams and solve specific business tasks in various areas: sales and customer service, cyber capital, sustainability, ecosystem approach, etc. Corporate University training solutions are also used at the Group’s international companies. 128 129 Statement by member of the Board of Directors About the Company Corporate Governance Our Team Environmental Protection Appendix ANNUAL REPORT 2020 The development programme NUMBER OF TRAINING NUMBER OF EDUCATIONAL SOLUTIONS, UNITS free up the space of the stalls. Multi- level sector seats for the audience, in the form of an amphitheater, can be organized on the stage. Glassroom, a physical space in the form of a classroom with a video wall, on which the audience screens are broadcast, will be installed on the stage. management vacancies. It also aims to further the career aspirations of NLMK employees and ensure the continuity of knowledge and technology. for the talent pool of mid-level managers has been in place at NLMK since 2018, while in the framework of the Corporate University it is being implemented since 2020. The third stream took place in September– December 2020. HOURS BY YEAR FOR ALL CORPORATE UNIVERSITY EDUCATIONAL SOLUTIONS (NLMK GROUP RUSSIAN COMPANIES)1 In 2020, the Talent Pool process was automated. The Company continues to hold regular career committees for the positions of foremen and heads of sections. The talent pool management indicators are automated and available for analysis to the Company's managers. 169,542 145,828 45 The stewardship over the talent pool is assigned to the heads of structural subdivisions. Managers are being trained in managerial skills evaluation for this purpose. In 2020, 83% of positions covered by the programme were filled from the talent pool. The programme is aimed at preparing managers for their transition to the next management level with the expansion of their area of The exhibition space will be organized on the first floor of the atrium. On the third and fourth floors, there will be two zones for design thinking sessions. On the fourth floor, under the glass dome, special rooms where people can unleash their creativity will be set up. 28 71,828 9,460 responsibility and the scale of tasks. 3 2 CAREER PLANNING 2017 2018 2019 2020 2017 2018 2019 2020 School of Foremen (for newly appointed foremen and the blue-collar talent pool for foreman positions) was developed in 2020. The pilot project was tested in July–November 2020. Cascade training started in September 2020 and will be carried out until 2022. In 2020, the Company continued to develop its standard career routes system. NUMBER OF CORPORATE UNIVERSITY DISTANCE LEARNING COURSES, UNITS NUMBER OF SESSIONS AND CONFERENCES HELD, UNITS The area around the campus will also be landscaped, and NLMK will build a children's playground, as the Mayor's office requested. A beautiful fountain with a century-old history, well-known in Lipetsk, is already functioning. The initiative aims to encourage employees to proactively develop the necessary competencies as they advance in their career within the Company, to provide guidance on possible growth directions, to support them in gaining interdisciplinary experience, and to increase the attractiveness of geographical mobility between the Group companies. 143 35 28 25 The programme is aimed at developing managerial competencies among foremen/talent pool members to improve their efficiency in solving work tasks, develop their people and process management skills, and teach them to interact within their team and related departments. Career planning offers access to career opportunities not only to the talent pool members, but also to a wider range of employees interested in developing competencies, gaining new experience and knowledge. This process enabled planning career routes to adjacent fields and functions, to the positions of specialists and experts: an expert career gets a new impetus, which is important for preserving the Company's production culture. Investments in the project will total close to RUB 4 billion. 36 27 Participation in the work of international communities 12 2017 2018 2019 2020 2018 2019 2020 Since 2019, the Corporate University has been a member of several international communities, including the European Foundation for Management Development (EFMD), the Executive Corporate Learning Forum (ECLF), and the Education and Training Committee (ETCO) of steeluniversity and worldsteel. In 2020, a pilot project in the Logistics function was successfully implemented. Close to 220 managers, specialists, and blue-collar workers selected and discussed with their immediate superiors possible options for developing their careers, including changing their specialization, functionality, and geography. NLMK Corporate University campus In Q3 2021, the NLMK Corporate University campus, a modern multifunctional cultural and business centre, unique for the region, is scheduled to open. It is worth noting that the building preserved its original appearance. In 2017, construction of the NLMK Corporate University building began at the site of the former Metallurgists’ Palace of Culture in Lipetsk. The campus will house a conference hall that can seat 492 attendees, with gradually rising seating to ensure audience sightlines. The transformed hall system is used: within 10–15 minutes, the telescopic folding grandstand allows you to completely EMPLOYEE SUPPORT GRI 404-2 NLMK provides opportunities for career advancement within the Group and offers free re-skilling programmes. Should an employee wish to switch specialization, we are ready to provide full support in acquiring new skills. The Company offers employees the opportunity to proactively apply for company-reimbursed training in order to gain new qualifications and progress in their careers at NLMK. PREPARING A TALENT POOL Ongoing work to develop the Company’s talent pool aims to identify, train, and promote members of the pool. The fundamental goal of these efforts is to foster in-house talent to fill Former NLMK employees that are highly skilled and who possess unique experience have the opportunity to act as expert consultants, passing on their knowledge and experience to new Company employees on the basis of a paid services agreement. 1 The stats do not include sessions and conferences 130 131 Statement by member of the Board of Directors About the Company Corporate Governance Our Team Environmental Protection Appendix ANNUAL REPORT 2020 Collective bargaining agreements govern the following social support measures: Medical services for employees SOCIAL SPENDING FOR NLMK GROUP EMPLOYEES (INCLUDING INTERNATIONAL COMPANIES) IN 2020 BY AREA SOCIAL POLICY ● GRI 201-1 and their children, including as part of the voluntary medical insurance system Provision of hot meals on-site One-off financial aid for employees NLMK Group’s internal social policy is a key tool for supporting a high level of employee engagement and also helps create additional labour market advantages. Since 2017, social policy issues have fallen within the remit of the Human Resources functional area, which helps to develop social projects more effectively and maintain a sharper focus on employee needs. Company’s internal social policy aims to support NLMK’s HR strategy and sustainable development goals. 2% 6% 7% Medicine and wellness Material assistance and payments to employees ● 36% 7% ● not involved in production Co-financing for private pension programmes Meals RUꢀ ꢁꢂꢃꢄ ꢅꢆꢇꢇꢆꢈꢉ and their family members as well as a system of compensation payments Organizing mass cultural and sporting ● Transport to workplace Sport and cultural activities events and creative competitions Provision of transport to and from 42% ● the workplace Private pension programme ● GRI 403-6 . The voluntary health (at some NLMK Group companies) Comprehensive support programme amid the spread of the coronavirus pandemic ● insurance programme was extended to provide free medicines for the treatment of COVID-19 and pneumonia, telemedicine, psychological support services, and for retired employees In 2020, NLMK Group continued to implement its Social Strategy through 2022, approved by the Management Board in 2019. The Social Strategy is a set of programmes that promote the long-term sustainability of business taking into account the interests additional examinations after COVID-19. Vaccination against flu and pneumococcal infection was also organized with a target coverage of 75% of the staff (see the COVID-19 response section for more details). Along with this, NLMK provides additional benefits for employees that aim to support their health, improve working conditions, and care for their family members, and also organizes various corporate events. NLMK GROUP’S EMPLOYEE HEALTH PROGRAMME of both the Company and its employees. The Strategy’s key objectives include: The Company also has PRIMEZONE. NLMK, a corporate loyalty programme developed for employees at major Russian companies. As part of the programme, employees have access to discounts and special offers from retailers in the cities where the Group has companies: Lipetsk, Stary Oskol, and Moscow. ● Achieving a high and well-balanced ● Healthy eating WORKING CONDITIONS level of staff satisfaction and ● Improving social conditions at work involvement Reducing losses (time, health, personal efficiency) Higher competitiveness/attractiveness of jobs/employer ● Optimizing work-life balance ● NLMK Group’s total social investments in 2020, including NLMK Group’s international assets, stood at RUB 8.4 billion, of which RUB 7.4 billion was allocated to social support programmes for NLMK Group employees. In 2019, the Company switched to disclosing social investments for the entire Group, including its international companies. ● ● Health training sessions Promotion of healthy lifestyle in corporate media services Getting employees involved in sport and healthy living (gamification) The Social Strategy sets out KPIs, the structure of social programmes, and key aspects of such key programmes as Medical Services, Catering, My Family, Sports, and Communities. ● GRI 201-1 NLMK GROUP’S SOCIAL SPENDING, RUB BN NLMK Group employees can participate in private pension programmes at companies with additional contributions made by the Company, thus securing additional pension payments once they become eligible to receive their GRI 404-2 LIFESTYLE MEDICINE ● 2020 2019 2018 2017 2016 2015 4.79 1.03 2.87 0.01 2.61 0.00 8.43 2.26 0.56 2.44 5.70 2.73 2.68 3.00 3.30 ● ● ● Improving the effectiveness of occupational medicine Improving the voluntary medical insurance system Developing preventative and wellness programmes 0.29 0.39 pension . SOCIAL SUPPORT 2.29 NLMK Group’s Employee Health 2.15 0.85 2.11 1.19 NLMK Group has developed social support measures for its employees that aim to boost their motivation and satisfaction levels. We are committed to constantly improving the content of these measures as well as the conditions under which they are provided. Programme was also further enhanced in 2020 with a special focus on activities that would ensure employee safety Social support expenses for the Group's Russian employees Investment in local community development in Russia1 Social support expenses for the Group's international employees Investment in foregn local community development1 1 1 For more information about investment in the development of local communities, please see the Development of Local Communities section. Including RUB 4.8 bn expenses at Russian assets. 132 133 Statement by member of the Board of Directors About the Company Corporate Governance Our Team Environmental Protection Appendix ANNUAL REPORT 2020 NLMK Group’s Employee Health Programme was highlighted by a number of key projects in 2020. consumed less than the normal amount of fruit before completing the programme, while after the programme their share reduced to less than 5%. A total of 40% of the smoking participants quit smoking: 13% of the participants smoked before the programme, and only 7% after the programme. The average number of steps per day taken by participants increased by 25% during the project. In 2019, a multi-disciplinary medical holding company that specializes in emergency medicine evaluation and optimization conducted a medical risk assessment for the Group and optimized the response sequences for the medical personnel. In 2020, based on the results of the assessment, the Company approved its Regulations on Emergency Medical Care and Medical Evacuation, trained paramedics in line with modern standards of emergency medical care at the hospital stage, prepared a manual on first aid, developed medical NLMK Eats! ● ● ● 1. Accident and critical illness insurance GRI 403-6, GRI 403-10 As much as 6% of participants improved their body mass index scores. As part of its Social Strategy NLMK Group has launched a new corporate nutrition programme titled “NLMK Eats! Delicious, healthy, accessible.” The programme will gradually cover all the Group companies during 2020–2021. In 2019, the Company introduced an accident and critical illness insurance. The new privilege was introduced as part of its Social Strategy of NLMK Group and aims to provide financial support to employees and their families in difficult health-related situations. This insurance covers all accidents, including ones that occurred outside of production facilities or office premises, for example at home or on vacation, as well as critical illnesses that are initially identified during the insurance coverage period (including oncological diseases). Moreover, the programme envisages additional payments for accidents at work and occupational illnesses that are diagnosed for the first time, and long- term disability. In 2020, in the context of the pandemic, the largest number of appeals were received from At the end of the year, the project participants received awards in the form of healthy lifestyle paraphernalia. Due to the spread of the coronavirus infection, the second cycle of the Healthy Choice project was postponed to 2021. Nevertheless, the participants continued to actively promote healthy lifestyle among their colleagues, participated in online competitions and training sessions, and continued yoga and volleyball classes initiated before the outbreak of the pandemic in compliance with anti-epidemic norms. What changed for employees? ● Food became cheaper: the employer reimburses part of the cost of lunch procedures, and organized training sessions. The company health centres are equipped with modern medical GRI 403-3 when an employee pays at the canteen. Food became more accessible: an employee can order food to be delivered ● to their workplace. Paying for food became more convenient: an employee can one-touch pay ● The Healthy Choice project received the highest award of the People Investor 2020 corporate projects competition in the Healthy Lifestyle category among the best practices in the field of corporate social responsibility and sustainable development. resuscitation equipment . with their pass. Healthy eating The Company develops and promotes a culture of healthy eating at NLMK sites. In 2020, as part of its strategic partnership with the best federal catering companies, NLMK implemented the following projects: RESULTS OF THE HEALTHY CHOICE PROJECT PULSE OF NLMK CORPORATE SURVEY In 2019–2020, our corporate Pulse of NLMK survey covered over 20,000 employees, or close to 74% of the full-time headcount at the Group’s Russian sites. The survey identified the strengths of the Group’s companies as well as areas for growth. In addition to the survey itself the cultural diagnostics cycle includes the analysis of survey results and permanent cultural councils developing and implementing activities in areas for growth as well as improving employee communication. The Pulse of NLMK survey will be conducted annually as part of a continuous cultural diagnostics cycle. ꢀꢁꢂꢃꢄ ꢅꢆ ꢇꢈꢉꢊꢈꢄꢄꢁꢅꢃ ꢇꢁꢄꢋꢉꢉꢈꢋꢊꢈꢇ ꢁꢃ ꢋ ꢌꢍꢁꢊꢇ ꢅꢆ ꢌꢍꢈ ꢉꢊꢅꢎꢈꢏꢌ ꢉꢋꢊꢌꢁꢏꢁꢉꢋꢃꢌꢄ Tꢍꢈ ꢉꢋꢊꢌꢁꢏꢁꢉꢋꢃꢌꢄꢟ ꢊꢁꢄꢚ ꢅꢆ ꢇꢈꢖꢈꢔꢅꢉꢁꢃꢂ ꢏꢍꢊꢅꢃꢁꢏ ꢇꢁꢄꢈꢋꢄꢈꢄ ꢇꢈꢏꢊꢈꢋꢄꢈꢇ ꢓꢙ ꢘꢅꢊꢈ ꢌꢍꢋꢃ ꢋ ꢌꢍꢁꢊꢇ ● Improving the quality of meals and service at corporate canteens and cafeterias Lunch box deliveries to remote ● ꢐꢅꢊꢈ ꢌꢍꢋꢃ ꢑ0ꢒ ꢅꢆ ꢉꢋꢊꢌꢁꢏꢁꢉꢋꢃꢌꢄ ꢓꢈꢂꢋꢃ ꢌꢅ ꢆꢅꢔꢔꢅꢕ ꢋ ꢍꢈꢋꢔꢌꢍꢁꢈꢊ ꢇꢁꢈꢌ ꢜꢝꢒ ꢅꢆ ꢄꢘꢅꢚꢈꢊꢄ ꢞꢗꢁꢌ ꢄꢘꢅꢚꢁꢃꢂ ꢇꢗꢊꢁꢃꢂ ꢌꢍꢈ ꢉꢊꢅꢎꢈꢏꢌ employees with temporary disability (more than 21 days), the amount of payments exceeded RUB 53 million with a total of 1,649 payments made. production sites and offices Providing a subsidy to partially ● reimburse the cost of meals for employees The Company carries out an additional detailed survey on staff satisfaction with social programmes every three years, with the last one in 2018. The next survey is scheduled for 2021. 2. Healthy Choice project GRI 403-6, GRI 403-10 The implementation of the NLMK Employee Health Programme Tꢍꢈ ꢋꢖꢈꢊꢋꢂꢈ ꢃꢗꢘꢓꢈꢊ ꢅꢆ ꢄꢌꢈꢉꢄ ꢉꢈꢊ ꢇꢋꢙ ꢌꢋꢚꢈꢃ ꢓꢙ ꢉꢋꢊꢌꢁꢏꢁꢉꢋꢃꢌꢄ ꢁꢃꢏꢊꢈꢋꢄꢈꢇ ꢓꢙ 2ꢛꢒ ꢇꢗꢊꢁꢃꢂ ꢌꢍꢈ ꢉꢊꢅꢎꢈꢏꢌ The goal of the Healthy Choice project is to involve NLMK Group employees in championing a healthy lifestyle, developing a healthy lifestyle culture within the Company, and promoting global best practices to this end. During the first stage of the project, the Company implemented a set of activities that aim to increase awareness among the members of the Healthy Choice project as regards their health status and build a conscious attitude towards health management. The project focuses on the principles of cascading and the gradual involvement of new members. In 2020, 600 in 2018–2020 achieved the following: TRADE UNIONS AND COLLECTIVE BARGAINING AGREEMENTS ● Modifying the voluntary medical insurance programme to focus more on early diagnosis and prevention Introducing a new type of insurance As part of its HR policy, the Company fully complies with the requirements set forth in collective bargaining agreements and holds regular meetings with representatives from trade unions. Collective bargaining agreements are in force at all the Group’s companies, including at our international companies. As of 2020, collective bargaining agreements covered 100% of employees at NLMK Group’s Russian companies. ● for accidents and critical illnesses Handing over management Aꢄ ꢘꢗꢏꢍ ꢋꢄ ꢝꢒ ꢅꢆ ꢉꢋꢊꢌꢁꢏꢁꢉꢋꢃꢌꢄ ꢁꢘꢉꢊꢅꢖꢈꢇ ꢌꢍꢈꢁꢊ ꢓꢅꢇꢙ ꢘꢋꢄꢄ ꢁꢃꢇꢈꢠ ꢄꢏꢅꢊꢈꢄ ● of corporate medical assets to an external provider Conceptualization and launch of ● In 2020, a series of collective negotiations was held with the shop-floor trade union organizations of NLMK Group’s companies and steps were taken to harmonize basic benefits provided under collective bargaining agreements. the Health School awareness-raising project Conceptualization and launch of ● 3. Transferring corporate medical assets to professional management GRI 403-6, GRI 403-10 the first cycle of the Healthy Choice project, which aims to promote a conscious attitude to health The main focus of this effort was to provide equal social support to all NLMK Group's employees. The Company continued working on reorganizing its medical assets and transferring them to responsible management in 2020. This measure aims to achieve planned employee health indicators, enhance the quality of medical service, and also establish a single cost and analytics center. participants of different age groups took part in the project, with more than 90% of them being blue-collars. In 2020, the results of the first cycle of the project were summed up: Medical services for NLMK Group employees are provided by three infirmaries and 29 medical centers. Employees are also able to undergo treatment at health resorts and take wellness holiday time, either at NLMK’s resorts and spas or in other regions GRI 403-3 ● More than 70% of the participants managed to stick to a healthy diet: for example, 81% of the participants of the country . 134 135 Statement by member of the Board of Directors About the Company Corporate Governance Our Team Environmental Protection Appendix ANNUAL REPORT 2020 NUMBER OF EMPLOYEES COVERED BY COLLECTIVE BARGAINING AGREEMENTS, % CORPORATE SPORT It was held in four disciplines among men, and four disciplines among women, in three age categories. A total of 60 athletes from main NLMK Group companies participated in the competition. GRI 102-41 NLMK Group provides its employees with all the conditions they need to engage in sports. The Group supports onsite sports halls and centres at its companies, maintains corporate sports facilities, hires external halls and facilities for team sports, provides employees with subscriptions to swimming pools and gyms, and arranges employee discounts at fitness centres. Corporate contests and tournaments are held on a regular basis. Around 400 employees pass Russia’s Ready for Labour and Defence physical fitness test every year. NLMK Group region 2016 100 90 2017 100 89 2018 100 88 2019 2020 100 87 NLMK teams also took part in BlitzBusinessChess-2020, the first online chess tournament among companies. Russia EU1 100 88 71 USA 1 n/a n/a 72 72 Nordic walking – a new way of living NLMK Group companies took part in the Nordic Walking – a new way of living national project from July to October 2020. Close to 100 employees of the Group, including about 50 at the Lipetsk site, actively trained and prepared for competition. As part of the project, NLMK Group fielded seven teams in four home regions: the Lipetsk, Kaluga, and Sverdlovsk Regions and the Altai Territory. NLMK Group teams came in first in these regions. According to the results of the national individual competition among men, NLMK Group employees won 1st, 4th, and 10th places (of 157 total). Thanks to the project, NLMK Group companies have formed teams of caring and active employees who are ready to promote Nordic walking and engage their colleagues in this sport. VOLUNTEERING Volunteer project competition Three key areas for developing corporate volunteering were identified for all the Group’s companies: The first competition of NLMK Group's volunteer projects was held in 2020, with social assistance as its primary focus. The volunteers offered a wide variety of projects for the competition: social English lessons, improvement of recreation areas for the elderly, assistance to special needs children, veterans, people with disabilities, organization of charity fairs, and much more. Since the competition was held at a difficult time of the COVID-19 pandemic, the authors of the projects reflected the risks associated with changes in the epidemiological situation. Following the competition, 19 winners received cash prizes of up to RUB 100,000 for the implementation of their volunteer project. ● The environment: including taking action to clean up and improve NLMK sites and environmentally sensitive areas, eco-quests for children and young people, and eco-expeditions Amid the spread of the new coronavirus infection, the First Open Multidiscipline Competition was held online in 2020. ● Healthy living: including events to promote a healthy lifestyle, involving local people in regions where NLMK operates in accessible sporting events, furnishing sports facilities VOLNA educational volunteer accelerator PLANS FOR 2021 AND THE MEDIUM TERM ● Social assistance: assistance for vulnerable groups, including helping children, retirees, and people with disabilities, and providing urgent assistance for community needs without employer involvement In 2020, at the VOLNA educational accelerator, NLMK Group's corporate volunteers improved their knowledge and skills in the field of volunteerism and shaped ideas for new social initiatives with the support of YouSocial project partner. Depending on their own competence and awareness of their role, employees could choose the sessions of interest to attend. During the accelerator, there were meetings and dialogues with representatives of local administration, as well as team design workshops on social initiatives ideation. When the epidemiological situation changed, VOLNA went online. NLMK employees participated in a two-week online campus and received expert advice on their initiatives, which they subsequently submitted to the volunteer project competition. Human resources management is a key component that impacts NLMK Group's development. NLMK Group is developing an action plan to increase awareness of the NLMK brand in the external and internal labour market and increase the share of employees filling internal vacancies. An important area of NLMK’s HR policy is the development of corporate programmes to attract students for internships and the creation of standard career routes and educational programmes for HiPos, high potential employees. 100% coverage of employees at all management levels by 2022. Incentive systems will also continue to evolve: incentives will be provided for participation in projects, for submitting initiatives, and more. At the end of 2020, about 1,500 NLMK employees took part in the volunteer movement. The spread of the coronavirus infection made it impossible to hold mass volunteer events, but the Company's volunteers played an active role in the We are Here for You corporate campaign to support veterans and retired employees (see the Developing local communities section for more details), and were able to put their own ideas into practice in the first corporate competition of volunteer projects. NLMK Corporate University plans to create more than 20 new educational solutions with a focus on personalization and global trends in training and development, as well as to expand the range of programmes for managers of various levels and the talent pool. Work will be carried out to improve the online learning environment: a virtual campus will be opened, personal account functionality will be added for internal coaches, etc. In 2021, NLMK Corporate University is expected to get internationally recognized CLIP accreditation, which is testament to the quality of corporate training. In addition, the opening of the Corporate University campus, the most modern and innovative space in the region, will take place. NLMK's corporate volunteering programme was recognized at the federal level In terms of its social policy, in 2021 the Company plans to develop and carry out a programme for updating medical equipment and introducing a unified medical information system, carry out the second cycle of the Healthy Choice project, continue the VOLNA educational volunteer accelerator, and hold the second competition of volunteer projects. A team of Lipetsk volunteers led by NLMK employee Maria Trukhacheva won the Best Eco Volunteer Team national competition in the Eco Youth category. For two years the activists participated in the Ecopatrol project to clean up the banks of the Voronezh River from garbage. As far as personnel assessment and remuneration is concerned, the Company plans to further develop the MBO system to ensure In December 2020, the Bonfire at the Volunteer Lighthouse meeting was held in an online format for the top 40 corporate volunteers at all the Group companies. 1 % of the actual headcount number. In accordance with national legislation, several employee categories do not have the right to a collective agreement, while for the other categories the coverage is 100% 136 137 Statement by member of the Board of Directors About the Company Corporate Governance Our Team Environmental Protection Appendix ANNUAL REPORT 2020 OCCUPATIONAL HEALTH AND SAFETY $ 47.8 million invested in the development of safe production MAJOR THEME OCCUPATIONAL HEALTH AND SAFETY 16 KEY EVENTS IN 2020 ● Severe injury rate decreased by 30% NLMK Group approved its fire safety, industrial healthcare, large-scale ● OHS projects and road safety strategies Injury prevention programmes for the top risks were developed A training programme on the 8 OHS tools was completed, ● curated by the Company’s Top 100 executives ● with the courses adapted to remote format 5 comprehensive top risk programmes currently underway to prevent injuries 3 new IT services launched: Hazard Reporting, Safety Behavioural Dialogues, and Safety Contact GLOBAL SUSTAINABLE DEVELOPMENT GOALS 138 139 Statement by member of the Board of Directors About the Company Corporate Governance Our Team Environmental Protection Appendix ANNUAL REPORT 2020 The Occupational Health and Safety Department manages OHS issues A factor analysis of incidents at NLMK Group’s Russian companies over 2018–2020 OUR APPROACH TO MANAGING was completed in the reporting period. It encompassed the following areas: ● at all the Group’s companies, including international ones. Each of the Group's companies has an OHS team. Dedicated occupational safety teams operate in the shops of the largest companies. A dedicated project office operates Work-related injuries across NLMK Group, functional areas, and production sites Fires and fire safety incidents Industrial safety incidents Road traffic incidents OCCUPATIONAL HEALTH AND SAFETY ● ● GRI 403-1 ● ● Industrial healthcare Occupational safety is a top priority for NLMK Group. The Company strives for a zero injury rate at all its operations by continuously improving the OHS management system. within the Department to develop and maintain the NLMK Group contractor safety management system. A separate unit works on contractor engagement at major reconstruction and development investment projects. All participants in the OHS management structure, including international companies, collaborate to ensure that a unified approach is adopted to improving safety at all NLMK companies. Requirements for compliance with NLMK Group’s OHS principles are identical for Company employees and contractors. The main objectives of the exercise were to identify problem areas with the highest injury rate and to conduct an analysis of the root causes of the incidents. The results of the analysis also formed the basis of the corrective measures for 2021 aimed at reducing OHS risks. NLMK GROUP'S OHS PRINCIPLES Our employees are our most highly prized asset. Protecting their lives and health is a priority in our production operations The Company’s approach is based on the following measures: OHS INVESTMENTS ● Strict compliance with Russian and international OHS regulations Introduction of best practices A risk-based approach and control In order to achieve the objectives that have been set in a timely and high-quality manner within the framework of the OHS Strategy, the Company invests in this sphere annually. In 2020, OHS expenses amounted to $47.8 m. ● Occupational health and safety are an integral part of our business and at the heart of our decisions to develop and improve business processes ● of key risk factors Maintaining and developing a safety ● culture among NLMK Group’s employees and contractors BREAKDOWN OF OCCUPATIONAL HEALTH AND SAFETY INVESTMENTS IN 2020, % The list of corporate documents also includes: All injuries, accidents, incidents, and occupational illnesses can and must be prevented ● OHS aspects are integral components of a large-scale project to develop the NLMK Production System. OHS risk management regulations Personal protective equipment Maintenance programme Industrial safety Repair of sanitary facilities Fire safety Improving workplace conditions Risk management Healthy meals 0.3 4.8 1.0 1.3 2.5 2.7 ● Fire safety regulations Regulations on machine enclosures Road safety regulations Regulations governing the safe 15.8 ● ● ꢀꢁꢂꢃ ꢄ ꢅ ● To ensure a high level of safety at work, the Company is guided by a set of internal principles that shape the OHS culture throughout the Group. operation of lifting equipment Contractor management Safe operations are the responsibility of every employee ● 5.3 regulations Regulations governing working OHS training Other 8.7 ● 5.3 at height Regulations on the use of safety ● In order to implement these principles, the Group is committed to: Identifying hazards and efficiently managing risks, thus controlling the level of risk to the life and health of the Group’s employees and contractors safety. He determines the Company’s OHS development strategy and approves the fundamental document, the Integrated Management System Policy (see Sustainability management section for more). behavioural dialogues Each NLMK Group company submits its planned measures and projects for OHS risk management to the Investment Committee for review. As part of the Maintenance and Major Repairs Programme, the Investment Committee decides on the allocation of funds for OHS projects. A detailed implementation schedule is prepared for each project, and a risk assessment is conducted. Maintenance and Major Repairs Programme projects are prioritized by assessing the risks of personnel injury and critical equipment malfunctioning. ● One of the Policy’s objectives is to ensure efficient operations without accidents, emergencies, and injuries. The Company strives to attain this objective by introducing best OHS practices and by continuously developing and promoting a production culture among NLMK Group employees and contractors. NLMK Group management recognizes its responsibility for ensure safe and favourable working conditions and protect the life and health of its employees and contractors. NLMK Group plans its economic activities based on the results of regular and objective risk analysis of environmental risks. The Company’s management regularly discusses OHS matters with employee representatives and labour unions. Structural unit employees can submit proposals related to safety, safe working methods, and the measures required to improve labour conditions through their OHS representatives. EFFECTIVENESS OF OHS EFFORTS ● Constantly increasing the skills of managers, employees, and contractors in matters concerning occupational health and safety Complying with Russian and international OHS regulations Since 2018, our main focus has been on developing a culture of safety at NLMK. Particular attention has been paid to improving the level of safe behaviour: internal and external training sessions have been conducted for Group employees and contractors. In 2020, over $15 million was invested into projects to improve production safety (Russian and international companies) in the following areas: ● Occupational health and safety Risk management Fire safety ● ● ● ● ● Ensuring transparency of OHS indicators Improving working conditions for employees The Company has established the following strategic objectives in matters concerning OHS: Zero fatalities involving employees and contractors OHS issues are regulated at all management levels within NLMK Group. The Group ensures that all NLMK employees and contractors are involved in measures to improve workplace safety. Renovation of sanitary and amenity facilities The Company’s Management Board is updated on a monthly basis on the status of the OHS Strategy, OHS projects, and the results of occupational accident investigations. These reports make it possible to analyse the performance of the OHS management system and develop next steps to improve it. In addition, the Management Board reviews the achievement of OHS KPIs. ● In 2020, NLMK Group continued a renovation programme for sanitary facilities to increase the level of employee satisfaction with their working conditions. ● Achieving a total Lost Time Injury Frequency Rate (LTIFR) among employees and contractors of not over 0.5 by the end of 2022 Raising awareness among staff vis-à-vis personal safety More than 110 facilities with a total area of more than 6,000 m2 were renovated at two production sites of the Group. Investment totalled RUB 380 million. The CEO (Chairman of the Management Board) plays a key role in regulating the Group’s approach to operational These KPIs are included in the annual assessment system for managers at all levels and are taken into consideration when promoting candidates to management positions. ● 140 141 Statement by member of the Board of Directors About the Company Corporate Governance Our Team Environmental Protection Appendix ANNUAL REPORT 2020 MANAGEMENT SYSTEM AND CERTIFICATION GRI 403-8 The most severe injuries occur as a result of falling from heights. In order to prevent them, a programme was developed to systematically reduce the risks related to working at heights, a steering committee was formed, and a working group was set up to introduce and implement measures to reduce injuries. In 2020, 98% of OHS functional area employees took professional development courses. Employees were trained in two areas: managerial skills and command of OHS tools. Overall, employees took 19 different trainings and seminars in 2020. Safety culture development: Leadership in OHS The Company continued to deliver its ‘Safety Culture Development’ training programme in an online format. Additionally, in 2020 the second part of the programme was developed, entitled ‘Safety Culture Development 2.0: Leadership in OHS’. Five e-courses on safety tools were developed for the programme. The programme’s objective is to introduce OHS leadership tools to management and develop the skills of applying these tools in practice. The programme was launched in September 2020 for Top 100 executives. In 2021 it will be cascaded down to the next management levels. NLMK is committed to establishing an OHS management system that operates effectively and covers 100% of employees and contractors. As of late 2020, the number of employees covered by the OHS management system was 50,000, or almost 100% of the headcount. Furthermore, in 2020 the Company achieved 100% coverage of contractor employees under the OHS management system. Industrial Medicine GRI 403-9 In early 2020 NLMK’s OHS Director officially joined the Safety and Health Committee of the World Steel international association. He now participates in the committee’s meetings regularly. In November 2019, a new occupational health and medicine area was introduced. In 2020, Regulations on ensuring readiness for medical emergency response and medical evacuation were adopted, along with a first aid guide and medical algorithms. NLMK Group elaborated development programmes for the personal protective equipment (PPE) management system: ● Vision protection: developing the culture of safety goggle use. As a result, As part of the programme for initial response actions to prevent cardiovascular disease aggravations, all sites have been equipped with training mannequins and machines. A dedicated remote training course on CPR was organized and taken by over 5,000 people, and over 500 employees were trained in person. 59 automatic external defibrillators were installed at 8 NLMK Group sites. In addition, the Group’s representatives regularly take part in OHS conferences and seminars organized by various international and Russian organizations. NLMK representatives participated in the 24th Occupational Health and Safety 2020 international specialized exhibition, presenting best practices in safety culture development during the pandemic, OHS management there were 45% less lost time injuries compared to the previous period. Comfortable safety footwear: individual shoe selection considering the working conditions, including shoes with anatomic insoles to reduce pressure on the spine. Hand protection: effective hand PPE selection considering work risks and ● The Company carries out certification of the OHS management system at individual enterprises. Initially, the sites were certified for compliance with OHSAS 18001:2007 requirements, with certificates still valid for NLMK Strasbourg (until 2021) and NLMK DanSteel (until 2021). ● the life cycle and cost of PPE In order to continuously monitor the condition of employees with heart diseases in real time, NLMK Lipetsk Railway Transport Unit launched an ECG T-shirt pilot project. Electronic work permit project launched In 2020 NLMK Lipetsk began implementing an electronic work permit project. The pilot project included handing out over 3,000 electronic work permits and training over 300 NLMK employees and over 100 contractor employees. In 2018, a working group was set up to transform OHS management systems at sites and ensure ISO 45001:2018 certification. NLMK Lipetsk and VIZ-Steel were certified in 2019, and NLMK Verona in 2020. More than 30,000 employees were covered by the OHS management system, which was certified by a third party. In 2020, 24 electronic check-up system terminals were installed at 5 Group sites. The electronic check-up system reduces the length of pre-shift and pre-trip medical check-ups and allows for the analysis of employees’ health condition. In addition, a pilot project for issuing electronic trip tickets was launched at Stoilensky. Both projects are being implemented as part of the industrial healthcare development strategy. leadership, and incident investigation. As part of its activities, the Group seeks to integrate innovative technologies, not only into production processes, but also into other areas of its activities, including occupational health and safety. Theoretical OHS training is conducted using advanced training technologies, such as computer-equipped classrooms, simulators, virtual reality, and effective media materials. Modules on highly hazardous works are currently being developed. In 2021 the electronic work permit system will be rolled out further across NLMK Group. Paramedics were trained in providing aid in case of various diseases and injuries at production sites. New equipment and workwear was purchased for the medical units, and training sessions were held. LOTO safety system In 2020, the LOTO (Lock Out Tag Out) system integration methodology for NLMK Group sites was developed and approved. LOTO is a hazardous energy management system to protect personnel and processes from unplanned start-up or energy supply during maintenance and repair of equipment and power grids. LOTO projects were implemented at 7 NLMK Group sites in 18 units. Investment in the projects exceeded RUB 42 million. OHS RISK ASSESSMENT In the area of managing occupational hazards and diseases, constant use of personal protective equipment for the eyes became a requirement, and eye washing stations were installed. The results have been positive: significantly less patients have come to the medical units with cases of eye microdamage. GRI 403-2, GRI 403-7 NLMK Group applies a risk-based approach to OHS management. A full risk assessment of operations falling into the top-5 category (at the sites of the Production System’s deployment) was conducted: the Company assessed the risks for Top 5 operations and initiated an operation-by-operation risk assessment for all production operations. Currently, risks have been assessed for 80% of production operations. NLMK’s OHS Director initiated the cooperation of Russian and international companies in the sphere of OHS. EVRAZ, Severstal, Metalloinvest, MMK, Rusal, Alrosa, Nornickel, Nordgold, and OMK have already joined the collaboration initiative. The first meeting of leading company OHS directors was held on 21st December 2020. Moving forward, such meetings will be held on a quarterly basis. In addition, continuous interaction is envisaged between specialists in certain OHS spheres: for instance, fire safety and working at heights. The main goal of this collaboration is sharing best practices in reducing injury rates and finding the most effective solutions. The system blocks all possible energy sources mechanically and minimizes risks during equipment maintenance. LOTO will be integrated at all potentially hazardous production areas. A pilot project was launched at Altai-Koks to prevent occupational deafness. The launch included determining the risk group, developing individual treatment programmes, creating videos to raise awareness, organizing training, and defining the requirements for purchasing noise protection equipment. Within five years, the project will be deployed in all production divisions of NLMK Group companies. STAFF TRAINING AND ENGAGEMENT GRI 403-4, GRI 403-5 The highest injury rate was observed in materialized risks of same-level falls (slips, trips, false steps). To reduce these risks, a programme was developed to systematically prevent such injuries, a steering committee was formed, and a working group was set up to introduce and implement measures to reduce injuries. The Group conducts all OHS training programmes prescribed by state regulations. NLMK also implements additional measures to bolster the safety culture at the Group and to improve employee engagement. In order to ensure a systematic approach to organizing employee training, NLMK develops training plans for employees aimed at developing particular skills and boosting professional competencies. When organizing and conducting training sessions, NLMK particularly emphasizes the practical application of the obtained knowledge at dedicated practice grounds and visits to operating production sites. 142 143 Statement by member of the Board of Directors About the Company Corporate Governance Our Team Environmental Protection Appendix ANNUAL REPORT 2020 Transparent feedback, instant responses to messages, and the resolution of issues enable the Company to improve working conditions and prevent injuries. In 2020, over 450 contractor and subcontractor organizations employing over 25,000 people worked at NLMK Group sites. NLMK Group management understands its responsibility for providing safe working conditions and protecting the life and health of contractor employees. Special emphasis is placed on arranging and overseeing OHS matters when working with contractors. In order to minimize the risk of incidents, the contractor safety management system was fully revised in 2020. This included reconsidering the Company’s approach to counterparty qualification. The new system has an expanded list of qualification processes and requires that counterparties for low-value operations and subcontractors go through these processes. It also introduces expanded qualification requirements for the participants of high-risk projects. PARTNERSHIPS WITH CONTRACTORS Contractors that interact with NLMK are fully covered by the Group’s OHS standards. Information about contractors is taken into account when calculating incident statistics and setting targets, and also when planning OHS training and awareness activities. In the Company’s efforts to organize safe contractor operation, special attention is paid to managing the risks emerging during the performance of works. Analysis of violations and injuries has highlighted the following high-risk areas that currently require more thorough consideration and additional measures: work at height, hot works, handling, and works with electrical equipment. A set of priority programmes was developed for each of these risks. In 2019, the Group drafted and implemented an Agreement concerning occupational health, industrial and fire safety, work performance, environmental protection, internal security and access control procedures (the Agreement), which defines the division of responsibility between the contractors and NLMK, regulates incentives and penalties, and defines the rights and obligations of the parties. The Agreement is the first of its kind to provide contractors with a mechanism for financial incentives to work safely. In order to verify contractors’ compliance with the legislative and corporate OHS requirements and to develop measures for strategic contractor development, a comprehensive check procedure was introduced in 2020. In the course of this process an audit organization assesses contractor organizations in over 12 OHS areas using an assessment sheet with more than 270 questions. The assessment was implemented for five contractors. As a result, corrective action plans were formed to address any gaps and develop the contractors’ OHS systems. EMERGENCY PREPAREDNESS AND INCIDENT REPORTING potential second-level incidents, as well as potential reputational incidents should be immediately reported to the CEO. Incident alerts are sent out in order to promptly inform employees and contractors about first-level and high-potential second-level incidents and in order to prevent such incidents in similar production environments of other units or when working with similar equipment or processes. If a serious production-related incident is reported in other similar steelmaking companies, the OHS function drafts an information sheet and sends it out to production sites in order to raise awareness of the incident and take prompt action where applicable. The information sheet procedure is identical to the incident alert procedure. A dedicated system of financial and non-financial incentives has been developed to engage the leadership of contractor organizations in OHS management matters and to attain a high level of contractor safety in NLMK Group. In 2020, two non- financial incentive programmes were implemented. NLMK prioritizes efforts to prevent and respond to emergencies. Each company has developed regulations on preventing and managing the consequences of both man-made and natural disasters. The schedule of planned emergency training sessions for 2020 included sessions on fires, gas leaks, acid/alkali spills, molten zinc leaks or spillages, as well as power outages. NLMK regularly assesses contractors that are involved in production at its enterprises for their compliance with OHS requirements according to a specially developed methodology. Based on the results of the evaluation, a rating is awarded that may affect whether the Group decides to continue working with the contractor in question. The Group provides tools for motivating contractor employees to comply with OHS rules. A Safety Week was held at all NLMK Group sites. The purpose of the event was to find places of possible slips, trips, and falls. Over 4,000 contractor employees were engaged in the process, and they detected over 3,700 hazards in five days. Incidents of all levels are subject to investigation, and corrective measures are taken to prevent such incidents and mitigate their consequences. The tools ensuring this process are Lessons Learned and the Action Plan. The head of the site is responsible for their implementation. ASSESSING THE MATURITY OF THE OHS SYSTEM Corrective measure implementation is checked during line walks, step-wise control, and targeted checks. In order to ensure prompt incident reporting, every site has a reporting algorithm, indicating key process NLMK has implemented a unified approach to the internal evaluation of the OHS system. Each year, OHS team employees complete maturity assessment reports. This report is a tool that is used to assess the extent to which the OHS approaches that are in place at each company comply with corporate regulations. A quantitative assessment of the Group's compliance with each of the existing corporate regulations is compiled based on these reports. In the event of there being any inconsistencies, remedial measures are developed and changes are made to the current approach to OHS management. To improve the quality of OHS system assessments, the Group is working to establish an internal institution of OHS auditors. The heads of OHS teams at the Group’s companies conduct regular inspections during which any employee or contractor can ask a question or put forward a suggestion. participants and persons responsible for the timely identification of first- and second-level incidents, as well as reputational incidents, and for informing the management about such incidents. The incident reporting algorithm is presented at the introductory briefing at all sites and prominently displayed. In an effort to enable employees to contact the OHS team promptly, NLMK companies publish information sheets that provide the contact details of the persons responsible for overseeing such issues. Partnership lies at the heart of the Company’s strategic approach to working with contractors. If a contractor is exposed to certain OHS risks, the Company is willing to help improve the OHS system in order to maintain a working relationship with the contractor. OHS HOTLINE The OHS hotline launched in December 2019 continued its operation in 2020. Employees have had a positive response to the new OHS communication tool. During the reporting period, employees of different sites called the +7 (800) 600-04-74 toll-free number and wrote emails to [email protected] over 190 times to ask questions about OHS standards and requirements, labour conditions, working during the COVID-19 pandemic, and PPE provision, as well as to report concealed incidents and any detected breaches or hazards. The OHS team immediately conducted thorough investigations and staff members were given feedback. According to the Regulations on identifying, recording, and investigating OHS incidents, all first-level and high- The hotline is available 24/7 for all employees of the Group’s Russian operations, including contractors, former employees, and trade union representatives. 144 145 Statement by member of the Board of Directors About the Company Corporate Governance Our Team Environmental Protection Appendix ANNUAL REPORT 2020 The Group also keeps records of all work-related injuries and measures the Total Recordable Injury Frequency Rate (TRIFR)1, which is calculated every month for each subsidiary and includes data on contractors. In 2020, TRIFR increased to 3.17 year-on-year due to an increase in the total number of registered injuries. TRIFR (RI) FOR NLMK GROUP EMPLOYEES AND CONTRACTORS1 2020 PERFORMANCE GRI 403-9 5.88 5.23 In 2020 the Company continued to support a policy of openness for incident registration at all levels that was introduced in late 2019. NLMK strives to determine the systemic causes, develop corrective measures, and prevent incidents from happening again. LTIFR stood at 1.25 in 2020: ● Most of the year-on-year growth was due to light injuries, with slips and same-level falls accounting for the absolute majority. The ratio of serious and light injuries was 1:7 vs. 1:3 in 2019. 3.97 3.66 3.50 3.22 2.55 2.47 2.43 2.42 3.58 3.17 2.01 2020 ● The number of light injuries increased by 80%, while the serious injury rate (severe and group injuries, fatalities) went down by 20% year-on-year. 2.37 2.12 The number of fatalities decreased year-on-year, from 6 to 3. The Company deeply regrets these incidents that occurred to employees and contractors at its sites in Lipetsk, Zarinsk and Revda. The accidents were investigated to identify the root causes and re-evaluate the relevant risks. In order to avoid a recurrence of such cases in the future, the Company is focusing on the top risks and has also launched a project to improve the efficiency of work permit procedures, including an electronic work permit project. In addition, the Company is building a process for improving work with contractors. 2016 2017 2018 2019 Having formed a complete base for injury analysis, the Company went on to implement new targeted programmes to reduce risks and introduce new OHS tools (Q1 2020). As a result, LTIFR went down consistently throughout the year (see the breakdown by quarters below). In 2020 the Company proceeded with the maintenance programme aimed at reducing fatal and high risks. The programme is based on the Vision Zero concept: all incidents are preventable. Employees Contractors Employees and contractors Among contractors, LTIFR decreased by 30% due to a number of measures addressing the top risks as part of investment project implementation: training and knowledge assessments, targeted and comprehensive checks, technical solutions, and work planning. INJURY SEVERITY, NUMBER OF ACCIDENTS 147 WORK-RELATED INCIDENTS 98 85 80 NLMK GROUP’S LTIFR IN 2019–2020: BREAKDOWN BY QUARTERS 77 NLMK's efforts to improve the NLMK safety system, including developing methods to respond to emergencies and incidents at work, enable the Company to minimize the consequences of incidents. 25 23 20 12 1.78 10 2016 2017 2018 2019 2020 1.21 1.12 1.06 1.02 0.89 Severe and group injuries, fatalities Light injuries 0.74 0.63 The system for recording work-related injuries at NLMK Group is based on industry-wide methods adopted by the World Steel Association. The main injury rate indicator used in the Group is Lost Time Injury Frequency Rate (LTIFR). Q1 2019 Q2 2019 Q3 2019 Q4 2019 Q1 2020 Q2 2020 Q3 2020 Q4 2020 INJURY RATES IN 2016–2020 NLMK Group (employees and contractors) Indicator 2016 95 75 20 5 2017 121 90 31 2018 89 65 24 3 2019 105 72 33 6 2020 167 133 34 3 Total number of occupational accidents Employees GRI 403-9 The year-on-year increase in the number of injures in 2020 is due to improved light injury registration. In late 2019, the Company launched a programme to prevent incident concealment, which includes the following actions: NLMK GROUP’S LTIFR Contractors 2.05 Number of occupational fatalities Employees 11 1.42 2 5 3 2 1 1.06 1.22 1.00 1.12 1.25 ● 0.86 Contractors 3 6 0 4 2 A large-scale communication 0.77 0.69 0.97 0.85 0.82 0.85 campaign (top management 0.76 Number of lost time injuries Employees 90 73 17 110 85 25 86 62 24 99 70 29 164 132 32 talking about the inadmissibility of concealing production incidents, videos, instruction pamphlets) Launching the OHS Hotline A moratorium on sanctions for 2016 2017 2018 2019 2020 Contractors ● Employees Contractors Employees and contractors Total man-hours worked for employees ● 91,943,948 19,901,080 92,677,015 15,108,161 93,637,091 22,612,132 95,179,559 26,995,931 93,693,124 39,797,555 reporting incidents that were initially concealed Harsher sanctions for concealing Total man-hours worked for contractors ● incidents, including contractor disqualification, dismissal, etc. 1 TRIFR includes fatalities, lost time injuries and cases requiring treatment. It is calculated on the basis of the method adopted by the Group for determining recordable injuries (RIs). 146 147 Statement by member of the Board of Directors About the Company Corporate Governance Our Team Environmental Protection Appendix ANNUAL REPORT 2020 ● ● CONTRACTOR Develop IT services for contractor management: the contractor's personal PLANS FOR 2021 AND THE MEDIUM TERM MANAGEMENT SYSTEM account, pilot projects for e-training of contractor employees, electronic access system for contractors, electronic work permit system pilot. Develop and implement an incentive system to motivate contractors to develop their OHS management systems and increase the level of safety culture of their employees. ● Undertake OHS activities on priority investment projects in line with the requirements of the new contractor management system and the top risk management programme. INDUSTRIAL HEALTHCARE ● Develop the top risk management ● system: a system for safety awareness training and assessment for contractors' employees, a system of ad hoc inspections and audits, marking of equipment, training videos and memos. Implement a set of measures on emergency medical response: the Company will continue to supply advanced and affordable means of emergency medical care to production facilities, introduce emergency medical response plans, and promote the accessible defibrillation programme. Extend mass training for workers in international standard of cardiopulmonary resuscitation, set up a network of training centres for practicing first aid skills, retrofit production sites with fully automatic external defibrillators. ● ● Adopt a new approach to ● the assessment of the contractors' OHS management system maturity. Supply automated complexes for medical examinations before work to health centres, identify and monitor risk groups for cardiovascular diseases. OHS TOOLS AND INJURY REDUCTION PROGRAMMES to control risks and determine coordination arrangements between the employee and the manager when identifying conditions that prevent the safe performance of work tasks. Develop an electronic work permit system to improve the efficiency and quality of the access control process. Implement benchmarking and ensure exchange of experience with the largest peers. ● ● ● Continue implementing programmes to manage top injury risks. Implement projects to roll out OHS ● tools at the Group companies. Roll out corporate training programmes on dealing with hazardous events, near misses, and behavioural FIRE SAFETY ● dialogues on safety, among others. Develop and carry out trainings on fire safety during performance of hot works ● Set up OHS Committees at the Group to improve the personnel’s expertise. Apply advanced approaches to the development of fire protection systems, including fire risk assessment mechanisms aimed at improving the safety of people and property and reducing operations downtime. ● companies to increase the level of employee engagement in OHS matters and the management's interest in implementing industrial safety measures. ● Extend the OHS Leadership ROAD SAFETY programme to cover line managers of the Group companies as part of an integrated approach to the development of a culture of safety. ● Introduce international practices for the development of personnel driving automotive, industrial (in-shop), and mining transport and special equipment. Introduce and develop a pool of corporate coaches in Defensive driving as taught in international driving schools. ● ● ● Implement a dynamic risk assessment Introduce new technologies and digital solutions in railway transport, update tool for employees to analyse hazards at the site of work and assess existing measures and necessary additions and finetune security/control systems (video analytics, impact sensors, driver identification, video infrastructure monitoring (signalling, centralization and blocking devices, track sections, etc.)). 148 149 Statement by member of the Board of Directors About the Company Corporate Governance Our Team Environmental Protection Appendix ANNUAL REPORT 2020 DEVELOPING LOCAL COMMUNITIES RUB 8.4 billion NLMK’s total social investment MAJOR THEMES INDIRECT ECONOMIC IMPACTS LOCAL COMUNITIES RUB 1.0 KEY EVENTS IN 2020 billion ● Over RUB 577 million allocated to support local communities amid investment in external social programmes the COVID-19 pandemic The Steel Tree grant competition of the Miloserdiye Charity Fund ● won the Best Social Projects of Russia award 61 projects supported through the Steel Tree grant competition GLOBAL SUSTAINABLE DEVELOPMENT GOALS 150 151 Statement by member of the Board of Directors About the Company Corporate Governance Our Team Environmental Protection Appendix ANNUAL REPORT 2020 OUR APPROACH TO MANAGING EXTERNAL SOCIAL ACTIVITIES Train of Good Deeds The year 2020 saw a continued inflow of charitable contributions by NLMK staff on the Miloserdiye online crowdfunding platform. In December 2020, a dedicated campaign webpage ran Train of Good Deeds, a New Year donation marathon. The donations went to the fund’s beneficiaries – veterans living alone, multi-child families, severely ill kids. All proceeds were earmarked for beneficiaries in the Lipetsk, Belgorod, Sverdlovsk, Kaluga, and Moscow Regions, as well as in Altai Territory. As a major extraction, steelmaking, and steel product manufacturing company, NLMK has a significant impact on the environment as well as local communities. The Company’s extractive and production facilities are located in cities and regions across Russia, Denmark, Belgium, Italy, France, and GRI 203-2 heritage, and provides assistance to pensioners, veterans, and other vulnerable social groups. The Miloserdiye Fund is a longstanding trusted partner of NLMK in the Lipetsk and Belgorod Regions and in Altai Territory. SVERDLOVSK OBLAST Over 30,000 people benefit from the Miloserdiye Fund each year. Miloserdiye implements charity projects in the following key areas: ● Assistance for veterans: supporting veterans’ organizations and former NLMK employees in their retirement, providing assistance in obtaining medicines and reimbursing treatment costs, and organizing cultural events. Train of Good Deeds the United States . ● Health: providing assistance by paying for expensive operations, targeted funding ꢀꢁ ꢂꢃꢄ ꢅꢆꢇꢈꢉꢊꢆ ꢋꢉ ꢉꢌꢍ ꢎꢆꢆꢄ ꢏꢆꢆꢄꢐ Tꢍꢂꢁꢃꢑ Two business unit coordinate for medical organizations, and health resort packages for children with disabilities and wheelchair users. Sport: support for sports federations, funding for children’s and young people’s sports schools, and purchasing equipment. Children: supporting children’s homes and residential schools and conducting charity campaigns for children. Science and culture: supporting gifted children (winners of science Olympiads and music and art competitions), creative groups, libraries, museums, and art galleries. Environment: purchasing specialized equipment, feed, and medicines for use in nature reserves and parks, forests, and veterinary practices. Cultural development: funding charity concerts, drama festivals, and holiday events for residents of Lipetsk and the Lipetsk Region. One-off assistance: providing one-off assistance to public organizations, municipal institutions, and citizens affected by terrorist attacks or natural or man-made disasters. local community engagement and the implementation of projects that fall under NLMK’s external social policy – the Social Policy Unit within the Human Resources function, together with Government Relations, which are subordinated to Vice President, HR & Management System and Vice President, Risk Management accordingly. Total personal contributions since the launch of the programme have exceeded RUB 8.5 million. ● ● ● ● Steel Tree grant competition STEEL TREE PROJECT GEOGRAPHY, NUMBER OF PROJECTS ● In 2017, the Miloserdiye Charity Fund launched the Steel Tree grant competition in Lipetsk. The competition offered local employees the opportunity to develop their own programmes to support the environment and to obtain grants to fund them. In 2020, grants were awarded to projects in the following categories: ecology and urban improvements, family values, science and culture, sports and health, supporting children and young adults, mercy and care, and longevity. A jury board was set up to select the best initiatives, with members to represent NLMK, the Miloserdiye Fund, regional and local authorities. The number of applications in 2020 set a new record at 189. A total of 61 grants were awarded to projects, of which NLMK contributed RUB 17.9 million. The context of the pandemic informed the decision to change the arrangements for selection and implementation of the projects: pitch presentations were made online, no mass gatherings were organized, all participants received personal protective gear. The work of these units in terms of developing local communities is aimed at determining common interests shared by NLMK Group, employees, local communities as well as governmental and local administrative bodies related to the sustainable development of the Company and the regions in which it operates and creating a positive environment for both employees and local communities. 3 6 ● 23 ꢀꢁ The Miloserdiye Fund has received a number of awards: in particular it was named Benefactor of the Year by the Lipetsk Chamber of Commerce and Industry, and is also a two-time recipient of the Golden Badge for Services to the City of Lipetsk. In 2017, the Chairman of the Miloserdiye Fund Board, Sergey Melnik, was presented with the Lipetsk Municipality’s highest honour, the Mitrofan Klyuev medal, for his many years of charitable work. 14 15 Lipetsk Stary Oskol Sverdlovsk Region Zarinsk Kaluga Region In an effort to improve the approaches taken to implement social programmes in 2019, NLMK Group developed and approved its Sustainable Development Policy. According to the standards set forth in this document, one of NLMK Group’s key goals in sustainable development is to contribute to the social development of the regions in which the Company operates. In 2020, the Steel Tree grant competition of the Miloserdiye Charity Fund won the Best Social Projects of Russia award. The award has been in place since 2012 and aims to support social projects and promote the development of partnerships in the social sphere. The Miloserdiye Charity Fund was included in the top 20 funds in the first rating of private and corporate charitable funds in Russia, compiled by the RAEX agency together with the Association of Rating Compilers (ARC) in 2020. Another charity fund operating in the Sverdlovsk Region is Zabota, Pomosch, Miloserdiye (Care, Help, Mercy). Theatre for All (City of Yelets) NLMK Group was awarded the B+ rating (Best Practice) in the Leaders of Corporate Charity 2020 rating, compiled by Donors Forum, the Association of Grantmaking Organizations, which confirms the high maturity level of systemic charity in the Company. The project helps children with disabilities to participate in theatre arts. It was developed by Lidiya Polosina, teacher at Yelets School No. 1, who received a Steel Tree grant in 2020. The project actively involves children with disabilities into staging theatre performances. The grant funds went to procure new audio and visual equipment for the theatre (microphones, a mixing console, and a video camera), make stage clothes, and build stage designs. A number of new performances were delivered by young artists from local schools and colleges, celebrating the days of Russia’s military glory. All performances were organized in full compliance with the epidemiological precautionary requirements. NLMK’s social and charitable activities to support and develop the regions in which it operates are pursued chiefly in collaboration with the Company’s social partner, the Miloserdiye (Mercy) Charity Fund for Social Assistance. The Fund supports the development of sport and healthcare, the preservation of cultural NLMK also operates various volunteering and charity programmes and conducts research on the needs of local communities in areas where it operates. It determines such needs through surveys and public hearings as well as various internal corporate communication channels. NLMK is committed to enhancing the tools it uses to collaborate and engage with communities. Since 2017, the Fund, together with NLMK Group, has been implementing the Steel Tree programme – a grant competition to support social and environmental public initiatives. 152 153 Statement by member of the Board of Directors About the Company Corporate Governance Our Team Environmental Protection Appendix ANNUAL REPORT 2020 STRATEGY DOCUMENTS IN CHARITY LOCAL COMMUNITY IMPACT ASSESSMENT A major effort was undertaken in 2020 to draft a Strategy on External Social Programmes and Charity for 2021–2023 and a Policy on External Social Programmes and Charity. Contributing to the strategic goals of the Company, the new high-level documents are to become an integral part of the Group’s package of strategies: Strategy 2022, Human Resources Strategy, and Social Strategy. Drafting was done in line with best Russian and international practices. It was based also on Within the reporting period, NLMK Group ran programmes on engaging and developing local communities in all regions of operation. This included a local community impact assessment. As part of developing the Strategy on External Social Programmes and Charity in 2020, an assessment was done of the key Group geographies potential. The assessment aimed to identify the most significant social and environmental issues. The assessment results were discussed with internal stakeholders. External stakeholders were reached out to with a questionnaire on charity and human rights. The survey was conducted on the Anketolog platform and received responses from 23 companies – existing and potential business partners of the Group. The data obtained informed the priorities for social investment GRI 413-1 by the Group and for development of the relevant strategy documents . the outcomes of evaluating the potential of the Group key home regions that was conducted in 2020. The project included consultations with NLMK RESULTS OF THE EXTERNAL STAKEHOLDER SURVEY ON NLMK CHARITABLE PROJECTS, % stakeholders in the relevant regions. In light of the pandemic, the framework documents of NLMK Group for charitable activities were discussed at an online strategy session. A joint discussion tapping about 40 participants addressed systemic aspects of charitable activities. Among the contributors were managing directors of main NLMK Group companies, heads of functions, and invited experts. The documents are to be adopted in Q1 2021. 9 ꢀꢁ ꢂꢁꢃ ꢄꢅꢁꢆ ꢁꢇ ꢈꢉꢊ ꢋꢉꢌꢍꢎꢈꢌꢏꢐꢊ ꢑꢍꢁꢒꢊꢋꢈꢓ ꢎꢔꢑꢐꢊꢔꢊꢅꢈꢊꢕ ꢏꢂ NLꢖꢗꢘ 22 I know that NLMK pursues charitable activities, but can not provide any examples I am aware of NLMK's charitable initiatives and projects I am not aware of NLMK's charitable initiatives and projects TOOLS USED TO ENGAGE AND DETERMINE THE NEEDS OF LOCAL COMMUNITIES GRI 413-1 No. Tool Description 69 1 Assessment of existing social programmes NLMK regularly analyses ongoing social programmes in order to determine their impact and audience reach and to obtain feedback from the intended beneficiaries. 2 Direct engagement via internal communication channels Given that many of NLMK Group’s companies are the main employers in their respective areas and that a significant proportion of the regional population work for them, the social needs of local people can be determined with the help of internal communication channels, including telephone hotlines, text messages, and the intranet portal. The portal can be used to leave messages, which a specialist then responds to; these messages can be read and commented on by all portal users. For more details about the internal communication channels used, see the Stakeholder Dialogue section. 3 4 Working with local authorities The Company works with regional and local authorities that are fully aware of the current needs and requirements of local communities in the regions where the Company operates. Using this information, NLMK collaborates with representatives from these authorities to develop social initiatives that meet the needs of local communities. For additional information, see the Stakeholder Dialogue: Government Authorities section. Public hearings Public hearings are held to review the environmental impacts of NLMK investment projects that are subject to State Environmental Expert Review. The hearings help identify the expectations of the locals and integrate them into project development and operations. In 2020, six NLMK projects were heard publicly and approved by Lipetsk residents. A public hearing on rezoning was held at Stagdok, also approved by local residents. 154 155 Statement by member of the Board of Directors About the Company Corporate Governance Our Team Environmental Protection Appendix ANNUAL REPORT 2020 A total of RUB 108 million was allocated to support veterans and retired employees in 2020, which amounted to 10.5% of the Company’s total investment in external social programmes. 2020 PERFORMANCE Helping our veterans GRI 201-1 Each year, NLMK allocates significant resources to social programmes in a variety of areas. In 2019, NLMK Group allocated RUB 1.028 billion to external social programmes, including support for veterans and retired employees. In light of the COVID-19 pandemic, significant funds went to support healthcare institutions and most vulnerable groups. INVESTMENT IN EXTERNAL SOCIAL PROGRAMMES IN 2020, % 1.2 3.8 7.1 GRASSROOTS AND CHILDREN’S SPORTS Health 10.5 11.7 42.0 Grassroots and children's sports Support for socially vulnerable groups Support for veterans and retires employees Funding education RUꢀ ꢁꢂ0ꢃ ꢄꢅꢆꢆꢅꢇꢈ The development of grassroots and children’s sport is one of the priorities within the Company’s social activities. NLMK creates conditions for engaging in sports not only for the Company’s employees and their family members, but also for local communities, regularly allocating resources for the maintenance of sports facilities and to provide assistance to children’s and young people’s sporting academies and groups as well as sports clubs and promising athletes. For example, NLMK covers all costs for the Lipetsk Metallurg sports club in Lipetsk and for Olympic Reserve School No. 13 for Children and Young People, which was set up on the core of the club. The school trains world-class athletes in skeet shooting: around half of Social support Culture and arts 23.8 SUPPORT FOR HEALTHCARE Support to the home regions in the ﬁght against COVID-19 Projects in this area aim to promote development of healthcare institutions, including through procurement of medical equipment and targeted aid to people with severe illnesses (reimbursement of costly surgery, medicines, and rehabilitation). The Group provided funds to counter the spread of the new coronavirus infection in its home regions in the amount of RUB 577 million. The contributions were proportionate to the scope of operation in the Lipetsk, Belgorod, Kaluga, and Sverdlovsk Regions, and in Altai Territory. As agreed with regional and city administrations, the funds were used to procure highly needed medical equipment and PPEs (masks, respirators, sanitizers, etc.). From April to June 2020, the Group ran the We are Here for You corporate campaign in support of NLMK veterans. It was pursued with the help of the Group’s social partner, the Miloserdiye Charity Fund, and corporate caterers Roteks and OMS. The campaign involved 277 corporate NLMK volunteers who were a tremendous support in the implementation. A total of 15,814 food and essentials parcels were put together and handed out. NLMK Lipetsk and its social partner, the Miloserdiye Charity Fund, made in-kind donations to 13 regional and municipal healthcare institutions in the Lipetsk Region. The donated medicine, equipment, and PPEs, including 57 ventilators, X-ray machines and oxygen concentrators, totalled over RUB 392 million. A total of RUB 430.6 million was allocated to support healthcare in 2020, which amounted to 42% of the Company’s total investment in external social programmes. the current Russian skeet shooting team are its former students. “Thank you for the real support and help to us, the veterans, in this challenging time. Your help inspires hope and will to live... Kindness and care cure all ills if we are here for each other. With kind regards, appreciation and best wishes, G. Sychev, veteran of labour.” In 2020, the Company allocated RUB 244 million to support grassroots and children's sports in the regions where it operates, or 24% of total investment in the Company's external social programmes. SUPPORT FOR SOCIALLY VULNERABLE GROUPS IN REGIONS WHERE Families with multiple children under the age of 23 provided for by the parents, living in seven cities where the Group operates, received targeted financial aid. NLMK GROUP OPERATES A total of RUB 120 million was allocated to support socially vulnerable groups in regions where NLMK Group operates in 2020, which amounted to 12% of the Company’s total investment in external social programmes. Social support by the Group is delivered in the form of targeted aid to people in need, support to initiatives with positive social impacts, facilitation for Group employees and proactive local residents to participate in social causes, including through the grant competition. Racing yacht for a Lipetsk athlete SUPPORT FOR VETERANS AND RETIRED EMPLOYEES NLMK and its social partner, the Miloserdiye Charity Fund, donated a world-sailing Laser-class dinghy to Ekaterina Zyuzina, a professional sailor from Lipetsk. Evgeniya Donskikh, Director of the Miloserdiye Fund, officially presented the memorial certificate to the prize winner of the Russian Yachting Championship. NLMK places considerable emphasis on supporting veterans and retired employees. This includes organizing regular trips and other cultural events, regular exhibitions of creative works by veterans as well as sporting tournaments and healthy lifestyle activities. One important aspect of our work with veterans is computer training, which helps elderly people use computers, mobile apps, and the Internet to find useful information, access electronic services, and communicate with family and friends online. In light of the pandemic the Group provided targeted aid to the most vulnerable groups. It allocated funds to provide food parcels to groups that are in need of support today in the cities where the Group operates, namely families with three or more children under the age of 18, families raising children with disabilities, and single parents. Around 15,000 parcels was delivered to families in Lipetsk, Stary Oskol, and Zarinsk. At the Sailing World Cup in Japan, Ekaterina Zyuzina won Russia the qualification for the 2020 Tokyo Olympics, which was pushed to 2021 because of COVID-19. As the sailor used to have no personal boat, Russian Yachting Federation approached the Miloserdiye Fund for help. Ekaterina serves as a role model for young people of Lipetsk and promotes grassroots sailing in the Lipetsk Region. In order to bolster ties between generations, NLMK works with local veterans’ organizations and trade unions to host meetings with veterans, organize visits to war memorial sites, and give lessons on courage in schools and colleges basic educational institutions. Due to the spread of COVID-19 in 2020, the scale of support for this group was significantly increased. 156 157 Statement by member of the Board of Directors About the Company Corporate Governance Our Team Environmental Protection Appendix ANNUAL REPORT 2020 SUPPORT SUPPORT FOR CULTURE AND ARTS A total of RUB 12.2 million was allocated to support culture and the arts in 2020, which amounted to 1% of the Company’s total investment in external social programmes. FOR EDUCATION The main focuses of scientific and educational development pursued As part of efforts to support culture and the arts, NLMK Group provides assistance to organizations that promote cultural history and education in the regions where the Company operates and makes financial contributions to the preservation and proper maintenance of cultural and architectural monuments and other sites with cultural and historic value. in NLMK Group’s social policy consist of multifaceted support for certain educational institutions in the regions where the Company operates, and support for high-quality technical education for young people. The Company provides targeted funding for scientific and educational activities at educational institutions, and also arranges and sponsors conferences dedicated to scientific research as well as scientific and technical competitions for students. In order to introduce the next generation of employees to the Company, NLMK organizes open days and trips to production facilities for schoolchildren as well as industrial internships at the Company’s enterprises for students from certain educational institutions. NLMK also finances a range of grants. Support for the construction of the Intercession Church in Lipetsk NLMK provided more than 7,000 tonnes of building materials and contributed money for the construction project. NLMK repair workers manufactured four metal domes and four crosses for the church. Each dome fit with a cross weighs 1.1 tonnes, its height is approximately 9 metres, and base diameter is 5 metres. The domes have been coated with titanium nitride and mounted on the church. Online paintings The Group also supports the activities of corporate museums, including NLMK’s Novolipetsk Museum in Lipetsk, the Demidov Centre in the Sverdlovsk Region town of Revda, and museum sites at Stoilensky Mining and Beneficiation Plant and Altai-Koks. NLMK Museum opened its first online exhibition with paintings about metal. The online exposition features artwork by Lipetsk painter Ivan Kolesnikov. The exhibition is available on the NLMK Virtual City website under “Exhibition Room”. The collection of NLMK corporate museum holds works by many well-known artists from Lipetsk, Moscow, and St. Petersburg. It includes paintings by Ivan Kolesnikov, member of the USSR Artists’ Union, participant of regional exhibitions. His works are also held by the Lipetsk Art Museum, private collections in the UK, US, and other countries. A total of RUB 12.2 million was allocated to support culture and the arts in 2020, which amounted to 1% of the Company’s total investment in external social programmes. DEVELOPING SOCIAL INFRASTRUCTURE OF REGIONS WHERE NLMK GROUP OPERATES The Company also allocates significant resources to improving facilities at nursery schools, schools, secondary schools, vocational institutions, children’s centres for the creative arts, children’s homes, and residential schools. The main priorities of NLMK Group’s external social programmes include determining and facilitating solutions to issues that currently affect the regions where the Company operates as well as social infrastructure development. PLANS FOR 2021 AND THE MEDIUM TERM In 2020, a total of RUB 39.4 million was allocated to develop the social infrastructure of the regions where NLMK Group operates, or 4% of the Company’s total investment in external social programmes. In 2020, a total of RUB 73 million was allocated to support science and education in regions where the Company operates; this amount represented 7% of the Company’s total investment in external social projects. The following strategy documents are to be adopted in 2021: the Policy on External Social Programmes and Charity and Strategy 2021–2023, including the implementation of Stage 1 of the Strategy. Support for improvements at Lipetsk public parks NLMK and the Miloserdiye Fund launched a public realm improvement programme for garden squares and recreational areas in Lipetsk. It is planned to further develop the Steel Tree grant contest, including a revision of the programme based on stakeholder feedback and digitalization of the contest procedure. Webinars for MISiS students The Fund paid to manufacture over 180 benches and about 110 sandboxes. The amenities were installed in the common areas and garden squares of new and existing residential developments in the Levoberezhny, Pravoberezhny, Sovetsky, and Yugo-Zapadny districts of Lipetsk. Neighbourhood residents provided inputs on where to best place the amenities. The Group hosted a series of webinars as part of the Career Fair organized by the National University of Science and Technology MISiS. Events like this one help students learn about the Group’s products and technologies, and about the jobs different specialists do at NLMK. Benches and sandboxes are made of modern wear-resistant materials. All sandboxes came with fresh sand. About 70 volunteers from NLMK helped with the installation. 158 159 ENVIRONMENTAL 162 Environmental protection 186 Climate change 202 Energy efficiency Statement by member of the Board of Directors About the Company Corporate Governance Our Team Environmental Protection Appendix ANNUAL REPORT 2020 ENVIRONMENTAL PROTECTION Awards $ 430 The NLMK Lipetsk slag dump processing project was shortlisted for the Excellence in Sustainability category of the Steelie Awards held annually by the World Steel Association. Thanks to this project million allocated to investment projects with 25 hectares of land were reclaimed MAJOR THEMES and 6 million tonnes of recyclables WATER BIODIVERSITY ATMOSPHERIC EMISSIONS WASTE SUPPLIER ENVIRONMENTAL ASSESSMENT ENVIRONMENTAL COMPLIANCE an environmental impact as part of Strategy 2022 was processed thus avoiding the emission of 85,000 tonnes of greenhouse gases. NLMK Lipetsk won the Environmental Culture. Peace and Harmony international competition, held under the auspices of the Vernadsky Non-Governmental Environmental Foundation, in the Environmental Culture in Industry and Energy category. $ 183 KEY EVENTS IN 2020 NLMK Group was awarded the gold medal of the 26th international industrial exhibition Metal-Expo 2020 for the construction of a dry slag cooling complex at NLMK Lipetsk. ● Major overhauls of Blast Furnaces No. 4 and No. 6 and BOFs No. 2 and No. 3 completed at NLMK Lipetsk BOF Shop No. 2 with a total emission reduction of 9,000 tonnes Upgrade of the NLMK Lipetsk local treatment facilities and a set of projects million allocated to operational and investment projects with an environmental impact in 2020 ● to reduce wastewater discharge completed; at 2020 year-end, the volume of domestic wastewater discharge into the Voronezh River was reduced by 73% (industrial wastewater discharge seized in 2009) compared to the design target values before the upgrade For the fourth consecutive year NLMK Kaluga was a prize-winner in the regional Eco Organization competition. In 2020 the company took second place among major corporations in the Environmentally Responsible Organization of Production category. ● A new section for waterless blast furnace slag cooling built at NLMK Lipetsk with a 3.5x hydrogen sulfide emissions reduction at the site UNITED NATIONS GLOBAL COMPACT PRINCIPLES Principle 7: Businesses should support a precautionary approach to environmental Altai-Koks won the Metals and Mining Company with High Social Efﬁciency industry competition in the Environmental Protection and Resource Conservation category. 97 % ● of water in production is recycled and reused challenges. ● Principle 8: Businesses should undertake initiatives to promote greater environmental responsibility. Principle 9: Businesses should encourage the development and diffusion of NLMK Lipetsk won the Ecology – a Reliable Partner national competition in the Best Project for Reducing Harmful Emissions into the Air, Ensuring Environmental Safety of the Air category. ● environmentally friendly technologies. 99 % NLMK Lipetsk was awarded with a Certiﬁcate of Merit of the Vernadsky Non-Governmental Environmental Foundation for active participation in the Green Spring national community clean-up and for supporting environmental initiatives. of waste recycled NLMK Lipetsk topped the Best Separate Waste Collection System category of the Green Healthy Ofﬁce competition. GLOBAL SUSTAINABLE DEVELOPMENT GOALS 162 163 Statement by member of the Board of Directors About the Company Corporate Governance Our Team Environmental Protection Appendix ANNUAL REPORT 2020 NLMK GROUP STRATEGIC ENVIRONMENTAL GOALS UNTIL 2023 OUR APPROACH TO MANAGING ENVIRONMENTAL PROTECTION Target KPI Units 2018 (baseline year) 2020 2023 target Approved earlier Compliance of environmental indicators of NLMK Group with best practices Specific emissions kg/t of steel % 18.9 89 19.8 (18.61) 95 18.0 92 ● A responsible attitude towards the environment and the efficient use of natural resources are the key principles of NLMK Group’s Sustainable Development Policy. The Group objectively assesses environmental risks and is committed to minimizing them. It allocates significant resources to various environmental programmes and the implementation of innovative technologies. Environmental protection is a top priority of NLMK Group’s activities. The Management Board’s Investment Committee is directly involved in reviewing Waste recycling share NLMK’s Environmental Programme. The Investment Committee includes vice presidents and directors of NLMK companies. The Investment Committee devotes special attention to the results of the annual environmental assessment, approves the investment budget for projects aimed at reducing environmental impacts, and oversees the investment budget for the Environmental Programme and its execution. NLMK Vice President for Energy and Environment is responsible for ensuring the efficiency of environmental and energy management, overseeing the execution of the approved portfolio of projects, achieving environmental targets, and resolving key issues in the field of environmental protection. The Environmental Department coordinates environmental management, including managing environmental risks and implementing advanced eco-friendly technologies, and organizes activities which aim to reduce the Company’s impact on climate. Each of the Group’s companies has an environmental protection service, which is responsible for, among other things, daily monitoring of compliance with environmental requirements, supporting production units, assessing environmental risks, supporting the implementation of environmental projects, and implementing systems that assess the maturity of environmental indicators and improve environmental management. Laboratories of production and environmental control, which are part of NLMK Group’s Environment function, monitor and measure the amount and/or composition of the emission, state of the air at the border of sanitary protection zones, the water quality in surface water, groundwater, industrial and household wastewater, drinking water quality, and soil condition at the NLMK Group production sites and sanitary protection zones, providing reliable data for the environment analysis, performed by the environmental protection services. Specific СО2 emissions, stationary sources (Scope 1+2) СО2 emissions reduction program t/t of steel 2.00 2.10 (1.981) 1.91 Approved in 2020 ● ● CO (NLMK Lipetsk) NОx (NLMK Lipetsk) SOx (NLMK Lipetsk) Dust kg/t of steel kg/t of steel kg/t of steel kg/t of steel 16.3 1.2 16.8 (16.01) 1.3 (1.21) 1.7 (1.71) 14.8 1.1 Air impact reduction by individual substance (specific emissions) 1.7 1.6 1.2 1.4 1.4 (1.21) 1st Class substances RF Group 0.08 (0.071) 0.7 (0.71) 12.5 (13.91) 29 0.07 0.6 13.2 30 NLMK takes a comprehensive approach to environmental management by focusing on improving energy efficiency, reducing air emissions by upgrading equipment, reusing and processing waste, conserving water resources, and rehabilitating contaminated land. g/t of steel 0.08 0.8 17.6 26 Specific water discharge (NLMK Lipetsk)2 m3/t of steel Reduction of impact on water resources Pollutants discharge into water bodies ‘000 t ● Overburden usage share (Mining Division) Increased usage of overburden, tailings, and iron-containing wastes % % STRUCTURE Share of iron-containing waste utilization3 93 99 101 NLMK’s management team is actively involved in the environmental management process: ● The Group’s CEO and Board of CERTIFICATION Directors review environmental performance on an annual basis. The Strategic Planning Committee TARGETS AND KEY PERFORMANCE INDICATORS In 2020, NLMK Group was awarded Environmental Product Declaration (EPD) certiﬁcates for rebar NLMK works continuously to systematize its environmental management ● NLMK recognizes the importance of efficient environmental management. As part of its Environmental Programme under Strategy 2022, which is reviewed and supplemented annually following a risk assessment, the following targets have been established: under the Board of Directors operations in accordance with modern international standards. NLMK Group employs an Environmental Management System, which enables it to identify and monitor environmental issues and the risks of its activities. EPD certification will boost the competitiveness of NLMK products in the Northern Europe market (in Sweden, Norway, Denmark, and Finland), where special attention is paid to energy efficiency and environmental safety when selecting a product. studies risks related to sustainable development, including those related to environment, atmospheric air, water resources, soil, biodiversity, and climate change (including greenhouse gas emissions), and approves the Environmental ● Minimizing the impact that the Group’s Russian and international companies have on the environment, and complying with all applicable environmental standards and environmental risk management commitments Increasing the waste recycling rate Reducing specific air emissions The Declaration includes a detailed description of the rebar product and how it impacts the environment throughout its life cycle: from feedstock and other materials used in production to the mode of transport used to deliver the product to consumers. It also discloses the main types of waste generated in rebar production, its amount and how it is disposed of. The volumes of emissions into the atmosphere and water bodies and the methods of handling them are also indicated as well as the recycling possibilities and methods after rebar loses its consumer properties. ● ● ● Reducing the impact on water resources The ISO 14001:2015 standard has been implemented at 14 of the Group’s facilities. Programme and investments in environmental protection projects. The Management Board reviews key An important highlight in 2020 was the update of the Group’s 2023 target to reduce greenhouse gas emissions. NLMK Group intends to continue reducing greenhouse gas emissions while increasing its steel output by 2023. The specific emissions target is 1.91 tonnes of CO2 per tonne of steel vs. 2.00 tonnes in 2018. ● components of the Environmental Programme, approves its key performance indicators, and signs off on its execution at all the Group divisions. In order to ensure a systematic approach to environmental management at the Group’s facilities, supervision and recertification audits for compliance with ISO 14001:2015 are carried out on a regular basis. The declaration assessment, carried out by an independent expert from the declaration developers, confirmed that the environmental performance in the production of NLMK Long rebar meets international requirements. In 2020, NLMK Group set additional targets for reducing air emissions of selected substances and the impact it has on water, and for increasing the use of overburden, tailings, and iron-containing waste. The target indicators are given in the table. NLMK Group Environmental Programme envisages the implementation of a portfolio of projects, which aim to achieve the targets mentioned above. 1 Without the impact of temporary factors, which have to do with lower production. Industrial and household wastewater, total. Without overburden and tailings taking into account accumulated sludge. 2 3 1 For more details on greenhouse gas emissions see the climate section of the Report. 164 165 Statement by member of the Board of Directors About the Company Corporate Governance Our Team Environmental Protection Appendix ANNUAL REPORT 2020 INVESTMENT MONITORING, CONTROL, AND COMPLIANCE The Company also engages its employees in the environmental control process. In 2020, NLMK Group’s Lipetsk site launched a rapid response system for environmental incidents. By calling the hotline or leaving a WhatsApp message, the company employees and local residents can report an incident or discrepancy. The hotline for environmental issues helps to quickly record appeals and inform the residents directly about the real state of affairs. In addition, the solution complements the internal environmental improvement system (IEIS), designed to ensure the environmental safety of the plant. As part of this system, shop employees themselves regularly find and eliminate environmental inconsistencies or their root causes. IN ENVIRONMENTAL PROTECTION NLMK Lipetsk introduced continuous environmental monitoring NLMK conducts internal audits to assess its environmental impact. It also has a production control system in place. Internal environmental audits involve the comprehensive monitoring of operations at the Group’s companies, including treatment facility performance tests, measures to reduce the environmental impact of generated waste, and an environmental production plan to reduce specific air emissions. The NLMK Lipetsk environmental laboratory successfully confirmed its Each year NLMK Group commits significant resources to ensuring the accident-free operation of equipment and the implementation of investment projects that have an environmental impact. Spending on environmental management over the reporting period totalled more than $183 million, an increase of 44% over the past five years. accreditation following an audit by the Federal Accreditation Service. In addition, the laboratory was able to perform 17 new measurements of substances and compounds, as well as measure the level of industrial noise in line with best international practices. The Group employs environmental production monitoring procedures with support from accredited laboratories in order to monitor the implementation of resolutions, prevent non-compliance with effluent discharge standards, and monitor sources of emissions and atmospheric quality at NLMK Group companies. These procedures have been agreed with state supervisory bodies and are regulated by legal GRI 303-2 The plant’s environmental laboratory daily monitors the impact of production on the environment and assesses the air quality not only at the plant, but also in the city. Every year, more than 26,000 tests are carried out, or close to 100 every day. documents . In 2020, the laboratory started testing the systems for online monitoring of air pollution. These are software and hardware complexes for live monitoring of substance concentrations. They include compact automatic measurement modules and information systems with a reporting function. Following the pilot tests, it is planned to install ten monitoring complexes in Lipetsk for continuous monitoring of the state of atmospheric air by meteorological parameters and 21 pollutants. The installation of online monitoring systems will enable NLMK environmental experts to obtain the most objective and complete information about the state of the city’s atmosphere, respond to changes, and take necessary measures in case of deviations. NLMK GROUP SPENDING ON ENVIRONMENTAL PROTECTION, $ M GRI 103-2 Supervisory bodies conduct regular annual checks, both scheduled and unscheduled, of the Group’s companies to ensure they comply with Russian legislation as well as stakeholder expectations. A total of 39 checks were carried out by local environmental supervisory bodies in 2020. No significant fines or non-monetary sanctions were imposed on NLMK Group, and no legal proceedings were brought against the Group seeking compensation for damage to the environment or to third parties. There were GRI 307-1 In 2020, NLMK Group launched a project to equip air emissions and wastewater disposal sources with automated monitoring and data transmission devices. The Company plans to allocate close to RUB 800 million for the implementation of this legislative requirement in the next five years. The programme for creating an automatic control system for emissions and water runoff for NLMK Group’s Russian companies was approved by the Group’s Investment Committee in November 2020. 202 183 175 95 no environmental accidents since the beginning of NLMK Group’s operations . 124 101 127 73 123 90 PAYMENTS FOR NEGATIVE ENVIRONMENTAL IMPACT, $ M Also in 2020, the industrial and environmental control laboratories began implementing the Ecology Laboratory Information System (ELIS), which is expected to automate processing, storing, and creating reports based on the measurement results. In the ELIS, measurement data are received directly from laboratory equipment, measurement protocols are automatically generated, and data on previous measurements are stored. The implementation of ELIS will reduce the probability of errors in calculations, confirm the transparency and reliability of laboratory tests for the regulator, and increase labour productivity by 10%. In 2020, the project was implemented in three of the six laboratories of the Group’s Russian companies. 82 80 78 54 Indicator 2016 2.4 1.6 2017 2.6 2018 2.3 2019 1.7 2020 1.8 33 Entire Group 1 2016 2017 2018 2019 2020 Investment projects Current expenditures on environment protection Russian assets 1.9 1.3 1.0 0.9 The payments have been decreasing over the last five reporting years, which is evidence of the reduction in the negative impact of the Group’s businesses on the environment. In 2020, the share of over-limit payments in the structure of payments for the negative impact on the environment of the Group’s Russian assets amounted to 19% (compared to 21% in 2018). In 2020, despite the pandemic, the financing of the Group’s environmental investment projects increased by 5% compared to 2019. Due to these capital investments, major overhaul of Blast Furnaces No. 4 and No. 6 and BOFs No. 2 and No. 3 in the NLMK Lipetsk BOF Shop No. 2 was completed with a total impact on emissions reduction of 9,000 tonnes. In addition, local treatment facilities were upgraded, and a new section for waterless BF slag cooling was built, enabling a 3.5x reduction in hydrogen sulfide emissions. TRAINING NLMK Lipetsk arranged Green City environmental seminars In 2020, NLMK Lipetsk implemented a project on video surveillance of the main sources of the company’s emissions. A system of 63 video surveillance cameras NLMK devotes special attention to fostering a culture of environmental awareness among employees at its companies and in communities in the regions where it operates. A series of educational courses, including the Key Rules for Protecting the Environment document and Protecting the Environment distance training course, have been developed for the benefit of all the Group’s staff. Special environmental protection training consists of modules covering the use of dust and gas cleaning facilities and treatment equipment, how to eliminate situations which could lead to environmental issues, and waste handling. At least 10% or 5,000 The project aimed to raise awareness among residents of Lipetsk about the current environmental situation in the city and the Company’s projects to reduce its impact on the environment. Several important topics were covered at these seminars: health of the residents, areas affected by the industry, programmes for improving the environment at the plant and in the city, as well as sustainability tools. In 2020, 15 training sessions were arranged to reach a wide audience, including representatives of government authorities, the press, entrepreneurs, students, and schoolchildren. Open communication between NLMK Lipetsk and the city is key to building an effective partnership in the field of environmental safety. The Company also plans to hold interactive meetings on ecology for students of all schools and universities of the city. enables identification of any visible emissions and allows reacting quickly to reduce the possible negative impact on the atmospheric air. Together with the video surveillance system, a system for analyzing NLMK’s visible emissions is being developed using machine vision algorithms and deep learning methods. This will enable identification of any atypical emissions into the atmosphere recorded by video surveillance cameras; determine their location, and the estimated volume. Upon receiving the results, the production department experts and the plant’s Industrial Environment Department will conduct detailed analysis and determine the causes of emissions. The video cameras cover the main facilities of the plant with significant gross emissions, and companies with a significant visible impact on the atmosphere at the plant border. The cameras also capture the view of the site as seen by Lipetsk residents. This new system will prevent and eliminate the causes of atypical emissions into the atmosphere. Online training is also available on the corporate portal. Two videos are currently available: ‘Environmental Initiatives’ and ‘Handling Class I and Class II Hazardous Waste’. of employees go through environmental training sessions and development courses every year. 1 For the Group’s international companies, costs of procuring permits are taken as payments for negative environmental impact. 166 167 Statement by member of the Board of Directors About the Company Corporate Governance Our Team Environmental Protection Appendix ANNUAL REPORT 2020 NLMK Group has been running the Green Office Programme for several years already. It aims to enhance MEMBERSHIP AND PARTICIPATION environmental developments in Europe and is particularly active in the EU carbon regulation activities. NLMK Group is committed to the sustainable steelmaking principles promoted by the EUROFER. IN ORGANIZATIONS the environmental commitment of the Group’s employees and teaches people about how they can contribute to reducing emissions into the air, water, and soil, and also reduce fuel costs in the process. In 2020, the programme was extended to all the Group’s Russian companies and standard Green Office activities became available for over 30,000 employees of the Group. NLMK works with Russian and international associations to establish an effective dialogue on issues In 2020, NLMK Group improved its standing in the World Wildlife Fund (WWF) Russia and National Rating Agency’s Environmental Transparency Rating of Mining & Metals Companies. NLMK ranked sixth, improving its standing by three positions compared to 2019. The main purpose of the report published by WWF Russia was to rank Russian companies according to their transparency in matters of environmental responsibility. The research examines the activities of 40 major companies and has been published since 2015, with the support of the UN Development Programme, the Global Environment Facility, and the Russian Ministry of Natural Resources and the Environment. surrounding the sustainable use of natural resources. In particular, NLMK Group is a member of the World Steel Association (WSA), which represents over 170 steel producers across the globe. NLMK is a member of WSA expert groups on the environment, sustainable development and climate, and participates in the Association’s events and expert meetings. As part of its collaboration with the WSA, the Group collects and submits data on sustainable development indicators on an annual basis and participates in steel products life cycle assessment. In 2018, NLMK Group signed the Sustainable Development Charter, which spells out the commitment of WSA members to treating steel as a key element in a sustainable world and their willingness to be guided by environmental, social, and economic sustainability principles. In 2020, the Company participated in the Worldsteel Steelie Awards and was shortlisted in the Excellence in Sustainability category. In 2020 NLMK Group took on the role of a strategic partner for the accelerator, GreenTech Startup Booster, organized by the Skolkovo Foundation, with the support of the Russian Ministry of Natural Resources and the Environment. More than 150 companies participated in the project, organized by the Skolkovo Foundation, with the support of the Russian Ministry of Natural Resources and the Environment, Ministry of Construction, Ministry of Energy, and industrial partners. Experts from NLMK, the official industrial partner of the programme, evaluated their projects. NLMK experts were primarily interested in solutions to respond to the current environmental and climate protection challenges of the Company. These include efficient dust suppression systems, emission control systems, air and water monitoring systems, resource conservation, and waste recycling projects. Among the finalists of the accelerator, NLMK singled out a technology for producing marketable products from liquid metal slags for the construction of roads and housing, production of compact gas treatment plants, and digital solutions for optimizing waste management processes. These solutions will be further analysed and the companies may be offered the opportunity to develop their pilot projects at NLMK Group sites. SUPPLIER ENVIRONMENTAL ASSESSMENT Starting from 2007, all suppliers of NLMK Group have been subjected to audits, which cover compliance with environmental standards. All providers of raw materials, supplies, and equipment to NLMK Group as well as suppliers of services (contractors), undergo a qualification procedure, which also includes assessments for compliance with environmental requirements. The environmental criteria for assessing suppliers include compliance with legal requirements, availability of necessary permits and Environmental Management Systems. For contractors, the assessment is carried out on the basis of internal corporate GRI 308-1 documents through a specially developed qualification questionnaire . They are obliged to sign the Agreement on occupational health, industrial and fire safety, work performance, environmental protection as well as onsite and access control for relations with its counterparties, which will also enable the Group’s enterprises to deal efficiently with suppliers and contractors on matters concerning environmental protection and to effectively prevent environmental violations from their side. NLMK Group also cooperates with other steelmaking companies in exchanging best practices and promoting sustainability principles. In 2020, NLMK Group established regular contacts with voestalpine, Tata Steel Group, and SSAB. At regular meetings, the companies discuss their main environmental indicators, approaches to environmental protection, implemented and planned projects to reduce the impact on the environment. NLMK Group is open about environmental issues, recognizing that environmental protection is a common cause, free from competition. NLMK Group is also a member of the Russian Steel industry association and takes active part in the work of its environmental committee, which reviews various environmental aspects of steelmaking operations and environmental regulation issues. The qualification, assessment, and audit procedures are set out in NLMK Group’s regulatory documents. In 2020, The decline in supplier audits in 2020 is due to the COVID-19 pandemic. the Company updated its Regulations on the Qualification of Contractors for Compliance with the Management Systems Requirements and the Regulations on the Contractor Management in the field of Occupational Health, Industrial and Fire Safety, Environmental Protection and Road Safety. The Group works with its suppliers during the audits to eliminate environmental deficiencies. In particular, in 2020, based on the audit results for two suppliers, measures were initiated to finalize the permitting environmental documentation of the audited facilities in order to ensure compliance with environmental requirements. NLMK is a member of the Committee on Ecology and Environment NLMK joined the international Competence Centre for the development of advanced metallurgical and environmental processes Management of the Russian Union of Industrialists and Entrepreneurs, the main platform for consolidating the Russian business community’s position on various environmental aspects. In addition, NLMK Group became a member of the newly created RUIE Committee on Climate Policy and Carbon Regulation, where NLMK’s Director of Environmental and Climate Affairs heads the international carbon regulation area. SUPPLIERS OF FEEDSTOCK, MATERIALS, AND EQUIPMENT TO NLMK GROUP SCREENED USING ENVIRONMENTAL CRITERIA DURING AUDITS GRI 308-2 SUPPLIERS WITH MEASURES TO IMPROVE ENVIRONMENTAL COMPLIANCE FOLLOWING NLMK Group became an industrial partner of K1-MET, a leading European Competence Centre for the development of advanced metallurgical and environmental processes. Contractors who have been found not to meet the established criteria following the qualification and audit procedures are not permitted to supply raw materials, supplies, or equipment or to provide services to NLMK Group companies. In 2018–2020, 100% of new service providers were screened using the environmental criteria. In addition, all products supplied to NLMK companies come with safety data sheets that regulate potential hazards associated with the handling of products and prescribe the respective necessary precautions. AUDITS, % OF TOTAL AUDITS GRI 308-2 CONDUCTED The first joint project of NLMK, voestalpine, and K1-MET was launched in January 2021. The project aims to develop a technology for processing zinc-containing waste from electric arc furnaces and BOF steelmaking. The new technology will enable the production of materials with higher contribution margins from recyclables with the involvement of thousands of tonnes of iron in the production cycle of the Group companies. An important environmental impact of using this technology is the replacement of primary raw materials with secondary resources, which reduces the volume of storage of associated products and helps to reduce greenhouse gas emissions. 39 80 69 36 34 41 38 13 NLMK Europe is a member of the European Steel Association (EUROFER), which discusses 2017 2018 2019 2020 2017 2018 2019 2020 168 169 Statement by member of the Board of Directors About the Company Corporate Governance Our Team Environmental Protection Appendix ANNUAL REPORT 2020 TOTAL VOLUME OF WATER In 2020, there was a downward trend in water consumption volumes compared to 2019, and a five-year low of natural water consumption for industrial and household needs was reached, thanks to operational measures to control water consumption and eliminate leaks. WATER RESOURCES WITHDRAWN FOR NLMK GROUP PRODUCTION NEEDS BY REGION, GRI 303-1, GRI 303-2 2020, M M3 GRI 303-3 NLMK Group is committed to reducing the volume of water that it consumes, and devotes considerable efforts to lowering its water intake volumes in favour of reusing water. The Group’s companies are likewise focused on reducing the volume and improving the quality of wastewater produced, which is in line with the IMS Policy of NLMK Group. the outlet and reduce the emission of substances with an unpleasant smell, a source of discomfort for residents of nearby areas. In December 2020, the main design solutions for the upgrade of the structures at two sections of the Lipetsk WWTP were developed. NLMK experts’ participation in this work allowed finding the most efficient solutions for the city and significantly optimizing the amount of investment while maintaining the cleaning targets. 30.0 At the same time, 74% of the water consumed for production needs by the Group’s international companies is direct-flow water for cooling equipment, which is not polluted during use and is fully returned to the natural environment unchanged. Over the last 40 years the annual withdrawal of fresh water from the Voronezh River by the Group’s core site in Lipetsk has been reduced by over nine times down to 21 million m3/year (from the level of 189 million m3/year in 1980 when production output was merely 9 million tonnes). 83.4 WATER WITHDRAWAL Russian companies International companies GRI 303-1, GRI 303-2 As part of the climate risk assessment initiated in 2020 by Carbon Trust Advisory Limited, an independent, competent third-party organization, which has relevant experience with commercial companies and government organizations since 2001, a risk assessment of water availability in the areas where NLMK Group operates was carried out. Based on the results of the assessment, it was found that in the short and medium term, this risk has a low probability of affecting the Group’s activities. NLMK companies withdraw a small proportion of their water from external sources for production and drinking purposes (less than 4% of the Group’s total water consumption). Maintaining the same low level of freshwater intake as production volumes grow is an important objective of NLMK Group. For industrial water supplies, the companies use water from surface water bodies, underground sources, and rainfall. NLMK Group companies do not use wastewater from other organizations. TOTAL VOLUME OF WATER WITHDRAWN FOR NLMK GROUP PRODUCTION NEEDS BY SOURCE, 2016–2020, M M3 GRI 303-3 Indicator 2016 61.5 62.6 2017 60.9 58.1 2018 60.1 2019 60.9 57.1 2020 58.4 54.9 Surface water Ground water The Group’s companies do not withdraw water from wetlands included on the Ramsar List of Wetlands of International Importance or from water bodies located within environmental conservation sites. 58.0 Rainwater collected and stored by organization 0.1 0.1 0.1 0.1 0.1 The water bodies that supply NLMK companies are assessed as being not particularly vulnerable given their size, role, or status as being rare, threatened, or endangered. Group total 124.3 119.1 118.2 118.2 113.4 Group total excl. direct-flow water for cooling equipment and mine drainage water (not used in the water loop) 57.0 54.6 537 54.1 53.1 The Group’s companies withdraw water in accordance with current permits and have no significant impact on the water sources in question. Water withdrawal by NLMK Group companies does not exceed 2.5% of the average annual water flow GRI 303-5 In March 2020, NLMK Lipetsk joined the initiative to discuss the state of urban sewage treatment plants and their potential upgrade with the Lipetsk city administration and the Lipetsk municipal WWTP. As part of this initiative, an upgrade programme was developed together with NLMK experts, which aims to improve the quality of wastewater at volume . WATER WITHDRAWAL FROM THE VORONEZH RIVER, LIPETSK SITE WATER WITHDRAWAL (CONSUMPTION, INCL. FROM WATER UTILITIES) FOR The Group’s companies are focused on reducing the volume and improving the quality of wastewater produced, which is in line with the IMS Policy of NLMK Group. In 2020, the Lipetsk site started working on a project for feeding treated household wastewater back into the company production water supply, which will reduce the intake of fresh natural water by 2 to 8 million m3. POTABLE WATER SUPPLY AT NLMK GROUP’S COMPANIES, 12.3 9.8 9.3 9.1 8.2 M M3 GRI 303-3 189.3 13.4 138.9 12.3 12.2 12.0 TOTAL VOLUME OF WATER CONSUMED BY NLMK GROUP GRI 303-3, GRI 303-5 11.1 96.5 7.5 7.5 5.3 7.2 5.1 7.0 4.9 6.8 4.7 5.5 21.8 21.3 138 131 130 130 125 124 119 118 118 113 2016 2017 2018 2019 2020 2016 2017 2018 2019 2020 91 84 82 81 81 Water withdrawal from the Voronezh river, m m3 Crude steel output, m t 2016 2017 2018 2019 2020 Total water withdrawn for production needs and domestic purposes, m m3 Water consumption for production needs, m m3 Consumptive water use (the difference between total water intake and wastewater disposal), m m3 Specific consumptive water use, m3/t of steel Specific consumption of fresh water for production needs, m3/t of steel 170 171 Statement by member of the Board of Directors About the Company Corporate Governance Our Team Environmental Protection Appendix ANNUAL REPORT 2020 The regions where the Group operates offer a high availability of water a roject to redirect pumped clean mine drainage waters directly into the water body without using them in the water-loop cycle, this way the company plans to return a valuable resource in the form of non-polluted water to the natural environment. resources. The Group has no operations in water-stressed areas. According to the UN methodology, a region or country is considered water-deficient if its annual water supply is below DISCHARGE 1,700 m3 per person. The regions where NLMK Group companies are located are not water-deficient. Only one Monitoring of discharge into water bodies at all sites is an important environmental aspect of NLMK Group’s operations. location, namely the Belgorod Region where Stoilensky is situated, is exposed to a local water shortage as related to potable and household water supply in some areas of the region during dry years (not in the area where Stoilensky operates). Recognizing the importance of preserving the water resources in light of shortage risks, Stoilensky is implementing projects to cut down potable water consumption and taking action to protect water resources from the harmful effects of operations, including though better safety and the reliability of hydraulic structures. A dedicated certified laboratory The Group’s international companies mainly discharge water that is used for cooling equipment in once-through systems. This water does not get polluted in use and is returned into water bodies in the same condition as it was withdrawn, without disrupting the natural state of the environment. TOTAL VOLUME OF WATER DISCHARGE BY NLMK GROUP, INCLUDING RUSSIAN AND INTERNATIONAL COMPANIES, 2020, M M3 GRI 303-4, GRI 306-1 15.8 RECYCLED AND REUSED WATER SHARE OF RECYCLED WATER IN NLMK GROUP’S TOTAL WATER CONSUMPTION, % VOLUME OF WATER RECYCLED AT NLMK GROUP COMPANIES, M M3 regularly samples and checks the quality of water withdrawn, sewerage and water bodies in the area of potential impact. In 2020, Stoilensky started working on 27.5 Russian companies International companies In order to reduce their negative impact on water resources, the majority of NLMK Group’s companies are equipped with water recycling systems. This also mitigates the Group’s water-related risks. 96.6 96.6 3,312 96.3 96.4 96.5 3,265 3,193 3,186 3,173 TOTAL VOLUME OF DISCHARGE BY RECEIVING WATER BODY, M M3 GRI 303-4, GRI 306-1 Indicator 2016 46.5 2017 47.3 2018 49.0 2019 47.7 2020 43.3 Water recycling solutions have been put in place at 14 NLMK Group assets. These solutions include both local systems for individual facilities and entirely self-contained subsidiary-wide systems. This helps to reduce water withdrawal and effluent discharge into surface water bodies. The share of recycled water supply at NLMK Group remains at a consistently high level. The goal of Strategy 2022 is to maintain a recycled water supply of at least 96% amid increasing production output. Total volume of water discharge for NLMK Group1 2016 2017 2018 2019 2020 2016 2017 2018 2019 2020 Water discharge as % from total water supply 1 1 1 1 1 POTABLE AND PUBLIC WATER CONSUMPTION AT STOILENSKY, ‘000 M3 Into surface water bodies, including rivers, lakes, reservoirs, and canals 44.4 0.2 2.1 45.2 0.2 2.1 46.8 0.3 2.1 45.7 0.3 41.6 0.3 1.7 1,183 including into seas and oceans 885 Transferred to third-party organizations for treatment 2.0 650 610 Specific water discharge1, m3/t of steel 428 391 7.5 7.0 6.8 7.5 7.2 The figures provided for recycled water supply show the additional water consumption by NLMK Group that would have occurred if no water recycling had been in place at its enterprises. 2015 2016 2017 2018 2019 2020 1 1 Source: Ministry of Natural Resources and Environment of the Russian Federation, http://www.mnr.gov.ru/en/ Industrial and household wastewater, total. 172 173 Statement by member of the Board of Directors About the Company Corporate Governance Our Team Environmental Protection Appendix ANNUAL REPORT 2020 ACTIONS TO REDUCE DISCHARGES OF HOUSEHOLD WASTEWATER INTO THE VORONEZH RIVER AIR EMISSIONS Actions Environmental improvement Overhaul of mechanical treatment facilities of NLMK’s LWWTP, local wastewater treatment plants (repair of the sand traps and grease traps) Improving the efficiency of NLMK's LWWTP (optimizing the process performance) Reduction of water disposal through LWWTP due to the redistribution of flows in the plant's water supply system and restoration of the tightness household sewerage wells At 2020 year-end compared to 2019: ● Volume of wastewater disposal reduced by 0.7 million m3 (−8%) ● Inflow of pollutants into the water Monitoring of the state of networks and structures of NLMK’s household sewerage system (detection and prevention of unauthorized discharges of wastewater into the plant's sewage networks) body reduced by 1,900 tonnes (−19%) Interaction with the Lipetsk municipal sanitation agency (improvement of wastewater quality and minimization of residential wastewater discharges to the plant’s sewage networks) In 2020, actions were taken at the main site in Lipetsk to reduce discharges of household wastewater into the Voronezh River. and domestic purposes meets the standards set by applicable regulations. The appropriate methods are applied according to the type of wastewater in question (mechanical purification, oil/water interceptors, biological purification, decontamination). All discharged materials have a mineral content of less than GRI 304-4 1,000 mg/L. No untreated discharges are made into water bodies . Each company makes use of water purification and treatment technologies that ensure the quality of wastewater as well as water used for industrial The Company’s Environmental Strategy sets the goal of reducing the discharge of pollutants with wastewater into water bodies by 25% compared to 2018. The Group companies develop and implement projects aimed at achieving this target. NLMK Group devotes considerable efforts to reducing its air emissions. The Group’s Strategy 2022 includes a target of reducing specific air emissions from 18.9 kg/t in 2018 to 18.0 kg/t of steel by 2023. programme was developed. The Company plans to start working on priority projects under this programme already in 2021. POLLUTANTS DISCHARGED INTO WATER BODIES WITH WASTEWATER, ‘000 T NLMK Lipetsk implemented a project to reduce the discharge of pollutants into water bodies As part of the four-way Cooperation Agreement between NLMK Group, the Russian Ministry of Natural Resources and the Environment, the Federal Supervisory Natural Resources Management Service (Rosprirodnadzor), and the Administration of the Lipetsk Region, signed in summer 2019, by the end of 2020 NLMK Lipetsk implemented 5 out of 9 activities planned by 2024. They are aimed at implementing the Ecology National Project and reducing gross air emissions in the atmosphere. The total emissions reduction was 9,000 tonnes. Substantial environmental investment of $1.3 billion since 2000 reduced NLMK Group’s specific emissions by more than a half: from 43.3 to 19.8 kg/tonne of steel. Overall, with almost a two-fold increase in production the amount of cumulative impact on the environment was reduced by 10%. NLMK Lipetsk implemented an investment project to upgrade local wastewater treatment facilities. In line with the project, the cleaning units (aerotanks) were upgraded and a pontoon pumping station was built to reduce the unbalanced water and use it for BF slag processing. The goal of the project was to achieve the standards for 13 substances out of 19 released into the Voronezh River. The total investment in the project amounted to RUB 118 million. The project helped to reduce maximum concentrations for all substances, while average annual concentrations reached the established standards for 15 out of 19 indicators. 17.6 16.2 13.5 15.7 12.7 15.3 In order to attain this target, the Environmental Programme 2022 envisages over 30 investment projects that aim to reduce the impact on the atmosphere. When upgrading its purification equipment, NLMK seeks to integrate and utilize best available technologies (BAT). 12.5 8.2 11.2 10.0 2016 2017 2018 2019 2020 Lipetsk: one of Russia’s cleanest steelmaking centres NLMK Group NLMK Lipetsk Over the last five years, the volume of water disposal at the Lipetsk site was reduced by 4.2 million m3 (−34%), the mass of substances going into the river was reduced by 5,300 tonnes (−39%). In 2020, NLMK Group made an inventory of all existing de-dusting systems to check their compliance with the requirements of environmental protection and dustiness at the workplace. Following the inventory, deficiencies were identified and Since 2014 the city of Lipetsk, which is home to NLMK Group’s largest asset, has been officially recognized as the ‘cleanest’ steelmaking city in Russia, according to data from Russia’s Federal Service for Hydrometeorology and Environmental Monitoring (Roshydromet). Thanks to environmental protection measures implemented at the Lipetsk site, the Integrated Air Pollution Index (IAPI)1 in Lipetsk decreased almost ten-fold from 2000 to 2020. Going forward, NLMK Group is considering the possibility of using wastewater treated in LWWTPs in the technical water supply system to seize the discharge of household wastewater into the Voronezh River. a long-term de-dusting system upgrade 1 The IAPI indicator, which was developed and calculated by Roshydromet, is used by the Russian Ministry of Natural Resources and the Environment to conduct scientific assessments of air pollution in Russian cities. 174 175 Statement by member of the Board of Directors About the Company Corporate Governance Our Team Environmental Protection Appendix ANNUAL REPORT 2020 ENVIRONMENTAL PROGRAMME EMISSION REDUCTION PROJECTS IMPLEMENTED IN 2019–2020 In 2020, gross emissions decreased by 4,000 tonnes (by 1.3%) compared to 2019. Specific emissions per tonne of steel were also reduced, driven by implemented investment projects. Specific emissions display a planned decline towards the target of 18.0 kg/t of steel in 2023 with production output kept flat. SPECIFIC VOLUME OF AIR EMISSIONS BY NLMK GROUP NLMK GROUP’S EMISSIONS BY HAZARD CLASS, % <1 0.2 Site Measure Eﬀect 20.2 18.91 15.7 20.0 19.8 19.5 17.1 7 18.9 17.5 8 ● NLMK Lipetsk Revamp of de-dusting systems, replacement of hot-blast stoves and re-tooling of slag granulation plants during overhauls of Blast Furnace No. 6 Reduction of H2S, SO2, dust, and CO, elimination of visible emissions Achieving a 99.9% purification rate, returning 100% of the captured dust to production Total effect – 5,663 tpa 18.61 15.8 16.6 332 ● 10 ● ● 334 332 317 313 Upgrade of de-dusting systems during the overhaul of Blast Furnace No. 4 Dust emissions reduction, elimination of visible emissions Achieving a 99.9% purification rate, returning 100% of the captured dust to production Total effect – 234 tpa 74% of NLMK Group’s emissions consist of carbon monoxide, a low-hazard substance of hazard class IV, which is not regulated as a harmful substance in many countries, and cannot harm human health, since it comes from high pipes, is lighter than air, and is dispersed without forming high concentrations in the surface layers of the atmosphere. At the same time, substances of hazard classes I–II account for only 0.2% of the Group’s gross emissions. 74 ● IV carbon oxide III sulfur oxide III nitrogen oxides III dust III-IV other I-II class ● ● 2016 2017 2018 2019 2020 Emissions total, '000 t Steel output, m t Specific emissions, kg/t Reconstruction of off-gas ducts at BOF No. 2 and 3 and construction of secondary emission treatment systems at BOF Shop No. 2 Reduction of dust and CO, elimination of visible emissions Achieving a 99.9% purification rate, returning 100% of the captured dust to production Total effect – 3,096 tpa ● ● I – Extremely hazardous II – Highly hazardous III – Moderately hazardous IV – Low-hazard substance ● ● Revamp of the de-dusting unit (ATU-24) in the refractory shop Over 90% reduction in dust emissions at the facility Performance of de-dusting system up by 20% to 240,000 m3/h ● ● Total effect – 81 tpa Revamp of by-product collection facilities, including merging of coke gas flows from coke batteries Reduction of phenol by 66%, H2S by 31% Road sweeping machines for NLMK and the city of Lipetsk to reduce dust content on site. Dust from production facilities settles on roads and secondary dusting is possible in windy weather. The new road-sweeping machines will reduce the dustiness of the plant’s roads and improve the air quality on its territory and in the city.” In the summer of 2020, NLMK Lipetsk purchased two road-sweeping machines. They will be used to clean industrial roads with high dust content on the territory of the plant and in the city of Lipetsk. They are able to remove up to 2,000 tonnes of dust from the plant’s roads annually. ● ● Construction of a new section for waterless slag cooling of all slag generated in BF Shop No. 1 Full transition to waterless slag cooling, reduction of H2S emission The overall effect is a 3.5x reduction in hydrogen sulfide emissions at the site Swiss Aebi Schmidt sweepers work as a washing vacuum cleaner and suck all the dust into a special hopper when cleaning. The efficiency of road surface cleaning is 98–99%, which is significantly higher than the usual dry and wet cleaning methods. ● Stoilensky Technical re-equipment of the crushing and screening area de-dusting unit (DU-1), Beneficiation Plant Additional capture of 700 tonnes of dust was implemented. The risk of exceeding the maximum permissible emissions at the source is eliminated, four-fold reduction in dust concentration at the workplace ensured The sweeper has a high level of dust suppression. This is achieved through filters for additional air purification and swirling dust flows. When the machine is running, the amount of fine dust particles released into the air is significantly lower than the established standard. Sergey Evseev, Head of NLMK’s Industrial Ecology Department, said: “The new equipment was delivered to the plant as part of measures ● Emission purification level increased from 35% to 96% The new sweepers are also equipped with a recirculation system for water, which can be reused after filtration. Blast Furnace No. 4 becomes cleaner system. The system ensures a purification efficiency of 99.9%, which is in line with the best available technologies. The new equipment will also enable more efficient blast furnace gas treatment for it to be utilized as a secondary energy source. Filtered dust will be utilized in the production of iron-containing briquettes, or fed back into the blast furnace process. As part of the project, the furnace was equipped with a new lining, special refractory blocks that will enhance the resistance of the furnace’s internal surface to thermal loads. Technical solutions and advanced materials will ensure stable operation of the furnace for the next 20 years. NLMK Lipetsk completed an upgrade of Blast Furnace No. 4 with a capacity of 2.1 million tonnes of pig iron per year. The project includes an environmental upgrade of the furnace infrastructure. All the dust generated during hot metal production will be captured by a highly efficient de-dusting After the furnace overhaul, emissions are expected to reduce by 200 tonnes per year. After the associated upgrade of air heaters is completed in 2022, the reduction in gross emissions will total 7,700 tonnes per year. 1 Specific emissions w/o the impact of temporary decline in production output at NLMK EAF assets and NLMK Lipetsk amid overhauls of blast furnace and steelmaking operations 176 177 Statement by member of the Board of Directors About the Company Corporate Governance Our Team Environmental Protection Appendix ANNUAL REPORT 2020 VOLUME OF SIGNIFICANT AIR EMISSIONS BY NLMK GROUP BY SUBSTANCE TYPE WASTE HANDLING AND SOUND USE OF NATURAL RESOURCES GRI 305-7 Indicator 2016 332.4 24.8 1.5 2017 333.8 27.1 2018 331.5 27.2 1.6 2019 2020 313.3 26.1 1.7 Total, ‘000 t 317.0 26.2 1.7 NOx emissions, '000 t WASTE MANAGEMENT NLMK Group utilizes some of the waste generated at its sites in the course of its own activities, and transfers some for reuse by specialized organizations that hold relevant licences. per unit of production, kg/t SO2 emissions, '000 t 1.6 NLMK Group’s waste-handling operations are orientated towards key modern steelmaking trends: minimizing waste generation and increasing the proportion of waste that is processed, reused, and safely disposed of. For example, a priority of the Environmental Programme 2022 is to increase waste utilization and recycling at NLMK Group to 92% (not including such mining waste as overburden and beneficiation tailings). Utilization includes reuse, recycling, and disposal. 28.9 1.7 31.8 1.9 31.7 1.8 29.5 1.9 31.0 2.0 per unit of production, kg/t Particulate matter emissions, '000 t per unit of production, kg/t СО emissions, '000 t The potential environmental impact is minimized through compliance with safe waste- handling standards and by implementing corresponding measures. 25.2 1.5 25.7 1.5 24.4 1.4 22.5 1.4 23.0 1.4 In 2020, total waste generation increased by 14% (by 7.8 million tonnes) due to increased mining output at Stoilensky. The share of recycled waste in 2020, excluding overburden and tailings, increased by 3% compared to 2019 and by 6% compared to the baseline in 2018, thanks to the processing of iron-containing sludge at the Briquetting Plant built in 2019. The share of processed sludge increased from 47% in 2018 to 87% in 2020. Going forward, the Company plans to process the entire volume of generated sludge at the plant and start processing the accumulated sludge. 249.6 15.0 2.6 245.9 14.4 2.6 244.8 14.0 2.7 235.3 15.0 2.8 230.1 14.5 2.6 per unit of production, kg/t Volatile organic compounds, '000 t Hazard class 1 substances1, t per unit of production1, g/t Hazard class 2 substances1, t per unit of production1, kg/t 1.4 1.2 1.3 1.2 1.2 0.09 560 0.04 0.07 552 0.03 0.08 547 0.03 0.08 514 0.08 480 0.03 GRI 306-2 TOTAL WASTE GENERATED AND UTILIZED BY NLMK GROUP, M T 0.03 Indicator 2016 2017 2018 2019 2020 Waste generation1 1.0 1.5 1.5 1.5 1.4 The increase in the specific SO2 emissions compared to previous periods is due to a change in Secondary raw materials recycled by the companies 2.2 0.7 4 1.9 1.0 5 1.8 1.2 4 1.9 1.2 4 2.0 1.2 3 NLMK Lipetsk cuts Н2S emissions Secondary raw materials recycled by third-party organizations the coking charge mix: the share of additives with a high sulfur content was increased. This did not lead to exceeding the maximum permissible concentrations. The SO2 emission standards are met. In order to minimize the consequences of the increase in the sulfur content in the charge, NLMK Group started developing a project for the construction of a desulphurization plant. NLMK Lipetsk has launched an anhydrous cooling system for blast furnace slag as part of its environmental upgrade programme. This will enable it to reduce hydrogen sulfide emissions in the corresponding area by 3.5x and keep the smell from this chemical compound to a minimum. Waste disposal at third-party landfills, % Recycling of secondary iron-containing raw materials, % The implementation of the complex marks the full transition of NLMK Lipetsk’s Blast Furnace Shop No. 1 (three blast furnaces) to dry slag cooling technology. The complex was built in place of a slag dump that had been accumulating since the 1970s. Close to 6 million tonnes of various materials were processed and more than 300,000 tonnes of iron were fed back into steel production in the course of the project. 90 91 93 99 99 OVERBURDEN AND BENEFICIATION TAILINGS GENERATED AND UTILIZED GRI 306-2 BY THE GROUP, M T Indicator 2016 2017 2018 2019 2020 Stoilensky overburden and beneficiation tailings 55.3 53.9 46.6 53.7 61.4 Overburden generation2 50.3 26 48.5 25 39.8 26 51.3 29 60.5 29 Share of utilized overburden, % Generated beneficiation tailings Utilized beneficiation tailings, % 17.6 25 18.2 25 19.5 25 20.5 26 21.4 24 1 Without taking into account secondary raw materials recycled by the companies. 2 The total volume of generated overburden is indicated. For Stagdok and Dolomit, overburden is not waste and is used for backfilling post-mining areas of the mine, as it is developed ‘to the side’, in contrast to Stoilensky, where the mine is being developed primarily ‘into the depths’, and the resulting overburden is mostly considered waste by Russian law, even though it is a non-hazardous inert material. 1 Russian assets. 178 179 Statement by member of the Board of Directors About the Company Corporate Governance Our Team Environmental Protection Appendix ANNUAL REPORT 2020 WASTE GENERATED BY NLMK GROUP BY HAZARD CLASS, NLMK Lipetsk increased recycling of secondary raw materials GRI 306-2 2020, ‘000 T As part of its Environmental Programme, NLMK Lipetsk continued to implement projects to utilize recyclables and reduce the impact on the surrounding areas. The plant processed a 25 ha slag dump with the total weight of accumulated slag exceeding 5 million tonnes. 1,561.1 63.4 0.6 0.1 The slag dump started to accumulate when the first blast furnace was launched on the left bank of the Voronezh River in 1934. Blast furnace slag was drained at a special site far from the residential sector and gradually accumulated, some of it was processed for the needs of road construction. Targeted processing of the slag dump began in 2018 and was completed in just two years. 62,656.6 ꢀꢁꢂ2ꢃꢄꢅꢃ Class V (including 61,393.6 of mining waste) Class IV Class III Class II About a tenth of the recyclables in the dump are metal scrap, varying in size, which was extracted by magnetic separation during processing. The resulting raw materials were used in ironmaking and steelmaking, while the remaining waste rock was utilized in construction. Class I RECYCLING OF SECONDARY IRON-CONTAINING The Company’s approach is to minimize waste generation, recycle as many secondary resources as possible in its own process cycle, and ensure that the remaining unused materials are processed, either internally or by third-party companies. The implementation of the recycling programme will ensure an increase in the rate of internal processing of secondary raw materials at the Lipetsk site from 81% to 94%. RAW MATERIALS1, % TAILINGS DAMS AND HYDRAULIC ENGINEERING STRUCTURES 99 99 Vtorchermet NLMK – a leader in scrap ferrous metal reprocessing 93 Each company of the Group annually develops measures aimed at reducing waste generation, increasing its upcycling in the companies’ operations, and reducing waste disposal at landfills. 91 The organizational structure of NLMK Group includes dedicated services and units responsible for the safety of hydraulic structures. 90 One NLMK Group asset, torchermet NLMK, is an industry leader in scrap metal processing technology. It collects and processes scrap ferrous metals, and supplies Crushed stone and crushed stone mixtures obtained during the processing of steelmaking slags are an example of upcycling material. Construction companies widely use this type of materials for the construction of roads, reclamation of disturbed land, and strengthening the banks of reservoirs. The Stoilenskoye iron ore deposit is mined using the open-pit method. NLMK Group’s sole tailings dams are located at Stoilensky. They were established in 1984, and are being built on the upstream slope. Throughout their operation, no environmental incidents related to the tailings dam systems and structures have been recorded. 2016 2017 2018 2019 2020 NLMK Ural, NLMK Kaluga, and 99.8% of the waste generated by NLMK Group in 2020 was non- hazardous. In the reporting year, NLMK Kaluga implemented an initiative to sift the residues from the cleaning of wagons to obtain man-made soil, which will be used as a material for reclamation. This will reduce the volume of waste placed at landfills by 7,000–8,000 tonnes per year. NLMK Lipetsk with 85% of the high- quality scrap metal they need for steelmaking. The scrap metal that arrives at Vtorchermet NLMK is given a second life in the form of products that are in high demand across various industries: rebar, steel duct, brackets, wire, fixing products, and flat-rolled products. Processing scrap metal helps both rid the environment of scrap and significantly reduce consumption of natural resources and energy. The safe operation of the tailings dam is ensured by means of a number of internal and independent inspections, including: ● Water level control at least twice a day. Visual inspection of engineering structures at least once a day. Quality control of tailings at least once a quarter. Quality control of tailings at least once a quarter. Control of water filtration at the dams at least once a month. The facility’s safety is checked weekly by inspectors from the Federal . Service for Environmental, Industrial and Nuclear Supervision Service ● ● 97.5% of the waste generated by the Group’s Russian sites is classified as Hazard Class 5 (non-hazardous). This waste category has virtually no impact on ecosystems and requires no special handling measures, including licensing. ● In 2020, together with its partners NLMK Group managed to produce carbonized bricks from steel slag with a compression strength of 10 MPa (M100). The properties of this material enable it to be used in the construction industry, at the same time reducing greenhouse gas emissions. The Company continues to develop the project for the transition to industrial production of this material. ● ● ● (Rostechnadzor). Environmental compliance assessment twice a month. Geological survey is carried out annually. Planned inspections of the dam’s technical condition and safety are performed ● ● Production lifecycle ● Currently the Group companies process the absolute majority of secondary resources. In order to attain its targets, the Company instituted a recycling programme with over 15 projects. NLMK Group companies manufacture steel products that can be fully assimilated into the environment once they are no longer of use to consumers. In this regard, ferrous metal products are a valuable raw material that can be reused in steelmaking. annually involving specialized government agencies. Hydraulic engineering structures at the tailings dam are checked involving ● Vtorchermet NLMK is a member of RUSLOM.COM, an organization whose mission and objectives include safeguarding Russia’s access to raw materials and environmental safety by returning recycled resources to the economy and creating a high-tech and efficient sector for handling scrap metal and industrial and consumer waste. government organizations, the general designer, and expert organizations at least once every three years. All steel produced by NLMK Group companies can be recycled and reprocessed. About 35% of the liquid steel output is produced from ferrous scrap. NLMK Group’s operations are part of the circular economy. In September 2018, a comprehensive survey of Stoilensky TMF hydraulic engineering structures was conducted together with representatives of Rostechnadzor, EMERCOM, and other specialized government agencies and entities. The survey assessed the ultimate safety level of the Stoilensky tailings hydraulic engineering structures as ‘normal’ (the best possible option). 1 When calculating the recycling index, data on the total generation and utilization of iron-containing waste and associated products is used. Mining waste is not factored in. In addition to iron-containing waste, the recycling index takes into account slags, slurries, gas cleaning dust, and ferrous metal scrap, which, in accordance with the process and national legislation, are not waste and are marketed or used for the company needs. 180 181 Statement by member of the Board of Directors About the Company Corporate Governance Our Team Environmental Protection Appendix ANNUAL REPORT 2020 There is a local warning system in place at Stoilensky and its operability is checked monthly by Stoilensky’s own staff and Rostechnadzor specialists. A contingency plan for hydraulic structures at the tailings dam has been drafted and is updated each year. Staff training is administered at least once a month. In April 2019, training sessions were held with participation of experts from EMERCOM. There is no need to monitor seismic activity in the area according to the appropriate determination of a specialized state committee. a stability coefficient higher than the standard one. The cost of the tailings storage maintenance programme amounted to RUB 241 million. BIODIVERSITY In accordance with the regulatory requirements, a survey of the hydraulic complex of the tailings storage facility is planned for 2021 with the involvement of state agencies, the general designer, and expert organizations. NLMK Group conducts operations on both industrial lands and residential areas in line with applicable law. AREA OCCUPIED BY GROUP COMPANIES AND REHABILITATED LAND, HA GRI G4-MM1 The Group duly informs local communities about the existence of the tailings dam and holds regular public hearings regarding the development of the facility. The Company’s activities have no direct significant impacts on biodiversity Indicator 2019 11,898 15 2020 11,896 10 Area GRI 304-2 . Stoilensky has introduced an Environmental Management System in accordance with ISO 14001:2015. Land rehabilitated In 2020, the area of NLMK Group’s companies decreased by 2 hectares. Fluctuations in the area over the years are insignificant and are associated with the opening and closing of NLMK Vtorchermet scrap collection sites. EFFICIENT TAILINGS STORAGE TECHNOLOGY Swan Lake Environmental Park: a natural indicator of NLMK’s commitment to a clean environment and biodiversity The water level in the tailings dam is maintained at the level more than 2 m below the crest of the dams, which meets the current safety criteria. In 2020, 762,000 m3 of tailings, rock soil, and crushed stone were used in the construction of the tailings storage facilities, 5,840 m of slurry pipelines were installed, and 4 ha of the dam slopes were reclaimed. In order to further increase the height of the dump protection dam, the necessary amount of engineering and geological surveys and a verification calculation of the dam stability were carried out, according to which the structure design provides Stoilensky, one of Russia’s leading iron ore producers, uses an efficient and environmentally friendly treatment process for the beneficiation of waste rock. It involves liquid extraction followed by the forced transfer of thickened tailings to storage. This process returns 80% of industrial water used during transportation back into the beneficiation process. Additionally, the better resilience of thickened tailings to weathering significantly reduces the dust levels at the tailings dam. As there is no way for excessive water to come into the facility, the overflow risk is mitigated and pressure on the dams is reduced. Thus, given that the tailings are thickened and measures are taken to ensure the safety of hydraulic structures, the risk of dam failure at Stoilensky is under control and has a conditionally acceptable level. Estimates indicate that a transition to fully dry storage of tailings at Stoilensky would inevitability lead to strong dusting, and it would be impossible to completely curb dust, especially in summer. In light of this, the Group considers dry tailings storage to be an unacceptable environmental risk and considers tailings thickening to be the most effective technology for managing environmental risks. NLMK Group production sites are not located on sites that are situated on environmentally protected land or on land with a high biodiversity value. NLMK Group’s activities do not pose any threat to animal or plant species registered on the IUCN Red List Swan Lake Environmental Park was created by NLMK employees in 1978. It is the only bioindicator in Russia and the former Soviet Union that is situated on the territory of an industrial site. The lake is filled with process water from the Lipetsk site that has undergone treatment following its use in production. The environmental park occupies more than 5 hectares of land situated between the BOF shops of the Lipetsk site. It is home to come 500 birds of over 40 species, including 20 rare species. The lake is also inhabited by fish (common and bighead carps), which helps ensure that the waterfowl have a natural diet. Many bird species can only live in natural or near-wildlife conditions. The quality of the environment in the park allows these picky and demanding birds to enjoy long lives and reproduce regularly. or in the Russian Red Book, or to species threatened with extinction GRI 304-1, GRI 304-4 . With a view to preserve biodiversity on the territory of the Group companies, it is prohibited to destroy or damage greenery, build fires, hunt, and fish. These requirements are the same for both personnel and employees of contracting organizations. All places of water intake from surface water bodies are equipped with fish protection devices. The sites’ location does not prevent the movement of migratory birds. In 2020, joint activities were carried out with the Oka State Natural Biosphere Reserve, a nursery of rare crane species, as part of the Eurasian Regional Association of Zoos and Aquariums’ programme for conservation of cranes of Eurasia. The perfect recipe to get rid of dust suppression will be used on dry beaches of the tailing dump. Its main ‘ingredient’ is a special reagent that was tested during a pilot experiment. The Conservation of Cranes of Eurasia programme involves determining the sex of all cranes kept in captivity and drawing up a genetic ID for each captive bird. In addition, genetic studies of cranes in Russia are being conducted in order to identify subspecies, genetic features of individual populations that will help both breeding in captivity and reintroduction into nature. Under the programme, the Company sent for research six blood samples from the Japanese crane and the belladonna crane, both Red Book species, living on the Swan Lake. Thanks to the genetic database of cranes kept in zoos in Russia, created by the Oka Reserve, NLMK hopes to find a male Daurian crane not related to NLMK’s female, for mating. In 2021, Stoilensky plans to carry out dust collection activities on the dry beaches of the tailing dump. It plans to build a flexible hose irrigation system. RUB 135 million were allocated for the project implementation. The tailings storage facility occupies an area of 1,000 hectares, where processing waste, tailings, which are basically fine sand, is stored. Over time, influenced by the sun and wind, it will dry up and dust in dry, windy periods. NLMK Group organized comprehensive assessment of possible involvement in biodiversity conservation projects. NLMK Lipetsk, Stoilensky, and Altai-Koks developed programmes for biodiversity conservation. NLMK experts were able to successfully apply the method of spraying a solution of a special reagent that binds the surface, turning the fine sand into a crust. The effect after applying the solution persists for three months. The reagent itself is a kind of non-toxic glue that binds the surface of the material, forming a dense top layer. At the same time, it makes it possible for water to penetrate through it, so that there are no puddles and there is no flooding. The current system was based on a rigid metal frame. As a result, as the compartments were filled, some of the pipelines were flooded and could not be used, and the emerging new beaches were not irrigated. Swan Lake works closely with other leading Russian zoos and nature reserves to grow and replenish the animal populations. As part of this cooperation, in 2021, 127 new birds belonging to 21 different species will move from the Vorob’i (Sparrows) and Malinki (Raspberries) bird parks, and the Penza and Lipetsk Zoos to a new place of comfortable residence in Swan Lake. In 2020, NLMK Group invested close to RUB 4 million into biodiversity research and conservation, including compensatory measures. Next year, according to the programme for the development of the tailings workshop, it is planned to treat 120 hectares of the tailings storage facility with the reagent solution. During the construction of the new system, an innovative ‘recipe’ for dust 182 183 Statement by member of the Board of Directors About the Company Corporate Governance Our Team Environmental Protection Appendix ANNUAL REPORT 2020 PLANS FOR 2021–2023 Representatives of Belogorye Nature Reserve conducted research at Stoilensky Altai-Koks replenishes ﬁsh stocks at the Verkhneobsky basin NLMK Group’s company located in Zarinsk, Altai Territory has developed a six- year programme for the conservation of aquatic biological resources and their habitat. As part of this programme, the company plans to release more than 100,000 juvenile carp into the rivers. In 2020, about 27,000 juvenile fish were already released to the Verkhneobsky basin within a radius of 30 km from Barnaul as compensatory measures to offset water intake from the Chumysh River. NLMK Group is planning to implement significant environmental protection initiatives in future reporting periods under its Environmental Programme 2022. The initiatives seek to minimize our environmental impact, including by revamping major production facilities in line with the best available technologies. Stoilensky cooperates with the Belogorye Nature Reserve in the study and conservation of the biodiversity of terrestrial and aquatic ecosystems. Reserve experts have compiled a list of animals and plants that are found in the area of the floodplain of the Chufichka River, where the head dam of the company is located, and forest areas close to the Stoilensky territory. MAIN PROJECTS SCHEDULED FOR 2021–2023 The Group regularly implements measures that aim to rehabilitate land disturbed by the operations of its extractive companies. The treatment of deposit sites includes phased rehabilitation work to restore the landscape and its plant cover and to GRI 304-3 Company Project Eﬀect Reduction of carbon monoxide emissions by 7,500 tonnes per year NLMK Lipetsk Upgrade of Blast Furnace No. 4 air heaters enable plants to grow again in the soil . Reclamation programmes have been developed and are publicly available on the websites of the Mining Division companies. The programmes are being implemented as planned. In 2020, rehabilitation was carried out on 10 hectares of disturbed land. More than RUB 10 million was spent on reclamation and improvement works. Construction of a waterless slag cooling unit at the Blast Furnace No. 7 BF slag processing section Reduction of hydrogen sulfide emissions at the section NLMK Lipetsk NLMK Lipetsk Reduction of dust emissions by 200 tonnes per year Upgrade of Blast Furnace No. 3 foundry yard de-dusting unit Scientists note that foxes, hare, weasel, as well as roe deer and wild boar inhabit these lands, while in the floodplain of the Chufichka River there are minks, beavers, and river otters. Reconstruction of the de-dusting system for capturing unorganized emissions of the BOF Shop No. 1 mixing department Reduction of dust emissions by 100 tonnes per year NLMK Lipetsk NLMK Lipetsk ﬁnished autumn planting of greenery NLMK Lipetsk completed the autumn stage of its territory landscaping programme. Elimination of the risk of soil contamination with petroleum products on an area of 400 m2 NLMK Lipetsk Stoilensky Technical re-equipment of the Mill 2000 regulating tank Among the birds, the common turtledove, quail, and crake, rare species that are included in the new lists of the Red Book, have been noticed. As for the Red Book plants, forest anemone, whole-leaved clematis, spring primrose, and grasshopper can be found on this territory. With a view to maintain an environmentally efficient green barrier, almost 1,100 trees and about 4,600 shrubs were planted on the industrial site and along the internal roads, and about 3,000 square meters of lawns and flowerbeds were arranged and renovated. The territory of the site was decorated with new seedlings of poplar, maple, and birch, as well as spirea bushes. Technical re-equipment of the beneficiation plant's medium and fine crushing department de-dusting system Reduction of dust emissions by 791 tonnes per year Construction of the de-dusting system for capturing unorganized emissions of the BOF Shop No. 1 mixing department Reduction of dust emissions by 100 tonnes per year Elimination of the risk of visible emissions NLMK Lipetsk The works are carried out as part of a 5-year programme for the inventory and renewal of the plant’s greenery, developed with the participation of the Voronezh State Forest Engineering University. Experimental plantings recommended by the university for the renewal of the green fund of trees are planned for 2021. Equipment of the storage area for waste from wagon cleaning Eliminating the risk of soil contamination on an area of 1000 m2 NLMK Lipetsk NLMK Lipetsk NLMK Lipetsk Altai-koks Following the results of the study, the reserve’s researchers will develop measures to rehabilitate the environment and preserve its biodiversity. Upgrade of the sludge drying scheme of sludge dewatering unit No. 6 Eliminating the risk of soil contamination on an area of 59,800 m2 Eliminating the risk of soil contamination on an area of 120 m2 Elimination of the risk of dusting when liming oiled scale In 2019–2020, 140,000 tree seedlings were planted at NLMK Group’s production sites. Reconstruction of the dust-free coke distribution unit's dust collection system on Coke Batteries No. 3 and 4 Reduction of dust emissions by 254 tonnes per year Eliminating the risk of soil contamination on an area of 1100 m2 Stoilensky Reconstruction of the plant’s storm sewer Installation of a waste storage warehouse Eliminating the risk of soil contamination on an area of 500 m2 NLMK Indiana 184 185 Statement by member of the Board of Directors About the Company Corporate Governance Our Team Environmental Protection Appendix ANNUAL REPORT 2020 1.901 CLIMATE CHANGE MAJOR THEMES t CLIMATE CHANGE AIR EMISSIONS (−1% yoy) of CO2-eq. per t of steel and commercial pig iron (Scope 1+2) KEY EVENTS IN 2020 ● NLMK Group’s climate-related risks and opportunities are estimated for the first time ● Scope 3 estimates indicating the Company’s other indirect emissions related to its upstream activities are disclosed for the first time Improved detail and completeness of data disclosure under Scope 1 and Scope 2: ● emissions are presented by activity and country, data on CO2 emissions are supplemented with data on methane (CH4) and nitrous oxide (N2O) emissions Memorandum of Cooperation to reduce climate impact signed with NOVATEK Greenhouse gas emissions reduction target through 2023 updated (Scope 1+2): targeted specific emissions stand at 1.91 tonnes of CO2 per tonne of steel (with previous target of 1.94 tonnes of CO2 per tonne of steel) −158 ● ● thousand t of CO2 through projects implemented in 2020 (Scope 1+2) UNITED NATIONS GLOBAL COMPACT PRINCIPLESН Principle 7: Businesses should support a precautionary approach ● to environmental challenges. Principle 8: Businesses should undertake initiatives to promote greater ● environmental responsibility. Principle 9: Businesses should encourage the development and diffusion ● of environmentally friendly technologies. GLOBAL SUSTAINABLE DEVELOPMENT GOALS 1 Specific emissions without the influence of temporary factors associated with a decrease in production. 186 187 Statement by member of the Board of Directors About the Company Corporate Governance Our Team Environmental Protection Appendix ANNUAL REPORT 2020 Climate change is one of the greatest threats facing the world today, OUR APPROACH NLMK joins the Net Zero Steel Pathway Methodology Project1 Cutting greenhouse gas emissions is the key focus of cooperation. NLMK Group and NOVATEK plan to jointly test СО2 capture, use, and storage technologies, to develop and improve hydrogen production technologies and transportation methods, as well as the use of hydrogen fuel to reduce GHG emissions. NLMK and NOVATEK are also exploring the development of new products required to implement low-carbon technologies. impacting society, the economy, and security globally. The main drivers of climate change are greenhouse gas emissions. Under the Paris Agreement, almost 200 countries made commitments to reduce their emissions, and over 100 countries announced their carbon neutrality goals. NLMK Group recognizes the importance of matters relating to climate change and the transition to a low-carbon economy. We are progressively reducing our greenhouse gas emissions by cutting our consumption of fossil fuels, increasing energy efficiency, and introducing innovative decarbonization solutions. This project was initiated in 2020 to assist iron and steel companies in developing a realistic and reliable approach to setting decarbonization targets, which would be in line with climate science and the Paris Agreement target, while also taking into account the way the industry works and interacts with other sectors. NLMK Group takes part in ﬁrst EU-Russia Climate Conference The Company’s leadership devotes continued attention to climate-related issues, which are embedded into the corporate governance system. The Board of Directors, the Board’s committees, СЕО (Chairman of the Management Board), and the Management Board determine strategic growth priorities and ensure overall sustainability management. The Company’s climate change initiatives are deeply intertwined with sustainable development and risk management matters (see the Sustainability Management section for more detail). Sergey Chebotarev, NLMK Group Vice President, and Nikita Vorobyev, Director According to various estimates, the iron and steel industry accounts for 7–9% of global greenhouse gas emissions. Therefore, the decarbonization of iron- and steelmaking is a major challenge for all industrial countries. The industry is currently engaged in active discussions of the ways to reduce its climate impact and the financing sources for potential initiatives. of Environmental and Climate Affairs, took part in the EU-Russia Climate Conference organized by the EU Delegation to Russia and the SKOLKOVO Business School. Business representatives, officials and experts from Russia and the EU discussed possible solutions to climate change. NLMK participates in the project’s Technical Working Group along with approximately twenty other organizations from the iron and steel industry, including the World Steel Association and ResponsibleSteel. Participating in the “Decarbonization of energy-intensive industries” session, Sergey Chebotarev talked about NLMK Group’s efforts to reduce its carbon footprint. NLMK follows a diversified approach to the climate agenda, using traditional and innovative tools to cut greenhouse gas emissions. In the coming years, the Company plans to launch a new power plant, which will be fuelled by recovered steelmaking gases. The project will cut greenhouse gas emissions by 650,000 tonnes annually. NLMK is also implementing a portfolio of research projects that focus on the use of hydrogen in the production process, and СО2 recovery and utilization. Our climate impact reduction targets are determined by the Strategic Planning Committee of the Board of Directors (see the Committees of the Board of Directors section for more detail). By addressing this issue on an annual basis, the Committee ensures that the Board of Directors pays close attention to the matter. NLMK Director of Environmental and Climate Affairs is in charge of managing the Company’s impact on key environmental components, including atmospheric air, water resources, and climate change. The functional area as a whole is curated by NLMK Vice President of Energy and Environment, who is a member of the Management Board. NLMK Group is fully committed to climate change action and takes meaningful steps towards decreasing greenhouse gas emissions, progressively reducing the carbon footprint of its products. Moreover, the Company’s products (such as steel for wind energy and energy-efficient electrical steels) enable a broad range of consumer industries to reduce their climate impact substantially and attain their decarbonization goals. Steel produced by NLMK Group consists of 35% of recycled ferrous scrap on average. For the Lipetsk site, where BOF steel is produced, this indicator is 17%. Specific CO2 emissions from scrap steelmaking are approximately four times lower than from primary raw materials. A special methodology was deemed necessary because the existing sectoral approach to decarbonization (SBTi SDA2) doesn’t fully take into account or makes it impossible to take into account such factors as different steelmaking routes (the possibilities of decarbonizing integrated steelmaking and EAF steelmaking differ significantly); metallurgical by-products replacing primary materials in other industries, which significantly reduces their carbon footprint; emission reduction at side projects, etc. The objective of the updated methodology developed as part of the project is to adequately factor in all the nuances of ferrous metallurgy, enabling the creation of a realistic ‘road map’ for its Nikita Vorobyev participated in the “Prospects for the Hydrogen Economy” section, where he shared his outlook on the prospects of using hydrogen in steelmaking and the necessary conditions for such a scenario. In addition, NLMK took part in the “Carbon border adjustment mechanism” session, which involved European Commission representatives, and outlined its vision of the regulation mechanism planned in Europe for imports of carbon-intensive products. NLMK believes that any regulation should take into account each company’s individual performance and avoid creating discriminatory conditions within the industry. CLIMATE COOPERATION The Company actively enhances environmental and climate cooperation with its Russian and international partners. NLMK Group participates in global decarbonization initiatives In 2020 NLMK Group joined the dialogue on the Mission Possible Platform, a World Economic Forum coalition aimed at accelerating the decarbonization of global industries that account for 30% of greenhouse gas emissions. Through this platform NLMK engages in discussions of an initiative to reduce the climate footprint of the iron and steel industry. NLMK Group supports ﬁrst Franco-Russian forum on low-carbon industrial development The forum was organized by the Nauka Innov Centre for Technological Cooperation of the Franco-Russian Chamber of Commerce (CCI France Russie), the trade mission of the Russian Federation in France, the Climate Partnership of Russia, and the Russian Ministry of Economic Development. The matters discussed include target-setting for impact reduction, the necessary regulatory base, the market conditions, and key technologies for the decarbonization of steelmaking. This year NLMK Group published its first report in line with the recommendations of the Task Force on Climate-related Financial Disclosures (TCFD)1. Going forward, this report will be further expanded to provide stakeholders with the fullest and timeliest information possible about the Company’s progress in the matter. decarbonization. NLMK Group, a partner of the forum, participated in a session dedicated to green steelmaking. Nikita Vorobyev, NLMK Group Director of Environmental and Climate Affairs, presented the Company’s vision of decarbonization prospects and spoke about current and future projects in the sphere. The session’s participants included numerous Russian industry leaders and the French companies Fives, Air Liquide, and Dassault Systèmes, which presented their innovative technological solutions that can assist Russian manufacturers in reaching their climate impact reduction targets. NLMK and NOVATEK sign Memorandum of Cooperation to reduce climate impact In 2020, Step Up, a joint project with the WSA, was launched at the Group’s flagship site in Lipetsk to identify potential areas for reducing greenhouse gas emissions and implement appropriate measures. In January 2021 NLMK Group and NOVATEK, the largest independent natural gas producer in Russia, signed a Memorandum of Cooperation in the field of mitigating adverse climate impacts. 1 The Task Force on Climate-related Financial Disclosures (TCFD) was created in December 2015 by the Financial Stability Board (FSB), an international body established by the G20 states. In June 2017 the TCFD published its recommendations, which set out the basic principles of climate-related disclosures for companies and organizations. 1 See https://netzerosteelpathwayproject.com/ Science-Based Targets initiative, Sectoral Decarbonization Approach. 2 188 189 Statement by member of the Board of Directors About the Company Corporate Governance Our Team Environmental Protection Appendix ANNUAL REPORT 2020 IMPACT ON STRATEGY RISK MANAGEMENT GRI 201-2 The internal control and risk Climate change implies a number of risks and opportunities for the iron and steel sector, which need to be identified in order to manage them and minimize the industry’s climate impact. Timely identification of climate risks and opportunities will make it possible to take them into account when developing projects for NLMK Group’s next strategy cycle beyond the 2023 horizon. TCFD DEFINITIONS OF TRANSITION management system employed by NLMK is designed to ensure reasonable certainty that the Group’s strategic and operational goals will be achieved, to create and protect value for the Group, and to ensure sustainable development by rapidly identifying, assessing, and effectively managing risks and opportunities. AND PHYSICAL RISKS Transition Risks Transitioning to a lower-carbon economy may entail extensive policy, legal, technology, and market changes to address mitigation and adaptation requirements related to climate change. Depending on the nature, speed, and focus of these changes, transition risks may pose varying levels of financial and reputational risk to organizations. The NLMK Board of Directors, which determines the principles and approaches to the organization of the risk management system and regularly reports on the status of the Company’s risks, plays a key role in the risk management process. In the reporting period NLMK partnered up with Carbon Trust (United Kingdom), an independent sustainability consultant, to analyse risks and opportunities related to climate change and NLMK Group’s activities for the first time. At the initial stage, the team identified 140 risks and opportunities, and later analysed 90 of them. The risks and opportunities were grouped by similar root causes and then classified by TCFD categories. For every group the team analysed the probability of materialization on the 2030 horizon for various scenarios of global temperature growth, including the Paris Agreement scenario (temperature increase limited to 2˚С). The Company believes that Strategy 2022 is highly resilient to climate change according to preliminary assessments. Physical Risks Physical risks resulting from climate change can be event-driven (acute) or longer- term shifts (chronic) in climate patterns. Physical risks may have financial implications for organizations, such as direct damage to assets and indirect impacts from supply chain disruption. Organizations’ financial performance may also be affected by changes in water availability, sourcing, and quality; food security; and extreme temperature changes affecting organizations’ premises, operations, supply chain, transport needs, and employee safety. NLMK Group classifies climate change-related risks (regulatory, market, reputation) as evolving risks. All processes to manage such risks are integrated into NLMK Group’s overarching risk management system (see the Operational Control and Risk Management section for more detail). Carbon border adjustment in Europe Since late 2019 the EU is considering the introduction of an additional import charge for products whose manufacturing is associated with СО2 emissions. This measure could become the first instance of a cross-border carbon price in the world. The process of analysing NLMK Group’s climate-related risks and opportunities began in 2020 as an independent project. The idea is to integrate such risks into NLMK Group’s risk management system more actively as new information becomes available. NLMK Group shares European environmental values and closely monitors the initiative’s development, participating in consultations and promoting the principles of fairness and non-discrimination. The Company works towards step-by-step greenhouse gas emission reduction, convinced that the mechanism can only be efficient and accepted politically at all levels if it employs a differentiated approach based on the ‘polluter pays’ principle, which takes into account every individual supplier’s actual level of carbon intensity. In addition, the Company believes that any carbon tax should take into account the practices and mechanisms used in other countries for emission regulation, which include pricing among other methods. For instance, not only the mechanism of internal carbon pricing should be taken into account, but also the entire spectrum of carbon neutrality measures used by companies and economies, including measures to increase carbon sequestration via efficient forest management, investment in renewables, and measures to improve energy efficiency. PERFORMANCE AND TARGETS Physical risks (extreme weather events, temperature change, availability of water resources) have little impact on NLMK Group’s activities. The risks of water resource availability only emerge on the long-term horizon after 2030. Global climate change challenges us to reduce greenhouse gas emissions. To that end, NLMK Group introduces new technologies, increases production efficiency, and monitors and controls its emissions. NLMK Group employs recognized international and industry standards and methodologies for GHG emission reporting and calculation, including The Greenhouse Gas Protocol: A Corporate Accounting and Reporting Standard. WRI and WBCSD, 2004 (revised); 2006 IPCC1 Guidelines for National Greenhouse Gas Inventories / 2019 Refinement; WSA CO2 Data Collection User Guide; Methodological guidelines on calculation of greenhouse gas emissions by organizations engaged in economic or other activities in the Russian Federation approved by order of the Russian Ministry of Natural Resources and the Environment dd. 30/06/2015 No. 300; EU Emission Trading System: The Monitoring and Reporting Regulation – General guidance for installations, and others. In 2021 the list of risks and their impact on the Company can be specified once the project is complete and the climate strategy is approved by the Board of Directors. We are constantly enhancing the level and quality of greenhouse gas emission disclosures. In 2020, we made our disclosures on Scope 1 and Scope 2 more detailed and complete, breaking down emissions by type of activity and by country, and providing data on methane (CH4) and nitrous oxide (N2O) emissions in addition to СО2. Moreover, we presented Scope 3 estimates for the first time, indicating the Company’s other indirect emissions related to its upstream activities. In 2020 the Company introduced a centralized system to collect input data from all Group sites. It is based on leveraging regular reporting information on the use of energy and other resources. Considering the complexity of the issue and the high cost of a mistake, we believe it would be practical to integrate the mechanism step-by-step, starting with sectors with the least sophisticated configuration (including in terms of project portfolios) and with the least inclusion in international trade flows. Since early 2020, the carbon content of each incoming batch of coal, coke, and other carbon-containing resources is continuously measured at NLMK Lipetsk and Altai-Koks via laboratory tests. This has enabled higher precision of СО2 emission calculations using the carbon balance method. NLMK is the first Russian steel company to conduct such a detailed analysis of incoming raw materials in order to determine their carbon footprint. 1 IPCC – Intergovernmental Panel on Climate Change. 190 191 Statement by member of the Board of Directors About the Company Corporate Governance Our Team Environmental Protection Appendix ANNUAL REPORT 2020 For an adequate comparison with 2020, we adjusted СО2 emission data for the preceding few years (2016 to 2019) and added data on emissions from mobile facilities, as well as СН4 and N2O emissions. The adjustments are due mainly to more precise information about carbon content in coal used. Voluntary reporting standards provide the possibility of reviewing and specifying emission data for previous years. 33.6 million tonnes of СО2 equivalent across NLMK Group, which is 4% higher compared to the previous year. The main reason for this growth was higher pig iron output. Meanwhile, compared to 2018, the baseline year of the strategy cycle, emissions were 5% lower. GHG EMISSIONS (SCOPE 1 + SCOPE 2), M T OF CO2- EQUIVALENT DIRECT GHG EMISSIONS BY TYPE OF ACTIVITY (SCOPE 1) IN 20201, 2, % 1 1 <1 Blast Furnace operations Energy production <1 5 35.3 4.0 31.2 34.8 4.0 30.7 34.2 3.8 30.4 33.6 3.6 5 32.2 3.6 The overall contribution of additionally calculated emissions from mobile units and СН4, N2O emissions to NLMK Group’s total direct GHG emissions is less than 1% in СО2 equivalent. Production of iron ore raw materials BOF operations 5 30.0 28.6 Lime production Rolled steel production and finishing Coke production 7 ꢀ0ꢁ0ꢀꢂ 50 ꢃ000 ꢄ ꢅꢆ ꢇO2ꢈꢉꢊꢋ We also evaluated СО2 emissions from biomass combustion (wood chips and charcoal), which is used at the Lipetsk site for ferroalloy production. These emissions are climate-neutral, provided for reference only, and are not included in the overall sum of reported emissions. The Company is currently considering the prospects of using sustainable biomass in its key steelmaking processes. 11 EAF steelmaking Mobile sources Ferroalloy production Other stationary sources 2016 2017 2018 2019 2020 14 In 2020, direct and indirect energy GHG emissions (Scope 1 + Scope 2) totalled Direct GHG emissions (Scope 1) Indirect energy GHG emissions (Scope 2) NLMK GROUP DIRECT AND INDIRECT ENERGY EMISSIONS, ‘000 T OF CO2-EQUIVALENT GRI 305-1, GRI 305-2 GHG EMISSIONS (SCOPE 3) UPSTREAM ALONG TOTAL DIRECT AND INDIRECT GHG EMISSIONS (SCOPE 1+SCOPE 2) BY COUNTRY, ‘000 T OF CO2-EQUIVALENT Indicator 2016 30,356 30,280 30,071 47 2017 30,740 30,665 30,459 47 2018 31,232 31,158 30,956 46 2019 28,601 28,531 28,311 42 2020 30,036 29,964 29,753 44 Direct GHG emissions (Scope 1) THE CORPORATE VALUE CHAIN, GRI 305-3 M T OF CO2-EQUIVALENT СО2 Including from stationary sources CH4 8.8 602 7.9 7.6 Russia USA N2O 28 28 28 28 28 Indirect energy emissions (Scope 2)1 Total (Scope 1 + Scope 2) Including stationary sources of CO2 3,810 34,166 33,879 4,025 34,765 34,481 4,032 35,264 34,985 3,621 32,222 31,929 3,552 33,587 33,302 Belgium Italy Denmark France India ꢀꢀꢁꢂꢃꢄ 241 25 1 119 89 32,511 2018 2019 2020 CO2 emission from biomass combustion (for reference) 20 16 17 25 25 By type of activity, blast furnace operations (50%) and energy production (14%) are the largest contributors to direct greenhouse gas emissions (Scope 1). NLMK Group companies (upstream emissions) and their delivery to the companies’ gates, as well as the transportation of raw materials and semi-finished products between the Group companies. Calculations are made for the last three years. Estimated coverage is at least 95%. Emissions associated with the transportation of finished products shipped to customers, as well as emissions generated during the use, processing, and disposal of the Company’s products, were not considered at this stage. Regarding purchased electric energy for Scope 3 disclosure, we took into account emissions from the extraction, processing, and delivery of fuel to power plants, as well as losses in transmission networks, but did not take into account emissions from fuel combustion at the power plants themselves, since Scope 2 covers the latter. For the first time, the analysis includes other indirect greenhouse gas emissions associated with the production of the main types of external resources used by 1 The CO2 emissions from the combustion of process gases (blast furnace and coke oven gases) outside the sources of these gases, but within the Group’s facilities, are considered equal to the emissions from the combustion of an energy equivalent amount of natural gas, adjusted for the combustion efficiency. The corresponding CO2 deduction is made for the production sources of process gases. The “Energy production” category includes emissions from the production of thermal, mechanical, and electrical energy, hydrogen, as well as auxiliary fuel combustion in the energy, gas, and water supply shops. 1 2 Emissions from fuel combustion in the production of electricity received from the external grid for the needs of the Group’s sites (regional method). For the Group’s sites in the United States, CH4 and N2O emissions are taken into account in addition to CO2. 192 193 Statement by member of the Board of Directors About the Company Corporate Governance Our Team Environmental Protection Appendix ANNUAL REPORT 2020 OTHER INDIRECT GHG EMISSIONS (SCOPE 3) UPSTREAM ALONG THE CORPORATE VALUE CHAIN BY TYPE OF RESOURCE IN 2020, % SPECIFIC CO2 EMISSIONS (SCOPE 1 + SCOPE 2) FROM STATIONARY SOURCES In 2020 the Company reviewed and expanded its portfolio of projects aimed at reducing greenhouse gas emissions. These include both standard projects to increase energy efficiency and reduce fuel consumption in blast furnaces and innovative solutions for the use of secondary carbon-based raw materials and biofuel in BF operations, as well as new decarbonization technologies of carbon dioxide capture and utilization. A number of projects has already been launched, and their status and progress are being monitored regularly. GRI 305-4 2.1 2.0 1.98 1.97 Hard coal Ferrous metals Electricity Natural gas R/w transportation Ferroalloys Non-ferrous metals Petroleum coke Sea transportation Fluxes and minerals Liquid fuel Pellets and HBI Truck transportation Coal coke Ore and concentrate Carbon-containing materials 1.95 1.92 0.7 0.7 3.5 4.4 5.0 1.92 1.921 38.5 1.901 In 2019–2020 we completed a range of previously planned projects aimed at reducing СО2 emissions. The effects of each project were calculated based on the achieved technical effects for the reviewed period (reduction in the consumption of natural gas, coke and coke fines, energy, oxygen, limestone, dolomite, etc.). ꢀꢁꢂ 6.5 ꢃ ꢄ ꢅꢆ ꢇO2ꢈꢉꢊꢁ 0.3 0.3 7.6 0.2 0.1 2016 2017 2018 2019 2020 11.7 t of CO2 per t of steel and commercial pig iron Our new recovery cogeneration plant, which will be launched at NLMK Lipetsk in 2023, will run on by-product gases from blast furnace and steelmaking operations, thus cutting CO2 emissions by 650,000 tonnes (35 kg per tonne of steel) annually. The step-by-step introduction of new ore beneficiation technologies at Stoilensky in 2020–2023 will increase Fe content in the charge and reduce fuel consumption at the blast furnaces in Lipetsk, which will bring an additional 790,000-tonne reduction in CO2 emissions (43 kg per tonne of steel) annually. Besides, NLMK is also implementing a portfolio of research projects that focus on the use of hydrogen in the production process, СО2 recovery and utilization, and other decarbonization areas. 16.4 The largest amount of other indirect greenhouse gas emissions, 38% of the total, is associated with coal production. These are mainly methane emissions from coal mining. The ferrous metals1 emissions are mainly related to the production of slabs purchased from third parties for NLMK USA, due to current restrictions (Section 232). The Group will continue to further slash specific GHG emissions in the period leading up to 2023. Specific emission (Scope 1 + Scope 2) target is 1.91 tonnes of CO2 per tonne of steel versus 2.0 tonnes in 2019 (5% reduction), per tonne of steel with commercial pig iron — 1.84 tonnes of CO2 versus 1.92 in 2019 (4% reduction). SPECIFIC CO2 EMISSIONS, STATIONARY SOURCES2, GRI 305-4 T CO2-EQ./T Indicator 2016 2017 2018 2019 2020 Direct emissions (Scope 1) Steel + commercial pig iron, t Steel, t ACTUAL 2020 CO2 EMISSION REDUCTIONS FROM PROJECTS INCLUDED IN THE 2023 STRATEGIC TARGET 1.76 1.73 1.70 1.75 1.72 GRI 305-5 1.81 1.78 1.77 1.80 1.88 Project Start-up date CO2 emission reduction CO2 emission reduction Specific indirect energy emissions (Scope 2): Steel + commercial pig iron, t Steel, t (implemented) (Scope 1 + Scope 2), ‘000 t (Scope 1 + Scope 2), kg/t 0.22 0.23 0.22 0.22 0.21 0.23 0.24 0.23 0.23 0.22 Construction of co-generation boiler-houses at NLMK Ural in Nizhniye Sergi and Beryozovsky November 2019 November 2019 27 7 1.7 Specific total emissions (Scope 1 + Scope 2): Steel + commercial pig iron, t Steel, t Construction of a water-heating boiler-house at NLMK Ural in Revda 1.98 1.95 1.92 1.97(1.92)3 1.92(1.90)3 0.5 2.04 2.02 2.00 2.03(2.00)3 2.10(1.98)3 Construction of an additional beneficiation section at Stoilensky1 July 2020 81 5.1 1.9 Turbine blower for Blast Furnace No. 7 November 2019 30 In addition to specific emissions per tonne of steel, a common indicator among steel companies, our analysis includes the specific emissions of steel production, including commercial pig iron, as the production of commercial pig iron accounts for a significant share in the total output of the Group. of and including pig iron production. Due to that, the Company decided to prioritize disclosing the joint indicator for steel and pig iron, since it reflects the Group’s actual emissions and the rate of their reduction more accurately. Use of dynamic stacking model when forming iron ore stacks and the APCS when metering out fluxes in coal preparation sections December 2020 8 0.5 Stopping the converting process in BOF at set carbon value (for part of the product mix) The increase in specific СО2 emissions per tonne of steel in 2019 and 2020 compared to previous periods was due to a temporary decrease in steel output during the upgrade programme at the NLMK Lipetsk BF and BOF operations. In addition, 2020 figures were impacted by the output decrease at the Company’s European and US companies amid the COVID-19 pandemic. Taking corresponding output normalization into account, the Company’s level of specific emissions has been decreasing throughout the 2016–2020 period. August 2020 2019–2020 2 0.1 Other 3 0.2 Total 158 10.0 At the same time, most of CO2 emissions (about 75% for the entire Group) are generated in the operations upstream 1 Emissions associated with large-capacity deliveries of ferrous metals mainly from third parties for smelting and rolling at NLMK Group sites. Consistent with the corporate approach for setting CO2 emission targets. Specific emission without the impact of temporary factors, which have to do with lower production. 2 3 1 Specific emissions without the impact of temporary factors, which have to do with lower production. Including effects of operational efficiency associated with the project 2 194 195 Statement by member of the Board of Directors About the Company Corporate Governance Our Team Environmental Protection Appendix ANNUAL REPORT 2020 At the Lipetsk site, the specific direct CO2 emissions per tonne of steel in 2020, calculated on the basis of the guidance document1 of the European Union Emission Trading Scheme (EU ETS), amounted to 1.72 t СО2/t steel. Compared to the estimated EU ETS benchmark2 (calculated based on the top 10% of companies in the EU), this gap is already only 8% today. NLMK’s goal is to close the gap with the current benchmark to 6% within the current strategic cycle. NLMK GROUP’S TARGET FOR SPECIFIC EMISSION REDUCTION FROM STATIONARY SOURCES (SCOPE 1 + SCOPE 2), T CO2/T OF STEEL NLMK PRODUCTS CONTRIBUTE TO THE TRANSITION TO A LOW-CARBON ECONOMY 20193 2.00 Crude steel output growth Captive electricity generation increase Fe content in the concentrate increase Other 0.01 −0.04 −0.04 –5% −0.02 1.91 2023 target NLMK GROUP’S TARGET FOR SPECIFIC EMISSION REDUCTION FROM STATIONARY SOURCES (SCOPE 1 + SCOPE 2), T CO2/T OF STEEL AND COMMERCIAL PIG IRON 20193 1.92 Crude steel output growth Captive electricity generation increase Fe content in the concentrate increase Other 0.01 −0.04 −0.04 –4% −0.01 1.84 2023 target CO2 EMISSIONS AT THE LIPETSK SITE ACCORDING TO EU ETS (SCOPE 1), T OF CO2/T OF STEEL NLMK Lipetsk 2020 NLMK Lipetsk 2023 EU ETS benchmark4 1.75 1.68 1.59 Forests are the largest carbon sink on the planet, they absorb more CO2 than they release into the atmosphere. However, even in the energy industry, there are sectors that contribute to reducing greenhouse gas emissions in their own way. For example, solar and wind energy are replacing fossil fuels. NLMK Group produces plate, which is used in the construction of wind power facilities, and premium electrical steel, thanks to which consumers are able to reduce specific magnetic losses in transformers and electric motors. NLMK also produces high- strength and wear-resistant steel grades that contribute to improving safety in a number of applications and lightening the weight of steel structures, which, in turn, leads to lower consumption of fuel and steel itself (replacing lower-quality grades), and, ultimately, contributes to the transition to a low-carbon economy. The Company estimates that the target sales volume of such steels during the 2018–2023 strategy cycle will allow it to prevent approximately 34 million tonnes per year of CO2 emissions on the consumer side. This volume exceeds the Company’s emissions from steel production. Taking into account the life cycle of the same steel volume (20–30 years), it can prevent over 700 million tonnes of emissions. Calculating the impact of consumers using certain product categories on curbing CO2 emissions is a common practice and is widely used in steel and other industries. 1 COMMISSION DELEGATED REGULATION (EU) 2019/331 of 19 December 2018 determining transitional Union-wide rules for harmonised free allocation of emission allowances pursuant to Article 10a of Directive 2003/87/EC of the European Parliament and of the Council The indicator for converter steel under the ETS is not separately established, but there are established benchmarks for coke, sinter, pig iron, lime, dolomite. The given data per ton of steel are calculated at the given consumption factors 2 3 4 Specific emission without the impact of temporary factors, which have to do with lower production Using the same coke and iron ore consumption rates as at NLMK Lipetsk in 2020 196 197 Statement by member of the Board of Directors About the Company Corporate Governance Our Team Environmental Protection Appendix ANNUAL REPORT 2020 REDUCTION OF CO2 EMISSIONS ON THE CONSUMER SIDE THROUGH NLMK PRODUCTS Total −0.1 −0.5 −1.5 −8.8 СО2 emission reduction on consumer side, annualy −13.7 −15.1 −2.6 −22.6 −33.5 m t CO2 −239.7 СО2 emission reduction on consumer side, life cycle 0.3 1.2 0.2 1.1 0.6 Plate produced −722.8 Wear-resistant and high-strength steel (Q&T and Q&P) at DanSteel Flat products with improved characteristics Premium GO electrical steels Premium NGO (used in wind energy facility construction) m t electrical steels Sales in 2018–2023 3.4 m t Sales in 2018–2023, m t −451.7 NLMK DanSteel supplies steel heavy plates for next-generation ﬂoating oﬀshore wind farm Wind Float Atlantic comprises three wind turbines 8.4 MW each, mounted on floating platforms. The third platform was installed in July, and the wind farm will start operating at full capacity. The wind farm will be able to generate enough energy to supply 60,000 households in Portugal. Wind Float Atlantic will save almost 1.1 million tonnes of CO2 emissions per year. NLMK Verona supplies Mercure, Hywind, etc. The company’s key customer is euskalforging, the world’s largest manufacturer of offshore wind turbine flanges. special steel for wind power NLMK Verona, the Group’s Italian plant, supplies steel for NLMK steel in superpower transformers for Krasnoyarsk HPP NLMK DanSteel, NLMK Group’s plant in Denmark, supplied its heavy plate for the Wind Float Atlantic project. Wind Float Atlantic is the first semi- submersible floating wind farm in the world located off the north coast of Portugal. NLMK DanSteel’s high-quality steel heavy plates are used in the production of floating platforms and foundations. the manufacture of wind turbine flanges. The flange of a wind turbine is its central connecting part and is manufactured by a limited number of companies in the world due to strict product requirements. NLMK Verona supplies about 15,000 tonnes of steel per year for the wind power generation sector, including for such projects as Beatrice, Galloper, In the reporting year NLMK supplied premium laser-treated electrical transformer steel to SVEL Group, a leading Russian manufacturer of electrotechnical equipment. NLMK steel was used to make a 630 MVA three-phase potential transformer for the Krasnoyarsk Hydro Power Plant. In 2020, NLMK DanSteel delivered more than 150,000 tonnes of steel for the manufacture of onshore and offshore wind farms, which can generate close to 3 GWh of ‘green’ electricity per year. The Company’s customers are such industry leaders as Ørsted, Vattenfall, Equinor, Siemens Gamesa, Vestas, GE Renewable Energy. Currently, the hydroelectric power plant is undergoing a comprehensive upgrade to install superpower transformers. By 2024, NLMK plans to supply close to 2,000 tonnes of steel to SVEL for the production of six more transformers. NLMK steel properties will enable a reduction in specific magnetic losses in transformers of up to 15% compared to commercial grades. The Company’s share on the European offshore wind energy market has already reached 14%, and 20% in the onshore segment, attesting to its leadership in supplies to a key renewable energy sector. 198 199 Statement by member of the Board of Directors About the Company Corporate Governance Our Team Environmental Protection Appendix ANNUAL REPORT 2020 TCFD INDEX PLANS FOR 2021 AND THE MEDIUM TERM TCFD recommendations GOVERNANCE Annual report 2020 Page In 2021, the Company plans to start the development of NLMK Group’s Disclose the organisation’s governance around climate-related risks and opportunities Describe the board’s oversight of climate-related risks and opportunities Information is presented in sections Sustainability management and Our approach to managing environmental protection p. 30, p. 186, p. 188 long-term climate change programme and to continue assessing the Company’s risks and opportunities taking various climate change scenarios into account. Additionally, NLMK plans to participate in the Carbon Disclosure Project (CDP) programme in 2021 for the first time. Describe management’s role in assessing and managing climate-related risks and opportunities. Information is presented in sections Sustainability management and Our approach to managing environmental protection p. 30, p. 186, p. 188 STRATEGY Disclose the actual and potential impacts of climate-related risks and opportunities on the organisation’s businesses, strategy, and financial planning where such information is material Describe the climate-related risks and opportunities the organisation has identified over the short, medium, and long term Information is presented in sections Climate change and Impact on strategy p. 186, p. 190 p. 186, p. 190 p. 186, p. 190 Describe the impact of climate-related risks and opportunities on the organisation’s businesses, strategy, and financial planning Information is presented in sections Climate change and Impact on strategy Describe the resilience of the organisation’s strategy, taking into consideration different climate-related scenarios, including a 2°C or lower scenario Information is presented in sections Climate change and Impact on strategy RISK MANAGEMENT Disclose how the organisation identifies, assesses, and manages climate-related risks Describe the organisation’s processes for identifying and assessing climate-related risks Information is presented in sections Climate change and Risk management p. 186, p. 191 Describe the organisation’s processes for managing climate-related risks Information is presented in sections Climate change and Risk management p. 186, p. 191 p. 186, p. 191 Describe how processes for identifying, assessing, and managing climate-related risks are integrated into the organization’s overall risk management Information is presented in sections Climate change and Risk management METRICS AND TARGETS Disclose the metrics and targets used to assess and manage relevant climate-related risks and opportunities where such information is material Disclose the metrics used by the organisation to assess climate-related risks and opportunities in line with its strategy and risk management process Information is presented in sections Climate change and Performance and targets p. 186, p. 191 Disclose Scope 1, Scope 2, and, if appropriate, Scope 3 GHG emissions, and the related risks Information is presented in sections p. 186, p. 191 p. 186, p. 191 Climate change and Performance and targets Describe the targets used by the organisation to manage climate-related risks and opportunities and performance against targets Information is presented in sections Climate change and Performance and targets 200 201 Statement by member of the Board of Directors About the Company Corporate Governance Our Team Environmental Protection Appendix ANNUAL REPORT 2020 ENERGY 396.4 EFFICIENCY PJ (+3.6% yoy) MAJOR THEME NLMK Group’s total energy consumption in 2020 ENERGY KEY EVENTS IN 2020 ● The fourth recovery CGP power unit was launched, with a steam turbocharger for the air blast supply at Blast Furnace No. 7. A project to switch walking beam furnaces in the Hot Rolling Shop to natural gas was completed. ● 0.094 ● ● ● К-1500 and К-500 compressors in the NLMK Lipetsk Oxygen shop were upgraded. A 220 kV substation was commissioned at the Revda plant (NLMK Ural). Supplies of medical oxygen from NLMK Lipetsk to clinics and hospitals in nearby regions reached record highs amid the COVID-19 pandemic. A daily-average record was set in energy generation at NLMK Lipetsk captive facilities (co-generation plant – 346.5 MW, recovery plant – 160.1 MW). NLMK Lipetsk halved its purchases of hot water heat energy by optimizing its power resource supply arrangements. Gcal/t (−1.7% yoy) ● ● ● reduction in speciﬁc energy intensity of steel production at NLMK Lipetsk NLMK Ural sites purchased 15 times less heat energy due to using cogeneration units. Our project to boost the energy eﬀiciency of lighting at NLMK’s NGOES Shop won UNITED NATIONS GLOBAL COMPACT PRINCIPLES Principle 7. Businesses should support a precautionary approach ● the Golden to environmental challenges. Principle 8. Businesses should undertake initiatives to promote greater ● Photon Award environmental responsibility. Principle 9. Businesses should encourage the development and diffusion in the international ● electrotechnical industry competition of the Eurasian Economic Community. of environmentally friendly technologies. GLOBAL SUSTAINABLE DEVELOPMENT GOALS 202 203 Statement by member of the Board of Directors About the Company Corporate Governance Our Team Environmental Protection Appendix ANNUAL REPORT 2020 CERTIFICATION MEMBERSHIP AND PARTICIPATION IN ORGANIZATIONS OUR APPROACH TO MANAGING ENERGY EFFICIENCY The Company’s energy management system is in compliance with the international ISO 50001 standard, as confirmed by its ENMS 598731 certificate. NLMK Group is a member of the Russian Association of Energy Consumers, a non-profit partnership that aims to protect the interests of member companies in the energy sector. NLMK Lipetsk is a member of the NP Market Council organization, which ensures the Company’s participation in the wholesale electricity and power market. The system encompasses nine core production sites: 1. NLMK Lipetsk 2. VIZ-Steel In November 2010 NLMK Lipetsk joined the non-commercial partnership SRO Union of Independent Energy Audit and Energy Expert Organizations. 3. Altai-Koks 4. Dolomit 5. NLMK Kaluga 6. NLMK Metalware 7. NLMK Ural 8. Stagdok 9. Stoilensky ENERGY RESOURCE CONSUMPTION IN 2020 In 2020 total energy consumption within the Company stood at 396.4 PJ, which is 14 PJ higher than in 2019. The increase is due to the commissioning of new production capacities at the Lipetsk site (Basic Oxygen Furnace No. 3 in BOF Shop No. 2) and a new batch annealing furnace at NLMK Metalware. NLMK DanSteel is also certified under ISO 50001. Non-renewable energy consumption totalled 394.7 PJ. In 2020, NLMK Group successfully completed a cycle of recertification audits of the energy management system at its sites. A certificate was issued to confirm their compliance with ISO 50001:2018. Additionally, a project was launched in 2020 to consolidate the management systems of all NLMK Group uses a variety of non-renewable energy resources in its production activities: 26.0% of all energy consumed comes from natural gas, and 59.9% comes from coal and coke products (minus marketed coke products). In addition, we use renewable energy sources (RES), wood chips, and charcoal to produce ferroalloys. In 2020 the share of electricity from renewable sources totalled 5.2% of all purchased electric energy. The share of renewable electric energy in all NLMK Group energy consumption was 0.42%. Group companies into an integrated management system (IMS). Steelmaking is an energy-intensive industry. NLMK Group systematically pursues energy efficiency improvements in its operations. This includes identifying and applying integrated solutions The Group is additionally committed to developing power generation capabilities that utilize metallurgical gases and other secondary energy resources, and to supporting the use of renewable energy sources where applicable and reasonable (for more information on our IMS Policy, please follow the link). to ensure a reliable supply of energy resources, as well as using energy sparingly in order to reduce costs and minimize the environmental impact. The Unified Technical Policy on Energy Complex Management has been in effect at NLMK Group’s Russian companies since 2014. The objective of this policy is to introduce the most advanced technical solutions, machinery, and technologies that bolster the reliability, efficiency, and safety of the Group’s energy complex. The policy sets out priorities and rules for applying technical solutions related to the utilization of energy facilities, the implementation of investment programmes for new construction, the re-tooling of core equipment, overhauls of energy assets belonging to NLMK Group companies, and the innovative and promising development of these companies. The Company has adopted an NLMK Group Integrated Management System Policy in Quality, Environmental Protection, Energy Efficiency, and Occupational Health and Safety (IMS Policy). This policy sets forth the vision, goals, principles, and management commitments related to the improvement of energy efficiency. NLMK Group Vice President for Energy and the Environment and the units reporting to him work to frame the principles and strategic goals for improving the energy efficiency of production and developing the Group’s energy facilities in addition to setting energy consumption KPIs and tracking them. Each year we create and implement a portfolio of energy efficiency projects aimed at attaining our energy resource use targets. The Group’s commitments under the IMS Policy go beyond introducing advanced energy-efficient technologies and solutions that reduce the consumption of natural and secondary energy resources. A key performance indicator for improving energy efficiency is the specific energy intensity of production (Gcal/t of output). The targets for these key performance indicators are determined based on earlier maximum results, taking into account the potential of optimizing the process to the best technologically achievable level, as well as the results of benchmarking similar machinery against global best practices. 204 205 Statement by member of the Board of Directors About the Company Corporate Governance Our Team Environmental Protection Appendix ANNUAL REPORT 2020 RENEWABLE ELECTRIC ENERGY CONSUMPTION ACROSS NLMK GROUP GRI 302-1 GROSS ENERGY CONSUMPTION CONSUMPTION FROM BREAKDOWN OF NON-RENEWABLE BY NLMK GROUP1, PJ NON-RENEWABLE SOURCES FUEL CONSUMPTION BY NLMK GRI 302-1 BY NLMK GROUP2, PJ GROUP IN 20203, % GRI 302-1 GRI 302-1 Indicator 2016 2017 2018 2019 2020 0.88 0.08 415.6 415.1 414.1 413.6 408.0 409.4 396.4 394.7 383.9 13.2 Share of renewable electric energy in purchased energy, % 385.3 4.79 4.81 4.86 5.10 0.37 1.43 5.15 Total share of renewable electric energy in total energy consumed, % 0.35 1.42 0.36 1.50 0.36 1.51 0.42 1.68 59.9 Total renewable electric energy consumed, PJ 26.0 2016 2017 2018 2019 2020 2016 2017 2018 2019 2020 Coal and coke products4 Natural gas Pulverized coal Motor fuel Fuel oil NLMK Group sites made no direct purchases from renewable energy suppliers. The share of generation from renewables is shown as assumed for Europe and the US as of the end of 2019 according to the Monthly Energy Review US report by the Energy Information Administration and The European Power Sector in 2019 report (available here on p. 120 and here on p. 7). SHARE OF RENEWABLE ELECTRIC ENERGY IN TOTAL PURCHASED ELECTRICITY BY REGION, WITHOUT TRANSIT FLOWS, % NLMK GROUP CONSUMPTION OF NON-RENEWABLE FUELS3, PJ GRI 302-1 Region Share of renewable energy Source Companies Fuel type 2016 218.37 99.409 18.10 2017 216.52 91.645 28.40 2.76 2018 207.94 87.750 43.30 2.79 2019 184.30 91.262 36.15 2020 196.94 85.499 43.36 2.90 Coal and coke products4 Russia, Central Unified Energy System zone (Central and Northwestern Federal Districts) NLMK Lipetsk, Stoilensky, Stagdok, Dolomit, NLMK Kaluga Natural gas 1.9 Hydro Pulverized coal Russia, Ural Unified Energy System zone (Ural and Volga Federal Districts) NLMK Ural, NLMK Metalware, VIZ-Steel Motor fuel (petrol, diesel, liquefied gas) 2.81 2.91 2.8 17.6 20.6 Hydro, wind, solar Hydro, wind, solar, biofuel Wind, solar, biofuel Fuel oil 0.26 0.04 0.04 0.21 0.27 NLMK Indiana LLC, NLMK Pennsylvania LLC, Sharon Coating LLC Total 338.93 339.37 341.83 314.92 328.97 USA NLMK La Louvière S.A., NLMK Clabecq S.A. Belgium France Italy 20.5 40.1 83.9 Hydro, wind, solar, biofuel Hydro, wind, solar, biofuel Wind, solar, biofuel NLMK Strasbourg S.A. NLMK Verona SpA NLMK DanSteel A/S Denmark 1 The methodology for calculating the Company’s energy consumption was adjusted: purchased energy minus sold energy (sales, shipment, transfer) at every production site; total across all sites. The methodology for calculating non-renewable energy consumption has been adjusted: total energy consumption by the Company minus renewable electric energy. Consumption of coke products and motor fuel has been adjusted because data sources have changed (added diesel fuel consumption by the Mining Division in ‘000 litres and coke fine consumption by NLMK Ural). Consumption of non-renewable fuels is shown net of fuel sales/shipment as products. Consumption of coal and coke products is shown net of sales/shipments of coke products (coke breeze, lump coke, coke nut, pitch coke) to 3rd parties. 2 3 4 206 207 Statement by member of the Board of Directors About the Company Corporate Governance Our Team Environmental Protection Appendix ANNUAL REPORT 2020 CONSUMPTION, GENERATION, AND SALE OF ELECTRICITY AND THERMAL ENERGY BY NLMK GROUP, PJ CAPTIVE ELECTRICITY GENERATION GRI 302-1 Indicator 2016 2017 2018 2019 2020 Electricity and thermal energy obtained for consumption Electrical power obtained Thermal energy obtained as steam Thermal energy obtained as hot water Total 83.06 0.45 1.64 87.32 0.51 87.30 0.50 1.59 78.47 0.48 1.33 77.68 0.48 1.01 The Company has managed to reduce CAPTIVE ELECTRICITY GENERATION AT NLMK GROUP SITES energy costs by implementing investment projects and optimization initiatives aimed at increasing captive generation of electricity and thermal energy. 1.52 85.15 89.35 89.39 80.28 79.17 In-house electricity and thermal energy generation Electricity generation NLMK LIPETSK, 522 MW 46.99 23.79 8.68 46.34 23.78 7.96 49.36 21.90 9.81 50.01 21.75 7.44 49.93 22.26 7.59 Electricity is generated at the Company’s captive power plants, which are chiefly powered by recycled fuel gases from steel production. Approximately 80% of the electricity generated at the Lipetsk site (and used for its production needs only) and 100% of the electricity generated at Altai-Koks is produced using NLMK Group’s captive recyclable resources (steelmaking gases). Co-generation plant: fuel – coke oven gas, blast furnace gas, Thermal energy as steam Thermal energy as hot water Total natural gas. Recovery co-generation plant: fuel – blast furnace gas, natural gas. Top pressure recovery turbine station: no fuel is used; instead, electricity is generated from excess blast furnace gas pressure. 79.47 78.07 81.07 79.20 79.77 Electricity and thermal energy sold to external consumers Electricity sold and transmitted 11.06 0.34 11.78 0.36 10.70 0.35 8.98 0.37 8.60 0.40 ALTAI-KOKS, 200 MW Heat energy sold and transmitted as steam Co-generation plant: fuel – coke oven gas Maximizing the utilization of available recyclable energy is one of the main challenges faced by NLMK Group. Overcoming this challenge will make it possible to not only minimize costs, but to also reduce our environmental impact by slashing emissions of harmful substances and greenhouse gases. Heat energy sold and transmitted as hot water 2.69 2.56 2.76 2.36 1.92 Total 14.08 14.70 13.81 11.71 10.92 NLMK URAL, 11 MW Mini gas-piston co-generation plant: fuel – natural gas SPECIFIC ENERGY INTENSITY1 AT THE LIPETSK SITE, GRI 302-3 GCAL/T In the reporting period, the total installed in-house generation capacity was 733 MW: 522 MW at the Lipetsk site and 200 MW at Altai-Koks; In 2020, NLMK Lipetsk generating capacities set an average daily record in electricity generation: (CGP – 346.5 MW, RCGP – 160.1 MW, total – 506.6 MW). Indicator 2016 2017 2018 2019 2020 Specific energy intensity 5.599 5.491 5.469 5.641 5.546 the installed capacity of gas-piston units at NLMK Ural was 11 MW. SHARE OF CAPTIVE CAPTIVE ELECTRICITY GENERATED AT NLMK LIPETSK2 ELECTRICITY IN TOTAL ELECTRICITY CONSUMPTION AT NLMK LIPETSK1, % 84 65.0 63.7 82 81 79 58.0 55.0 72 53.0 480 478 450 417 417 Captive electricity generation, MW Share of captive electricity generation from secondary fuel gases, % 2016 2017 2018 2019 2020 2016 2017 2018 2019 2020 1 Specific energy intensity = (energy consumption during steel production / extraction and processing of raw materials, Gcal) / (steel production / extraction and processing of raw materials, t). The following types of energy resources were used in the calculation: purchased – coking coal and additives, pitch coke, lump coke, coke breeze, pulverized coal, natural gas, fuel oil, thermal energy as hot water, steam, electricity, oxygen (NLMK Kaluga), and heat from chemically treated water (VIZ-Steel); sold – coke breeze, coke nut, chemical products, blast furnace gas, steam, thermal energy as hot water, oxygen, nitrogen, compressed air, industrial water, hydrogen, and commercial pig iron. 1 The share of captive electricity generation n 2020 is lower than in 2019 because of the increase in overall energy consumption on the site (start-up of new equipment for Basic Oxygen Furnace No. 3 in BOF Shop No. 2). The share of captive electricity generation from secondary fuel gases went up in 2020 due to increased utilization of BF gases after repairs at Blast Furnaces No. 6 and 7 were completed in 2019. 2 208 209 Statement by member of the Board of Directors About the Company Corporate Governance Our Team Environmental Protection Appendix ANNUAL REPORT 2020 IMPLEMENTING ENERGY EFFICIENCY PROJECTS PLANS FOR 2021 AND THE MEDIUM TERM Construction works are ongoing at a new recovery co-generation plant (RCGP-2) fuelled by secondary energy resources, which will bring NLMK Lipetsk’s self-suﬀiciency in electricity to 94% During the reporting period, NLMK Group implemented a number of energy efficiency projects at its sites to address the following items: ● Increasing the efficiency of fuel gas utilization in electricity generation Improving the efficiency of compressor equipment and cooling equipment Replacing pumping equipment with more energy-efficient units Optimizing process charts for the production of technical gases ● ● ● ● Optimizing the load and configuration of energy transportation networks, In 2019, NLMK Group launched a project to construct a new recovery co-generation plant at NLMK Lipetsk. The new plant will be fuelled by recyclable gases from steel production: BOF and BF gases. The installed capacity of the new recovery co-generation plant will be 300 MW. The estimated investment into the project is RUB 35 billion. optimizing the operation modes of energy equipment As part of the target-oriented programmes, lighting fixtures at NLMK Group sites were replaced with more advanced and efficient solutions. Previous work to improve efficiency was continued, such as replacement of pumping equipment and projects to improve the efficiency of compressor operation. OPTIMIZATION INITIATIVES UNDERTAKEN BY NLMK GROUP IN 2020 The energy efficiency and optimization projects carried out in 2020 for the co-generation and recovery plants at NLMK Lipetsk and the co-generation plant at Altai-Koks aimed to improve the operation modes and control algorithms of boilers and turbines, apply a new technology of heating combustion air, increase the surface area of economizers, and optimize equipment repairs. In 2020, design documentation engineering was completed for the main facilities in the new power plant complex, and the project was approved by the State Environmental Impact Assessment Authority REDUCTION OF ENERGY CONSUMPTION AS A RESULT OF ENERGY-SAVING INITIATIVES (PROGRAMMES) AT LIPETSK SITE, TJ GRI 302-4 The 2023 launch of this new power plant running on by-product gases of blast furnace and steelmaking operations will cut CO2 emissions by 650 kt (36 kg per tonne of steel) annually. 1,939 1,851 1,392 ● Improving the energy efficiency of production is a key goal of Strategy 2022. The main lines of action to boost energy efficiency in 2021 and the medium term include: Improving the efficiency of power-generating equipment Optimizing process charts for the production of technical gases Improving the efficiency of compressor equipment Replacing pumping equipment with more energy-efficient units Lighting system upgrades Reducing the amount of purchased thermal energy Developing and introducing innovative energy solutions Increasing the cost-efficiency of energy facilities by outsourcing processes Implementing investment projects for infrastructure development, technical Total amount of energy saved Total amount of fuel saved Total reduction in consumption of energy 753 743 ● ● ● ● ● ● ● ● 1,521 1,374 1,201 Stoilensky expands energy capacities in open-cast mine 664 372 348 329 ● Reducing specific energy 141 68 32 Stoilensky Mining and Beneficiation Plant, an NLMK Group company, has completed construction of the main step-down substation (MSDS-15) at its open-cast mine. The substation generates consumption at production units; in the medium term – reaching the minimum technically feasible level of consumption 2016 2017 2018 2019 2020 upgrades/construction of facilities with improved energy efficiency performance NLMK DanSteel to build the most environmentally friendly reheating furnace in Europe electricity to power mining machinery, traction units, and drain well equipment. The construction works were part of an NLMK Group Strategy 2022 project to boost the capacity of the open-cast mine to 42 million tonnes of ore annually. The new, cleaner furnace will open up new opportunities to expand production. This major investment is part of a larger strategy, aimed, inter alia, at enhancing the quality of plate for offshore wind turbines. The furnace will reduce emissions of CO2 and NOx by 15% and 75%, respectively. NOx emissions will go down to a quarter of the maximum level permitted by Danish legislation. 210 211 Statement by member of the Board of Directors About the Company Corporate Governance Our Team Environmental Protection Appendix ANNUAL REPORT 2020 SCOPE OF REPORTING ABOUT NLMK OPERATIONS AND SUSTAINABILITY ACTIVITIES ABOUT THE REPORT RUSSIA OUR APPROACH In 2020 Report, the Climate Change section has been published for the first time, relied on the TCFD (Taskforce on Climate-related Financial Disclosure) recommendations. New indicators are also provided in accordance with the SASB (Sustainability Accounting Standards Board). NLMK RUSSIA FLAT PRODUCTS TO PREPARING REPORTS NLMK Lipetsk Steel and flat products VIZ-Steel GO electrical steel Coke NLMK Group’s 2020 Annual Report (the Report) discloses information about financial and business operations along with data on the Company’s achievements in sustainability Altai-Koks The Report also covers compliance with the principles of the UN Global Compact to which the Company acceded in 2019 and the OECD Principles of Corporate Governance based on which the Group strives to conduct its activities. NLMK Trading SA Trader (located in Switzerland) NLMK RUSSIA LONG PRODUCTS management for the period from 1 January 2020 to 31 December 2020 NLMK Ural Steel and long products Steel and long products Metalware The interests of the investment community regarding sustainability management practices were taken into account during the preparation of this Report. In particular, the Group relied on the methodology of such rating agencies as SAM S&P, MSCI, Sustainalytics, FTSE Russell, ISS when disclosing information. NLMK Kaluga GRI 102-50 . NLMK Metalware NLMK prepares its Annual Report on a yearly basis. The Report includes information about the Company’s sustainability activities in the relevant topic-specific sections. The Company’s most recent annual report was published in April 2020. Electronic versions of previous reports can be found on the Company’s official GRI 102-51, GRI 102-52 Vtorchermet NLMK Scrap processing – Other The Report also reflects the Group’s contribution to the achievement of the Sustainable Development Goals adopted by the United Nations in 2015 in the document Transforming Our World: The 2030 Agenda for Sustainable Development. MINING DIVISION (RUSSIA) Stoilensky Extraction and processing of iron ore Extraction and processing of flux limestones Extraction of flux dolomite Stagdok Dolomit SCOPE OF REPORTING USA website . NLMK USA GRI 102-45 Information about the Group’s financial and business activities NLMK Pennsylvania LLC & Sharon Coating LLC NLMK Indiana LLC Flat products Starting from 2018 Company uses the recommendations of the Global Reporting Initiative (GRI Standards). The core option was selected for information disclosure. The GRI Content Index listing the disclosures included can be found in the Appendix is disclosed in accordance with its 2020 IFRS consolidated financial statements. Steel and flat products Data relating to NLMK’s operating activities and sustainability information are presented within the scope shown in the table below, unless otherwise indicated in the text of the Report. EU NLMK DANSTEEL AND PLATE DISTRIBUTION NETWORK NLMK DanSteel A/S Plate NBH SEGMENT GRI 102-54, GRI 102-55 . NLMK Clabecq S.A. Plate Plate Strip Strip – NLMK Verona SpA NLMK La Louviere S.A. NLMK Strasbourg S.A. Other SERVICE AND SUPPORTING BUSINESSES NLMK Trade House Sales of NLMK Group products Novolipetsk Steel Service Centre (Metallobaza) Sales of NLMK Group products, manufacturing of plastic and steel products NLMK Engineering SMT NLMK Design and survey operations Construction NLMK IT IT and computing services Telecom services NLMK Communications VIZ Steel baths VIZ-Broker Customs brokerage services Gas-concrete blocks Cutting and sales of GO steel – Gazobeton-48 NLMK INDIA Service Center Pvt Ltd Other 1 The GRI Standards: Core option requires obligatory disclosure of a selected set of indicators from GRI Standard 102 (General disclosures), as well as at least one indicator from the selected topic-specific GRI Standards 214 215 Statement by member of the Board of Directors About the Company Corporate Governance Our Team Environmental Protection Appendix ANNUAL REPORT 2020 THE PROCESS OF DEFINING For the preparation of the 2020 Report, the heads of NLMK’s functional areas updated the list of material topics based on an analysis of stakeholder (shareholders, investors, and analysts) requirements pertaining to the environment, the social sector, corporate governance, local communities, the authorities, market and social trends, and GRI Standards. MATERIAL TOPICS GRI 102-47 MATERIAL TOPICS Category Topic Level of materiality Link to Global Sustainable Development Goals GRI 102-46 In the process of defining the Report’s content, NLMK identified significant economic, environmental, and social topics that are of the greatest importance to the Company and its stakeholders. This approach was developed Economic 201 Economic Performance High A total of 21 material topics were identified and approved based on the analysis. These disclosures were also prioritized on the basis of a survey of internal stakeholders. 201-2 Climate change Medium The GRI information disclosure requirements were met to the same extent for all topics regardless of their level of materiality. At the same time, topics with a high level of materiality were given special attention: additional detailed information about them is provided in the Report. based on the requirements set out in the GRI Standards. APPROACH TO DEFINING MATERIAL TOPICS Analysis of external Analysis of stakeholder views Listing material topics 203 Indirect Economic Impacts 205 Anti-Corruption 302 Energy Medium High 1 sources 2 3 Analysis of the results of a survey completed by internal stakeholders Analysis of public information about the Company and the mining and steel industry Approval of the list of material topics by the Group CEO (members of the working group) Environmental High Benchmarking of material topics that Amended list of material topics Approved list of material topics are disclosed by international and Russian companies 303 Water and Effluents 304 Biodiversity Medium Medium High in the mining and steel industry Analysis of the requirements of ESG analysts who determine ratings for sustainability practices 305 Emissions Preliminary list of material topics 306 Effluents and Waste High 307 Environmental Compliance High 308 Supplier Environmental Assessment Medium 216 217 Statement by member of the Board of Directors About the Company Corporate Governance Our Team Environmental Protection Appendix ANNUAL REPORT 2020 Category Topic Level of materiality Link to Global Sustainable Development Goals EXTERNAL ASSURANCE principles and requirements of the GRI Standards based on the Group’s existing processes for collecting and preparing business information GRI 102-48, GRI 102-49 . Proper disclosure of qualitative and quantitative information prepared in accordance with the GRI Standards for selected indicators (sample information) has been verified in accordance with the International Standard on Assurance Engagements (ISAE) 3000 Revised, Assurance Engagements Other than Audits or Reviews of Historical Financial Information. The independent auditor's opinion on the results of the audit, which provides limited confidence in the sample information, can be found in the Appendix. The independent auditor was AO PricewaterhouseCoopers GRI 102-56 Social 401 Employment High Financial information is presented in US dollars or Russian rubles in accordance with the financial reporting system used in the Group. In cases where financial data were recalculated in dollars, the weighted average rate for 2020 was used: USD 1 = RUB 72.15 or the rate on 31 December 2020: USD 1 = RUB 71.88. 403 Occupational Health and Safety High Operating performance indicators and sustainability data are presented in the International System of Units (SI). State mandatory statistical reporting forms, which are submitted to the relevant government agencies on an annual basis, were used as sources of sustainability information about staff management, occupational health and safety, and environmental protection. 404 Training and Education High For the sake of comparing data, the most significant indicators of the Group’s activities will be presented not only for the reporting period, but also 405 Diversity and Equal Opportunity Medium High for the previous four years. The scope of 2020 information disclosure covers both the Group’s Russian and international companies, unless the text states otherwise. Audit . In 2020, the Company expanded its disclosure of greenhouse gas emissions, including Other indirect (Scope 3) GHG emissions. In the next reporting periods, the Company plans to continue disclosing this information. Major step in 2020 was disclosure of information about climate change aspect. 406 Non-Discrimination METHODOLOGY FOR PREPARING AND REVISING DATA The calculation, collection, In 2020 information about the impact of the COVID-19 pandemic on NLMK Group's operations was also disclosed. The decision to add this information to the the Report was made in response to the strong impact of this event at all levels of the global economy. The list of disclosed indicators of the structure and remuneration of personnel was also expanded. 407 Freedom of Association and Collective Bargaining Medium Low and consolidation of the operational, social, and environmental indicators presented in the Report were carried out in accordance with the reporting 408 Child Labour ANNUAL REPORT 2020 APPROVAL PROCEDURE No. Stage Document 409 Forced or Compulsory Labour Low 1 Preliminary approval by the Board of Directors Approval by the General Meeting of Shareholders MoM No. 279 dd 22.03.2021 MoM No No. __ dd 29.04.2021 2 411 Rights of indigenous peoples Low 413 Local Communities High 218 219 Statement by member of the Board of Directors About the Company Corporate Governance Our Team Environmental Protection Appendix ANNUAL REPORT 2020 Indicator Reference / Comment Page SASB INDICATORS GREENHOUSE GAS EMISSIONS EM-MM-110a.1 Gross global Scope 1 emissions, percentage covered under emissions-limiting regulations Gross global Scope 1 emissions – 30 mn t CO2-equiv. Only 1.2% is regulated by legal requirements at factories in the EU. p. 193 Indicator Reference / Comment Page GREENHOUSE GAS EMISSIONS AIR QUALITY EM-MM-110a.2 Discussion of long-term and short-term strategy or plan to manage Scope 1 emissions, emissions reduction targets, and an analysis of performance against those targets NLMK Group progressively reducing greenhouse p. 191, p. 193 EM-MM-120a.1 Air emissions of the following pollutants: (1) CO, (2) NOx (excluding N2O), (3) SOx, (4) particulate matter (PM10), (5) mercury (Hg), (6) lead (Pb), and (7) volatile organic compounds (VOCs) (1) carbon monoxide (CO) - 230.1 thousand tons, (2) nitrogen oxides (excluding N2O) - 26.1 thousand tons, (3) sulfur oxides – 31.0 thousand tons, (4) solid particles 23.0 thousand tons, (5) mercury (Hg) – 0 tons, (6) lead (Pb) – 1 ton, (7) volatile organic compounds (VOC) – 2.6 thousand tons p. 221 gas emissions by cutting consumption of fossil fuels, increasing energy efficiency, and introducing innovative decarbonization solutions. The Board of Directors, the Board’s committees, СЕО (Chairman of the Management Board), and the Management Board determine strategic growth priorities and ensure overall sustainability management WASTE & HAZARDOUS MATERIALS MANAGEMENT EM-MM-150a.1 Total weight of tailings waste, percentage recycled Total weight of tailings – 21.4 million tons The share of used tailings is 24% of the total volume. p. 179, p. 221 p. 221 ENERGY MANAGEMENT EM-MM-130a.1 Total energy consumed, percentage grid electricity, percentage renewable Total energy consumed – 396.4 PJ; Percentage grid electricity – 17%; Percentage renewable – 0.42%. p. 203–208 p. 170 EM-MM-150a.2 Total weight of mineral processing waste, percentage recycled The total weight of overburden is 60.5 million tons (including non-waste). The share of used overburden is 29% of the total volume WATER MANAGEMENT EM-MM-150a.3 Number of tailings impoundments, broken down by MSHA hazard potential NLMK Group operates one tailing dump. Detailed information is available at the link https://nlmk.com/ upload/iblock/4dc/TSF-management.pdf p. 221 p. 136 EM-MM-140a.1 Total fresh water Total fresh water withdrawn – 11,074 th m3 Ttotal fresh water consumed – 11,074 th m3 The regions of the Group's presence are characterized by high availability of water resources. The Group does not operate in water-scarce areas. withdrawn, total fresh water consumed, percentage of each in regions with High or Extremely High Baseline Water Stress LABOR RELATIONS EM-MM-310a.1 Percentage of active workforce covered under collective bargaining agreements, broken down by local and foreign employees Without local and foreign employees stucture BIODIRVERSITY IMPACTS EM-MM-160a.1 Description of environmental management policies and practices for active sites NLMK Group conducts operations on both industrial lands and residential areas in line with applicable law. The Company’s activities have no direct significant impacts on biodiversity. NLMK Group production sites are not located on industrial sites that are leased. More specifically, they are not located on sites that are situated on environmentally protected land or on land with a high biodiversity value. p. 183 SECURITY, HUMAN RIGHTS, RIGHTS OF INDIGENOUS PEOPLES EM-MM-210a.1 Percentage of (1) proved and (2) probable reserves in or near areas of conflict Company doesn’t have such reserves p. 221 EM-MM-210a.2 Percentage of proved and probable reserves in or near indigenous land According to the Company estimates, there is no presence of indigenous peoples in the regions where NLMK Group operates p. 221 EM-MM-160a.2 Percentage of mine sites where: EM-MM-210a.3 Discussion of engagement processes and due diligence practices with respect to human rights, indigenous rights, and operation in areas of conflict p. 112, p. 115 Acid rock drainage is predicted to occur NLMK Group has one ore mining company, and acid effluents are not predicted to form there. Drainage waters as well as bottom waters at Stoilensky GOK pit mine are collected and pumped out into a buffer tank or a dam reservoir of the tailing dump. The control of the physical and chemical composition of drainage water is carried out both at the stage of entering the tailing dump and its near-dam reservoirs, and during the discharge of drainage water into a water body after biological treatment in natural conditions. The pH value (measure of acidity) of the drainage water entering the tailing dump and discharged into the water body is within the pH range of 7.7–8.0 (alkaline) p. 220 COMMUNITY RELATIONS EM-MM-210b.1 Discussion of process to manage risks and opportunities associated with community rights and interests p. 112, p. 150 p. 221 EM-MM-210b.2 Number and duration of non-technical delays There were no non-technical delays at Russian assets ACTIVITY METRICS EM-MM-000.A Production of (1) metal ores and (2) finished metal products Saleble iron ore production: 18.5 mn t Finished metal products production: 17.41 p. 221 p. 121 Acid rock drainage is actively mitigated Not applicable. Acid effluents are not formed p. 220 p. 220 Acid rock drainage is under treatment or remediation Not applicable. Wastewater treatment is carried out by sedimentation of suspensions in the tailing dump and biological treatment in natural conditions. EM-MM-000.B Total number of employees NLMK Group’s average 2020 headcount was 51,900 people EM-MM-160a.3 Percentage of proved and probable reserves in or near sites with protected conservation status or endangered species habitat Percentage of proved and probable reserves in or near sites with protected conservation status or endangered species habitat – 0% All explored reserves are located within the contour of the mining allotment and do not lie within (or near) territories that have a conservation status or are a habitat for endangered species p. 220 1 Including NBH. 220 221 Statement by member of the Board of Directors About the Company Corporate Governance Our Team Environmental Protection Appendix ANNUAL REPORT 2020 Indicator Reference / Comment Page GRI INDEX BUSINESS ETHICS & TRANSPERANCY EM-MM-510a.1 Description of the management system for prevention of corruption and bribery throughout the value chain The Company has adopted the Code of Corporate Ethics and Anti-Corruption Policy. Whenever a new version of the Code of Corporate Ethics or Anti-Corruption Policy comes into effect, all employees of the Company review latest version and sign an acknowledgement form. The Company also expects its business partners to adhere to basic values and principles of good business conduct. The Company’s business partners familiarize themselves with the provisions of the Code of Corporate Ethics during the qualification and selection of p. 88 Indicator Reference / Comment Page Independent verification GRI 102: General Disclosures 1. ORGANIZATIONAL PROFILE GRI 102-1 Name of the organization p. 8 p. 9 GRI 102-2 Activities, brands, products, and services a counterparty as well as the conclusion of a contract. GRI 102-3 Location of headquarters GRI 102-4 Location of operations GRI 102-5 Ownership and legal form p. 44 EM-MM-510a.2 Production in countries that have the 20 lowest rankings in Transparency International’s Corruption Perception Index NLMK Group does not have production assets in countries ranked in one of the last 20 places in the Transparency International Corruption Perceptions Index p. 222 p. 8, p. 20 The organizational structure of the Company can be found on its website at https://www.nlmk.com/ru/ about/group-structure/ The legal form of all companies belonging to NLMK Group is presented in the About the Report section. GRI 102-6 Markets served p. 20 GRI 102-7 Scale of the organization p. 8, p. 121 p. 121, p. 122 GRI 102-8 Information on employees and other workers ✔ The average headcount (in total); Staff breakdown (by segment, region, contract type, gender, age and category). GRI 102-9 Supply chain p. 110 ✔ Procurement from suppliers of goods and materials by supplier country. GRI 102-10 Significant changes to the organization and its supply chain In the reporting period, there p. 110 were no significant changes in the structure and activities of the Company. GRI 102-11 Precautionary Principle or approach p. 80 GRI 102-12 External initiatives GRI 102-13 Membership of associations 2. STRATEGY p. 236 p. 236 GRI 102-14 Statement from senior decision-maker p. 2 3. ETHICS AND INTEGRITY GRI 102-16 Values, principles, standards, and norms of behaviour p. 30, p. 88, p. 96 GRI 102-17 Mechanisms for advice and concerns about ethics p. 88, p. 114 4. CORPORATE MANAGEMENT GRI 102-18 Governance structure p. 48 p. 31 GRI 102-20 Executive-level responsibility for economic, environmental, and social topics 222 223 Statement by member of the Board of Directors About the Company Corporate Governance Our Team Environmental Protection Appendix ANNUAL REPORT 2020 Indicator Reference / Comment Page Independent verification Indicator Reference / Comment Page p. 214 p. 129 Independent verification GRI 102-21 Consulting stakeholders on economic, environmental, and social topics p. 98 GRI 102-55 GRI content index GRI 102-56 External assurance MATERIAL TOPICS GRI 102-22 Composition of the highest governance body and its committees p. 54, p. 56, p. 67 GRI 200 ECONOMIC GRI 102-23 Chair of the highest governance body p. 56 GRI 201 ECONOMIC PERFORMANCE GRI 103 Management Approach p. 40 GRI 102-24 Nominating and selecting the highest governance body p. 53 GRI 201-1 Direct economic value generated and distributed p. 43, p. 132, p. 133, p. 156 ✔ Investment in external social programmes; Social spending for employees at the Russian assets of NLMK Group. GRI 102-25 Conflicts of interest p. 66 p. 53 GRI 102-26 Role of highest governance body in setting purpose, values, and strategy GRI 102-27 Collective knowledge of highest governance body p. 58 p. 64 p. 68 GRI 201-2 Financial implications and other risks and opportunities due to climate change p. 190 p. 125 GRI 102-28 Evaluating the highest governance body’s performance GRI 202 MARKET PRESENCE GRI 102-29 Identifying and managing economic, environmental, and social impacts GRI 202-1 Ratios of standard entry level wage by gender compared to local minimum wage ✔ Average employee salary at the Group. GRI 102-30 Effectiveness of risk management processes p. 80 p. 68 GRI 203 INDIRECT ECONOMIC IMPACTS GRI 103 Management Approach p. 152 p. 152 GRI 102-32 Highest governance body’s role in sustainability reporting GRI 203-2 Significant indirect economic impacts GRI 102-35 Remuneration policies p. 77, p. 79 p. 77, p. 79 GRI 204 PROCUREMENT PRACTICES GRI 102-36 Process for determining remuneration GRI 204-1 Proportion of spending on local suppliers p. 110 ✔ Proportion of spending on local suppliers. GRI 102-37 Stakeholders’ involvement in remuneration p. 77 GRI 205 ANTI-CORRUPTION 5. DIALOGUE WITH STAKEHOLDERS GRI 103 Management Approach p. 152 p. 89 GRI 102-40 List of stakeholder groups p. 96 GRI 205-1 Operations assessed for risks related to corruption GRI 102-41 Collective bargaining agreements p. 136 ✔ Employees covered by collective bargaining agreements, %. GRI 205-2 Communication and training about anti-corruption policies and procedures p. 88, p. 89 p. 89 GRI 102-42 Identifying and selecting stakeholders p. 96 p. 96 p. 98 GRI 205-3 Confirmed incidents of corruption and actions taken GRI 102-43 Approach to stakeholder engagement GRI 206 ANTI-COMPETITIVE BEHAVIOR GRI 206-1 Legal actions for anti-competitive behavior, anti-trust, and monopoly practices p. 89 GRI 102-44 Key topics and concerns raised 6. REPORTING PRACTICE GRI 102-45 Entities included in the consolidated financial statements p. 214 p. 216 GRI 300 ENVIRONMENTAL GRI 302 ENERGY GRI 102-46 Defining report content and topic boundaries GRI 103 Management Approach p. 205 GRI 302-1 Energy consumption within the organization p. 206, p. 207, p. 208 ✔ GRI 102-47 List of material topics GRI 102-48 Restatements of information GRI 102-49 Changes in reporting GRI 102-50 Reporting period p. 217 Gross energy consumption by the Company (excluding fuel consumption from renewable sources); p. 219 p. 219 p. 214 Consumption from non-renewable fuels GRI 102-51 Date of most recent report GRI 102-52 Reporting cycle p. 214 by the Company; Breakdown of non-renewable fuel consumption by the Company; Consumption, generation, and sale of electricity and thermal energy by the Company. p. 214 GRI 102-53 Contact point for questions regarding the report p. 44, p. 93 GRI 102-54 Claims of reporting in accordance with the GRI Standards p. 214 224 225 Statement by member of the Board of Directors About the Company Corporate Governance Our Team Environmental Protection Appendix ANNUAL REPORT 2020 Indicator Reference / Comment The Company considers it unhelpful to calculate the energy intensity Page Independent verification Indicator Reference / Comment Page Independent verification GRI 305-3 Other indirect (Scope 3) GHG emissions p. 193 ✔ GRI 302-3 Energy intensity p. 208 Other indirect (Scope 3) GHG emissions. indicator for the Group as a whole due to different production specifics at its companies. This indicator is calculated only for the main Russian production site – NLMK Lipetsk. GRI 305-4 GHG emissions intensity p. 194, p. 195 p. 195 ✔ GHG emissions intensity. GRI 305-5 Reduction of GHG emissions ✔ Reduction of GHG emissions. GRI 305-6 Emissions of ozone-depleting substances (ODS) NLMK Group companies do not produce, emit or use ozone-depleting substances in its processes, except for the use as GRI 302-4 Reduction of energy consumption GRI 303 WATER AND EFFLUENTS p. 210 a reagent in chemical GRI 103: Management Approach p. 164 p. 170 laboratory analyses in extremely limited quantities, as well as for refuelling compressor equipment, air conditioning and fire extinguishing systems. GRI 303-1 Interactions with water as a shared resource GRI 303-2 Management of water discharge-related impacts p. 166, p. 170 p. 170, p. 171 GRI 303-3 Water withdrawal ✔ GRI 305-7 Nitrogen oxides (NOX), sulfur oxides (SOX), and other significant air emissions p. 178 ✔ Total volume of water withdrawn; Total volume of water withdrawn for the Group by needs, by sources and by region Volume of significant air emissions by the Company by substance type. GRI 306 EFFLUENTS AND WASTE GRI 303-4 Water discharge p. 173 ✔ GRI 103: Management Approach p. 164 p. 173 Total volume of water discharge by receiving water body; total volume of water discharge by regions GRI 306-1 Water discharge by quality and destination GRI 306-2 Waste by type and disposal method p. 179, p. 180 ✔ Waste generated by the Group by hazard class; the amount of recycled materials processed in-house; amount of secondary raw materials recycled by third parties; waste disposal GRI 303-5 Water consumption p. 170, p. 172 ✔ Total volume of water recycled GRI 304 BIODIVERSITY GRI 103: Management Approach p. 164 p. 183 GRI 304-1 Operational sites owned, leased, managed in, or adjacent to, protected areas and areas of high biodiversity value outside protected areas at third-party landfills. GRI 306-3 Significant spills In the course of the Company's activities in the reporting year, no significant spills were recorded. GRI 304-2 Significant impacts of activities, products, and services on biodiversity p. 183 GRI 304-3 Habitats protected or restored p. 184 GRI 306-4 Transport of hazardous waste NLMK Group's companies do not import or export hazardous waste or ship it internationally. Transportation of waste outside the Group's premises is carried out by specialized organizations with appropriate licenses. GRI 304-4 IUCN Red List species and national conservation list species with habitats in areas affected by operations p. 174, p. 183 GRI G4-MM1 land rehabilitated p. 183 ✔ Hectares of rehabilitation carries out of contaminated land. GRI 307 ENVIRONMENTAL COMPLIANCE GRI 103: Management Approach p. 164 p. 166 GRI 305 EMISSIONS GRI 103-2: The management approach and its components ✔ GRI 103: Management Approach GRI 305-1 Direct (Scope 1) GHG emissions p. 188 p. 192 Spending on environmental protection (incl. investments projects and current expenditures). ✔ Direct GHG emissions (Scope 1). GRI 305-2 Energy indirect (Scope 2) GHG emission p. 192 ✔ GRI 307-1 Non-compliance with environmental laws and regulations p. 166 Indirect energy GHG emissions (Scope 2). 226 227 Statement by member of the Board of Directors About the Company Corporate Governance Our Team Environmental Protection Appendix ANNUAL REPORT 2020 Indicator Reference / Comment Page Independent verification Indicator Reference / Comment Page Independent verification GRI 308 SUPPLIER ENVIRONMENTAL ASSESSMENT GRI 404-3 Percentage of employees receiving regular performance and career development reviews p. 125, p. 126 ✔ Employees who received a regular performance. GRI 103: Management Approach p. 164 p. 168 GRI 308-1 New suppliers that were screened using environmental criteria GRI 405 DIVERSITY AND EQUAL OPPORTUNITY GRI 103: Management Approach p. 120 GRI 308-2 Negative environmental impacts in the supply chain and actions taken p. 168 ✔ Suppliers of feedstock, materials, and equipment to the Company screened using environmental criteria during audits; GRI 405-1 Diversity of governance bodies and employees p. 121, p. 122 GRI 406 NON-DISCRIMINATION GRI 103: Management Approach p. 114 p. 116 Suppliers subject to measures to improve environmental compliance following audits (% of total audits conducted). GRI 406-1 Incidents of discrimination and corrective actions taken GRI 407 FREEDOM OF ASSOCIATION AND COLLECTIVE BARGAINING GRI 103: Management Approach p. 114 GRI 400 SOCIAL GRI 407-1 Operations and suppliers in which the right to freedom of association and collective bargaining may be at risk p. 114, p. 116 GRI 401 EMPLOYMENT GRI 103: Management Approach p. 120 GRI 401-1 New employee hires and employee turnover p. 122, p. 123 ✔ GRI 408 CHILD LABOR GRI 103: Management Approach p. 114 GRI 403 OCCUPATIONAL HEALTH AND SAFETY GRI 408-1 Operations and suppliers at significant risk for incidents of child labour p. 114, p. 116 GRI 103: Management Approach p. 140 p. 140 GRI 403-1 Occupational health and safety management system GRI 409 FORCED OR COMPULSORY LABOR GRI 403-2 Hazard identification, risk assessment, and incident investigation p. 142 GRI 103: Management Approach p. 114 GRI 409-1 Operations and suppliers at significant risk for incidents of forced or compulsory labour p. 114, p. 116 GRI 403-3 Occupational health services p. 135 p. 142 GRI 403-4 Worker participation, consultation, and communication on occupational health and safety GRI 411 RIGHTS OF INDIGENOUS PEOPLES GRI 411-1 Incidents of violations involving rights of indigenous peoples Company conciders there p. 115 p. 114 GRI 403-5 Worker training on occupational health and safety p. 142 is no presence of indigenous peoples in the regions where NLMK Group operates. GRI 403-6 Promotion of worker health p. 133, p. 134 p. 142 GRI 403-7 Prevention and mitigation of occupational health and safety impacts directly linked by business relationships GRI 412 HUMAN RIGHTS ASSESSMENT GRI 412-1 Operations that have been subject to human rights reviews or impact assessments The question about possible violations of human rights is included in the annual corporate survey "Pulse NLMK", GRI 403-8 Workers covered by an occupational health and safety management system p. 142 which covers the largest enterprises of the company. In the reporting year, there were no cases of human rights violations. GRI 403-9 Work-related injuries p. 142, p. 146, p. 147 ✔ LTIFR for employees and contractors; TRIFR for employees and contractors; Number of occupational accidents with employees and contractors; Total man-hours worked for employees and contractors. GRI 412-2 Employee training on human rights policies or procedures p. 114 p. 152 GRI 413 LOCAL COMMUNITIES GRI 103: Management Approach GRI 403-10 Work-related ill health GRI 404 TRAINING AND EDUCATION GRI 103: Management Approach p. 134 GRI 413-1 Operations with local community engagement, impact assessments, and development programs p. 97, p. 154, p. 155 p. 127 p. 127 GRI 404-1 Average hours of training per year per employee GRI 413-2 Operations with significant actual and potential negative impacts on local communities No such operations. GRI 404-2 Programs for upgrading employee skills and transition assistance programs p. 127, p. 129, p. 131, p. 133 228 229 Statement by member of the Board of Directors About the Company Corporate Governance Our Team Environmental Protection Appendix ANNUAL REPORT 2020 GRI INDICATOR CONSOLIDATION BOUNDARIES The GRI standard disclosures about the company’s profile, strategy, ethics and integrity, management, stakeholder engagement practices, and are collected by the NLMK Group. The standard GRI disclosure of the 103 series cover management approaches for all significant topics defined in the 200, 300, 400 series. 101 and 102 set out the reporting principles for determining the quality content, and also include information Indicator Russia Flat Products (Russia) Russia Long Products (Russia) Mining Division (Russia) NLMK USA DanSteel and plate distribution network NBH Segment Service and Supporting Business NLMK Clabecq S.A., Other companies NLMK Verona SpA, NLMK La Louviere S.A., NLMK Strasbourg S.A. Information on employees and other workers (GRI 102-8) ✔ ✔ ✔ ✔ – ✔ – ✔ – ✔ ✔ – Supply chain (GRI 102-9) 1 3 6 ✔ ✔ ✔ – Collective bargaining agreements (GRI 102-41) 8 ✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔ The management approach and its components (GRI 103-2) 1 4 11 ✔ ✔ ✔ ✔ ✔ – ✔ ✔ ✔ – ✔ ✔ ✔ – – ✔ Direct economic value generated and distributed (GRI 201-1) 1 9 12 ✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔ Financial implications and other risks and opportunities due to climate change (GRI 201-2) ✔ ✔ – ✔ Ratios of standard entry level wage by gender compared to local minimum wage (GRI 202-1) 1 13 ✔ ✔ Market presence; average employee salary at the Group (GRI 203-2) ✔ ✔ ✔ ✔ ✔ ✔ Procurement (GRI 204-1) 1 3 6 ✔ ✔ ✔ – – – – ✔ ✔ – – ✔ ✔ – Anti-corruption (GRI 205-1, 205-2, 205-3) ✔ ✔ ✔ ✔ ✔ ✔ ✔ – ✔ ✔ ✔ – ✔ ✔ ✔ – ✔ ✔ ✔ – Anti-competitive behaviour (GRI 206-1) Energy (GRI 302-1) 1 5 ✔ ✔ Energy (GRI 302-4) 2 ✔ – – – Water 1 4 11 ✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔ – ✔ (GRI 303-1, 303-2, 303-3, 303-4, 303-5) Biodiversity (GRI 304-1, 304-2, 304-3, 304-4, G4-MM1) 1 4 11 ✔ ✔ – ✔ Emissions (GRI 305-1, 305-2, 305-3, 305-4, 305-5) 1 5 9 14 ✔ ✔ ✔ ✔ Emissions (GRI 305-7) 1 4 11 ✔ ✔ – – ✔ Effluents and waste (GRI 306-1, 306-2) 1 4 11 ✔ ✔ ✔ 230 231 Statement by member of the Board of Directors About the Company Corporate Governance Our Team Environmental Protection Appendix ANNUAL REPORT 2020 Indicator Russia Flat Products Russia Long Products Mining Division (Russia) NLMK USA DanSteel and plate distribution network NBH Segment Service and Supporting Business (Russia) (Russia) NLMK Clabecq S.A., Other companies NLMK Verona SpA, NLMK La Louviere S.A., NLMK Strasbourg S.A. Environmental compliance (GRI 307-1) ✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔ Supplier environmental assessment (GRI 308-1, 308-2) Employment (GRI 401-1) 5 15 ✔ ✔ Occupational health and safety (GRI 403-1, 403-2, 403-3, 403-4, 403-5, 403-6, 403-7, 403-8, 403-9, 403-10) 1 5 10 16 ✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔ Training and education (GRI 404-1, 404-2, 404-3) 1 1 7 17 ✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔ – ✔ Diversity and equal opportunity (GRI 405-1) ✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔ Non-discrimination (GRI 406-1) Freedom of association and collective bargaining (GRI 407-1) ✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔ Child labor (GRI 408-1) ✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔ Forced or compulsory labor (GRI 409-1) Rights of indigenous peoples (GRI 411-1) Human rights assessment (GRI 412-1, 412-2) Local communities (GRI 413-1) 1 Excluding NLMK Trading SA Only NLMK Lipetsk 2 3 Excluding NLMK SORT and Vtorchermet NLMK Excluding NLMK-URAL Service and NLMK SORT Excluding NLMK SORT Excluding Stagdok and Dolomit Excluding Stagdok Excluding NLMK Jemappes Steel Center, NLMK Profil Batiment and NLMK Liege Steel Distribution Only NLMK Manage Excluding NLMK Spain Steel, NLMK Belgium HoldingsSTRIP and Commercial-Plate-WorldQ&T Only VIZ Excluding VIZ-Broker, Blinovskoye, GK Metallurg, Ural'skaya zdravnica Nizhnie Sergi, Demidov Centre, GOK Usinskiy-3 Excluding NLMK India Service Center Pvt Ltd Only VIZ and NLMK India Service Center Pvt Ltd 4 5 6 7 8 9 10 11 12 13 14 15 16 17 Excluding Blinovskoye, GK Metallurg, Ural'skaya zdravnica Nizhnie Sergi, Demidov Centre, GOK Zhernovsky-1, GOK Usinskiy-3 Only Novolipetsk metallobaza, NLMK-Engineering, NLMK-IT, NLMK-Svyaz, VIZ and NLMK India Service Center Pvt Ltd Only Novolipetsk metallobaza, NLMK-Engineering, STROITEL'NO-MONTAZHNYJ TREST NLMK, NLMK-IT, NLMK-Svyaz, VIZ, Gazobeton-48 and NLMK INDIA Service Center Pvt Ltd 232 233 Statement by member of the Board of Directors About the Company Corporate Governance Our Team Environmental Protection Appendix ANNUAL REPORT 2020 Independent Limited Assurance Report This report, including our conclusion, has been prepared solely for the management of the Group in accordance with the agreement between us, to assist management in reporting on the Group’s sustainability performance and activities. We permit this report to be disclosed in the Annual Report, which may be published on the Company’s website1, to assist management in responding to their governance responsibilities by obtaining an independent limited assurance report in connection with the Selected Information. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the management of the Group for our work or this report. To the Management of Novolipetsk Steel: Introduction We have been engaged by Novolipetsk Steel (hereinafter – the “Company”) to provide limited assurance on the selected information listed below and included in the 2020 Annual Report of the Company (hereinafter – the “Annual Report”). The Annual Report represents information related to the Company, its subsidiaries and a joint venture (hereinafter together – the “Group”). Professional standards applied and level of assurance We performed a limited assurance engagement in accordance with International Standard on Assurance Engagements 3000 (Revised) “Assurance Engagements other than Audits and Reviews of Historical Financial Information’’ issued by the International Auditing and Assurance Standards Board. A limited assurance engagement is substantially less in scope than a reasonable assurance engagement in relation to both the risk assessment procedures, including an understanding of internal control, and the procedures performed in response to the assessed risks. Selected information We assessed quantitative information specified in Appendix 1 (hereinafter – the “Selected Information”), that is disclosed in the Annual Report and referred to the GRI content index. Our independence and quality control The scope of our assurance procedures was limited to the Selected Information for the year ended 31 December 2020 only. We have not performed any procedures with respect to earlier periods or any other items included in the Annual Report and, therefore, do not express any conclusion thereon. We have complied with the independence and other ethical requirements of the International Code of Ethics for Professional Accountants (including International Independence Standards) issued by the International Ethics Standards Board for Accountants (IESBA Code), which is founded on fundamental principles of integrity, objectivity, professional competence and due care, confidentiality and professional behaviour, and the ethical requirements of the Auditor’s Professional Ethics Code and Auditor’s Independence Rules that are relevant to our limited assurance engagement in respect of the Selected information in the Russian Federation. We have fulfilled our other ethical responsibilities in accordance with these requirements Reporting criteria We assessed the Selected Information using relevant criteria, including reporting requirements, in the respective GRI Standards 102, 103, 201, 202, 204, 302, 303, 304, 305, 306, 308, 401, 403, 404 (hereinafter – the “GRI Standards”) published by the Global Reporting Initiative (GRI) (hereinafter – the “Reporting Criteria”). We believe that the Reporting Criteria are appropriate given the purpose of our limited assurance engagement. Our firm applies International Standard on Quality Control 1 and accordingly maintains a comprehensive system of quality control including documented policies and procedures regarding compliance with ethical requirements, professional standards and applicable legal and regulatory requirements. The Group’s responsibilities Management of the Group is responsible for: • • • • designing, implementing and maintaining internal control relevant to the preparation of the Selected Information that is free from material misstatement, whether due to fraud or error; Work done We are required to plan and perform our work in order to consider the risk of material misstatement of the Selected Information. In doing so, we: establishing internal methodology and guidelines for preparing and reporting the Selected Information in accordance with the Reporting Criteria; • • made enquiries of the Group’s management; preparation, measuring and reporting the Selected Information in accordance with the Reporting Criteria; and conducted interviews of personnel responsible for the preparation of the Annual Report and collection of underlying data; accuracy, completeness and presentation of the Selected Information. • • performed analysis of the relevant internal methodology and guidelines, gaining an understanding of the design of the key systems, processes and controls for preparing and reporting the Selected Information; and Our responsibilities We are responsible for: performed limited substantive testing on a selective basis of the Selected Information to check that data had been appropriately measured, recorded, collated and reported. • • • planning and performing the engagement to obtain limited assurance about whether the Selected Information is free from material misstatement, whether due to fraud or error; forming an independent conclusion, based on the procedures we have performed and the evidence we have obtained; and 1 The maintenance and integrity of the Company’s website is the responsibility of management; the work carried out by us does not involve consideration of these matters and, accordingly, we accept no responsibility for any changes that may have occurred to the reported Selected Information or Reporting Criteria when presented on the Company’s website. reporting our conclusion to the management of the Group. AO PricewaterhouseCoopers Audit White Square Office Center 10 Butyrsky Val Moscow, Russian Federation, 125047 T: +7 (495) 967 6000, F:+7 (495) 967 6001, www.pwc.ru 2 234 235 Statement by member of the Board of Directors About the Company Corporate Governance Our Team Environmental Protection Appendix ANNUAL REPORT 2020 Appendix 1 Reporting and measurement methodologies The range of different, but acceptable under the GRI Standards, measurement and reporting techniques can result in materially different reporting outcomes that may affect comparability with other organisations. The Selected Information should therefore be read in conjunction with the methodology used by management in preparing the Annual Report, described therein, and which the Group is solely responsible for. The Selected Information GRI disclosure Information 102-8 Information on employees and other workers • • The average headcount; Staff breakdown (by segment, region, contract type, gender, age and category). Limited assurance conclusion 102-9 Supply chain • • • Procurement from suppliers of goods and materials by supplier country. Based on the procedures we have performed and the evidence we have obtained, nothing has come to our attention that causes us to believe that the Selected Information for the year ended 31 December 2020 has not been prepared, in all material respects, in accordance with the Reporting Criteria. 102-41 Collective bargaining agreements Number of employees covered by collective bargaining agreements, %. 103-2 The management approach and its components Spending on environmental protection (incl. investments projects and current expenditures). 201-1 Direct economic value generated and distributed • • Investment in external social programmes; Social spending for employees at the Russian assets of the Group. 22 March 2021 Moscow, Russian Federation 202-1 Ratios of standard entry level wage by gender compared to local minimum wage • Average employee salary at the Group. 204-1 Proportion of spending on local suppliers • • Proportion of spending on local suppliers. A. B. Fomin, certified auditor (licence No. № 01-000059), AO PricewaterhouseCoopers Audit 302-1 Energy consumption within the organization Gross energy consumption by the Group (excluding consumption from renewable fuels); Audited entity: Novolipetsk Steel PJSC Independent auditor: AO PricewaterhouseCoopers Audit • • Consumption from non-renewable fuels by the Group; Breakdown of non-renewable fuel consumption by the Group; Consumption, generation, and sale of electricity and thermal energy by the Group. Record made in the Unified State Register of Legal Entities on 9 July 2002 under State Registration Number 1024800823123 Registered by the Government Agency Moscow Registration Chamber on 28 February 1992 under Nо. 008.890 Taxpayer Identification Number 4823006703 Record made in the Unified State Register of Legal Entities on 22 August 2002 under State Registration Number 1027700148431 • 2, Metallurgov sq., Lipetsk, 398040, Russian Federation Taxpayer Identification Number 7705051102 Member of Self-regulatory organization of auditors Association «Sodruzhestvo» 303-3 Water withdrawal • • Total volume of water withdrawn; Total volume of water withdrawn for the Group by needs, by sources and by region. Principal Registration Number of the Record in the Register of Auditors and Audit Organizations – 12006020338 303-4 Water discharge • • Total volume of water discharge by receiving water body; Total volume of water discharge by regions. 303-5 Water consumption • • Total volume of water recycled. Direct GHG emissions (Scope 1). 305-1 Direct (Scope 1) GHG emissions 305-2 Energy indirect (Scope 2) GHG emissions • • • Indirect energy GHG emissions (Scope 2). Other indirect (Scope 3) GHG emissions. GHG emissions intensity. 305-3 Other indirect (Scope 3) GHG emissions 305-4 GHG emissions intensity 3 4 236 237 Statement by member of the Board of Directors About the Company Corporate Governance Our Team Environmental Protection Appendix ANNUAL REPORT 2020 NLMK’S INTERNAL AUDIT SERVICE CONCLUSION ON THE RISK MANAGEMENT AND INTERNAL CONTROL IN THE COMPANY IN 2020 GRI disclosure Information 305-5 Reduction of GHG emissions • Reduction of GHG emissions. In 2020, the Internal Audit Service evaluated the reliability and efficiency of risk management and internal control system to confirm the existence and efficient functioning of the controls necessary to manage material risks in NLMK’s key business processes. 305-7 Nitrogen oxides (NOx), sulphur oxides (SOx), and other significant air emissions • Volume of significant air emissions by the Group by substance type. In its activities, the Internal Audit Service was guided by the Federal Law “On Joint-Stock Companies”, the Bank of Russia 306-2 Waste by type and disposal method • • • Waste generated by the Group by hazard class; Secondary raw materials recycled by the Group; Secondary raw materials recycled third-party organizations; Corporate Governance Code, the Regulations on the Audit Department, International Professional Standards of Internal Audit, internl audit guidelines and practices, documents of international professional organizations in the field of risk management and internal control, including ISO 31000:2018, COSO ERM: 2017 and COSO 2013, as well as internal regulatory documents of the NLMK Audit Department. • • Waste disposal at third-party landfills. In the course of the evaluation, the Internal Audit Service considered whether the Company has functioning controls in place, that are necessary to implement in practice the relevant principles of material risk management and internal control in the following processes in the Company: Supply of raw materials, Repairs, Production, Operational efficiency, Contractor qualification, Procurement procedures, Conclusion of contracts, Compliance with anti-corruption requirements, etc. 308-2 Negative environmental impacts in the supply chain and actions taken Suppliers of feedstock, materials, and equipment to the Group screened using environmental criteria during audits; Suppliers subject to measures to improve environmental compliance following audits (% of total audits conducted). • • Following the evaluation, we have not found any facts that would give us reason to believe that the controls in question preclude the Company from managing its material risks. 401-1 New employees hires and employee turnover New employees hires and employee turnover. 403-9 Work-related injuries • • • LTIFR for employees and contractors; TRIFR for employees and contractors; Number of occupational accidents, employees and contractors; E. Sidorova Audit Director (Head of the Internal Audit Service) • • Total man-hours worked for employees and contractors. 404-3 Percentage of employees receiving regular performance and career development reviews Employees who received a regular performance. Lipetsk, 10 March 2021 G4-MM1 Amount of land disturbed or rehabilitated • Hectares of land rehabilitated. 5 238 239 Statement by member of the Board of Directors About the Company Corporate Governance Our Team Environmental Protection Appendix ANNUAL REPORT 2020 PARTICIPATION IN INDUSTRY ASSOCIATIONS AND EXTERNAL INITIATIVES RESPONSIBILITY STATEMENT NLMK management, having considered the information available regarding the activities of the Company, confirms its responsibility for: NLMK Group plays an active part in the life of the professional community, helping to address topical issues in the industry, including sustainability matters. Participation in external initiatives is a priority for NLMK Group. Representatives of the Group are not only active in a number of industry associations and relevant commissions and committees, they also head some of them, which allows the Group to play an active role in shaping the views and values of the business community. For instance, NLMK Group Chairman of the Board of Directors Vladimir Lisin is also Chairman of the Commission on Metals and the Committee on Taxation Policy as well as member of the Management Bureau of the Russian Union of Industrialists and Entrepreneurs (RSPP). Preparation and reliability of the Group’s consolidated financial statements, prepared in accordance with IFRS, as of December 31, 2020 and also for the year ended on that data, within balance sheets, profit and loss statements, cash flow statements, equity statements and the statements on the total income of shareholders and notes to the consolidated financial statements. Management confirms the reliability of NLMK’s financial status, operational results and cash flow results, as well as that of its companies and dependent companies in the consolidated financial statements. The completeness and correctness of the information submitted in the NLMK Group Annual Report for 2020, specifically the information on the operational results of NLMK Group, the results of its strategic development, risks, and events which in the near future may have impact on the operations of the Group. NLMK GROUP’S PARTICIPATION IN INDUSTRY ASSOCIATIONS GRI 102-12, 102-13 AND EXTERNAL INITIATIVES Association/Initiative NLMK Group’s status The Company management confirms that the operational and financial indices fully reflect the outcome of NLMK Group’s operations in 2020 and main changes regarding the previous periods as well as give a comprehensive representation on the development of NLMK and its companies and dependent companies. World Steel Association, an international association of iron and steel product manufacturers Membership in the Association 2018 signatory to the Sustainable Development Charter of the World Steel Association Participation in conferences and seminars enabling the sharing of best practices in occupational health and safety Provision of information about sustainability indicators G. Fedorishin CEO (Chairman of the Management Board) UN Global Compact Participant in the Global Initiative The Russian Union of Industrialists and Entrepreneurs (RSPP) Membership in the Management Bureau and the Board Chairmanship of the Commission on Metals Participation in other Commissions and Committees, including: the Commission on Mining, the Committee on Corporate Social Responsibility and Demographic Policies, the Committee on Vocational Training and Qualifications, the Committee on Competition Development, Committee on Ecology and Environment Management, Committee on Climate Policy and Carbon Regulation Russian Steel Association President and Vice President of the Association Membership in all commissions of the Association, including the Commission for protection of labour, industrial and environmental safety European Steel Association (EUROFER) Membership in the Association and on the Board Participation in working groups Council of Electricity Consumers of the Russian Federation Membership in the Council Expert Council of the Committee on Transport and Construction of the State Duma of the Russian Federation Membership in the Council Participation in the Council as an expert RUSLOM.COM (Non-Profit Partnership National Self-Regulatory Organization for the Recycling of Ferrous Party to the Partnership and Non-Ferrous Metal Scrap and Waste and Recycling of Vehicles) Anti-Corruption Charter of Russian Business Steel Construction Development Association Party to the Charter Participation in the Association 240 241 Statement by member of the Board of Directors About the Company Corporate Governance Our Team Environmental Protection Appendix ANNUAL REPORT 2020 No Regulation Reference Status Comments REPORT ON COMPLIANCE WITH THE ‘DIRECTIVE ON INFORMATION DISCLOSURE BY SECURITY ISSUERS‘ to the clause of compliance 13 Report on compliance with the Corporate Governance Code principles and recommendations 70.3. Compliance ensured Information is represented in Appendix Information is represented in Appendix 14 15 Information on the approval of 70.3. Compliance ensured the annual report by the general meeting of shareholders or the board of directors of a joint-stock company No Regulation Reference to the clause Status of compliance Comments Corporate Governance Code: 70.4. Compliance ensured Information is represented in Appendix 1 Information about Joint-stock company position in the industry 70.3. 70.3. 70.3. Compliance ensured Information is represented in part “About Company”, section Company Profile Statement by the board of directors (supervisory board) of the joint- stock company on compliance with corporate governance principles stated in the Corporate Governance Code, and if such principles are not followed by the joint-stock company or are not fully respected by them, indicating these principles and a brief description of what part they are not observed 2 3 Information about strategy in joint-stock company development Compliance ensured Information is represented in part “About Company”, section Strategy 2022, 2020 performance review Report of the Board on results of joint-stock company strategy development Compliance ensured Information is represented in part “About Company”, section Strategy in action 4 5 6 Information about consumption of energy resources 70.3. 70.3. 70.3. Compliance ensured Information is represented in in Appendix 16 17 Corporate Governance Code: a brief description of the most significant aspects of the corporate governance model and practice in a joint-stock company 70.4. 70.4. Compliance ensured Information is represented in Appendix Information is represented in Appendix Information about development perspectives Compliance ensured Information is represented in part “About Company”, section Strategy 2022 Report on dividends declared Compliance ensured Information is represented in part “Corporate governance”, section Information for shareholders and investors and Appendix Corporate Governance Code: Compliance ensured Description of the methodology by which the joint-stock company assessed compliance with corporate governance principles enshrined in the Corporate Governance Code 7 Information about key risk factors 70.3. 70.3. 70.3. 70.3. Compliance ensured Information is represented in part “Corporate governance”, section Operational control and risk management 18 Corporate Governance Code: 70.4. Compliance ensured Information is represented in Appendix 8 List of transactions which are recognized as major transactions in line with the Federal Law “On Joint- stock Companies” Compliance ensured Information is represented in Appendix Explanation of key reasons, factors and (or) circumstances that should be specific, due to which the joint- stock company does not comply or does not fully comply with corporate governance principles enshrined in the Corporate Governance Code 9 List of transactions recognized as interested-party transactions in line with the Federal Law “On Joint-stock Companies” Compliance ensured Information is represented in Appendix 19 Corporate Governance Code: 70.4. 70.4. Compliance ensured Information is represented in Appendix Information is represented in Appendix 10 Composition of the Board of Directors, changes in Composition of the Board of Directors, information about Board of Directors members, Board of Directors members transactions with company shares Compliance ensured Information is represented in part “Corporate governance”, section Board of Directors Description of corporate governance mechanisms and tools that are used by the joint-stock company instead of those recommended by the Corporate Governance Code 20 Corporate Governance Code: Expected actions and activities of the joint-stock company to improve the corporate governance model and practice, indicating the timing for the implementation of such actions and activities Compliance ensured 11 Information about the person holding the position (exercising the functions) of the sole executive body of 70.3. Compliance ensured Information is represented in part “Corporate governance”, section Management Board the Company and the members of the collegial executive body, transactions made by the person holding the position (exercising functions) of the sole executive body and (or) members of the collegial executive body for the acquisition or disposal of shares of the joint-stock company 21 Section on the status of net assets, if at the end of the second reporting year or each subsequent reporting year the value of the net assets of the joint-stock company is less than its authorized capital 70.5. Not applicable – 12 Joint-stock company policy in the field of remuneration and (or) compensation of expenses 70.3. Compliance ensured Information is represented in part “Corporate governance”, section Report on remuneration paid to governing bodies 242 243 Statement by member of the Board of Directors About the Company Corporate Governance Our Team Environmental Protection Appendix ANNUAL REPORT 2020 No. Company name 2 Address Activity 4 NLMK Lipetsk share NLMK COMPANIES AND AFFILIATES AS OF 31.12.2020 in charter capital, % 1 3 5 16. NLMK Overseas Holdings Limited Liability Company Lipetsk, Russia Developing the growth strategy for NLMK Group companies, supporting relations between the Group’s Russian and international businesses 100 No. Company name Address 3 Activity 4 NLMK Lipetsk share in charter capital, % 1 2 5 17. Novolipetskaya Metallobaza Limited Liability Company Lipetsk, Russia Lipetsk, Russia Manufacturing of plastic and steel products 100 100 SUBSIDIARY COMPANIES 1. Altai-Koks Joint-Stock Company Zarinsk, Altaisky Region, Russia Production and marketing of coke and by-products, generation and marketing of heat and electric power 100 18. NLMK Construction and Assembly Trust Limited Liability Company Contracting of industrial, housing, utilities, cultural services, and road construction works. 2. 3. Dolomit Joint-Stock Company Dankov, Lipetsk Region, Russia Mining and processing of dolomite 100 100 Construction of health facilities and household natural gas supply lines Stoilensky Mining and Beneficiation Plant Joint-Stock Company Stary Oskol, Belgorod Region, Russia Mining and processing of iron ore and other minerals 19. NLMK Trading House, Limited Liability Company Moscow, Russia Sale of NLMK Group products 100 100 4. Studenovskaya Joint-Stock Mining Company Studenovskaya industry area, Vvedensky local council, Lipetsk District, Lipetsk Region, Russia Production of fluxing 100 20. Uralvtorchermet, Limited Liability Company Yekaterinburg, Sverdlovsk Consulting services re Region, Russia limestone for steelmaking, process limestone for the sugar industry, commercial activities, management, investing in securities, leasing of assets lime-containing materials and crushed stone for construction and roadwork AFFILIATED COMPANIES 21. Neptune Limited Liability Company Lipetsk, Russia, 398005, 1C Adm. Makarova St., Office 35 Sports and recreation services 25 5. 6. NLMK Engineering Joint-Stock Company Lipetsk, Russia Design and survey operations 100 NLMK Ural Joint-Stock Company Revda, Sverdlovsk Region, Russia Production of long steel stock, hot-rolled and forged flat steel 92.59 7. VIZ-Steel Limited Liability Company Yekaterinburg, Production and marketing of electrical steel 100 100 Sverdlovsk Region, Russia 8. Vtorchermet NLMK Limited Liability Company Yekaterinburg, Sverdlovsk Region, Russia Collection, processing, and sales of ferrous and non-ferrous scrap 9. Zhernovsky-1 Mining and Processing Complex Limited Liability Company Novokuznetsk, Kemerovo Region, Russia Entire range of works related to coal mining and processing 100 10. 11. Hotel Metallurg Lipetsk, Russia Lipetsk, Russia Hotel services 100 100 100 Limited Liability Company NLMK Information Technologies Limited Liability Company IT, computing, and telecom services 12. NLMK Kaluga Limited Liability Company Vorsino, Borovsk District, Kaluga Region, Russia Production of steel, re-rolling stock (billets), hot-rolled and forged flats, unpainted and pre-painted cold-rolled flat steel 13. NLMK Metalware Limited Liability Company Beryozovsky, Sverdlovsk Region, Russia Production of wire, wire products, fasteners, and springs 100 14. 15. NLMK Communications Lipetsk, Russia Telecom services 100 100 Limited Liability Company NLMK Long Products Limited Liability Company Yekaterinburg, Sverdlovsk Managing company, trading Region, Russia and procurement activities 244 245 Statement by member of the Board of Directors About the Company Corporate Governance Our Team Environmental Protection Appendix ANNUAL REPORT 2020 USAGE OF ENERGY RESOURCES (FUELS AND COALS) OF NLMK (NOVOLIPETSK) IN 2019–2020 LIST OF TRANSACTIONS PERFORMED BY NLMK IN 2020 RECOGNIZED AS MAJOR TRANSACTIONS IN LINE WITH THE FEDERAL LAW "ON JOINT-STOCK COMPANIES" AND OF OTHER TRANSACTIONS FALLING UNDER THE EXTENDED PROCEDURE FOR APPROVING MAJOR TRANSACTIONS IN LINE WITH THE COMPANY’S CHARTER Name Item mln kWth 2020 2,555 3,713 2,044 11,377 24,237 41 2019 2,442 3,924 2,145 11,689 84,837 146 Change, % 5 −5 Electric energy mln of RUB with VAT mln m3. −5 Natural gas Heating energy Gas oil mln of RUB with VAT GCal −3 −71 −72 2 mln of RUB with VAT ‘000 liters 22,311 899 21,967 930 In 2020, NLMK did not perform any transactions that the Federal Law “On Joint-Stock Companies” recognizes as major transactions. NLMK’s Charter does not specify any additional cases falling under the extended procedure for approval of major transactions in line with the Federal Law “On Joint-Stock Companies”. mln of RUB with VAT t −3 253 294 −14 −10 178 169 2 Benzine mln of RUB with VAT t 14 16 3,101 16 1,115 Heating oil Coking coal mln of RUB with VAT ‘000 t 6 LIST OF TRANSACTIONS PERFORMED BY NLMK IN 2020 RECOGNIZED 4,848 36,071 4,736 50,375 mln of RUB with VAT −28 AS INTERESTED-PARTY TRANSACTIONS IN LINE WITH THE FEDERAL LAW "ON JOINT-STOCK COMPANIES" ● An interested-party transaction is a transaction involving an interest of a member of the Board of Directors, the CEO (Chairman of the Management Board), the Interim or Acting CEO (Chairman of the Management Board), a member of the Management Board of the Company or a controlling entity of the Company, or an entity entitled to give binding instructions to the Company in accordance The CEO (Chairman of the Management Board), the Interim or Acting CEO (Chairman of the Management Board), the executive manager of the Company, a member of the Management Board, a person holding offices in management bodies of the managing entity. A person whose spouse, parents, children, full-blood and half-blood brothers and sisters, adoptive parents, and adoptees are persons holding offices in the said management bodies of the Company, managing entity of the Company or holding the office of a manager of the Company. A controlling entity of the Company or the Company’s managing organization (manager) entrusted with the functionality of the Company’s sole executive body or entitled to give mandatory instructions to the Company. Resolution on consent to an interested-party transaction shall be passed by the General Meeting of Shareholders by the majority of votes of all the shareholders (owners of the Company’s voting shares participating in the voting) who are not interested in the transaction, in the following cases: In case a transaction or several related transactions are made in respect of the property with a book value (quotation price of the acquired property) of 10 or more percent of the book value of the Company’s assets according to its accounting (financial) statements as of the latest reporting date. If a transaction or several related transactions involve the sale of common shares keeping records of over two percent of the common shares distributed by the Company earlier, and common shares which earlier distributed securities convertible into shares can be converted into, unless the Charter provides for a lower number of shares. ● ● ● with the Federal Law “On Joint-Stock Companies”. A resolution on consent to an interested- party transaction shall be passed by the Board of Directors of the Company, unless otherwise stipulated in the Federal Law ● ● “On Joint-Stock Companies”. A resolution on consent to such a transaction shall be passed by the Company’s Board of Directors by the majority of votes of the directors who are not interested in the transaction, and who are not, and have not been, within 1 year prior to such a resolution: In 2020, neither the General Meeting of Shareholders nor the Board of Directors passed resolutions regarding interested-party transactions. 246 247 Statement by member of the Board of Directors About the Company Corporate Governance Our Team Environmental Protection Appendix ANNUAL REPORT 2020 No. Principles of corporate governance Criteria of corporate governance principles observance evaluation Status Clarification of deviation from criteria of corporate governance principles observance evaluation REPORT ON COMPLIANCE WITH THE CORPORATE GOVERNANCE CODE PRINCIPLES AND RECOMMENDATIONS of compliance with corporate governance principle 1.1 The Company shall provide equal and fair treatment to all shareholders exercising their right to participate in the Company governance. 1.1.1. The Company 1. The Company’s internal document approved by the General Meeting and regulating the General Meeting procedures is publicly available. 2. The Company provides an accessible way of ◼ Compliance ensured The present report on observance of principles and recommendations of the Corporate Governance Code was reviewed by NLMK’s Board of Directors at the 22.03.2021 meeting [MoM No. 279]. model and practices is presented in the Corporate Governance section of the Annual Report. creates the most favourable conditions for shareholders to participate in the General Meeting of Shareholders, to elaborate an informed position on General Meeting agenda items, and to coordinate their actions, as well as a possibility to express their opinions in relation to the items under consideration. ◻ Partial compliance ◻ Non- compliance Information on compliance with speciﬁc principles and key recommendations of the Corporate Governance Code is presented in the table below in the format recommended for use by the Bank of Russia. communication with the Company, such as The Board of Directors conﬁrms that the data given in the present report contain complete and reliable information on the Company’s observance of principles and recommendations of the Corporate Governance Code in 2020. The methodology for evaluating NLMK's compliance with the principles of corporate governance enshrined in the Corporate Governance Code is based on the Recommendations for compiling reports on compliance with Corporate Governance Code principles and recommendations (Letter of the Bank of Russia No. IN-06-52/8 dd. 17 February 2016). a hotline, e-mail, or web-based message board, which allows shareholders to express their opinion and ask questions about an agenda in the course of the General Meeting preparation. The Company ensured the compliance with the above-mentioned criteria shortly before the convocation of every General Meeting within the reporting period. Explanations of non-compliance with the criteria of the corporate governance principles, a description of corporate governance mechanisms and tools, and plans for its improvement are given in the table below, as well as in the Corporate Governance section of the Annual Report. A detailed description of the key aspects of the corporate governance 1.1.2. The procedure of notifying about upcoming General Meetings and submission of materials for the General Meeting enables shareholders to get properly prepared for participation therein. 1. A notice of the General Meeting of Shareholders is published on the Company’s website at least 30 days ahead of the date of the meeting. 2. The notice of the General Meeting specifies the venue of the meeting and ◼ Compliance ensured ◻ Partial compliance ◻ Non- compliance the documents needed to access the venue. 3. Shareholders have access to the information about who proposed the agenda items and who nominated the candidates for election to the Board of Directors and audit commission of the Company. 248 249 Statement by member of the Board of Directors About the Company Corporate Governance Our Team Environmental Protection Appendix ANNUAL REPORT 2020 No. Principles of corporate governance Criteria of corporate governance principles observance evaluation Status Clarification of deviation from criteria of corporate governance principles observance evaluation No. Principles of corporate governance Criteria of corporate governance principles observance evaluation Status Clarification of deviation from criteria of corporate governance principles observance evaluation of compliance with corporate governance principle of compliance with corporate governance principle 1.1.3. In preparation for the General Meeting of Shareholders 1. In the reporting period shareholders were given ◼ Compliance 1.1.6. The General Meeting rules of procedure established by the Company provide for equal opportunity for all persons present at the meeting to 1. When General Meetings of Shareholders were held in the reporting period ◼ Compliance ensured ensured a chance to ask questions to members of executive bodies and of the Company’s Board of Directors shortly before and during the Annual General Meeting of Shareholders. 2. The opinion of the Board of Directors (including specific opinions entered into ◻ Partial ◻ Partial and its convocation, shareholders were able to receive information on the meeting and materials therefor, to ask executive bodies and members of the Company’s Board of Directors questions, and to communicate with each other freely and in a timely manner. compliance ◻ Non- compliance in the form of a meeting (the joint presence of shareholders), sufficient time was given for reports on the agenda items and to discuss those items. compliance ◻ Non- compliance express their opinions and ask questions. 2. Candidates to the Company’s management and supervision bodies were available to answer questions from shareholders in those the MoM) on each agenda item of the General Meetings of Shareholders held within the reporting period was quoted in the materials to the General Meeting of Shareholders. meetings where their nominations were put to vote. 3. While taking decisions related to preparation and holding of General Meetings of 3. In all cases of General Meeting of Shareholders convocation in the reporting period, the Company Shareholders, the Board of Directors studied the issue of using telecommunications to provide shareholders with remote access to participate in General Meetings of provided access to a list of persons having the right to participate in the General Meeting of Shareholders to the shareholders entitled to it starting from the date on which the Company received it. Shareholders in the reporting period. 1.2. The shareholders are provided an equal and fair opportunity to participate in the Company’s profit by receiving dividends. 1.1.4. The shareholders experienced no unnecessary complications in exercising their right to convene a General Meeting of Shareholders, to nominate candidates to the governing bodies, and to propose agenda items for a General Meeting of Shareholders. 1. In the reporting period, shareholders had ◼ Compliance ensured 1.2.1 The Company developed and implemented a transparent and clear mechanism of dividend determination and payment. 1. The Dividend Policy was developed by the Company, approved by the Board of Directors, and disclosed. 2. If the Company’s Dividend Policy uses the Company’s statement indicators ◼ Compliance ensured an opportunity to propose items for inclusion in the agenda of the Annual General Meeting of Shareholders at least 60 days after the respective calendar year-end. ◻ Partial ◻ Partial compliance ◻ Non- compliance ◻ Non- compliance compliance to determine dividends, the respective provisions of the Dividend Policy take into account consolidated financial statement indicators. 2. In the reporting period the Company did not refuse to accept proposals on the agenda items or candidates to the Company’s governing bodies due to misprints and other minor faults in a shareholder’s proposal. 1.2.2. The Company does not make decisions to pay dividends if such a decision, though 1. The Company’s Dividend Policy contains clear indications of financial/economic ◼ Compliance ensured ◻ Partial circumstances under which dividends should not be paid. compliance ◻ Non- not violating legal restrictions formally, is economically groundless and can lead to false representations of compliance 1.1.5. Every shareholder had an opportunity for unhindered exercise of their voting right in the simplest and the most convenient manner. 1. The Company’s internal document (internal policy) contains provisions according to which every participant of the General Meeting of Shareholders can request a copy of the ballot they filled in, certified by the Counting commission, before the end of the respective meeting. ◼ Compliance ensured ◻ Partial compliance ◻ Non- the Company’s business. 1.2.3. The Company does not allow for deterioration of its shareholders’ dividend rights. 1. In the reporting period, the Company did not take any actions resulting in ◼ Compliance ensured compliance ◻ Partial the deterioration of its shareholders’ dividend rights. compliance ◻ Non- compliance 250 251 Statement by member of the Board of Directors About the Company Corporate Governance Our Team Environmental Protection Appendix ANNUAL REPORT 2020 No. Principles of corporate governance Criteria of corporate governance principles observance evaluation Status Clarification of deviation from criteria of corporate governance principles observance evaluation No. Principles of corporate governance Criteria of corporate governance principles observance evaluation Status Clarification of deviation from criteria of corporate governance principles observance evaluation of compliance with corporate governance principle of compliance with corporate governance principle 1.2.4. The Company seeks to prevent shareholders from using other methods of obtaining profit (income) at the Company's expense, except for dividends and liquidation value. 1. In order to prevent ◼ Compliance 2.1. The Board of Directors performs strategic management of the Company, identifies the basic principles and approaches to the Company’s risk management and internal control systems, supervises the activity of the Company’s executive bodies, and performs other key functions. shareholders from using other methods of obtaining profit (income) at the Company's expense, except for dividends and liquidation value, ensured ◻ Partial compliance ◻ Non- 2.1.1. The Board of Directors is responsible for taking decisions related to the appointment and dismissal from office of executive bodies, including because of underperformance. The Board of Directors ensures that the Company's executive bodies act in compliance with the approved 1. In line with the Company’s Charter, the Board of ◼ Compliance ensured compliance Directors is entitled to appoint members of executive bodies, dismiss them from office, and define their contractual terms and conditions. ◻ Partial the Company's internal documents establish control mechanisms ensuring compliance ◻ Non- compliance timely determination and an approval procedure for transactions with persons affiliated with (related to) material shareholders (persons entitled to dispose of the votes attributed to the issuer’s voting shares) in cases when such transactions are not legally recognized as interested-party transactions 2. The Board of Directors reviewed the report (reports) of the sole executive body and members of the collegial executive body on execution of the Company's strategy. development strategy and core businesses of the Company. 2.1.2. The Board of Directors defines the main 1. Within the reporting period the Board of Directors reviewed the following ◼ Compliance ensured 1.3. The corporate governance system and practices ensure parity for all shareholders owning shares of the same category (type), including minority shareholders and foreign shareholders, and their equal treatment by the Company. reference points ◻ Partial of the Company's issues: status and update of the Company’s strategy; approval of the Company’s business plan (budget); consideration of criteria and indicators (including interim ones) of the Company's strategy and business plan execution. compliance ◻ Non- compliance 1.3.1. The Company has established conditions for the fair treatment of each shareholder by the Company’s management and supervisory bodies, including conditions ensuring the inadmissibility of abuses of minor shareholders by major shareholders. 1. During the reporting period, procedures to manage potential conflicts of material shareholders’ interests were effective, and the Board of Directors paid due attention to shareholders’ conflicts, if any. ◼ Compliance ensured business on a long-term basis, evaluates and approves key business indicators and main business objectives of the Company, assesses and approves strategy and business plans related to core activities of the Company. ◻ Partial compliance ◻ Non- compliance 2.1.3. The Board of Directors defines the principles and approaches of the Company’s risk management and 1. The Board of Directors defined the principles and approaches to the arrangement ◼ Compliance ensured ◻ Partial 1.3.2. The company does not take any actions which result in or may result in artificial redistribution of corporate 1. There are no quasi-treasury shares or they have not participated in voting within the reporting period. ◼ Compliance ensured of the Company’s risk compliance ◻ Non- compliance management and internal control system. ◻ Partial internal control system. compliance ◻ Non- 2. The Board of Directors evaluated the Company’s risk management and internal control system within governance. compliance 1.4. Shareholders are provided with a reliable and efficient procedure for registration of their shareholder rights and a possibility to dispose of their shares in a free and unhindered manner. the reporting period. 2.1.4. The Board of Directors defines the Company's policy on remuneration and/or reimbursement of expenses (compensations) to members of the Board of Directors, executive bodies, and other 1. The Company elaborated and introduced the policy (policies) approved by the Board of Directors on remuneration and reimbursement of ◼ Compliance ensured 1.4. Shareholders are 2. The quality and reliability of the Registrar’s activities in maintaining the Register of shares comply with the requirements of ◼ Compliance ensured provided with a reliable and efficient procedure for registration of their shareholder rights and a possibility to dispose of their shares in a free and unhindered manner. ◻ Partial ◻ Partial compliance ◻ Non- compliance compliance ◻ Non- expenses (compensations) to members of the Board of Directors, executive bodies, and other key executives of the Company. the Company and its shareholders. compliance key executives of the Company. 2. During the reporting period the issues related to the above policy (policies) were reviewed at Board of Directors meetings. 252 253 Statement by member of the Board of Directors About the Company Corporate Governance Our Team Environmental Protection Appendix ANNUAL REPORT 2020 No. Principles of corporate governance Criteria of corporate governance principles observance evaluation Status Clarification of deviation from criteria of corporate governance principles observance evaluation No. Principles of corporate governance Criteria of corporate governance principles observance evaluation Status Clarification of deviation from criteria of corporate governance principles observance evaluation of compliance with corporate governance principle of compliance with corporate governance principle 2.1.5. The Board of Directors plays a key role in the prevention, identification, and settlement of internal conflicts between the Company's bodies, shareholders, and employees. 1. The Board of Directors plays a key role in the prevention, identification, and settlement of internal conflicts. 2. The Company established a system for identifying transactions related to a conflict of interests and a system of measures aimed at the settlement of such conflicts. ◼ Compliance ensured 2.3. The Board of Directors is an effective and professional governing body of the Company, capable of making impartial independent judgements and decisions that are in the interest of the Company and its shareholders. ◻ Partial 2.3.1. Only persons who 1. The procedure for ◼ Compliance ensured compliance ◻ Non- compliance have an impeccable business and personal reputation, and have the knowledge, skills, and experience required to make decisions within the Board of Directors’ area of expertise assessing the efficiency of the Board of Directors adopted in the Company includes an evaluation of the professional qualifications of members of the Board of Directors. ◻ Partial compliance ◻ Non- compliance 2. In the reporting period, the Board of Directors (or its Nomination Committee) evaluated the candidates to the Board of Directors in terms of whether they have the necessary experience, knowledge and business reputation, lack of conflict of interest, etc. 2.1.6. The Board of Directors plays a key role in ensuring the Company’s transparency, timely and complete information disclosure, and easy access for shareholders to the Company’s documents. 1. The Board of Directors approved the Regulations on Information Policy. 1. The Company appointed persons responsible for ensuring compliance with the Information Policy. ◼ Compliance ensured and necessary for the effective performance of its functions are elected as members of the Board of Directors. ◻ Partial compliance ◻ Non- compliance 2.3.2. Members of the Board of Directors are elected through a transparent procedure that allows shareholders to receive information on the candidates, sufficient to get an idea of their personal and professional qualities. 1. In all cases in the reporting period when the agenda of a General Meeting of Shareholders included ◼ Compliance ensured 2.1.7. The Board of Directors exercises control over the corporate governance practices in the Company and plays a key role in the Company’s significant corporate events. 1. During the reporting period the Board of Directors reviewed the Company’s corporate governance practices. ◼ Compliance ensured ◻ Partial ◻ Partial compliance ◻ Non- compliance compliance ◻ Non- an item on election of the Board of Directors, the Company presented to shareholders the curricula vitae of all the candidates to the Board of Directors, the results of evaluation of the candidates performed by the Board of Directors (or its Nomination Committee), as well as information on the candidates’ compliance with the independence compliance 2.2. The Board of Directors is accountable to the Company’s shareholders. 2.2.1. Information on the activities of the Board of Directors is disclosed and provided to shareholders. 1. The Company’s Annual Report for the reporting period includes information on individual directors’ attendance of the Board of Directors and committee meetings. ◼ Compliance ensured ◻ Partial compliance ◻ Non- compliance criteria, in accordance with recommendations 2. The Annual Report contains information on the key results of an evaluation of the Board of Directors’ activities performed during the reporting period. No. 102 to 107 of the Code, and the written consent of the candidates for election to the Board of Directors. 2.3.3. The composition of the Board of Directors is balanced, including the qualifications of its members, their experience, knowledge, and business qualities, and enjoys the trust of shareholders. 1. As part of the procedures for the Board of Directors evaluation held during the reporting period, ◼ Compliance ensured 2.2.2. The Chairman of the Board of 1. The Company employs a transparent procedure enabling shareholders to ask questions to the Chairman of the Board of Directors and share their opinion on these matters with them. ◼ Compliance ensured ◻ Partial compliance ◻ Non- compliance Directors is available for communication with the Company's shareholders. ◻ Partial the Board of Directors reviewed its own needs in the field of professional qualification, experience, and business skills. compliance ◻ Non- compliance 254 255 Statement by member of the Board of Directors About the Company Corporate Governance Our Team Environmental Protection Appendix ANNUAL REPORT 2020 No. Principles of corporate governance Criteria of corporate governance principles observance evaluation Status Clarification of deviation from criteria of corporate governance principles observance evaluation No. Principles of corporate governance Criteria of corporate governance principles observance evaluation Status Clarification of deviation from criteria of corporate governance principles observance evaluation of compliance with corporate governance principle of compliance with corporate governance principle 2.3.4. The quantitative 1. As part of the Board of Directors evaluation procedure carried out in the reporting period, the Board of Directors considered the issue of ◼ Compliance ensured 2.4.2. The candidates to the Board of Directors are evaluated for compliance with the independence criteria; independent directors are also regularly evaluated for compliance with the independence criteria. During this evaluation, the content should prevail over the form. 1. In the reporting period, the Board of Directors (or the Board’s Nomination Committee) formed ◼ Compliance ensured composition of the Board of Directors makes it possible to arrange the activities of the Board of Directors in the most efficient manner, ◻ Partial ◻ Partial compliance ◻ Non- compliance compliance ◻ Non- compliance an opinion of each candidate’s independence and submitted a conclusion on the matter to shareholders. compliance of the quantitative Board composition with the Company’s needs and the interests of shareholders. including the formation of the Board’s 2. During the reporting period, the Board of Directors (or the Board’s Nomination Committee) evaluated committees; it also provides significant minority shareholders an opportunity to elect a candidate for whom they vote. the independence of the current Board members indicated in the Annual Report as independent directors at least once. 2.4. The Board of Directors has a sufficient number of independent directors. 3. The Company has procedures in place which define 2.4.1. An independent director is a person who has sufficient competence, experience, and independence to form their own opinion, and is able to make objective and fair judgments that are independent of the influence 1. During the reporting period, all independent Board ◼ Compliance ensured the necessary actions for a Board member to take in case they cease to be independent, including the obligation to inform the Board of this fact members met all ◻ Partial the independence criteria set out in recommendations 102–107 of the Code or were recognized as independent by the decision of the Board of Directors. compliance ◻ Non- compliance in due time. 2.4.3. 2.4.4. At least one third of the elected members of the Board are 1. At least one third of ◼ Compliance ensured the members of the Board are independent directors. of the Company’s executive bodies, certain groups of shareholders, or other interested parties. It should be borne in mind, however, that in ordinary ◻ Partial independent directors. compliance ◻ Non- compliance Independent directors play a key role in preventing internal Company conflicts and in the Company’s execution of material corporate actions. 1. Independent directors (with no conflict of interest) give a preliminary evaluation of material corporate actions related to a possible conflict of interest; this evaluation is submitted to the Board of Directors. ◼ Compliance ensured circumstances ◻ Partial a candidate (elected member of the Board of Directors) who is associated with the Company, compliance ◻ Non- compliance its significant shareholder, significant counterparty, or a competitor, or is associated with the state, cannot be regarded as an independent candidate. 256 257 Statement by member of the Board of Directors About the Company Corporate Governance Our Team Environmental Protection Appendix ANNUAL REPORT 2020 No. Principles of corporate governance Criteria of corporate governance principles observance evaluation Status Clarification of deviation from criteria of corporate governance principles observance evaluation No. Principles of corporate governance Criteria of corporate governance principles observance evaluation Status Clarification of deviation from criteria of corporate governance principles observance evaluation of compliance with corporate governance principle of compliance with corporate governance principle 2.5. The Chairman of the Board of Directors promotes the most efficient implementation of the functions assigned to the Board of Directors. The Company recognizes the expediency of introducing the position of Senior Independent Director in case the number of independent directors becomes less than 50% of the Board of Directors. 2. Compliance ensured 2.5.1. An independent director is elected Chairman of the Board of Directors, or a Senior Independent Director is chosen from among the elected Independent Directors, who coordinates 1. The Chairman of the Board of Directors is an independent director or a Senior ◻ Compliance ensured 1. Non-compliance The Chairman of the Board of Directors is not ◼ Partial Independent Director chosen from among independent directors. compliance ◻ Non- compliance an independent director; a Senior Independent Director has not been chosen from among independent directors. The Chairman of the Board of Directors is a member who made a significant contribution to the development of the Company and has the most experience, professional competence, and authority among shareholders, 2. The role, rights, and duties of the Board Chairman (and Senior Independent Director, if any) are duly defined in internal corporate documents. 2.5.2. The Chairman of 1. The efficiency of Chairman of the Board’s performance was evaluated during ◼ Compliance ensured the Board creates a constructive the activities of ◻ Partial independent directors and carries out atmosphere at the evaluation of the Board’s performance in the reporting period. compliance ◻ Non- compliance meetings, ensures open discussions on the agenda interaction with the Chairman of the Board of Directors. items, and monitors the implementation of resolutions passed by the Board of Directors. members of management bodies, and employees of the Company. Independent Directors, who make up the majority of members of the Company’s Board, have full opportunity to have face-to-face 2.5.3. The Chairman of the Board takes 1. The obligation of ◼ Compliance ensured the Chairman of the Board to take measures to ensure timely submittal of materials required for taking decisions on the agenda items to the Board members is set out in the Company’s internal documents. reasonable measures to ensure timely submittal of information required by the Board members for taking decisions on the agenda items. ◻ Partial compliance ◻ Non- compliance communication with the Chairman of the Board of Directors. The Company has opted for a model whereby having a majority of independent directors ensures their key role in resolving all matters and eliminates the need for a Senior Independent Director. The Company believes that its Chairman of the Board of Directors not being an independent director and there being no Senior Independent Director does not entail additional risks for the Company. The Company does not believe that the mandatory election of an independent Chairman of the Board of Directors is practical when the majority of directors are independent. In case independent directors are no longer in the majority on the Board of Directors, the Company will include in its agenda the matter of electing a Chairman of the Board of Directors from among independent members or electing a senior independent director. 2.6. Members of the Board act reasonably and in good faith in the interests of the Company and its shareholders, based on sufficient information, with due diligence and care. 2.6.1. Members of the Board make decisions taking into account all available information, with no conflict of interest, on the condition of equal treatment of the Company’s shareholders, within the normal business risk. 1. The Company’s internal documents state that a Board member must duly notify the Board of Directors if ◼ Compliance ensured ◻ Partial compliance ◻ Non- a conflict of interest arises pertaining to any agenda item of a Board meeting or a Board committee meeting before the start of discussions on the respective agenda item. 2. The Company’s internal documents state that a Board member must refrain from voting on any item where they have a conflict of interest. 3. There is a procedure in place in the Company which entitles the Board of Directors to receive professional compliance consultations on items within their area of expertise at the Company’s expense. 2.6.2. The rights and 1. There is a published document in effect in the Company which clearly defines the Board members’ rights and ◼ Compliance ensured obligations of the Board members are clearly worded and stated in the Company’s internal documents. ◻ Partial compliance ◻ Non- obligations. compliance 258 259 Statement by member of the Board of Directors About the Company Corporate Governance Our Team Environmental Protection Appendix ANNUAL REPORT 2020 No. Principles of corporate governance Criteria of corporate governance principles observance evaluation Status Clarification of deviation from criteria of corporate governance principles observance evaluation No. Principles of corporate governance Criteria of corporate governance principles observance evaluation Status Clarification of deviation from criteria of corporate governance principles observance evaluation of compliance with corporate governance principle of compliance with corporate governance principle 2.6.3. Board members have enough time to perform their duties. 1. Individual presence at ◼ Compliance 2.7.3. The format of the Board meetings is determined by the degree of 1. The Charter or an internal document of the Company requires that the most significant issues (according to the list specified in ◼ Compliance ensured the meetings of the Board and committee meetings, as well as the time dedicated to the preparation for ensured ◻ Partial compliance ◻ Non- ◻ Partial importance of compliance ◻ Non- compliance the agenda items. The most important issues are resolved at meetings held in praesentia. such meetings, were taken into consideration during the Board evaluation in compliance recommendation 168 of the Code) should be considered at Board meetings held in praesentia. the reporting period. 2. According to the Company's internal documents, members of the Board must notify the Board of Directors of their intention to enter 2.7.4. Resolutions on the most important issues 1. The Company’s Charter stipulates that resolutions on the most important issues listed in recommendation 170 of the Code are to be passed at the Board meetings by qualified majority, at least 75% of votes, or by a simple majority of votes of all ◻ Compliance ensured In accordance with the Charter, resolutions on of the Company’s ◼ Partial most of the issues that are in the competence of the Board of Directors are made by open voting of the members of the Board of Directors participating in the meeting with a simple majority, except in cases stipulated by law. This way, full compliance with legislative requirements is achieved. business are passed at the Board meetings by qualified majority or by a majority of votes of all the elected Board members. compliance ◻ Non- compliance the management bodies of other organizations (except the controlled and affiliated companies) and of the fact of such an appointment. the elected Board members. 2.6.4. All members of 1. In accordance with ◼ Compliance ensured the Board have the Company's internal documents, members of the Board of Directors have the right to access documents and make inquiries regarding the Company and the companies it controls, while the Company's executive bodies are obliged to provide the relevant information and documents. equal access to the documents ◻ Partial compliance ◻ Non- compliance The Company believes and information of the Company. Newly elected members of the Board receive sufficient information on the Company and the Board of Directors’ activities as promptly as possible. that the risks related to partial compliance with the requirements of the Code are offset by the high attendance of meetings by members of the Company’s Board of Directors and preliminary study of 2. The Company has a formal induction procedure for newly elected members of the Board. the most important issues by independent directors as part of the activities of the Board Committees, as well as the maximum consideration of the opinions of all Board members when taking decisions on the most important issues concerning the Company’s activities. Thus, in practice, compliance with this Code recommendation is ensured. 2.7. Meetings of the Board of Directors, preparation for them, and attendance by the Board members ensure the efficient performance of the Board of Directors. 2.7.1. Meetings of the Board of Directors are 1. The Board of Directors had at least six meetings during the reporting year. ◼ Compliance ensured conducted on an ad hoc basis, taking into account the scope of activities and tasks that the Company is facing at a given time. ◻ Partial compliance ◻ Non- compliance In view of the above, the Company eliminates the possibility of any risks and is not planning to alter its practices related to this recommendation. At the same time, in case of risk factors, it will take measures to adjust this system by amending internal corporate documents. 2.7.2. The Company’s 1. The Company has ◼ Compliance ensured internal documents set the procedure for preparing and holding Board meetings, an approved internal document in place which sets the procedure for preparing and holding Board meetings, stating, inter alia, that ◻ Partial compliance ◻ Non- enabling Board members to be properly prepared. compliance the notice of the meeting should be made, as a rule, at least 5 days in advance. 260 261 Statement by member of the Board of Directors About the Company Corporate Governance Our Team Environmental Protection Appendix ANNUAL REPORT 2020 No. Principles of corporate governance Criteria of corporate governance principles observance evaluation Status Clarification of deviation from criteria of corporate governance principles observance evaluation No. Principles of corporate governance Criteria of corporate governance principles observance evaluation Status Clarification of deviation from criteria of corporate governance principles observance evaluation of compliance with corporate governance principle of compliance with corporate governance principle 2.8. The Board of Directors sets up committees for preliminary consideration of the most important issues of the Company’s activity. In order to ensure thorough consideration of matters included in the Committee meeting agenda, the Company takes into account the maximum number of committees that every Board member can participate in (stipulated in NLMK’s Regulations on the Board of Directors in accordance with the Corporate Governance Code recommended by the Bank of Russia). Thus, the Company takes into account the expediency of attaining maximum 2.8.1. An Audit Committee consisting of 1. The Board of Directors has set up an Audit Committee, which consists entirely of independent directors. 2. The Company’s internal documents define the tasks for the Audit Committee, including, among others, the tasks listed in ◻ Compliance ensured 1. Partial compliance The Board of Directors has set up an Audit Committee chaired by an independent director; the majority of Committee members are independent directors. independent ◼ Partial directors is set up for the preliminary consideration of issues related to the control over the company’s financial and economic activities. compliance ◻ Non- compliance The Audit Committee was formed based on recommendation 172 of the Code. the requirements of maximum effectiveness, taking into consideration members’ qualifications in order to attain the optimal balance of relevant expert competencies and professional experience. The Board of Directors does not limit itself to a formal Committee formation 3. At least one member of the Audit Committee who is an independent director has experience in and knowledge about the compilation, analysis, evaluation, and audit of accounting (financial) statements. engagement of independent directors and their required prevalence in the above Committees. In view of the above, 4. Meetings of the Audit Committee were held at least once per quarter during the reporting period. approach, considering not only the independence of its members, but also their professional knowledge and skills necessary to ensure the Committee’s effective operation. The Board takes into account the entirety of factors related to the Company believes that the optimal Committee composition has been formed, with the vast majority of members (four out of five), as well as the Chairman, being independent directors. The Company holds that non-compliance with this recommendation does not entail additional risks and has no plans to ensure compliance with this recommendation in the near future. the Committee members’ specialized competencies, including the relevant professional expertise and education, and other important aspects concerning the ability to form objective, independent opinions and judgements and to take 2. Compliance ensured 3. Compliance ensured 4. Compliance ensured decisions based on the long- term interests of the Company and all its shareholders. Additionally, the Board considers the effectiveness of the members’ previous work on the Committee and their engagement in its activities. The Committee member acting as a non-executive director has extensive experience, a deep understanding of business, and comprehensive knowledge in areas related to the Committee’s remit, making a substantial contribution, which is required for the Committee’s functioning. 262 263 Statement by member of the Board of Directors About the Company Corporate Governance Our Team Environmental Protection Appendix ANNUAL REPORT 2020 No. Principles of corporate governance Criteria of corporate governance principles observance evaluation Status Clarification of deviation from criteria of corporate governance principles observance evaluation No. Principles of corporate governance Criteria of corporate governance principles observance evaluation Status Clarification of deviation from criteria of corporate governance principles observance evaluation of compliance with corporate governance principle of compliance with corporate governance principle 2.8.2. For the preliminary consideration of 1. The Board of Directors ◻ Compliance 1. Partial compliance Committee members acting as non-executive directors, including the Chairman has set up a Remuneration Committee, which consists entirely of independent directors. ensured ◼ Partial compliance ◻ Non- The Board of Directors has set up the Human Resources, Remuneration, and Social Policy Committee chaired by an independent director; the majority of Committee members are independent directors. issues related to the development of the Human Resources, Remuneration, and Social Policy Committee, have extensive experience, authority among shareholders, members of management bodies and employees of the Company, a deep understanding of business, and comprehensive knowledge in areas related to the Committee’s remit, making a substantial contribution, which is required for the Committee’s functioning. In order to ensure thorough consideration of issues included in the Committee meeting agenda, the Company takes into account of an efficient and transparent 2. The Chairman of compliance remuneration practice, a Remuneration the Remuneration Committee is an independent director who is not the Chairman of the Board. Committee has been set up, which consists of independent directors and is chaired by an independent director who is not the Board Chairman. The Human Resources, 3. The Company’s internal documents define the tasks of the Remuneration Remuneration, and Social Policy Committee was formed based on the requirements of maximum effectiveness, taking into consideration members’ qualifications in order to attain the optimal balance of relevant expert competencies and professional experience. The Board of Directors does not limit itself to a formal Committee formation Committee, including, among others, the tasks listed in Recommendation 180 of the Code. approach, considering not only the independence of its members, but also their professional knowledge and skills necessary to ensure the Committee’s effective operation. The Board takes into account the entirety of factors related to the maximum number of committees that every Board member may participate in (stipulated in NLMK’s Regulations on the Board of Directors in accordance with the Corporate Governance Code recommended by the Bank of Russia). the Committee members’ specialized competencies, including the relevant Thus, the Company takes into account the expediency of attaining maximum professional expertise engagement of independent directors and their required prevalence in the Committee. In view of the above, the Company believes that the optimal Committee and education, and other important aspects concerning the ability to form objective, independent opinions and judgements and to take decisions based on the long- term interests of the Company and all its shareholders. Additionally, the Board considers the effectiveness of the members’ previous work on the Committee and their engagement in its activities. composition has been formed, with the majority of members, as well as the Chairman, being independent directors, and other members being non-executive. The Company holds that non-compliance with this recommendation does not entail additional risks and has no plans to ensure compliance with this recommendation in the near future. 2. Compliance ensured 3. Compliance ensured 264 265 Statement by member of the Board of Directors About the Company Corporate Governance Our Team Environmental Protection Appendix ANNUAL REPORT 2020 No. Principles of corporate governance Criteria of corporate governance principles observance evaluation Status Clarification of deviation from criteria of corporate governance principles observance evaluation No. Principles of corporate governance Criteria of corporate governance principles observance evaluation Status Clarification of deviation from criteria of corporate governance principles observance evaluation of compliance with corporate governance principle of compliance with corporate governance principle 2.8.3. For the preliminary consideration of 1. The Board of Directors has set up a Nomination Committee (alternatively, another committee ◼ Compliance ensured 2.8.5. The committees are composed in such a way as to enable comprehensive examination of issues under consideration based on various opinions. 1. Committees of the Board are chaired by independent directors. ◻ Compliance ensured 1. Partial compliance Formed in accordance with the Corporate Governance Code as a matter of issues related to ◻ Partial ◼ Partial human resources planning (succession planning), occupational structure, and efficient performance of the Board of Directors, a Nomination (Appointments, Staffing) Committee has been set up, which mostly consists of independent directors. compliance ◻ Non- compliance 2. The company’s internal documents (polices) contain provisions stating that non-members of the Audit Committee, Nomination Committee, and Remuneration Committee may only attend their meetings when invited by the respective committee’s chair. compliance ◻ Non- compliance performs its tasks, listed in recommendation 186 of the Code), which mostly consists of independent directors. priority, the Company’s Audit Committee and HR, Remuneration, and Social Policy Committee are chaired by independent directors. Apart from the Audit 2. The Company’s internal documents define the tasks of the Nomination Committee (or another committee performing related Committee and the HR, Remuneration, and Social Policy Committee, the Board of Directors set up a Strategy Committee, which assists the Board of Directors in matters related to long-term efficiency improvements, growing the Company’s asset base, and increasing its tasks), including, among others, the tasks listed in recommendation 186 of the Code. 2.8.4. Considering the scope of activities and risk level, the Board of 1. During the reporting period, the Board of Directors has considered the compliance of its committees’ ◼ Compliance ensured profitability and investment appeal. The Committee is chaired by a member ◻ Partial Directors has made sure that the composition of its committees is fully in line with the Company’s business objectives. Additional committees have either been compliance ◻ Non- composition with the goals of the Board and objectives of the Company. Additional committees have either been formed or deemed unnecessary. of the Board of Directors who is not independent. The Committee is made up of five independent directors, other members of the Board of Directors, and experts with the professional experience required to address the matters listed above. The Company believes that this Committee structure is optimal, implies no additional risks for NLMK, and changing it is not practical in the near future. compliance formed or deemed unnecessary (Strategy Committee, Corporate Governance Committee, Ethics Committee, Risk Management Committee, Budget Committee, Health, Safety and Environment Committee, and others). Nevertheless, the Company is monitoring the situation and will take measures to adjust the structure if necessary. 2. Compliance ensured 2.8.6. Committee chairs regularly inform the Board of Directors and its Chairman of their respective Committees’ activities. 1. Within the reporting period Committee chairs regularly reported on their activities to the Board of Directors. ◻ Compliance ensured ◼ Partial compliance ◻ Non- compliance 266 267 Statement by member of the Board of Directors About the Company Corporate Governance Our Team Environmental Protection Appendix ANNUAL REPORT 2020 No. Principles of corporate governance Criteria of corporate governance principles observance evaluation Status Clarification of deviation from criteria of corporate governance principles observance evaluation No. Principles of corporate governance Criteria of corporate governance principles observance evaluation Status Clarification of deviation from criteria of corporate governance principles observance evaluation of compliance with corporate governance principle of compliance with corporate governance principle 2.9. The Board of Directors ensures that the performance of the Board, its committees and members is evaluated. 4.1. The level of remuneration paid by the Company is sufficient to attract, motivate, and retain persons with the required expertise and qualification. Remuneration to the Board members, executive bodies, and other key executives of the co mpany is paid according to the remuneration policy adopted in the Company. 2.9.1. The evaluation of the Board of Directors is designed to determine the efficiency of the Board’s, its Committees’, and members’ 1. Within the reporting period, self-assessment or external assessment of the Board’s performance was carried out, including a performance evaluation of the Committee, individual members of ◼ Compliance ensured ◻ Partial 4.1.1. The level of 1. The Company has adopted an internal document ◼ Compliance ensured compliance ◻ Non- compliance remuneration paid by the Company to the Board members, executive bodies, and other key executives is sufficient to motivate them to perform (internal documents): a policy (policies) on remuneration of the Board members, members of executive ◻ Partial compliance ◻ Non- compliance performance and the correspondence of their performance to the development needs of the Company, as well as to step up the Board’s activities and identify the areas for potential improvement. the Board, and the Board of Directors as a whole. 2. The results of self-assessment or external assessment bodies, and other key executives, which expressly establishes approaches to the remuneration paid to these persons. effectively, enabling the Company to attract and retain competent and of the Board of Directors made within the reporting period have been reviewed at the Board of Directors’ meeting in praesentia. qualified professionals. At the same time the company avoids having a higher than necessary remuneration level and an unreasonably large gap between the remuneration of the persons mentioned above and the company employees. 2.9.2. A performance 1. An independent performance evaluation of the Board of Directors was carried out by an independent auditor (consultant) at least once within the last three reporting periods. ◼ Compliance ensured assessment of the Board of Directors, Board committees, and Board members is made on a regular basis at least once a year. For an independent quality assessment of the Board of ◻ Partial compliance ◻ Non- compliance 4.1.2. The Company’s remuneration policy is developed by the Remuneration Committee and approved by the Board of Directors. With the assistance of 1. Within the reporting period the Remuneration Committee reviewed the remuneration policy (policies) and practices and, if required, gave ◼ Compliance ensured Directors’ performance, an external company (consultant) is involved at least once every three years. ◻ Partial compliance ◻ Non- compliance relevant recommendations to the Board of Directors. 3.1. The Corporate Secretary of the Company ensures efficient day-to-day interaction with shareholders, coordinates the Company’s activities aimed at the protection of shareholders’ rights and interests, and supports the efficient operation of the Board of Directors. the Remuneration Committee, the Board of Directors oversees the incorporation and implementation of the remuneration policy in the Company, and, if required, revises and amends it. 3.1.1. The Corporate 1. The Company has adopted and disclosed an internal document: Regulations on the Corporate Secretary. 2. The biography of ◼ Compliance ensured Secretary has sufficient knowledge, experience, and qualification to perform his obligations, as well as an impeccable reputation and ◻ Partial compliance ◻ Non- compliance the Corporate Secretary published on the company's website and the Annual Report is as detailed as the biographies of Board members and the company’s executive management. credibility with shareholders. 4.1.3. The Company’s 1. The Company’s remuneration policy (policies) contains (contain) transparent ◼ Compliance ensured remuneration policy contains transparent mechanisms ◻ Partial mechanisms for determining the remuneration level of the Board members, members of executive compliance ◻ Non- compliance for determining the remuneration level of the Board 3.1.2. The Corporate 1. The Board of Directors approves the appointment, dismissal from office, and additional remuneration of the Corporate Secretary. ◼ Compliance ensured Secretary has sufficient independence from the Company’s ◻ Partial members, members of executive bodies, and other key executives of the Company, and regulates all types of payments, benefits, and privileges granted to the these persons. bodies, and other key compliance ◻ Non- compliance executives of the Company, and regulates (regulate) all types of payments, benefits, and privileges granted to the these persons. executive bodies and has the required authority and resources to execute the tasks assigned to him. 268 269 Statement by member of the Board of Directors About the Company Corporate Governance Our Team Environmental Protection Appendix ANNUAL REPORT 2020 No. Principles of corporate governance Criteria of corporate governance principles observance evaluation Status Clarification of deviation from criteria of corporate governance principles observance evaluation No. Principles of corporate governance Criteria of corporate governance principles observance evaluation Status Clarification of deviation from criteria of corporate governance principles observance evaluation of compliance with corporate governance principle of compliance with corporate governance principle 4.1.4. The Company 1. The Company’s remuneration policy (policies) or other internal documents establish the rules of expense ◼ Compliance ensured 4.2.3. The Company does not provide for additional payments or compensations in the event of early termination of the Board members’ appointment in connection with 1. The Company does not provide for additional ◼ Compliance ensured establishes its policy of reimbursement of expenses ◻ Partial payments or compensations in the event of early termination of the Board members’ appointment in connection with the transfer of control over the Company or other circumstances. ◻ Partial compliance ◻ Non- compliance compliance ◻ Non- compliance (compensation) specifying the list of reimbursable reimbursement of the Board members, members of executive bodies, and other key executives of the Company. expenses and the level of service to which Board members, executive bodies, and other key executives of the Company are entitled. This policy can be a part of the Company’s remuneration policy. the transfer of control over the Company or other circumstances. 4.3. The Company’s remuneration system for members of executive bodies and other key executives provides for a correlation between the amount of remuneration and the Company’s performance and personal contribution to achieving this performance. 4.3.1. The remuneration of members of executive bodies and other key executives of the Company is determined in such a way as to ensure a reasonable and justified 1. Within the reporting period annual performance ◻ Compliance ensured 1. Compliance ensured 2. Compliance ensured 3. Non-compliance The Company uses a clear mechanism for paying bonuses to members of executive bodies and other senior executives: 1. Determining the quantitative indicators that the bonus will be paid for; 2. Control departments independently calculating the planned and actual indicators required for the bonus payout; 3. Independent audit of the actual attainment of the indicators before calculating the bonus size; 4. The HR, Remuneration, and Social Policy Committee approving the actual attainment and the size of the payout. The Company believes that this system eliminates the need for an additional bonus return procedure. 4.2. The remuneration system for members of the Board of Directors aligns the financial interests of directors with the long-term financial interests of shareholders. indicators approved by ◼ Partial the Board of Directors were used to determine the amount of variable remuneration of members of executive bodies and other key executives of the Company compliance ◻ Non- 4.2.1. The Company pays fixed annual remuneration to the Board members. The Company does not pay remuneration for participation in individual meetings of the Board of Directors or Board Committees. The Company does not use any forms of short-term incentives and additional material incentives for members of the Board of 1. Fixed annual remuneration was the sole form of ◼ Compliance ensured compliance monetary remuneration to the Board members for their work on the Board of Directors during ◻ Partial compliance ◻ Non- compliance correspondence between the fixed part of remuneration and the variable part of remuneration, depending on 2. During the latest evaluation of the Company’s remuneration system for members of the reporting period. executive bodies and other key executives, the Board of Directors (Remuneration Committee) made sure that an efficient ratio of the fixed part and the variable part of remuneration is applied in the Company. the Company’s performance and the employee’s personal (individual) contribution to the final result. Directors. 3. The Company provides for a procedure which ensures that the Company’s bonuses illegally received by members of executive bodies and 4.2.2. Long-term ownership of the Company's shares is most conducive to aligning the financial interests of the Board members with the long- term interests of 1. If the Company’s internal document (documents) – policy (policies) on ◼ Compliance ensured ◻ Partial remuneration – provides for the ownership of compliance ◻ Non- other key executives of the Company are returned to the Company. the Company’s shares by the Board members, clear and explicit rules aimed at encouraging long-term ownership of the Company’s shares by the Board members should be introduced and disclosed. compliance shareholders. At the same time, Nevertheless, if preconditions for returning bonus payments emerge, the Company will take the necessary measures: recalculate the indicators and bonus sums with subsequent withholding/return according to existing Russian Federation legislation. the Company does not tie the rights to sell shares to achieving certain performance indicators, and members of the Board of Directors do not participate in option programmes. 270 271 Statement by member of the Board of Directors About the Company Corporate Governance Our Team Environmental Protection Appendix ANNUAL REPORT 2020 No. Principles of corporate governance Criteria of corporate governance principles observance evaluation Status Clarification of deviation from criteria of corporate governance principles observance evaluation No. Principles of corporate governance Criteria of corporate governance principles observance evaluation Status Clarification of deviation from criteria of corporate governance principles observance evaluation of compliance with corporate governance principle of compliance with corporate governance principle 4.3.2. The Company has implemented a long- term incentive 1. The Company has ◻ Compliance ensured In conditions when significantly changing market prices have a determining influence on the share price, a long- term incentive programme using the Company's shares has been recognized as ineffective and is not used in the Company. The Company has adopted a long-term incentive programme for members of executive bodies and other key executives of the Company, which does not provide for the use of the Company’s shares (financial instruments based on the Company’s shares). The current long-term 5.1. The Company has an efficiently functioning risk management and internal control system in place, aimed at providing reasonable assurance that the Company will achieve its targets. implemented a long-term incentive programme for ◼ Partial 5.1.1. The Board of Directors defines the principles and approaches to the Company’s risk management and 1. The Company’s internal documents/respective policy approved by the Board of Directors explicitly ◼ Compliance ensured programme for members of executive bodies and other key executives of the Company using compliance members of executive bodies and other key executives of the Company using the Company’s shares (options or other derivative financial instruments based on the Company’s shares). ◻ Non- ◻ Partial compliance compliance ◻ Non- compliance the Company’s shares defines the functions of the Company’s various management bodies and subdivisions in the risk management and internal control system. (financial instruments based on the Company’s shares). 2. In line with the long-term incentive programme, internal control system. members of executive bodies and other key executives of the Company have the right to sell shares and other financial instruments not earlier than three years from the moment of their granting. Additionally, the right to sell them depends on the Company achieving certain performance 5.1.2. 5.1.3. The Company's 1. The Company's executive bodies ensured that risk management and internal control functions and ◼ Compliance ensured executive bodies ensure that an efficiently functioning risk ◻ Partial compliance ◻ Non- compliance management and internal control system is established and maintained in the Company. authority are well distributed between the managers (heads) of the subdivisions reporting to them. incentive programme is based on defining and evaluating long-term strategic KPIs. The right to receive long- term remuneration appears no earlier than three years after the KPIs are set if indicators. The Company's risk management and internal control 1. The Company has adopted an anti-corruption policy. 2. There is a procedure in place in the Company aimed at informing the Board of Directors or the Board’s Audit Committee about ◼ Compliance ensured ◻ Partial system ensures compliance ◻ Non- compliance there is confirmation of an objective, fair, and clear understanding of the Company’s current state and prospects, the integrity and transparency of the Company's statements, and that the risks assumed by the Company their successful attainment expressed in quantitative terms. The KPIs for the long- term programme correlate directly with the Company’s strategic success. any violations of legislation, the Company’s internal procedures, and ethics code. In the near future there are no plans to implement a long- term incentive programme for members of executive bodies and key executives of the Company with the use of the Company’s shares (financial instruments based on the Company’s shares). are reasonable and acceptable. 5.1.4. The Company’s 1. During the reporting period, the Board of Directors or the Board’s Audit Committee evaluated the efficiency ◼ Compliance ensured Board of Directors takes the necessary measures to ensure that the Company's risk management and internal control system functions efficiently and complies with the principles and approaches determined by the Board of ◻ Partial compliance ◻ Non- compliance 4.3.3. The amount of 1. The amount of compensation (golden parachute) paid by the Company to members of executive bodies or other key executives in case of their early termination initiated by the Company and with no fraudulent actions on their part did not exceed the two- fold amount of the fixed part of their annual remuneration in the reporting period. ◼ Compliance ensured of the Company’s risk compensation (golden parachute) paid by the Company to management and internal control system. The results of this evaluation are included in the Company’s Annual Report. ◻ Partial compliance ◻ Non- members of executive bodies or other key executives in compliance case of their early termination initiated by the Company and with no fraudulent actions on their part does not exceed the two-fold amount of the fixed part of their annual remuneration. Directors. 272 273 Statement by member of the Board of Directors About the Company Corporate Governance Our Team Environmental Protection Appendix ANNUAL REPORT 2020 No. Principles of corporate governance Criteria of corporate governance principles observance evaluation Status Clarification of deviation from criteria of corporate governance principles observance evaluation No. Principles of corporate governance Criteria of corporate governance principles observance evaluation Status Clarification of deviation from criteria of corporate governance principles observance evaluation of compliance with corporate governance principle of compliance with corporate governance principle 5.2. The Company arranges internal audits for a systematic independent evaluation of the reliability and efficiency of the risk management and internal control system and corporate governance practice. 6.1.2. The Company discloses information on its corporate governance system and practices, including detailed information on observance of the principles and recommendations of the Code. 1. The Company discloses information on its corporate governance system and on the general principles of corporate governance used in the Company, including on the Company’s website. 2. The Company discloses information on ◼ Compliance ensured 1. Compliance ensured 2. Compliance ensured 3. Compliance ensured The Board of Directors is chaired by a person controlling the Company, whose plans with regard to the Company’s corporate governance are reflected in the documents approved by the Company’s General Meeting of Shareholders and Board of Directors, available to an unlimited number of interested parties. ◻ Partial 5.2.1. A separate structural subdivision has been set up in the Company for internal audit or an independent external auditor has been engaged. There is a division between the functional and administrative jurisdictions of 1. The Company has set up a separate structural ◼ Compliance ensured compliance ◻ Non- compliance subdivision for internal audit, which functionally reports to the Audit Committee and the Company’s Board of Directors, or engaged an independent auditor under the same accountability principle. ◻ Partial compliance ◻ Non- compliance the composition of its executive bodies and the Board of Directors, the independence of the Board members and their membership in the Board Committees (in accordance with the definition set out in the Code). the Internal Audit Department. The Internal Audit Department functionally reports to the Board of Directors. 3. If there is a person controlling the Company, the Company publishes a memorandum of 5.2.2. The Internal Audit Department evaluates the efficiency of the internal control, risk management, and corporate governance systems. The Company is guided by generally accepted internal audit standards. 1. During the reporting period, the internal audit evaluated the efficiency of the internal control and risk management system. 2. The Company is guided by generally accepted ◼ Compliance ensured ◻ Partial the controlling person regarding their plans with regard to the Company's corporate governance. compliance ◻ Non- compliance 6.2. The Company discloses complete, valid, and reliable information on the Company in due time to enable the Company’s shareholders and investors to make informed decisions. approaches to internal control and risk management. 6.2.1. The Company discloses information guided by the principles of regularity, consistency, efficiency, availability, reliability, completeness, and comparability of the information disclosed. 1. The Information Policy of the Company defines approaches and criteria of determining information that can significantly affect the Company's valuation and the value of its securities; it also defines procedures ensuring timely disclosure of such information. ◼ Compliance ensured 6.1. The Company and its activity are transparent for its shareholders, investors, and other stakeholders. ◻ Partial 6.1.1. The Company 1. The Company’s Board of Directors has approved the Company’s Information Policy developed with regard to recommendations of the Code. 2. The Board of Directors (or one of its Committees) has reviewed the issues related to information policy observance at least one time within the reporting period. ◼ Compliance ensured compliance ◻ Non- has developed and implemented ◻ Partial compliance an information policy, which ensures efficient interaction between the Company, its compliance ◻ Non- compliance shareholders, investors, and other stakeholders information-wise. 2. If the Company's securities circulate on foreign regulated markets the disclosure of material information in the Russian Federation and in these markets is done simultaneously and similarly during the reporting year. 3. If foreign shareholders own a significant quantity of the Company’s shares, the information was disclosed not only in Russian but also in one of the most common foreign languages during the reporting year. 274 275 Statement by member of the Board of Directors About the Company Corporate Governance Our Team Environmental Protection Appendix ANNUAL REPORT 2020 No. Principles of corporate governance Criteria of corporate governance principles observance evaluation Status Clarification of deviation from criteria of corporate governance principles observance evaluation No. Principles of corporate governance Criteria of corporate governance principles observance evaluation Status Clarification of deviation from criteria of corporate governance principles observance evaluation of compliance with corporate governance principle of compliance with corporate governance principle 6.2.2. The Company avoids a box-ticking approach while disclosing information; it discloses material information on its activities even if law does not require such disclosure. 1. During the reporting year, the Company disclosed its annual and semi- ◼ Compliance ensured 7.1 Actions that significantly affect or can significantly affect the structure of the share capital and the financial status of the Company and, accordingly, the shareholders' standing (i.e. material corporate events) are carried out on fair terms ensuring observance of the rights and interests of shareholders and other interested parties. ◻ Partial annual IFRS financial compliance ◻ Non- compliance 7.1.1 The material 1. The Company’s Charter lists transactions and other actions that are recognized as material corporate events and the criteria to determine them. Decision-making ◻ Compliance ensured The Company’s Charter does not list transactions and other actions that are recognized as material corporate events and the criteria to determine them. Decision-making in relation to actions, recognized by the Corporate Governance Code as material corporate events, fall in the remit of the Company’s Board of Directors or the General Meeting of Shareholders in line with the legislation and the Company’s Charter. In cases when such corporate events are statutorily assigned to the competence of the General Meeting of Shareholders, the Board of Directors provides respective recommendations to shareholders. In cases when such corporate events are statutorily statements. The Annual Report of the Company for the reporting year includes annual IFRS financial statements and an auditor's opinion. corporate events include restructuring of the Company; ◼ Partial compliance ◻ Non- compliance acquisition of 30 and over percent of the Company‘s voting shares regarding material corporate events falls in the remit of the Company’s Board of Directors. In cases when the decision on performing such corporate actions statutorily falls in the remit of the General Meeting of Shareholders, the Board of Directors provides respective recommendations to 2. The Company discloses information on the its equity structure in full in its Annual Report and on the Company’s website in line with Recommendation 290 of the Code. (takeover); material transactions effected by the Company; increase or reduction of the Company’s authorized capital; listing and delisting of the Company’s shares; other actions which may cause a significant change of shareholders’ rights or violation of their interests. The Company’s 6.2.3. The Annual Report as one of the most important tools of interaction with shareholders and other stakeholders contains information, which enables the evaluation of the Company’s performance over a year. 1. The Company’s Annual Report contains information on the key aspects of the Company’s operations and its financial performance. 2. The Company’s Annual Report contains information on environmental and social aspects of the Company’s activities. ◼ Compliance ensured ◻ Partial compliance ◻ Non- shareholders. 2. The Company’s Charter lists the following actions, among others, as material corporate events: restructuring of the Company; acquisition of 30 and over percent of the Company’s voting shares (takeover); increase or compliance Charter lists (specifies the criteria of) transactions and other actions that are recognized as material corporate events and fall in the remit of the Company’s Board of Directors. assigned to the competence of the Board of Directors, they are first reviewed 6.3 The Company provides information and documents requested by shareholders in line with the principle of equal and easy access. reduction of the Company’s authorized capital; listing and delisting of the Company’s shares. 6.3.1 Information and 1. The Company’s Information Policy determines an easy procedure of giving access to information for shareholders including the information on legal entities controlled by the Company on ◼ Compliance ensured by the relevant Board documents requested by shareholders are disclosed in line with the principle of equal and easy access. Committees that provide respective recommendations to the Board of Directors. In view of the above, ◻ Partial compliance ◻ Non- compliance the Company excludes the possibility of any risks. The Company does not plan to review and approve the list of material corporate events in the near future, but intends to continue to act within the framework of current legislation. shareholder’s request. 6.3.2 When providing 1. In the reporting year, the Company did not refuse to satisfy the shareholders’ requests to provide information or justified such refusals. 2. In cases defined by the Information Policy of the Company, shareholders are warned about ◼ Compliance ensured information to shareholders ◻ Partial the Company ensures a reasonable balance between the interests of certain shareholders and the interests of the Company itself, which seeks to keep important commercial information, which may significantly affect its competitiveness, confidential. compliance ◻ Non- compliance the confidential nature of the information and undertake to keep it confidential. 276 277 Statement by member of the Board of Directors About the Company Corporate Governance Our Team Environmental Protection Appendix ANNUAL REPORT 2020 No. Principles of corporate governance Criteria of corporate governance principles observance evaluation Status Clarification of deviation from criteria of corporate governance principles observance evaluation No. Principles of corporate governance Criteria of corporate governance principles observance evaluation Status Clarification of deviation from criteria of corporate governance principles observance evaluation of compliance with corporate governance principle of compliance with corporate governance principle 7.1.2 The Board of Directors plays a key role in decision-making 1. The Company has a procedure in place ensuring that ◼ Compliance ensured In cases when such corporate events are statutorily assigned to the competence of the Board of Directors, these matters are first the independent directors declare their opinion on material corporate events before they are approved. ◻ Partial or in preparing compliance ◻ Non- compliance recommendations regarding material corporate events; the Board of Directors relies on the opinion of the Company’s independent directors. reviewed by the relevant Board Committees that provide respective recommendations to the Board of Directors. The current system meets the needs of the Company, and its change in the next few years does not seem practical. The Company believes 7.1.3 In case of material corporate events that affect the rights and legitimate interests of shareholders, equal conditions are provided to all the Company’s shareholders; if the procedures set out in the legislation and designed to protect the shareholders’ rights are not sufficient, additional measures are taken to protect the rights and legitimate interests of the Company’s shareholders. In this case, the Company is guided not only by compliance with formal statutory requirements but also by the corporate governance principles outlined in the Code. 1. The Company’s Charter, taking into account ◻ Compliance ensured 1. Partial compliance The Company’s Charter does not establish minimal criteria for the attribution of the Company’s transactions to material corporate events that are lower than those statutorily required. the specifics of the Company’s activities, establishes the minimal criteria for the attribution of the Company’s transactions to material corporate events, which are lower than those statutorily required. ◼ Partial that additional risks for compliance ◻ Non- the Company are excluded. At the same time, the Company is monitoring the system for protecting the rights and legitimate interests of shareholders and in case of any risk factors emerging, it will take required measures to adjust the system. compliance The Company is guided by statutory criteria 2. During the reporting period all material corporate events underwent an approval procedure prior to their implementation. for the attribution of the Company’s transactions to material corporate events. The majority of material corporate events recognized by the Corporate Governance Code fall within the remit of the Company’s Board of Directors or the General Meeting of Shareholders. Decision-making with regard to transactions, which 2. Compliance ensured 7.2 The Company ensures such a procedure for material corporate events that enables shareholders to receive full information thereof in due time and to influence such events; it guarantees observance and proper level of protection of their rights when such events take place. 7.2.1 Information on 1. During the reporting period, the Company disclosed ◼ Compliance ensured material corporate events is disclosed with an explanation of the grounds, conditions, and consequences of such events. information on its material corporate events in a timely and detailed manner including the grounds and timing of such events. ◻ Partial compliance ◻ Non- compliance the Corporate Governance Code recognizes as material corporate events, fall within the remit of the Company’s Board of Directors. In cases when such corporate events are statutorily assigned to the competence of the General Meeting of Shareholders, the Board of Directors provides respective recommendations to shareholders. 278 279 Statement by member of the Board of Directors About the Company Corporate Governance Our Team Environmental Protection Appendix ANNUAL REPORT 2020 No. Principles of corporate governance Criteria of corporate governance principles observance evaluation Status Clarification of deviation from criteria of corporate governance principles observance evaluation No. Principles of corporate governance Criteria of corporate governance principles observance evaluation Status Clarification of deviation from criteria of corporate governance principles observance evaluation of compliance with corporate governance principle of compliance with corporate governance principle 7.2.2 The rules and 1. The Company’s internal documents provide for a procedure for engaging ◻ Compliance ensured 1. Partial compliance 3. Partial compliance The Company’s internal procedures related to the Company's performance of The Company’s internal ◼ Partial documents do not provide for a procedure for engaging an independent appraiser to estimate the value of property to be disposed of or acquired as a material transaction or as an interested party transaction. The Company engages an independent appraiser in cases set out in the legislation of the Russian Federation, and the Company believes that this fully documents do not provide for an expanded list of grounds on which Board members and other parties as required by law are recognized as an interested party in the Company’s transactions. Before the conclusion of any transaction in which there can be interest, the Company evaluates all possible circumstances that could lead to the existence of such interest, including those not provided for by law. This approach has proved to be effective in practice, risks are completely excluded and the Company does not deem it appropriate to provide an expanded list of grounds on which Board members and other parties are an independent appraiser to estimate the value of property to be disposed of or acquired as a material transaction or as an interested party transaction. compliance ◻ Non- compliance material corporate events are specified in the Company’s internal documents. 2. The Company’s internal documents provide for a procedure for engaging an independent appraiser to estimate the value of acquisition and buyback of its shares. eliminates any risk. 3. The Company’s internal documents provide for The Company does not plan to review the procedure for engaging an independent appraiser in the near future and intends to continue to operate within the framework of the current legislation. The Company is monitoring the system, and in case of any risk factors emerging, it will take the required measures to adjust the system. an expanded list of grounds on which Board members and other parties are recognized as an interested party in the Company’s transactions under the Russian legislation. recognized as an interested party in the Company’s internal documents. Thus, the Company does not plan to make changes to internal documents in the near future and will continue to adhere to the established approach. The Company is monitoring the system, and in case of any risk factors emerging,it will take the required measures to adjust the system. 2. Compliance ensured 280 281 Statement by member of the Board of Directors About the Company Corporate Governance Our Team Environmental Protection Appendix ANNUAL REPORT 2020 REPORT ON THE PAYMENT OF DECLARED (ACCRUED) DIVIDENDS Year Period Dividend per share, RUB Declaration date Amount, RUB Dividends/free cash flow, %1 Date of payment Paid out2 as of 31.12.2020 RUB 38,526,138,114.73 28,427,060,235.83 19,212,238,851.08 103,925,539,981.95 % from declared 99.973 2020 2020 2020 2019 9M 6.43 4.75 3.21 18.12.2020 25.09.2020 30.06.2020 29.05.2020 38,536,451,153.2 28,467,829.390 19,238,259,440.40 134 101 83 from 30.12.2020 до 10.02.2021 (inclusive) from 13.10.2020 до 17.11.2020 (inclusive) from 14.07.2020 до 17.08.2020 (inclusive) from 10.06.2020 до 15.07.2020 (inclusive) 6M 99.86 3M 99.86 year 17.36 (taking into account paid interim dividends, the outstanding dividend amount to be paid is RUB 3.12 per share) 104,042,424,886.40 (taking into account paid interim dividends, the outstanding dividend amount to be paid is RUB 18,698,868,988.80) 104 99.89 2019 2019 2019 2018 9M 3.22 3.68 7.34 20.12.2019 27.09.2019 07.06.2019 19.04.2019 19,298,191,712.80 22,055,076, 243.20 43,990,287,941.60 124 133 99 from 10.01.2020 to 13.02.2020 (inclusive) from 11.10.2019 to 15.11.2019 (inclusive). from 20.06.2019 to 24.07.2019 (inclusive) from 07.05.2019 to 13.06.2019 (inclusive) 19,277,572,251.46 22,031,690,658.57 43,941,942,070.47 136,559,008,896.53 99.89 99.89 99.89 99.89 6M 3M year 22.81 (taking into account paid interim dividends, the outstanding dividend amount to be paid is RUB 5.80 per share) 136,705,513,344.40 (taking into account paid interim dividends, the outstanding dividend amount to be paid is RUB 34,760,717.992) 104 2018 2018 2018 2017 9M 6.04 5.24 5.73 21.12.2018 36,199,092,529.60 31,404,510,737.60 34,341,192,085.20 84 166 93 from 10.01.2019 to 13.02.2019 (inclusive) from 13.10.2018 to 19.11.2018 (inclusive). from 21.06.2018 to 25.07.2018 (inclusive) from 21.06.2018 to 25.07.2018 (inclusive) 36,160,188,287.60 31,370,838,449.86 34,304,657,291.50 84,054,201,298.19 99.89 99.89 99.89 99.89 6M 28.09.2018 08.06.2018 08.06.2018 3M year 14.04 (taking into account paid interim dividends, the outstanding dividend amount to be paid is RUB 3.36 per share) 84,144,910,449.60 (taking into account paid interim dividends, the outstanding dividend amount to be paid is RUB 20,137,243,526.40) 113 2017 2017 2017 2016 9M 5.13 22.12.2017 29.09.2017 02.06.2017 02.06.2017 30,745,255,741.20 19,178,327,168 99 from 10.01.2018 to 13.02.2018 (inclusive) from 13.10.2017 to 17.11.2017 (inclusive) from 15.06.2017 to 19.07.2017 (inclusive) from 15.06.2017 to 19.07.2017 (inclusive) 30,712,814,779.85 19,157,682,665.66 14,067,867,006.85 55,198,112,496.67 99.89 99.89 99.88 99.89 6M 3.20 2.35 101 120 84 3M 14,084,084,014 year 9.22 (taking into account paid interim dividends, the outstanding dividend amount to be paid is RUB 3.38 per share) 55,257,555,152.80 (taking into account paid interim dividends, the outstanding dividend amount to be paid is RUB 20,257,108,071.20) 2016 2016 2016 2015 9M 3.63 1.08 1.13 23.12.2016 30.09.2016 03.06.2016 03.06.2016 21,755,414,881.20 6,472,685,419.20 6,772,346,781.20 75 65 37 65 from 10.01.2017 to 13.02.2017 (inclusive) from 13.10.2016 to 17.11.2016 (inclusive) from 15.06.2016 to 19.07.2016 (inclusive) from 15.06.2016 to 19.07.2016 (inclusive) 21,731,775,726.20 6,465,547,166.15 6,764,857,327.70 41,605,954,038.53 99.89 99.89 99.89 99.89 6M 3M year 6.95 (taking into account paid interim dividends, the outstanding dividend amount to be paid is RUB 2.43 per share) 41,652,929,318 (taking into account paid interim dividends, the outstanding dividend amount to be paid is RUB 14,563,542,193.20) 2015 2015 2015 2014 9M 1.95 0.93 1.64 21.12.2015 11,686,793,118 44 50 52 26 from 09.01.2016 to 12.02.2016 (inclusive) from 13.10.2015 to 17.11.2015 (inclusive) from 17.06.2015 to 21.07.2015 (inclusive) from 17.06.2015 to 21.07.2015 (inclusive) 11,673,475,109.09 5,567,460,843.39 9,817,408,088.53 14,606,462,870.22 99.89 99.89 99.88 99.88 6M 30.09.2015 05.06.2015 05.06.2015 5,573,701,333.20 9,828,892,673.60 3M year 2.44 (taking into account paid interim dividends, the outstanding dividend amount to be paid is RUB 1.56 per share) 14,623,474,465.60 (taking into account paid interim dividends, the outstanding dividend amount to be paid is RUB 9,349,434,494.40) 2014 6M 0.88 30.09.2014 5,274,039,971.20 18 from 12.10.2014 to 18.11.2014 (inclusive) 5,267,898,137.36 99.88 1 3 The ratio “Dividends to net profit, %” is calculated as Dividends per share in rubles multiplied by the number of shares (5,993,227,240) divided by the dollar rate on the day of the announcement divided by the net profit attributable to NLMK shareholders under IFRS multiplied by 100%. The obligation to pay dividends on shares was fulfilled by PJSC “NLMK” in the terms established by the legislation of the Russian Federation. The reason for paying dividends is not in full amount due to incorrect payment details of shareholders. As at December 31, 2020 dividends payment deadline has not expired. The data is related to the expiry date of the dividend payout period the 9 months of 2020 – deadline expiring – February 10, 2021. 2 282 283 NOVOLIPETSK STEEL CONSOLIDATED FINANCIAL STATEMENTS PREPARED IN ACCORDANCE WITH INTERNATIONAL FINANCIAL REPORTING STANDARDS AS AT AND FOR THE YEAR ENDED 31 DECEMBER 2020 (WITH INDEPENDENT AUDITOR’S REPORT THEREON) Novolipetsk Steel Consolidated financial statements as at and for the year ended 31 December 2020 CONTENTS Independent auditor’s report 3 9 Consolidated statement of financial position Consolidated statement of profit or loss Consolidated statement of comprehensive income Consolidated statement of changes in equity Consolidated statement of cash flows 10 11 12 13 14 Notes to the consolidated financial statements 2 Independent Auditor’s Report To the Shareholders and the Board of Directors of Novolipetsk Steel: Our opinion In our opinion, the consolidated financial statements present fairly, in all material respects, the consolidated financial position of Novolipetsk Steel and its subsidiaries (together – the “Group”) as at 31 December 2020, and the Group’s consolidated financial performance and consolidated cash flows for the year then ended in accordance with International Financial Reporting Standards (IFRS). What we have audited The Group’s consolidated financial statements comprise: • • • • • • the consolidated statement of financial position as at 31 December 2020; the consolidated statement of profit or loss for the year then ended; the consolidated statement of comprehensive income for the year then ended; the consolidated statement of changes in equity for the year then ended; the consolidated statement of cash flows for the year then ended; and the notes to the consolidated financial statements, which include significant accounting policies and other explanatory information. Basis for opinion We conducted our audit in accordance with International Standards on Auditing (ISAs). Our responsibilities under those standards are further described in the Auditor’s responsibilities for the audit of the consolidated financial statements section of our report. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion. Independence We are independent of the Group in accordance with the International Code of Ethics for Professional Accountants (including International Independence Standards) issued by the International Ethics Standards Board for Accountants (IESBA Code) and the ethical requirements of the Auditor’s Professional Ethics Code and Auditor’s Independence Rules that are relevant to our audit of the consolidated financial statements in the Russian Federation. We have fulfilled our other ethical responsibilities in accordance with these requirements and the IESBA Code. AO PricewaterhouseCoopers Audit White Square Office Center 10 Butyrsky Val Moscow, Russian Federation, 125047 T: +7 (495) 967-6000, F:+7 (495) 967-6001, www.pwc.ru Our audit approach Overview • Overall Group materiality: 92 million US Dollars (USD), which represents 1% of the Group’s consolidated revenue Materiality • • We conducted audit work at 5 reporting units in four countries Group scoping Our audit scope addressed 78% of the Group’s revenues and 74% of the Group’s consolidated total assets • Key Audit Matter – Assessment of the recoverability of the carrying value of goodwill, intangible assets, property, plant and equipment and investment in joint venture NBH. Key audit matters As part of designing our audit, we determined materiality and assessed the risks of material misstatement in the consolidated financial statements. In particular, we considered where management made subjective judgements; for example, in respect of significant accounting estimates that involved making assumptions and considering future events that are inherently uncertain. As in all of our audits we also addressed the risk of management override of internal controls, including among other matters consideration of whether there was evidence of bias that represented a risk of material misstatement due to fraud. Materiality The scope of our audit was influenced by our application of materiality. An audit is designed to obtain reasonable assurance whether the consolidated financial statements are free from material misstatement. Misstatements may arise due to fraud or error. They are considered material if, individually or in aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of the consolidated financial statements. Based on our professional judgement, we determined certain quantitative thresholds for materiality, including the overall Group materiality for the consolidated financial statements as a whole as set out in the table below. These, together with qualitative considerations, helped us to determine the scope of our audit and the nature, timing and extent of our audit procedures and to evaluate the effect of misstatements, if any, both individually and in aggregate on the consolidated financial statements as a whole. Overall Group materiality How we determined it USD 92 million (2019: USD 106 million) 1% of the Group’s consolidated revenue Rationale for the materiality benchmark applied We chose revenue as the benchmark because, in our view, it is the benchmark which objectively best represents the performance of the Group over a period of time while financial results are volatile. We determined overall materiality as 1%, which in our experience is within the range of acceptable quantitative materiality thresholds applied for public companies in the relevant industry. Key audit matters Key audit matters are those matters that, in our professional judgment, were of most significance in our audit of the consolidated financial statements of the current period. These matters were addressed in the context of our audit of the consolidated financial statements as a whole, and in forming our opinion thereon and we do not provide a separate opinion on these matters. Key audit matter How our audit addressed the key audit matter Assessment of the recoverability of the carrying value of goodwill, intangible assets, property, plant and equipment, and investment in joint venture NBH Refer to Notes 8, 9 and 4 to the consolidated financial statements We obtained, understood and evaluated management’s impairment models. We involved our valuation experts to assist in the evaluation of the methodology, mathematical accuracy and assumptions used in the models. The Group management performed an analysis of existence of indicators of impairment of the Group’s property, plant and equipment (PP&E), intangible assets, goodwill and carrying value of investment in joint venture NBH (a joint venture between the Group and Societe Wallonne de Gestion et de Participations S. A.(SOGEPA), as well as indicators of potential reversal of an impairment loss recognised in prior periods. This analysis revealed: Specific work performed over the impairment test included: • comparing the key assumptions used within the impairment models to the historic performance of the respective CGUs, approved estimates, and other supporting calculations; • sales volumes and prices decline on the market of certain finished products and raw materials because of the spread of COVID -19; • sample benchmarking the key assumptions used within the impairment models, including price forecasts for core raw materials and finished products, inflation and discount rates, against external expert valuations, • high volatility on the market of certain finished products and raw materials. macroeconomic and industry forecasts, which corroborated their validity; The analysis triggered testing a number of the Group’s cash-generating units (CGUs) for impairment. No indicators that an impairment loss recognised in prior periods may no longer exist or may have decreased have been identified. • • performing a sensitivity analysis over the key assumptions in order to assess their potential impact on impairment results and ranges of possible outcomes of the recoverable amounts; The recoverable amount of PP&E, intangible assets and goodwill for each CGU subject to testing as well as recoverable amount of investment in NBH were calculated by management as at 31 December 2020 or as at 30 June 2020. assessing compliance with the requirements of IFRS of the related disclosures in the consolidated financial statements and verification of disclosure. Key audit matter How our audit addressed the key audit matter Management assessed the recoverable amount of CGU PJSC NLMK as fair value less cost to sell and as value in use for each other CGU using discounted cash flow models. The scope of the audit procedures for verification of impairment models for each CGU was based on its significance, safety margin, sensitivity to assumptions and on individual risks. As a result of this testing performed, additional impairment loss of USD 120 million was recognized in respect to investment in NBH. In respect to other CGUs management concluded that no impairment was required as at 31 December 2020. We focused on this area because of the significant judgmental factors involved in the calculation of recoverable amount of each CGU, and the significant carrying value of the assets in scope of the test. How we tailored our Group audit scope We tailored the scope of our audit in order to perform sufficient work to enable us to provide an opinion on the consolidated financial statements as a whole, taking into account structure of the Group, the accounting processes and controls, and the industry in which the Group operates. The Group’s major production facilities are located in the Russian Federation, the USA and Western Europe and the trading company is based in Switzerland. Based on our continuing assessment, we included in our group audit scope the 5 components located in these regions. The audits of the components were conducted by PwC network firms in accordance with International Standard on Auditing (ISA) 600 “Special considerations – audits of group financial statements (including the work of component auditors)”. The Group engagement team’s instructions to component auditors included results of our risk assessment, materiality levels and the approach to the audit of centralised processes and systems. The Group engagement team is in regular contact with the component auditors. Our selection is based on the relative significance of the entities within the Group or specific risks identified. By performing the procedures above at the components in combination with additional procedures performed at the Group level, we have obtained sufficient and appropriate audit evidence regarding the consolidated financial statements as a whole that provides a basis for our opinion. Other information Management is responsible for the other information. The other information comprises the Group Annual Report for 2020 and the Issuer’s Report for the first quarter of 2021 (but does not include the consolidated financial statements and our auditor’s report thereon), which are expected to be made available to us after the date of this auditor’s report Our opinion on the consolidated financial statements does not cover the other information and we will not express any form of assurance conclusion thereon. In connection with our audit of the consolidated financial statements, our responsibility is to read the other information identified above when it becomes available and, in doing so, consider whether the other information is materially inconsistent with the consolidated financial statements or our knowledge obtained in the audit, or otherwise appears to be materially misstated. When we read the Group Annual Report for 2020 and the Issuer’s Report for the first quarter of 2021, if we conclude that there is a material misstatement therein, we are required to communicate the matter to those charged with governance. Responsibilities of management and those charged with governance for the consolidated financial statements Management is responsible for the preparation and fair presentation of the consolidated financial statements in accordance with IFRS, and for such internal control as management determines is necessary to enable the preparation of consolidated financial statements that are free from material misstatement, whether due to fraud or error. In preparing the consolidated financial statements, management is responsible for assessing the Group’s ability to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless management either intends to liquidate the Group or to cease operations, or has no realistic alternative but to do so. Those charged with governance are responsible for overseeing the Group’s financial reporting process. Auditor’s responsibilities for the audit of the consolidated financial statements Our objectives are to obtain reasonable assurance about whether the consolidated financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor’s report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with ISAs will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these consolidated financial statements. As part of an audit in accordance with ISAs, we exercise professional judgement and maintain professional scepticism throughout the audit. We also: • Identify and assess the risks of material misstatement of the consolidated financial statements, whether due to fraud or error, design and perform audit procedures responsive to those risks, and obtain audit evidence that is sufficient and appropriate to provide a basis for our opinion. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control. • Obtain an understanding of internal control relevant to the audit in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Group’s internal control. • • Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made by management. Conclude on the appropriateness of management’s use of the going concern basis of accounting and, based on the audit evidence obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on the Group’s ability to continue as a going concern. If we conclude that a material uncertainty exists, we are required to draw attention in our auditor’s report to the related disclosures in the consolidated financial statements or, if such disclosures are inadequate, to modify our opinion. Our conclusions are based on the audit evidence obtained up to the date of our auditor’s report. However, future events or conditions may cause the Group to cease to continue as a going concern. • Evaluate the overall presentation, structure and content of the consolidated financial statements, including the disclosures, and whether the consolidated financial statements represent the underlying transactions and events in a manner that achieves fair presentation. • Obtain sufficient appropriate audit evidence regarding the financial information of the entities or business activities within the Group to express an opinion on the consolidated financial statements. We are responsible for the direction, supervision and performance of the Group audit. We remain solely responsible for our audit opinion. We communicate with those charged with governance regarding, among other matters, the planned scope and timing of the audit and significant audit findings, including any significant deficiencies in internal control that we identify during our audit. We also provide those charged with governance with a statement that we have complied with relevant ethical requirements regarding independence, and to communicate with them all relationships and other matters that may reasonably be thought to bear on our independence, and where applicable, actions taken to eliminate threats or safeguards applied. From the matters communicated with those charged with governance, we determine those matters that were of most significance in the audit of the consolidated financial statements of the current period and are therefore the key audit matters. We describe these matters in our auditor’s report unless law or regulation precludes public disclosure about the matter or when, in extremely rare circumstances, we determine that a matter should not be communicated in our report because the adverse consequences of doing so would reasonably be expected to outweigh the public interest benefits of such communication. The certified auditor responsible for the audit resulting in this independent auditor’s report is A. B. Fomin. 10 February 2021 Moscow, Russian Federation Signed on the original: A. B. Fomin A. B. Fomin, certified auditor (licence No. № 01-000059), AO PricewaterhouseCoopers Audit Audited entity: Novolipetsk Steel Independent auditor: AO PricewaterhouseCoopers Audit Record made in the Unified State Register of Legal Entities on 28 January 1993 under State Registration Number 1024800823123 Registered by the Government Agency Moscow Registration Chamber on 28 February 1992 under Nо. 008.890 Taxpayer Identification Number 4823006703 Record made in the Unified State Register of Legal Entities on 22 August 2002 under State Registration Number 1027700148431 2, Metallurgov sq., Lipetsk, 398040, Russian Federation Taxpayer Identification Number 7705051102 Member of Self-regulatory organization of auditors Association “Sodruzhestvo” Principal Registration Number of the Record in the Register of Auditors and Audit Organizations –12006020338 Novolipetsk Steel Consolidated statement of financial position (millions of US dollars) As at As at As at Note 31 December 2020 31 December 2019 31 December 2018 Assets Current assets Cash and cash equivalents Short-term financial investments Trade and other accounts receivable Inventories 3 5 6 7 842 191 713 287 1,179 19 1,148 1,373 16 1,047 1,634 14 1,326 1,816 10 Other current assets 3,570 3,695 4,350 Non-current assets Long-term financial investments Investments in joint ventures Property, plant and equipment Goodwill 5 4 7 131 5 223 85 159 8 5,659 212 6,039 248 4,798 224 9 Other intangible assets Deferred income tax assets Other non-current assets 9 159 162 165 17 119 101 152 5 11 11 6,292 9,862 6,789 10,484 5,594 9,944 Total assets Liabilities and equity Current liabilities Trade and other accounts payable Dividends payable 10 11 1,065 109 1,054 51 1,124 318 468 32 1,122 525 398 28 Short-term borrowings Current income tax liability Other short-term liabilities 3 - - 2,282 1,942 2,073 Non-current liabilities Long-term borrowings 11 17 2,432 359 2,188 405 1,677 346 Deferred income tax liability Other long-term liabilities 48 2 14 2,839 5,121 2,595 4,537 2,037 4,110 Total liabilities Equity attributable to Novolipetsk Steel shareholders Common stock 12(a) 221 8 221 9 221 10 Additional paid-in capital Accumulated other comprehensive loss Retained earnings (7,140) 11,641 4,730 11 (6,140) 11,840 5,930 17 (6,782) 12,370 5,819 15 Non-controlling interests Total equity 4,741 9,862 5,947 10,484 5,834 9,944 Total liabilities and equity The consolidated financial statements as set out on pages 9 to 66 were approved by the Group’s management and authorised for issue on 10 February 2021. The accompanying notes constitute an integral part of these consolidated financial statements. 9 Novolipetsk Steel Consolidated statement of profit or loss (millions of US dollars, unless otherwise stated) For the year ended 31 December 2020 For the year ended 31 December 2019 For the year ended 31 December 2018 Note Revenue 14 9,245 10,554 (7,303) 12,046 (7,680) Cost of sales (5,920) Gross profit 3,325 3,251 4,366 General and administrative expenses Selling expenses (346) (845) (8) (352) (843) (1) (375) (886) (1) Net impairment losses on financial assets Other operating income/(expenses), net Taxes other than income tax 9 13 (4) 16 (64) (66) (88) Operating profit before share of results of joint ventures and impairment of investments in joint ventures, impairment of non-current assets and loss on disposals of property, plant and equipment 2,071 2,002 3,012 Loss on disposals of property, plant and equipment Impairment of non-current assets (8) (5) (4) (7) (4) 8, 9 4 (30) Share of results of joint ventures and impairment of investments in joint ventures (236) - (88) - (243) (2) 21 Losses on investments, net Finance income 18 18 18 18 (68) (6) - Finance costs (90) (40) (24) (39) (67) (70) 33 Foreign currency exchange (loss)/gain, net Hedging result 19, 22 22 - Expenses on operations with financial instruments Other expenses, net - - (30) (11) Profit before income tax Income tax expense Profit for the year 1,580 (343) 1,237 1,794 (453) 1,341 2,729 (486) 2,243 17 Profit is attributable to: Novolipetsk Steel shareholders Non-controlling interests 1,236 1 1,339 2 2,238 5 Earnings per share: Earnings per share attributable to Novolipetsk Steel shareholders (US dollars) 13 0.2062 0.2234 0.3734 Weighted-average number of shares outstanding: basic and diluted (in thousands) 12(a) 5,993,227 5,993,227 5,993,227 The accompanying notes constitute an integral part of these consolidated financial statements. 10 Novolipetsk Steel Consolidated statement of comprehensive income (millions of US dollars) For the year ended 31 December 2020 For the year ended 31 December 2019 For the year ended 31 December 2018 Note Profit for the year 1,237 1,341 2,243 Other comprehensive (loss)/income: Items that may be reclassified subsequently to profit or loss: Hedge reserve of cash flows 22 22 (205) 41 - - - - Income tax related to hedge reserve of cash flows Cumulative translation adjustment 2(b) (839) 644 (1,154) Total comprehensive income/(loss) for the year attributable to: 234 1,985 1,089 Novolipetsk Steel shareholders Non-controlling interests 236 (2) 1,981 4 1,087 2 The accompanying notes constitute an integral part of these consolidated financial statements. 11 Novolipetsk Steel Consolidated statement of changes in equity (millions of US dollars) Attributable to Novolipetsk Steel shareholders Accumulated other Additional comprehensive Retained earnings Non-controlling interest Note Common stock paid-in capital loss Total equity 6,646 Balance at 1 January 2018 221 10 (5,631) 12,029 17 Profit for the year Cumulative translation adjustment - - - - - - - (1,151) (1,151) 2,238 - 5 (3) 2 2,243 (1,154) 1,089 2(b) 12(b) 2(b) Total comprehensive income 2,238 Acquisition of non-controlling interest Dividends to shareholders - - - - - - (1) (1,896) (3) (1) (4) (1,897) Balance at 31 December 2018 221 10 (6,782) 12,370 15 5,834 Profit for the year Cumulative translation adjustment - - - - - - - 642 642 1,339 - 2 2 4 1,341 644 Total comprehensive income 1,339 1,985 Disposal of assets to an entity under common control Acquisition of non-controlling interest - (1) - - - (1) - - - - - - - (2) - (2) (1,869) Dividends to shareholders 12(b) (1,869) Balance at 31 December 2019 221 9 (6,140) 11,840 17 5,947 Profit for the year - - - - - - - - - (164) 1,236 1 - 1,237 (164) (839) 234 Hedge reserve of cash flows net of related income tax Cumulative translation adjustment 22 - - 2(b) (836) (3) (2) Total comprehensive income (1,000) 1,236 Disposal of assets to an entity under common control Dividends to shareholders - - (1) - - - - - (4) (1) (1,439) 12(b) (1,435) Balance at 31 December 2020 221 8 (7,140) 11,641 11 4,741 The accompanying notes constitute an integral part of these consolidated financial statements. 12 Novolipetsk Steel Consolidated statement of cash flows (millions of US dollars) For the year ended 31 December 2020 For the year ended 31 December 2019 For the year ended 31 December 2018 Note Cash flows from operating activities Profit for the year 1,237 1,341 2,243 Adjustments to reconcile profit for the year to net cash provided by operating activities: Depreciation and amortisation 574 562 577 Loss on disposals of property, plant and equipment Losses on investments 8 - 4 - 7 2 Finance income Finance costs 18 18 (18) 90 (18) 68 (21) 70 Share of results of joint ventures and impairment of investments in joint ventures Income tax expense Impairment of non-current assets Foreign currency exchange loss/(gain), net Hedging result 4 17 8, 9 19,22 22 236 343 5 40 24 39 88 453 30 6 - - 243 486 4 (33) - Expenses on operations with financial instruments - Change in impairment allowance for inventories and credit loss allowance of accounts receivable 4 5 1 Changes in operating assets and liabilities (Increase)/decrease in trade and other accounts receivable (177) 117 (2) 314 284 (1) (132) 3,004 (381) 2,623 (258) (187) 7 Decrease/(increase) in inventories (Increase)/decrease in other operating assets Increase /(decrease) in trade and other accounts payable Сash provided by operations Income tax paid Net cash provided by operating activities Cash flows from investing activities 46 177 2,566 (285) 2,281 3,318 (577) 2,741 Purchases and construction of property, plant and equipment and intangible assets Proceeds from sale of property, plant and equipment Purchases of investments and loans given Proceeds from repayment of loans given Placement of bank deposits (1,124) 15 (51) 142 (836) 847 (1,080) 1 (164) 115 (933) 777 (680) 3 (91) - (305) 1,349 Withdrawal of bank deposits Interest received 10 (131) 29 (155) 22 - Contribution to share capital of joint venture Acquisition of subsidiary, net of cash and cash equivalents acquired 4 (4) - (1,132) - (1) (1,411) (4) (4) 290 Acquisition of non-controlling interest Net cash (used in)/provided by investing activities Cash flows from financing activities Proceeds from borrowings 2,002 (1,284) (20) 1,015 (500) (14) 470 (643) - Repayment of borrowings Payments on leases Interest paid (64) (49) (56) Payments from settlement of derivative financial instruments Dividends paid to Novolipetsk Steel shareholders Dividends paid to non-controlling interests (16) (1,637) (1) - (2,120) - - (1,888) (2) Net cash used in financing activities (1,020) 129 (1,668) (456) (10) 1,179 713 (2,119) 912 (34) 301 1,179 Net increase/(decrease) in cash and cash equivalents Effect of exchange rate changes on cash and cash equivalents Cash and cash equivalents at the beginning of the year Cash and cash equivalents at the end of the year - 3 3 713 842 Supplemental disclosures of cash flow information: Non-cash investing activities: Conversion of debt to equity 4 - - 210 The accompanying notes constitute an integral part of these consolidated financial statements. 13 Novolipetsk Steel Notes to the consolidated financial statements (millions of US dollars) 1 Background Novolipetsk Steel (the “Parent Company” or “NLMK”) and its subsidiaries (together – the “Group”) is one of the world’s leading steelmakers with facilities that allow it to operate an integrated steel production cycle. The Parent Company is a public joint stock company in accordance with the Civil Code of the Russian Federation. The Parent Company was originally established as a State owned enterprise in 1934 and was privatised in the form of an open joint stock company on 28 January 1993. On 29 December 2015, the legal form of the Parent Company was changed to public joint stock company due to changes in legislation of the Russian Federation. The Group is a vertically integrated steel company and the largest steel producer in Russia. The Group also operates in the mining segment (Note 21). The Group’s main operations are in the Russian Federation, the European Union and the USA and are subject to the legislative requirements of the respective state and regional authorities. The Parent Company’s registered office is located at 2, Metallurgov sq., 398040, Lipetsk, Russian Federation. As at 31 December 2020, the Parent Company’s major shareholder with 79.25% (81.40% as at 31 December 2019 and 84.03% as at 31 December 2018) ownership interest is Fletcher Group Holdings Limited, which is beneficially owned by Mr. Vladimir Lisin. The major companies of the Group by reportable segment (see Note 21) are: Share at 31 December 31 December 31 December 2020 2019 2018 Share at Share at Country of incorporation Activity Russian flat products LLC VIZ-Steel JSC Altai-Koks Production of steel Russia Russia 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% Production of blast furnace coke Trading NLMK Trading S.A. Switzerland 100.00% 100.00% 100.00% (formerly – Novex Trading (Swiss) S.A.) NLMK DanSteel and Plates Distribution Network NLMK DanSteel A/S Production of steel Denmark 100.00% 100.00% 100.00% NLMK USA NLMK Indiana LLC NLMK Pennsylvania LLC Production of steel Production of steel USA USA 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% Russian long products JSC NLMK-Ural Production of steel and long products Production of metalware Production of long products Russia Russia Russia Russia 92.59% 100.00% 100.00% 100.00% 92.59% 100.00% 100.00% 100.00% 92.59% 100.00% 100.00% 100.00% LLC NLMK-Metalware LLC NLMK-Kaluga LLC Vtorchermet NLMK Processing of metal Mining JSC Stoilensky GOK Mining, processing and pelletising of iron-ore Russia 100.00% 100.00% 100.00% 14 Novolipetsk Steel Notes to the consolidated financial statements (millions of US dollars) 1 Background (continued) Among joint ventures the major is: Share at 31 December 2020 Share at 31 December 2019 Share at 31 December 2018 Country of incorporation Activity NLMK Belgium Holdings S.A. Holding company Belgium 49.00% 49.00% 49.00% NLMK Belgium Holdings S.A. is owned jointly by the Group and Societe Wallonne de Gestion et de Participations S. A. (SOGEPA), a Belgian state company (Note 4). It comprises strip and plate manufacturers located in Belgium, France and Italy. 2 Basis of preparation of the consolidated financial statements Basis of preparation (a) These consolidated financial statements are prepared in accordance with International Financial Reporting Standards (“IFRS”) under the historical cost convention except as described in the principal accounting policies applied in the preparation of these consolidated financial statements, as set out in Note 25. These policies have been consistently applied to all the periods presented in these consolidated financial statements except for new standards adopted as set out in Note 27. Figures for three reporting periods are presented for users’ convenience. (b) Functional and reporting currency The functional currency of all of the Group’s Russian entities is considered to be the Russian ruble. The functional currency of the majority of the foreign subsidiaries is their local currency. The Group uses US dollars as the presentation currency of these consolidated financial statements. All amounts in the consolidated financial statements are rounded to the nearest million unless otherwise stated. The results of operations and financial position of each Group entity are translated into the presentation currency as follows: ▪ assets and liabilities in the statement of financial position are translated at the closing rate at the end of the respective reporting period; ▪ income and expenses are translated at average exchange rates for each month (unless this average rate is not a reasonable approximation of the cumulative effect of the rates prevailing on the transaction dates, in which case income and expenses are translated at the dates of the transactions); ▪ ▪ components of equity are translated at the historical rate; all resulting exchange differences are recognised in other comprehensive income. Items of consolidated statement of cash flows are translated at average exchange rates for each month (unless this average rate is not a reasonable approximation of the cumulative effect of the rates prevailing on the transaction dates, in which case proceeds and disposals are translated at the dates of the transactions). When control over a foreign operation is lost, the previously recognised exchange differences on translation to a different presentation currency are reclassified from accumulated other comprehensive income/loss to profit or loss for the year as part of the gain or loss on disposal. On partial disposal of a subsidiary without loss of control, the related portion of accumulated currency translation differences is reclassified to non-controlling interest within equity. 15 Novolipetsk Steel Notes to the consolidated financial statements (millions of US dollars) 2 Basis of preparation of the consolidated financial statements (continued) The Central Bank of the Russian Federation’s Russian ruble to the main foreign currencies closing rates of exchange as of the reporting dates and the period weighted average exchange rates for corresponding reporting periods are indicated below. 2020 2019 2018 Russian ruble to US dollar For the year ended 31 December As at 31 December 72.1464 73.8757 64.7362 61.9057 62.7078 69.4706 Russian ruble to Euro For the year ended 31 December As at 31 December 82.4488 90.6824 72.5021 69.3406 73.9546 79.4605 3 Cash and cash equivalents As at As at As at 31 December 2020 31 December 2019 31 December 2018 Cash Deposits Other cash equivalents 441 384 17 388 296 29 526 627 26 842 713 1,179 4 Investments in joint ventures As at As at As at 31 December 2020 31 December 2019 31 December 2018 NLMK Belgium Holdings S.A. (“NBH”) TBEA & NLMK (Shenyang) Metal Product Co., Ltd. 121 10 213 10 149 10 131 223 159 The table below summarises the movements in the carrying amount of the Group’s investments in joint ventures. 2020 2019 2018 As at 1 January Share of net loss 223 (81) 131 (120) - (35) (1) 14 159 (101) 155 (31) - 205 (120) Contribution into share capital Impairment of investments Disposal of 2% stake in NBH Share of change in unrealised profit in inventory Share of change in other comprehensive income Translation adjustment 210 (87) (7) (36) (2) 44 (1) (2) 223 (4) 159 As at 31 December 131 16 Novolipetsk Steel Notes to the consolidated financial statements (millions of US dollars) 4 Investments in joint ventures (continued) Summarised consolidated financial information for NBH before impairment losses is as follows: As at As at As at 31 December 2020 31 December 2019 31 December 2018 Current assets Non-current assets 693 673 767 551 969 562 Total assets 1,366 1,318 1,531 Current liabilities Non-current liabilities (635) (539) (654) (507) (684) (673) Total liabilities Equity (1,174) 192 (1,161) 157 (1,357) 174 For the year ended For the year ended For the year ended 31 December 2020 31 December 2019 31 December 2018 Revenue Net loss 1,374 (167) 1,562 (207) 1,837 (242) NBH cash and cash equivalents as at 31 December 2020, 2019 and 2018 amounted to $32, $25 and $1, respectively. NBH financial liabilities excluding trade and other accounts payable as at 31 December 2020, 2019 and 2018 amounted to $510, $649 and $690, respectively, and are included in current and non-current liabilities. Reconciliation of net assets of NBH, calculated in accordance with its consolidated financial statements, to the carrying amount of the investment is below. 2020 2019 2018 Net assets as at 1 January Net loss for the year 23 (161) 33 (202) 19 (197) Contribution into share capital Acquisition of treasury shares Other comprehensive income Translation adjustment Net assets as at 31 December PP&E valuation difference Adjusted net assets as at 31 December As at 31 December: 185 - (1) 3 49 143 192 195 - (2) (1) 23 210 (5) 1 5 33 141 174 134 157 Share in net assets 94 77 85 Excess of fair value of investment in NBH as at the deconsolidation date 100 100 100 Accumulated share of the other investor in contributions into share capital Accumulated impairment of investments Share of unrealised profit in inventory Cumulative translation adjustment Investments in NBH 416 (469) (61) 41 376 (349) (26) 35 316 (318) (70) 36 121 213 149 The other investor in NBH is SOGEPA, a Belgian state-owned company, controlling the stake of 49.0% as of 31 December 2020, 2019 and 2018. 17 Novolipetsk Steel Notes to the consolidated financial statements (millions of US dollars) 4 Investments in joint ventures (continued) In October 2019, the Group and SOGEPA have agreed to jointly support NBH bank financing via shareholder guarantees on a parity basis and to invest in the charter capital of NBH for the execution of the Group’s Strategy 2022 investment projects EUR 35 million, EUR 50 million and EUR 15 million in 2019, 2020 and 2021, respectively, each. In December 2018, the Group converted existing loans to NBH into share capital in the amount of $210. Information about the Group’s operations with NBH and investment impairment testing is disclosed in Notes 23 and 8, respectively. 5 Financial investments As at As at As at 31 December 2020 31 December 2019 31 December 2018 Short-term financial investments Bank deposits (Note 22(c)) Loans to related parties (Note 23(c)) Other short-term financial investments 149 41 1 157 128 2 5 14 - 191 287 19 Long-term financial investments Loans to related parties (Note 23(c)) Bank deposits (Note 22(c)) 6 1 5 - 85 - 7 5 85 198 292 104 The carrying amounts of financial investments approximate their fair values. 6 Trade and other accounts receivable As at As at As at 31 December 2020 31 December 2019 31 December 2018 Financial assets Trade accounts receivable Credit loss allowance of trade accounts receivable Other accounts receivable 834 (14) 147 (22) 818 (18) 33 1,099 (21) 30 Credit loss allowance of other accounts receivable (23) (17) 945 810 1,091 Non-financial assets Advances given to suppliers Allowance for impairment of advances given to suppliers VAT and other taxes receivable Accounts receivable from employees 79 (9) 132 1 70 (3) 168 2 76 (3) 161 1 203 237 235 1,148 1,047 1,326 The carrying amounts of trade and other accounts receivable approximate their fair values. 18 Novolipetsk Steel Notes to the consolidated financial statements (millions of US dollars) 6 Trade and other accounts receivable (continued) As at 31 December 2020, 2019 and 2018, accounts receivable with a carrying value of $119, $133 and $173, respectively, served as collateral for certain borrowings (Note 11). Movements in the credit loss allowance of financial receivables are as follows: 2020 2019 2018 As at 1 January (41) (5) 3 3 4 (36) (38) (7) 2 5 (3) (41) (43) (8) - 7 6 (38) Credit loss allowance recognised Accounts receivable written-off Credit loss allowance reversed Translation adjustment As at 31 December 7 Inventories As at As at As at 31 December 2020 31 December 2019 31 December 2018 Raw materials Work in process Finished goods 771 298 350 927 383 384 859 504 501 1,419 (46) 1,694 (60) 1,864 (48) Impairment allowance 1,373 1,634 1,816 Product type “Slabs” is represented by semi-finished products of own production or purchased from third parties, which the Group plans to process further or sell to third parties without processing. Depending on the origin and usage plans, this type of product is distributed between “Raw materials”, “Work in process” and “Finished goods” categories as follows: As at As at As at 31 December 2020 31 December 2019 31 December 2018 Raw materials Work in process Finished goods 82 108 42 219 141 42 97 249 65 As at 31 December 2020, 2019 and 2018 inventories with a carrying value of $287, $460 and $472, respectively, served as collateral for certain borrowings (Note 11). Cost of raw materials and acquired semi-finished goods in cost of production for the years ended 31 December 2020, 2019 and 2018 amounted to $3,939, $4,835 and $5,521, respectively. Cost of fuel and energy resources in cost of production for the years ended 31 December 2020, 2019 and 2018 amounted to $540, $607 and $632, respectively. In November 2020 the Group has signed settlement agreement with the United States Government and will receive refund of paid steel tariffs and accrued interests, enacted by Department of Commerce under Section 232 of the USA Trade Expansion Act. Cost of sales for the year ended 31 December 2020 was reduced by $97. 19 Novolipetsk Steel Notes to the consolidated financial statements (millions of US dollars) 8 Property, plant and equipment Land and buildings improvements Machinery and equipment Construction in progress Land Buildings Vehicles Total 12,180 (6,631) 5,549 Cost at 1 January 2018 Accumulated depreciation and impairment Net book value at 1 January 2018 128 - 128 2,057 (783) 1,274 2,328 (1,442) 886 6,533 (4,218) 2,315 279 (188) 91 855 - 855 Additions Disposals Impairment - - - - (1) - - (1) - - (3) - - - - 731 (4) (4) 731 (9) (4) - Transfers 5 55 37 201 43 (341) Reclassification to intangible assets (Note 9) Depreciation charge - - - (47) (207) - (76) (147) - (424) (321) - (16) (17) (24) - (167) (24) (563) (882) Translation adjustment (23) Cost at 31 December 2018 110 - 110 22 1,774 (700) 1,074 42 1,956 (1,257) 699 5,701 (3,933) 1,768 13 266 (165) 101 - 1,050 (4) 1,046 - 10,857 (6,059) 4,798 79 Accumulated depreciation and impairment Net book value at 31 December 2018 Adjustment on adoption of IFRS 16 Net book value at 1 January 2019 2 701 132 1,116 1,781 101 1,046 4,877 Additions Disposals Impairment - (3) - 6 - - - (2) - 3 (4) (4) - (1) - 1,158 - 1,167 (10) (8) (4) Transfers Depreciation charge Translation adjustment 1 - 13 53 (56) 128 88 (73) 85 657 (391) 179 75 (25) 16 (874) - 137 - (545) 558 Cost at 31 December 2019 Accumulated depreciation and impairment Net book value at 31 December 2019 143 - 143 2,081 (834) 1,247 2,263 (1,464) 799 6,880 (4,659) 2,221 370 (204) 166 1,472 (9) 1,463 13,209 (7,170) 6,039 20 Novolipetsk Steel Notes to the consolidated financial statements (millions of US dollars) 8 Property, plant and equipment (continued) Land and buildings improvements Machinery and equipment Construction in progress Land Buildings Vehicles Total Including: Right-of-use assets Cost at 31 December 2019 Accumulated depreciation Net book value at 31 December 2019 19 - 19 53 (8) 45 1 - 1 16 (3) 13 1 - 1 - - - 90 (11) 79 Additions Disposals Impairment 5 - - 1 (1) - - - - 1 (14) - - (1) - 1,087 (3) 1,094 (19) (5) (5) Transfers Depreciation charge Translation adjustment - - 62 (57) (189) 302 (84) (138) 642 (388) (302) 48 (28) (29) (1,054) - (215) - (557) (893) (20) Total property, plant and equipment Cost at 31 December 2020 Accumulated depreciation and impairment Net book value at 31 December 2020 128 - 128 1,826 (763) 1,063 2,168 (1,289) 879 6,487 (4,327) 2,160 351 (195) 156 1,285 (12) 1,273 12,245 (6,586) 5,659 Including: Right-of-use assets Cost at 31 December 2020 Accumulated depreciation Net book value at 31 December 2020 19 - 19 47 (13) 34 1 - 1 18 (7) 11 1 - 1 - - - 86 (20) 66 The amount of borrowing costs capitalised is $32, $59 and $36 for the years ended 31 December 2020, 2019 and 2018, respectively. The capitalisation rate was 3.2%, 5.5% and 6.5% in 2020, 2019 and 2018, respectively. 21 Novolipetsk Steel Notes to the consolidated financial statements (millions of US dollars) 8 Property, plant and equipment (continued) The Group management made an analysis of impairment indicators of the Group’s assets as well as indicators of potential reversal of an impairment loss recognized in prior periods as at 30 September 2020. Against the background of the spread of coronavirus infection (COVID-19) heightened volatility accompanied by the sales volumes and prices decline on the market of certain finished products and raw materials triggered impairment assessment of some of the Group’s cash generating units, which required the reassessment of the recoverable amounts using the income approach based primarily on Level 3 inputs as at 31 December 2020. Goodwill was also tested for impairment as of the same date. No indicators that an impairment loss recognized in prior periods may no longer exists or may have decreased have been identified. Testing for impairment in the comparative periods was also caused by similar factors and was conducted as of 31 December 2019 and 2018. For the purpose of the impairment test, the Group management used a forecast of cash flows for five years and normalised cash flows for a post-forecast period. The table below summarises CGUs and types of assets, subject to determination of the recoverable amount as of 31 December 2020 (for JSC NLMK-Ural and LLC NLMK-Metalware as of 30 June 2020), major assumptions and their sensitivity used in the impairment models. Sales price is estimated using an average annual growth rate, over the 5-year forecast period (31 December 2019: 5-year; 31 December 2018: 5-year) based on current industry trends and including long-term inflation forecasts for each territory. Sales volume is estimated using an average annual growth rate over the same forecast period based on past performance and management’s expectations of market development. Discount rate reflects specific risks relating to the relevant segments and the countries in which they operate. Sensitivity in the table below was determined as a percentage of changes of corresponding factors in forecast and post-forecast periods when recoverable values of assets (value in use) become equal to their carrying values (in respect of NLMK Belgium Holdings S.A. - carrying value prior to current year impairment loss). As of 30 June 2020 impairment testing showed that recoverable amount of investment (value in use) in NLMK Belgium Holdings S.A. before impairment recognised was below its carrying amount by $120. Recoverable amount for CGU NLMK has been determined as fair value less costs to sell. As a result of testing performed recoverable amount is higher than carrying amount and possible changes in assumptions do not lead to impairment recognition. Sensitivity, % of change Sales volume Average sale price, $ per Product types tonne (FCA) Discount rate, % Sales Price Discount rate CGU Asset type NLMK Belgium Holdings S.A.Investment 7.7% 9.8% 9.7% Flat products and plate Flat products 650 768 641 -0.4% -1.4% -0.7% -2.7% -5.6% -6.4% 0.5 p.p. 0.8 p.p. 1.5 p.p. NLMK Pennsylvania LLC NLMK Indiana LLC Property, plant and equipment Property, plant and equipment Goodwill Plate NLMK Indiana LLC JSC Altai-Koks 9.7% 14.1% Plate Coke, chemical products 641 179 -0.4% -57.0% -3.3% -47.9% 0.7 p.p. 70.1 p.p. Goodwill LLC VIZ-Steel Property, plant and equipment Goodwill Property, plant and equipment 13.9% Flat products 1,455 -40.0% -9.2% 14.8 p.p. LLC VIZ-Steel JSC NLMK-Ural 13.9% 13.6% Flat products Long-products and semi- 1,455 453 -38.5% -0.2% -8.8% -1.0% 13.4 p.p. 0.3 p.p. finished goods Metalware LLC NLMK-Metalware NLMK DanSteel A/S Property, plant and equipment Property, plant and equipment 13.4% 8.1% 615 687 -6.5% -2.5% -32.9% -7.4% 39.6 p.p. 3.7 p.p. Plate * Weighted average prices based on the forecast product mix, averaged for the period from 2021 to 2025. 22 Novolipetsk Steel Notes to the consolidated financial statements (millions of US dollars) 8 Property, plant and equipment (continued) The table below summarises CGUs and types of assets, subject to determination of the recoverable amount as of 31 December 2019, major assumptions and their sensitivity used in the impairment models. Sales price is estimated using an average annual growth rate, over the 5-year forecast period (31 December 2018: 5-year) based on current industry trends and including long-term inflation forecasts for each territory. Sales volume is estimated using an average annual growth rate over the same forecast period based on past performance and management’s expectations of market development. Discount rate reflects specific risks relating to the relevant segments and the countries in which they operate. Sensitivity in the table below was determined as a percentage of changes of corresponding factors in forecast and post-forecast periods when recoverable values of assets (value in use) become equal to their carrying values (in respect of NLMK Belgium Holdings S.A. - carrying value prior to current year impairment loss). As of 31 December 2019 impairment testing showed that recoverable amount of investment (value in use) in NLMK Belgium Holdings S.A. before impairment recognised was below its carrying amount by $31. Sensitivity, % of change Sales volume Average sale price, $ per Product types tonne (FCA) Discount rate, % Sales Price Discount rate CGU Asset type NLMK Belgium Holdings S.A.Investment 7.5% 9.8% 9.7% Flat products and plate Flat products 622 737 582 0.3% -4.0% -0.5% 2.3% -31.4% -6.1% -0.3 p.p. 6.4 p.p. 1.3 p.p. NLMK Pennsylvania LLC NLMK Indiana LLC Property, plant and equipment Property, plant and equipment Goodwill Property, plant and equipment Goodwill Plate NLMK Indiana LLC JSC Altai-Koks 9.7% 12.9% Plate Coke, chemical products Coke, chemical products Flat products 582 147 -0.4% -47.2% -4.4% -34.0% 0.9 p.p. 36.6 p.p. JSC Altai-Koks LLC VIZ-Steel 12.9% 13.8% 147 -38.6% -4.2% -27.8% -22.3% 32.6 p.p. 5.8 p.p. Property, plant and equipment Goodwill 1,286 LLC VIZ-Steel 13.8% 13.6% Flat products Long-products and semi- 1,286 421 -3.5% -0.6% -18.7% -3.0% 4.4 p.p. 0.5 p.p. LLC NLMK-Kaluga Property, plant and equipment finished goods Plate NLMK DanSteel A/S Property, plant and equipment 8.1% 649 -0.1% -0.3% 0.1 p.p. * Weighted average prices based on the forecast product mix, averaged for the period from 2020 to 2024. 23 Novolipetsk Steel Notes to the consolidated financial statements (millions of US dollars) 8 Property, plant and equipment (continued) The table below summarises CGUs and types of assets, subject to determination of the recoverable amount as of 31 December 2018, major assumptions and their sensitivity used in the impairment models. Prices for steel products in this estimate were determined based on forecasts of investment banks’ analysts. Sensitivity in the table below was determined as a percent of changes of corresponding factors in forecast and post-forecast periods when recoverable values of assets (value in use) become equal to their carrying values (in respect of NLMK Belgium Holdings S.A. - carrying value prior to current year impairment loss). As of 31 December 2018 impairment testing showed that recoverable amount of investment (value in use) in NLMK Belgium Holdings S.A. before impairment recognised was below its carrying amount by $87. Sensitivity, % of change Sales volume Average sale price, $ per Product types tonne (FCA) Discount rate, % Sales Price Discount rate CGU Asset type NLMK Belgium Holdings S.A.Investment 7.6% 13.0% 13.0% 7.8% Flat products and plate Coke, chemical products Coke, chemical products Plate 642 187 187 674 0.7% -15.4% -2.4% -0.7% 6.9% -10.6% -1.6% -3.6% -0.8 p.p. 13.5 p.p. 1.5 p.p. 0.8 p.p. JSC Altai-Koks Property, plant and equipment Goodwill JSC Altai-Koks NLMK DanSteel A/S Property, plant and equipment * Weighted average prices based on the forecast product mix, averaged for the period from 2019 to 2023. 24 Novolipetsk Steel Notes to the consolidated financial statements (millions of US dollars) 9 Intangible assets Industrial intellectual property Beneficial lease interest Goodwill Mineral rights Total Cost at 1 January 2018 Accumulated amortisation and impairment Net book value at 1 January 2018 279 (14) 265 351 (234) 117 53 (14) 39 9 (1) 8 692 (263) 429 Additions - 1 18 - 19 Reclassification from property, plant and equipment (Note 8) Amortisation charge - - 24 (4) (21) - (10) (7) - - - 24 (14) (69) Translation adjustment (41) Cost at 31 December 2018 Accumulated amortisation and impairment Net book value at 31 December 2018 Adjustment on adoption of IFRS 16 238 (14) 224 - 296 (179) 117 - 57 (17) 40 9 (1) 8 600 (211) 389 - (8) - (8) Net book value at 1 January 2019 224 117 40 381 Additions Impairment Amortisation charge Translation adjustment - - - 1 (22) (3) 24 - (14) 5 - - - - 25 (22) (17) 43 24 14 Cost at 31 December 2019 Accumulated amortisation and impairment Net book value at 31 December 2019 262 (14) 248 311 (204) 107 86 (31) 55 - - - 659 (249) 410 Additions Disposals Amortisation charge Translation adjustment - - - 1 - (3) (16) 44 (3) (14) (12) - - - - 45 (3) (17) (64) (36) Cost at 31 December 2020 Accumulated amortisation Net book value at 226 (14) 263 (174) 100 (30) - - 589 (218) 31 December 2020 212 89 70 - 371 Including: Right-of-use assets Cost at 31 December 2020 Accumulated amortisation Net book value at - - - - 17 (2) - - 17 (2) 31 December 2020 - - 15 - 15 25 Novolipetsk Steel Notes to the consolidated financial statements (millions of US dollars) 9 Intangible assets (continued) Mineral rights include a license for iron ore and non-metallic minerals mining of Stoilensky iron-ore deposit in Belgorod Region expiring in 2040, with the carrying value of $59, $73 and $68 as at 31 December 2020, 2019 and 2018, respectively. In October 2019, the Group decided to stop coal exploration works in the Usinsky mine field area No. 3 and returned an exploration and extraction license expiring in 2031 to the government. As a result, impairment charge of $22 was recognized which equals the full amount of the exploration asset carrying value. Goodwill arising on acquisitions was allocated to the appropriate business segments in which the respective acquisitions took place. Allocation of net book value of goodwill to each segment is as follows: As at As at As at 31 December 2020 31 December 2019 31 December 2018 Russian flat products NLMK USA Russian long products Mining 137 21 3 163 21 3 146 21 3 51 61 54 212 248 224 Goodwill impairment testing The Group tested goodwill for impairment as at 31 December 2020, 2019 and 2018. For the purpose of annual impairment testing of goodwill related to CGU JSC Stoilensky GOK as at 31 December 2020, management decided to use the previous detailed calculation of this СGU recoverable amount as there were no significant changes in the underlying business. The recoverable amount has been determined as value in use of the respective asset. For the purpose of this impairment testing (excluding CGU JSC Stoilensky GOK), the Group used the same assumptions and estimates as for other assets, as disclosed in Note 8. Impairment testing showed no impairment of goodwill as at 31 December 2020, 2019 and 2018. 10 Trade and other accounts payable As at As at As at 31 December 2020 31 December 2019 31 December 2018 Financial liabilities Trade accounts payable 429 558 584 Accounts payable for purchases of property, plant and equipment Other accounts payable 159 27 184 29 121 26 615 771 731 Non-financial liabilities Accounts payable and accrued liabilities to employees Advances received Taxes payable other than income tax 144 175 131 149 103 101 177 120 94 450 353 391 1,065 1,124 1,122 The carrying amounts of trade and other accounts payable approximate their fair values. In 2020 and 2019 the Group recognised revenue equal to the amount of contracts liability included into advances received as at the beginning of the year. 26 Novolipetsk Steel Notes to the consolidated financial statements (millions of US dollars) 11 Borrowings As at As at As at 31 December 2020 31 December 2019 31 December 2018 Rates Bonds Currency Maturity From 4.00% to 4.70% USD 2023-2026 1,709 1,065 1,709 784 1,354 562 Loans From EURIBOR+0.85% to EURIBOR+1.30% From LIBOR +1.20% to LIBOR +1.50% 0.94% 0.95% EUR 2021-2024 USD EUR EUR 2021 2022 2022 258 123 245 85 - - 159 - - Leases 2021-2089 86 78 - 3,486 2,656 2,075 Less: short-term loans and current maturities of long-term loans, bonds and leases (1,054) (468) (398) Long-term borrowings 2,432 2,188 1,677 * Rates and maturity as of 31 December 2020 The carrying amounts and fair value of long-term bonds are as follows: As at 31 December 2020 As at 31 December 2019 As at 31 December 2018 Carrying amount Fair value Carrying amount Fair value Carrying amount Fair value Bonds 1,709 1,864 1,709 1,823 1,209 1,159 The fair value of short-term borrowings equals their carrying amount. The fair values of long-term borrowings approximate their carrying amount. The fair values of bonds are based on market price and are within level 1 of the fair value hierarchy. The Group has complied with the financial and non-financial covenants of its borrowing facilities during the years ended 31 December 2020, 2019 and 2018. Bonds and bonds’ coupons as at 31 December 2020 were designated as hedging instrument with carrying amount and fair value of $1,287 and $1,386, respectively (Note 22). The long-term borrowings mature as follows: As at As at As at 31 December 2020 31 December 2019 31 December 2018 1-2 years 2-5 years Over 5 years 579 1,327 526 410 1,245 533 133 1,044 500 2,432 2,188 1,677 Collateral As at 31 December 2020, 2019 and 2018, the loan facilities were secured by inventories and accounts receivable with the total carrying value of $406, $593 and $645, respectively (Notes 6, 7). 27 Novolipetsk Steel Notes to the consolidated financial statements (millions of US dollars) 11 Borrowings (continued) Net debt reconciliation Short-term bank deposits Short-term borrowings Cash and cash equivalents Long-term borrowings Net debt (923) Balance at 1 January 2018 (380) (1,901) 301 1,057 Cash flows Interest accrued Foreign exchange difference Translation adjustment 55 (77) (19) 23 199 - (246) 271 840 - 72 (1,055) 12 39 (65) (131) 189 62 (71) (34) Balance at 31 December 2018 (398) (1,677) 1,179 5 (891) Cash flows Interest accrued Foreign exchange difference Recognition on adoption of IFRS 16 Leasing recognised 17 (81) 23 (8) - (436) - 184 (71) (15) (173) (456) 143 13 (17) - - 13 (732) (68) 96 (79) (15) (97) - (94) - - 84 Translation adjustment (21) Balance at 31 December 2019 (468) (2,188) 713 157 (1,786) Cash flows Interest accrued Foreign exchange difference Leasing recognised Other financial expenses Translation adjustment (424) (100) (42) (12) - (178) - (342) (17) (7) 129 (14) (487) (93) (320) (29) (7) - 59 - 7 5 - - (6) - (8) 300 (59) 227 Balance at 31 December 2020 (1,054) (2,432) 842 149 (2,495) 12 Shareholders’ equity (a) Shares As at 31 December 2020, 2019 and 2018, the Parent Company’s share capital consisted of 5,993,227,240 issued common shares, with a par value of 1 Russian ruble each. For each common share held, the stockholder has the right to one vote at the stockholders’ meetings. (b) Dividends Dividends are paid on common shares at the recommendation of the Board of Directors and approval at a General Shareholders Meeting, subject to certain limitations as determined by the Russian legislation. Profits available for distribution to the shareholders in respect of any reporting period are determined by reference to the statutory financial statements of the Parent Company. As at 31 December 2020, 2019 and 2018, the retained earnings of the Parent Company, available for distribution in accordance with the legislative requirements of the Russian Federation, amounted to $3,322, $4,671 and $4,689, converted into US dollars using the exchange rates at 31 December 2020, 2019 and 2018, respectively. According to the Group’s dividend policy, the Group pays dividends on a quarterly basis as follows: ▪ If Net Debt/EBITDA is below 1.0х, the payout amount shall be equivalent to or above 100% of free cash flow, based on the Company's IFRS Consolidated Financial Statements for the reporting period; ▪ If Net Debt/EBITDA is above 1.0х, the payout amount shall be equivalent to or above 50% of free cash flow, based on the Company's IFRS Consolidated Financial Statements for the reporting period. 28 Novolipetsk Steel Notes to the consolidated financial statements (millions of US dollars) 12 Shareholders’ equity (continued) Dividends, declared by the Parent Company and translated to US dollars at the historical rate as of the announcement date, are as in the table below. 2020 2019 2018 Declaration period Per share Total Total Total amount amount Per share amount Per share For the 4th quarter of previous year April For the 1st quarter of current year June For the 2nd quarter of current year September For the 3rd quarter of current year December 3.12 3.21 4.75 6.43 263 275 369 528 5.80 7.34 3.68 3.22 543 674 343 309 3.36 5.73 5.24 6.04 326 556 477 537 1,435 1,869 1,896 * Dividends per share are shown in Russian rubles. (c) Capital management The Group’s objectives when managing capital are to safeguard financial stability and a target return for the shareholders, as well as the reduction of cost of capital and optimisation of its structure. To achieve these objectives, the Group may revise its investment program, borrow new or repay existing loans, offer equity or debt instruments on capital markets. When managing capital, the Group uses the following indicators: ▪ ▪ ▪ the return on invested capital ratio, which is defined as operating profit before share of results of joint ventures and impairment of investments in joint ventures, impairment of non-current assets and loss on disposals of property, plant and equipment less income tax divided by capital employed for the last twelve months, should exceed cost of capital; the net debt to EBITDA ratio, which is defined as total debt less cash and cash equivalents and short-term bank deposits divided by operating profit before share of results of joint ventures and impairment of investments in joint ventures, impairment of non-current assets and loss on disposals of property, plant and equipment less depreciation and amortization for the last twelve months; free cash flow, which is defined as net cash provided by operating activities less net interest paid less capital expenditures, should be positive. There were no changes in the Group’s approach to capital management during the reporting period. 13 Earnings per share For the year ended For the year ended For the year ended 31 December 2020 31 December 2019 31 December 2018 Profit for the year attributable to the NLMK shareholders (millions of US dollars) 1,236 1,339 2,238 Weighted average number of shares 5,993,227,240 5,993,227,240 5,993,227,240 Basic and diluted earnings per share (US dollars) 0.2062 0.2234 0.3734 Basic and diluted net earnings per share is calculated by dividing profit for the year attributable to the NLMK shareholders by the weighted average number of common shares outstanding during the reporting period. NLMK does not have potentially dilutive financial instruments during the years ended 31 December 2020, 2019 and 2018. 29 Novolipetsk Steel Notes to the consolidated financial statements (millions of US dollars) 14 Revenue (a) Revenue by type For the year ended For the year ended For the year ended 31 December 2020 31 December 2019 31 December 2018 Revenue from sale of goods Flat products 4,819 2,684 990 197 69 5,804 2,628 1,231 295 6,416 3,477 1,268 307 - Pig iron, slabs and billets Long products and metalware Coke and other chemical products Iron ore and sintering ore Scrap 48 75 54 86 Other products 136 178 194 Total revenue from sale of goods 8,949 296 10,259 295 11,748 298 Revenue from transportation services 9,245 10,554 12,046 (b) Revenue by geographical area The allocation of total revenue by geographical area is based on the location of end customers who purchased the Group’s products. The Group’s total revenue from external customers by geographical area is as follows: For the year ended For the year ended For the year ended 31 December 2020 31 December 2019 31 December 2018 Russia 3,820 1,562 1,426 1,033 780 4,337 1,917 1,948 1,169 244 4,051 2,268 2,556 1,375 489 European Union North America Middle East, including Turkey Asia and Oceania CIS 249 405 405 Central and South America Other regions 210 165 285 249 557 345 9,245 10,554 12,046 The Group does not have customers with a share of more than 10% of the total revenue in 2020 and 2019, except NBH group companies in 2018 (Note 23). 30 Novolipetsk Steel Notes to the consolidated financial statements (millions of US dollars) 15 Labour costs The Group’s labour costs, including social security costs, which are included in the corresponding lines of the consolidated statement of profit or loss, were as indicated below. For the year ended For the year ended For the year ended 31 December 2020 31 December 2019 31 December 2018 Cost of sales General and administrative expenses Selling expenses 696 182 31 750 191 29 720 230 29 909 970 979 Remuneration of the key management personnel that comprises payments to members of the Management Board and the Board of Directors of the Parent Company, is recorded within general and administrative expenses and includes annual compensation and performance bonus contingent on the Group’s results for the reporting year. Total remuneration of the key management personnel, including social security costs amounted to $14, $17 and $38 in 2020, 2019 and 2018, respectively. As at 31 December 2020, 2019 and 2018 accrued liabilities to key management personnel related to the long-term incentive plan amounted to nil, nil and $25, respectively. 16 Taxes other than income tax Allocation of taxes other than income tax to the functional items of consolidated statement of profit or loss is indicated below. For the year ended For the year ended For the year ended 31 December 2020 31 December 2019 31 December 2018 Cost of sales General and administrative expenses Other operating expenses 59 4 1 57 3 6 76 4 8 64 66 88 17 Income tax Income tax charge comprises the following: For the year ended For the year ended For the year ended 31 December 2020 31 December 2019 31 December 2018 Current income tax expense Deferred income tax benefit/(expense) Income tax related to hedge reserve of cash flows (308) 6 (41) (379) (74) - (574) 88 - Total income tax expense (343) (453) (486) The corporate income tax rate applicable to the Group entities located in Russia, is predominantly 20%. The corporate income tax rate applicable to income of foreign subsidiaries ranges from 11% to 30%. 31 Novolipetsk Steel Notes to the consolidated financial statements (millions of US dollars) 17 Income tax (continued) Profit before income tax is reconciled to the income tax expense as follows: For the year ended For the year ended For the year ended 31 December 2020 31 December 2019 31 December 2018 Profit before income tax Income tax at rate 20% 1,580 (316) 1,794 (359) 2,729 (546) Change in income tax: - tax effect of non-deductible income/(expenses) - non-taxable translation adjustments - effect of different tax rates 3 4 22 (15) (1) 9 - 7 27 - unrecognized deferred tax asset on investments in joint ventures - unrecognised tax loss carry forward for the year - utilisation of previously unrecognised tax loss carry forward - effect of tax on intercompany dividends (59) (10) 13 - (26) (27) 1 (71) (8) 56 (1) (6) - impairment of previously recognised deferred tax assets - recognition of previously unrecognised tax loss carry forward - (34) (15) - - 70 Total income tax expense (343) (453) (486) The tax effects of temporary differences that give rise to the deferred tax assets and deferred tax liabilities, are presented below: As at 31 December 2020 Translation adjustment As at 1 January 2020 (Charged)/credited to profit or loss Deferred tax assets Trade and other accounts payable Trade and other accounts receivable Inventories Tax losses carried forward Borrowings 26 13 18 39 13 10 8 4 5 (6) 3 10 (3) (2) - - - - 21 11 13 45 10 - Other long-term liabilities 119 24 (5) 100 Deferred tax liabilities Property, plant and equipment Other intangible assets (348) (11) (14) (4) 62 1 (396) (8) (359) (240) (18) 6 63 58 (404) (304) Total deferred tax liability, net 32 Novolipetsk Steel Notes to the consolidated financial statements (millions of US dollars) 17 Income tax (continued) As at 31 December 2019 Translation adjustment As at 1 January 2019 (Charged)/credited to profit or loss Deferred tax assets Trade and other accounts payable Trade and other accounts receivable Inventories Tax losses carried forward Borrowings 21 11 13 45 10 (9) 1 (10) (42) 10 2 1 - - - 28 9 23 87 - 100 (50) 3 147 Deferred tax liabilities Property, plant and equipment Other intangible assets (396) (8) (27) 3 (38) (1) (331) (10) (404) (304) (24) (74) (39) (36) (341) (194) Total deferred tax liability, net As at 31 December 2018 Translation adjustment As at 1 January 2018 (Charged)/credited to profit or loss Deferred tax assets Trade and other accounts payable Trade and other accounts receivable Inventories 28 9 23 87 11 (2) 6 (4) (3) (6) 1 21 14 23 30 Tax losses carried forward 56 147 71 (12) 88 Deferred tax liabilities Property, plant and equipment Other intangible assets (331) (10) 20 (3) 59 4 (410) (11) (341) (194) 17 88 63 51 (421) (333) Total deferred tax liability, net The amount of tax loss carry-forwards that can be utilised each year is limited under the Group’s different tax jurisdictions. The Group regularly evaluates assumptions underlying its assessment of the realisability of its deferred tax assets and makes adjustments to the extent necessary. In assessing the probability that future taxable profit against which the Group can utilise the potential benefit of the tax loss carry forwards will be available, management considers the current situation and the future economic benefits outlined in specific business plans for each subsidiary. Deferred tax assets are recorded only to the extent that it is probable that the temporary difference will reverse in the future and there is sufficient future taxable profit available against which the deductions can be utilised. 33 Novolipetsk Steel Notes to the consolidated financial statements (millions of US dollars) 17 Income tax (continued) The table below summarises unused cumulative tax losses for which no deferred tax assets has been recognised, with a breakdown by the expiry dates. As at As at As at 31 December 2020 31 December 2019 31 December 2018 From 10 to 20 years No expiration 180 1,468 256 1,407 - 1,393 Total 1,648 1,663 1,393 The unused tax losses were incurred mostly by Group subsidiaries located in Europe and USA. The Group has not recorded a deferred tax liability in respect of temporary differences of $1,441, $1,417 and $1,728 for the years ended 31 December 2020, 2019 and 2018, respectively, associated with investments in subsidiaries and joint ventures as the Group is able to control the timing of the reversal of those temporary differences and does not intend to reverse them in the foreseeable future. In accordance with the statutory legislation, the Group’s entities in Russia (major entities, including NLMK) and USA were integrated in two separate consolidated groups of taxpayers for the purpose of assessment and payment of corporate income tax in line with the combined financial result of business operations. The Group’s entities that are not part of the consolidated groups of taxpayers assess their income taxes individually. As at 31 December 2020, 2019 and 2018, the Group analysed its tax positions for uncertainties affecting recognition and measurement thereof. Following the analysis, the Group believes that all deductible tax positions which form the basis for income tax returns of the Group companies, are recognised and measured in accordance with the applicable tax legislation. 18 Finance income and costs For the year ended For the year ended For the year ended 31 December 2020 31 December 2019 31 December 2018 Interest income on bank accounts and bank deposits Other finance income 7 11 13 5 12 9 Total finance income 18 18 21 Interest expense on borrowings Capitalised interest (100) 32 (81) 33 (77) 21 Other finance costs (22) (20) (14) Total finance costs (90) (68) (70) 34 Novolipetsk Steel Notes to the consolidated financial statements (millions of US dollars) 19 Foreign exchange differences For the year ended For the year ended For the year ended 31 December 2020 31 December 2019 31 December 2018 Foreign exchange gain/(loss) on cash and cash equivalents Foreign exchange gain/(loss) on financial investments Foreign exchange (loss)/gain on debt financing 59 74 (171) (2) (94) (139) 242 72 245 (250) (34) Foreign exchange loss on other assets and liabilities (15) (40) (6) 33 Starting from February 3, 2020 the Group adopted hedge accounting of cash flows in accordance with IFRS 9 “Financial instruments” (Note 22). 20 Operating leases Commitments for minimum lease payments in relation to non-cancellable operating leases are payable as follows: As at As at As at 31 December 2020 31 December 2019 31 December 2018 Within 1 year From 1 to 5 years After 5 years - - - - - - 15 50 228 Total commitments for minimum lease payments - - 293 In 2018 total rental expenses relating to operating leases were $17. From 1 January 2019, the Group has recognised right-of-use assets for these leases, except for short-term and low- value leases. 21 Segment information The Group management examines the Group’s performance both from a product and geographic perspective and has identified six reportable segments of its business: Mining, Russian flat products, Russian long products, NLMK USA, NLMK DanSteel and Plates Distribution Network, and Investments in NBH. Each of these segments represents a combination of subsidiaries (except for Investments in NBH – see Note 4), offers its own products, has a separate management team and is managed separately with relevant results reviewed on a monthly basis by the Group’s Management Board which is the Chief Operating Decision Maker as defined by IFRS 8 Segment Reporting. The Group management determines pricing for intersegmental sales, as if the sales were to third parties. The revenue from external parties is measured in the same way as in the consolidated statement of profit or loss. The Group management evaluates performance of each segment based on segment revenues, gross profit, operating profit before share of results of joint ventures and impairment of investments in joint ventures, impairment of non-current assets and loss on disposals of property, plant and equipment, profit for the year and amount of total assets and total liabilities. Elimination of intersegmental operations and balances represents elimination of intercompany dividends paid to Russian flat products segment by other segments and presented within “Profit for the year” line together with other intercompany elimination adjustments, including elimination of NBH’s liabilities to the Group companies (Note 23). NBH deconsolidation adjustments include elimination of NBH’s sales, recognition of the Group’s sales to NBH and elimination of unrealised profits (Notes 4, 23), elimination of NBH’s assets and liabilities and recognition of the investment in joint venture (Note 4), recognition of impairment and share of NBH’s loss, and other consolidation adjustments. 35 Novolipetsk Steel Notes to the consolidated financial statements (millions of US dollars) 21 Segment information (continued) Information on the segments’ profit or loss for the year ended 31 December 2020 and their assets and liabilities as of this date is as follows: NLMK DanSteel and Plates Elimination of intersegmental NBH deconsoli- Russian flat products Russian long products NLMK USA Distribution Investments in operations and dation adjust- ments Mining Network NBH balances Total 9,245 - (5,920) 3,325 2,071 (72) Revenue from external customers Intersegment revenue Cost of sales 92 1,307 (355) 1,044 957 5,600 1,188 (4,775) 2,013 1,076 (73) 1,171 368 (1,343) 196 49 1,086 - (1,007) 79 399 1 (359) 41 (16) (3) 1,325 - (2,864) 2,850 (14) 21 (428) (49) 430 (47) 119 13 49 (1,361) 13 (154) (13) Gross profit Operating profit/(loss) Net finance income/(costs) Income tax (expense)/benefit Profit/(loss) for the year Segment assets Segment liabilities Depreciation and amortization Capital expenditures 19 3 1 - - (188) 760 1,738 (264) (107) (202) (152) 1,260 6,957 (4,942) (354) (806) (7) 28 940 (398) (44) (38) 3 24 749 (150) (57) (49) (1) - 2 - (343) (23) 428 (315) (12) (44) (167) 1,366 (1,174) (61) (541) (1,153) 1,291 - (104) (1,163) 831 61 1,237 9,862 (5,121) (574) (274) - 274 (1,139) * Operating profit/(loss) before share of results of joint ventures and impairment of investments in joint ventures, impairment of non-current assets and loss on disposals of property, plant and equipment. 36 Novolipetsk Steel Notes to the consolidated financial statements (millions of US dollars) 21 Segment information (continued) Information on the segments’ profit or loss for the year ended 31 December 2019 and their assets and liabilities as of this date is as follows: NLMK DanSteel and Plates Elimination of intersegmental NBH deconsoli- Russian flat products Russian long products NLMK USA Distribution Investments in operations and dation adjust- ments Mining Network NBH balances Total 10,554 - (7,303) 3,251 2,002 (50) Revenue from external customers Intersegment revenue Cost of sales 77 1,238 (381) 934 864 15 5,897 1,430 (5,239) 2,088 1,160 (55) 1,428 329 (1,554) 203 39 1,715 - (1,728) (13) (95) (8) 490 1 (435) 56 (3) (2) 1,502 - (2,998) 2,938 (60) (7) (555) (60) 664 49 241 12 60 (1,568) (6) (197) (12) Gross profit/(loss) Operating profit/(loss) Net finance income/(costs) Income tax (expense)/benefit Profit/(loss) for the year Segment assets Segment liabilities Depreciation and amortization Capital expenditures - - (161) 661 2,120 (607) (113) (218) (239) 1,941 7,483 (4,567) (330) (854) (8) 15 1,160 (437) (50) (50) (31) (128) 840 (314) (58) (37) (1) (6) 371 (258) (11) (33) 4 (13) (1,097) (1,752) 2,028 - (4) (453) (207) 1,318 (1,161) (63) 162 (1,056) 779 63 1,341 10,484 (4,537) (562) (118) - 118 (1,192) * Operating profit/(loss) before share of results of joint ventures and impairment of investments in joint ventures, impairment of non-current assets and loss on disposals of property, plant and equipment. 37 Novolipetsk Steel Notes to the consolidated financial statements (millions of US dollars) 21 Segment information (continued) Information on the segments’ profit or loss for the year ended 31 December 2018 and their assets and liabilities as of this date is as follows: NLMK DanSteel and Plates Elimination of intersegmental NBH deconsoli- Russian flat products Russian long products NLMK USA Distribution Investments in operations and dation adjust- ments Mining Network NBH balances Total 12,046 - (7,680) 4,366 3,012 (49) Revenue from external customers Intersegment revenue Cost of sales 22 1,189 (381) 830 771 19 6,327 2,416 (5,672) 3,071 2,005 (49) 1,720 432 (1,779) 373 2,134 - (1,863) 271 513 1 (475) 39 (26) (4) 1,772 - (4,038) 3,856 (182) (59) - (442) (65) 446 (61) 126 65 (1,812) 25 (162) (12) Gross profit Operating profit/(loss)* Net finance income/(costs) Income tax (expense)/benefit Profit/(loss) for the year Segment assets Segment liabilities Depreciation and amortization Capital expenditures 161 (6) 196 (9) 12 (179) 706 2,081 (412) (117) (137) (355) 1,875 6,822 (4,262) (334) (520) (25) 155 1,150 (450) (60) 69 255 1,019 (350) (57) (20) (4) 19 8 (19) (37) (1,284) 846 (486) (34) 373 (251) (9) (242) 1,531 (1,357) (75) (435) (1,748) 2,126 - 2,243 9,944 (4,110) (577) 75 116 (36) (37) (116) - (750) * Operating profit/(loss) before share of results of joint ventures and impairment of investments in joint ventures, impairment of non-current assets and loss on disposals of property, plant and equipment. 38 Novolipetsk Steel Notes to the consolidated financial statements (millions of US dollars) 21 Segment information (continued) Geographically, all significant assets, production and administrative facilities of the Group are located in Russia, USA and Europe. The following is a summary of non-current assets other than financial instruments, investments in joint ventures and deferred tax assets by location: As at As at As at 31 December 2020 31 December 2019 31 December 2018 Russian Federation USA Denmark Other 5,503 287 220 25 5,975 298 169 18 4,731 310 145 12 6,035 6,460 5,198 22 Risks and uncertainties Operating environment of the Group (a) The Russian Federation displays certain characteristics of an emerging market. The legal, tax and regulatory frameworks continue to develop and are subject to varying interpretations (Note 24(f)). The Russian economy continues to be negatively impacted by ongoing political tension in the region and international sanctions against certain Russian companies and individuals. This environment may have a significant impact on the Group’s operations and financial position and the future effects of the current economic situation are difficult to predict therefore management’s current expectations and estimates could differ from actual results. Management is taking necessary measures to ensure sustainability of the Group’s operations. The major financial risks inherent to the Group’s operations are those related to market risk, credit risk and liquidity risk. The objectives of the financial risk management function are to establish risk limits, and then ensure that exposure to risks stays within these limits. (b) Market risk Market risk is the risk that the fair value of future cash flows of a financial instrument will fluctuate because of changes in market prices. Market risk comprises three types of risk: interest rate risk, foreign currency risk and commodity price risk. Interest rate risk Interest rate risk is the risk that the fair value of future cash flows of a financial instrument will fluctuate because of changes in market interest rates. The risk of changes in market interest rates relates primarily to the Group’s long-term borrowings with variable interest rates. To manage this risk, the Group continuously monitors interest rate movements. The Group reduces its exposure to this risk by having a balanced portfolio of fixed and variable rate borrowings. 39 Novolipetsk Steel Notes to the consolidated financial statements (millions of US dollars) 22 Risks and uncertainties (continued) The interest rate risk profile of the Group is follows: As at As at As at 31 December 2020 31 December 2019 31 December 2018 Fixed rate instruments Financial assets - cash and cash equivalents (Note 3) 842 198 713 292 1,179 104 - financial investments (Note 5) - trade and other accounts receivable less credit loss allowance (Note 6) 945 810 1,091 1,985 1,815 2,374 Financial liabilities - trade and other accounts payable (Note 10) - dividends payable (615) (109) (771) (318) (731) (525) - borrowings (Note 11) (2,163) (2,887) (1,787) (2,876) (1,354) (2,610) Variable rate instruments Financial liabilities - borrowings (Note 11) (1,323) (869) (721) (1,323) (869) (721) A change of 100 basis points in interest rates for variable rate instruments would not have significantly affected profit for the year and equity. Foreign currency risk Foreign currency risk is the risk that the fair value of future cash flows of a financial instrument will fluctuate because of changes in foreign exchange rates. The export-oriented companies of the Group are exposed to foreign currency risks. To minimise foreign currency risks, the export program is designed taking into account potential (forecast) major foreign currencies’ exchange fluctuations. The Group diversifies its revenues in different currencies. In its export contracts, the Group controls the balance of currency positions: payments in foreign currency are settled with export revenues in the same currency. Management of foreign currency risk related to changes in cash flows of future receipts in foreign currency The Group is exposed to foreign currency risk related to the revenue expected to be received nominated in foreign currencies, mainly in US dollars. To hedge the foreign currency risk exposure on revenue expected to be received in foreign currency the Group attracts borrowings in the same foreign currency. On February 3, 2020 the Group designated the portion of US dollars nominated borrowings as hedging instrument of the expected highly probable US dollars nominated revenue in accordance with IFRS 9 “Financial instruments”. On February 3, 2020 a portion of future monthly revenues expected to be received in US dollars over the period from February 2020 through May 2026 was designated as a hedged item. The Group's bonds and bonds’ coupons nominated in US dollars were designated as hedging instrument (Note 11). The nominal amounts of the hedged item and the hedging instrument are equal. To the extent that a change in the foreign currency rate impacts on the value of the hedging instrument, the effects are recognized in other comprehensive income or loss and further reclassified to profit or loss in the same period in which the hedged revenue is recognised. 40 Novolipetsk Steel Notes to the consolidated financial statements (millions of US dollars) 22 Risks and uncertainties (continued) The management strategy of foreign currency risk related to volatility of future cash inflows in foreign currency is to hedge revenue expected to be received in the amount of the net monetary position in US dollars. The amount of hedged revenue aligns the amount of payments on bonds and bonds’ coupons. The Group expects that the hedging relationships are effective since the future cash outflows on bonds and bonds’ coupons payments match the future cash inflows on the hedged portion of revenue. Ineffectiveness may occur as hedged items and hedge instruments have different maturity dates. Information on the amounts of currency differences on hedging instrument recognized in other comprehensive loss is as follows: For the year ended For the year ended For the year ended 31 December 2020 31 December 2019 31 December 2018 Hedge reserve of cash flows Hedging result (229) 24 - - - - Income tax related to hedge reserve of cash flows 41 - - (164) - - A schedule of the expected reclassification of the accumulated effects from the remeasurement of hedging instrument recognized in other comprehensive loss to profit or loss as of December 31, 2020 is as follows: 2020 2021 2022 2023 2024 2025 2026 Total (209) Reclassifications Income tax (29) 6 (29) 6 (30) 6 (55) 11 (41) 8 (20) 4 (5) 1 42 (23) (23) (24) (44) (33) (16) (4) (167) The net foreign currency position presented below is calculated in respect of major currencies by items of consolidated statement of financial position as the difference between financial assets and financial liabilities denominated in a currency other than the functional currency of each entity at 31 December 2020. Hong Kong US dollar Euro dollar Swiss franc Cash and cash equivalents Trade and other accounts receivable Financial investments Trade and other accounts payable Borrowings 409 7 139 401 139 112 - - - - - - - 50 - - - - (49) (1,709) 1,287 (345) (1,433) - Cash flow hedge Net foreign currency position (55) (1,099) 162 - 41 Novolipetsk Steel Notes to the consolidated financial statements (millions of US dollars) 22 Risks and uncertainties (continued) The net foreign currency position presented below is calculated in respect of major currencies by items of consolidated statement of financial position as the difference between financial assets and financial liabilities denominated in a currency other than the functional currency of each entity at 31 December 2019. Hong Kong US dollar Euro dollar Swiss franc Cash and cash equivalents Trade and other accounts receivable Financial investments 115 4 - 304 349 133 1 - 154 1 - - Trade and other accounts payable Borrowings (82) (1,709) (324) (784) - - - - Net foreign currency position (1,672) (322) 155 1 The net foreign currency position presented below is calculated in respect of major currencies by items of consolidated statement of financial position as the difference between financial assets and financial liabilities denominated in a currency other than the functional currency of each entity at 31 December 2018. Hong Kong US dollar Euro dollar Swiss franc Cash and cash equivalents Trade and other accounts receivable Financial investments 84 1 - 480 536 99 309 1 - 24 - - Trade and other accounts payable Borrowings (56) (1,355) (186) (562) - - - - Net foreign currency position (1,326) 367 310 24 Sensitivity analysis Sensitivity is calculated by multiplying a net foreign currency position of a corresponding currency by percentage of currency rates changes. A 25 percent strengthening of the following currencies against the functional currency as at 31 December 2020, 2019 and 2018 would have increased/(decreased) equity by the amounts shown below, however effect on profit for the year would be different, and would amount to $230 loss, $376 loss and $29 loss, respectively, due to foreign exchange effects from intercompany operations (Note 19) and applying of hedge accounting. As at As at As at 31 December 2020 31 December 2019 31 December 2018 US dollar Euro Hong Kong dollar Swiss franc (336) (275) 41 (418) (81) 39 (332) 92 78 6 - - A 25 percent weakening of these currencies against the functional currency as at 31 December 2020, 2019 and 2018 would have had an equal but opposite effect to the amounts shown above, provided all other variables remain constant. Income tax was not recalculated on the possible reasonable change in exchange rates for the purpose of this sensitivity analysis. 42 Novolipetsk Steel Notes to the consolidated financial statements (millions of US dollars) 22 Risks and uncertainties (continued) Commodity price risk Commodity price risk is the risk arising from possible changes in price of raw materials and metal products, and their impact on the Group’s future performance and the Group’s operational results. The Group minimises its risks related to metal prices by having a wide range of geographical zones for sales, which allows the Group to respond quickly to negative changes in the situation on its existing markets on the basis of an analysis of the existing and prospective sales markets. One of the commodity price risk management instruments is vertical integration. A high degree of vertical integration allows cost control and effective management of the entire process of production: from mining of raw materials and generation of electric and heat energy to production, processing and distribution of metal products. To mitigate the corresponding risks the Group also uses formula pricing tied to price indices for steel products when contracting raw and auxiliary materials. (c) Credit risk Credit risk is the risk that a counterparty will not meet its obligations under a financial instrument or customer contract, leading to a financial loss for the Group. The Group is exposed to credit risk from its operating activities (primarily for outstanding receivables from customers) and from its financing activities, including deposits with banks and financial institutions, and other financial instruments. Customer credit risk is managed by each business unit subject to the Group’s established policy, procedures and control relating to customer credit risk management. The Group controls the levels of credit risk it undertakes by assessing the degree of risk for each counterparty or groups of parties. In order to minimise credit risk, management developed and maintains the Group’s credit risk grading to categorise exposures according to their degree of risk of default. A default on a financial asset is when the counterparty fails to make contractual payments within 30 days of when they fall due. The Group’s credit risk grading framework comprises six categories: • • • • • • AAA – investments grade which correspond to international agencies ratings from AAA till BB+; A – low risk non-investments grade which correspond to international agencies ratings BB and BB-; B – moderate risk non-investments grade which correspond to international agencies ratings B+ and B; C – high risk non-investments grade which correspond to international agencies rating B-; D – critical risk non-investments grade which correspond to international agencies ratings from CCC till D; NR – not rated category used for related parties or secured debts. The credit rating information is based on a range of data that is determined to be predictive of the risk of default and applying experienced credit judgement. The nature of the exposure and type of borrower are taken into account in the analysis. Credit risk grades are defined using qualitative and quantitative factors that are indicative of risk of default. The credit risk grades are designed and calibrated to reflect the risk of default as credit risk deteriorates. As the credit risk increases the difference in risk of default between grades changes. Each exposure is allocated to a credit risk grade at initial recognition, based on the available information about the counterparty. All exposures are monitored and the credit risk grade is updated to reflect current information. The monitoring procedures followed are both general and tailored to the type of exposure. The following data are typically used to monitor the Group’s exposures: • • • • Payment report, including payment ratios and ageing analysis; Extent of utilisation of granted limit; Changes in business, financial and economic conditions; Credit rating information supplied by external rating agencies. 43 Novolipetsk Steel Notes to the consolidated financial statements (millions of US dollars) 22 Risks and uncertainties (continued) The Group monitors all financial assets, loans issued and financial guarantee contracts that are subject to the impairment requirements to assess whether there has been a significant increase in credit risk since initial recognition. If there has been a significant increase in credit risk the Group will measure the loss allowance based on lifetime rather than 12-month estimated credit loss. In assessing whether the credit risk on a financial instrument has increased significantly since initial recognition, the Group compares the risk of a default occurring on the financial instrument at the reporting date based on the remaining maturity of the instrument with the risk of a default occurring that was anticipated for the remaining maturity at the current reporting date when the financial instrument was first recognised. In making this assessment, the Group considers both quantitative and qualitative information that is reasonable and supportable, including historical experience and forward-looking information that is available without undue cost or effort, based on the Group’s historical experience and expert credit assessment. The Group analyses all data collected using statistical models and estimates the remaining lifetime probability of default exposures and how these are expected to change over time. The factors taken into account in this process include macro-economic data such as GDP growth, unemployment and interest rates. Multiple economic scenarios form the basis of determining the probability of default at initial recognition and at subsequent reporting dates. Different economic scenarios will lead to a different probability of default. It is the weighting of these different scenarios that forms the basis of a weighted average probability of default that is used to determine whether credit risk has significantly increased. Irrespective of the outcome of the above assessment, the Group presumes that the credit risk on a financial asset has increased significantly since initial recognition when contractual payments are more than 30 days past due unless the Group has reasonable and supportable information that demonstrates otherwise. The Group has monitoring procedures in place to make sure that the criteria used to identify significant increases in credit are effective, meaning that significant increase in credit risk is identified before the exposure is defaulted or when the asset becomes 30 days past due. The Group performs periodic back-testing of its ratings to consider whether the drivers of credit risk that led to default were accurately reflected in the rating in a timely manner. The Group uses forward-looking information that is available without undue cost or effort in its assessment of significant increase of credit risk as well as in its measurement of expected credit loss. The Group employs experts who use external and internal information to generate a ‘base case’ scenario of future forecast of relevant economic variables along with a representative range of other possible forecast scenarios. The base case scenario is the most likely outcome. The external information used includes economic data and forecasts published by governmental bodies and monetary authorities. The Group applies probabilities to the forecast scenarios identified and calculate probability-weighted expected credit loss by running each scenario through the relevant expected credit loss model and multiplying it by the appropriate scenario weighting. The Group has not made changes in the estimation techniques or significant assumptions made during the reporting period. The Group holds collateral to mitigate credit risk associated with trade accounts receivable by reducing expected credit loss in case of default. The main types of collateral are bank coverage and credit insurance. There was no change in the Group’s collateral policy during the year. Predicted relationships between the key indicators and default and loss rates on various portfolios of financial assets have been developed based on analysing historical data over the past 3 years. The measurement of expected credit loss is based on probability weighted average credit loss. As a result, the measurement of the loss allowance should be the same regardless of whether it is measured on an individual basis or a collective basis. In relation to the assessment of whether there has been a significant increase in credit risk it can be necessary to perform the assessment on a collective basis. 44 Novolipetsk Steel Notes to the consolidated financial statements (millions of US dollars) 22 Risks and uncertainties (continued) The Group’s maximum exposure to credit risk by class of assets reflected in the carrying amounts of financial assets on the consolidated statement of financial position is as follows: As at As at As at 31 December 2020 31 December 2019 31 December 2018 Cash and cash equivalents (Note 3) Trade and other accounts receivable (Note 6) Financial investments (Note 5) 842 945 198 713 810 292 1,179 1,091 104 Total on-balance sheet exposure 1,985 283 1,815 331 2,374 309 Financial guarantees issued (Note 23(d)) 2,268 2,146 2,683 Credit risk related to investment in the charter capital of NBH is disclosed in Note 4. Analysis of trade accounts receivable, net of credit loss allowance, by credit quality, based on internal credit ratings is as follows: As at As at As at 31 December 2020 31 December 2019 31 December 2018 AAA A B C 23 80 89 51 12 28 53 49 39 1 19 25 41 18 2 D NR, including: - NBH group companies - Credit insurance (AA international agencies’ credit ratings) 297 169 249 254 411 284 - Bank coverage (A- and above international agencies’ credit ratings) - Not covered 72 27 55 72 202 76 820 800 1,078 Analysis by credit quality, based on international agencies’ credit rating, of bank balances and bank deposits is as follows: As at As at As at 31 December 2020 31 December 2019 31 December 2018 Bank balances and term deposits AAA-BBB BB-B 835 5 2 706 5 2 1,173 4 2 Unrated and cash on hand 842 713 1,179 Short-term and long-term bank deposits AAA-BBB BB-B 148 2 157 - 5 - 150 157 5 45 Novolipetsk Steel Notes to the consolidated financial statements (millions of US dollars) 22 As at 31 December 2020, ageing of trade and other receivables is as follows: Trade and other receivables Risks and uncertainties (continued) Credit loss allowance Gross amount Net of allowance Not past due 919 (14) 905 Past due, including: - up to 1 month - from 1 to 3 months - from 3 to 12 months - over 12 months 34 3 4 - - 34 3 2 (2) (20) 21 1 Total 981 (36) 945 As at 31 December 2019, ageing of trade and other receivables is as follows: Trade and other receivables Credit loss Gross amount Net of allowance allowance Not past due 773 (15) 758 Past due, including: - up to 1 month - from 1 to 3 months - from 3 to 12 months - over 12 months 42 6 5 - - 42 6 4 (1) (25) 25 - Total 851 (41) 810 As at 31 December 2018, ageing of trade and other receivables is as follows: Trade and other receivables Credit loss Gross amount Net of allowance allowance Not past due 995 (10) 985 Past due, including: - up to 1 month - from 1 to 3 months - from 3 to 12 months - over 12 months 93 6 8 - - 93 6 6 (2) (26) 27 1 Total 1,129 (38) 1,091 46 Novolipetsk Steel Notes to the consolidated financial statements (millions of US dollars) 22 Risks and uncertainties (continued) Liquidity risk (d) Liquidity risk is the risk that an entity will encounter difficulty in meeting obligations associated with financial liabilities. The Group is exposed to daily calls on its available cash resources. The Group monitors its risk to a shortage of funds using a regular cash flow forecast. The Group’s objective is to maintain a balance between continuity of funding and flexibility through the use of bank overdrafts, bank loans, debentures, finance leases. To provide for sufficient cash balances required for settlement of its obligations in time the Group uses detailed budgeting and cash flow forecasting instruments. The table below analyses the Group’s short-term and long-term borrowings and leases by their remaining corresponding contractual maturity. The amounts disclosed in the maturity table are the undiscounted cash outflows. As at As at As at 31 December 2020 31 December 2019 31 December 2018 Less than 1 year From 1 to 2 years From 2 to 5 years Over 5 years 1,134 662 1,464 672 545 491 1,432 708 296 193 1,342 520 Total borrowings 3,932 3,176 2,351 Liquidity risk related to investment in the charter capital of NBH and financial guarantees issued, is disclosed in Notes 4 and 23(d), respectively. As at 31 December 2020, 2019 and 2018, the Group does not have significant trade and other accounts payable with maturity over one year and its carrying amount approximates its fair value. (e) Insurance To minimize risks the Group concludes insurance policies which cover property damages and business interruptions, construction and erection all risks, freightage, auto insurance and commercial (trade) credits. In respect of legislation requirements, the Group purchases compulsory motor third party liability insurance, insurance of civil liability of organizations operating hazardous facilities. The Group also buys civil liability insurance of the members of self-regulatory organizations, directors and officers liability insurance, voluntary health insurance and accident insurance for employees of the Group. 23 Related party transactions Parties are considered to be related if one party has the ability to control the other party, is under common control, or can exercise significant influence or joint control over the other party in making financial or operational decisions as defined by IAS 24, Related Party Disclosures. In considering each possible related party relationship, attention is directed to the substance of the relationship, not merely the legal form. The Group carries out operations with related parties on an arm’s length basis. 47 Novolipetsk Steel Notes to the consolidated financial statements (millions of US dollars) 23 Related party transactions (continued) (a) Sales to and purchases from related parties For the year ended For the year ended For the year ended 31 December 2020 31 December 2019 31 December 2018 Sales NBH group companies 897 947 1,330 Companies of Freight One Group and other transport companies under the common control of beneficial owner Other related parties 2 4 2 6 2 1 Purchases Companies of Freight One Group and other transport companies under the common control of beneficial owner NBH group companies Other related parties 376 49 26 384 60 18 410 65 5 NBH group companies together are the major customer of the Group. Sales to NBH group are performed by the Russian flat products segment and represent 9.7%, 9.0% and 11.0% of the total sales of the Group for the years ended 31 December 2020, 2019 and 2018, respectively. (b) Accounts receivable from and accounts payable to related parties As at As at As at 31 December 2020 31 December 2019 31 December 2018 Accounts receivable and advances given NBH group companies Companies of Freight One Group and other transport companies under the common control of beneficial owner 298 32 249 26 412 32 Accounts payable NBH group companies Companies of Freight One Group and other transport companies under the common control of beneficial owner 22 11 28 5 31 6 (c) Financial transactions As at 31 December 2020, 2019 and 2018 loans issued to NBH group companies amounted to $47, $133 and $99 and maturing 31 December 2021, 31 December 2020 and 31 December 2020, respectively (Note 5). When issuing loans to the foreign companies of the Group and joint ventures, interest rate is determined using information on similar external deals subject to the company’s internal credit rating. (d) Financial guarantees issued As at 31 December 2020, 2019 and 2018, guarantees issued by the Group for borrowings received by NBH group companies amounted to $283, $331 and $309, respectively, which is the maximum potential amount of future payments, payable on demand of the guarantee. No amount has been accrued in these consolidated financial statements for the Group’s obligation under these guarantees as the Group assesses the probability of cash outflows related to these guarantees, as low. 48 Novolipetsk Steel Notes to the consolidated financial statements (millions of US dollars) 23 Related party transactions (continued) The maturity of the guaranteed obligations is as follows: As at As at As at 31 December 2020 31 December 2019 31 December 2018 Less than 1 year From 1 to 2 years Over 2 years 107 127 49 130 - 201 57 - 252 283 331 309 (e) Investments transactions In September 2018, the Group completed the sale of 2% stake in share capital of NBH to Tubes de Haren et Nimy S.A., a subsidiary of NBH, for a cash consideration of $5, realising a loss of $2 upon the decrease of carrying value of the investment of $7. As a result of this transaction, direct ownership of the Group in the share capital of NBH decreased to 49.0%. 24 Commitments and contingencies Anti-dumping investigations (a) The Group’s export trading activities are subject from time to time to compliance reviews by the regulatory authorities in the importers’ jurisdictions. The Group’s export sales prices were considered by local governments within several anti-dumping investigation frameworks. The Group takes steps to address negative effects of the current and potential anti-dumping investigations and participates in the settlement efforts coordinated through the Russian authorities. No provision arising from any possible agreements and decisions as a result of anti-dumping investigations has been made in the consolidated financial statements. (b) Litigation The Group, in the ordinary course of business, is the subject of, or party to, various pending or threatened legal actions. The Group management believes that any liability resulting from these legal actions will not significantly affect its financial position or results of operations, and no amount has been accrued in the consolidated financial statements. (c) Environmental matters The enforcement of environmental regulation in the Russian Federation is evolving and the enforcement posture of government authorities is continually being reconsidered. The Group periodically evaluates its obligations under environmental regulations. As obligations are determined, they are recognised in financial statements immediately. Potential liabilities, which might arise as a result of future changes in existing regulations, civil litigation or legislation, cannot be reasonably estimated. In the current enforcement climate under existing environmental legislation, significant liabilities for management believes that the Group has met the Government’s federal and regional requirements concerning environmental matters, therefore, there are no environmental damage and remediation. 49 Novolipetsk Steel Notes to the consolidated financial statements (millions of US dollars) 24 Commitments and contingencies (continued) Capital commitments (d) Management estimates the outstanding agreements in connection with equipment supply and construction works amounted to $881, $1,157 and $714 as at 31 December 2020, 2019 and 2018, respectively. (e) Social commitments The Group makes contributions to mandatory and voluntary social programs. The Group’s social contributions, as well as local social programs, benefit the community at large and are not normally restricted to the Group’s employees. The Group has transferred certain social operations and assets to local authorities, however, the Group management expects that the Group will continue to fund certain social programs for the foreseeable future. These costs are recorded in the period they are incurred. (f) Tax contingencies Management believes that the tax policy of the Group complies with the legislation of the Russian Federation on taxes and related fees. At the same time, the legislation on taxes and related fees in the Russian Federation is characterised by dynamic development, as well as the possibility of wide discretion by the tax administration on many issues of taxation, which can lead to different interpretations of individual legal norms by taxpayers and regulatory authorities. Therefore, the risk of expenses cannot be excluded if the tax policy applied by the Group is contested in any part. As a general rule, risk may arise in respect of three calendar years preceding the year in which the decision to conduct the review is made. The amount and probability of risk cannot be estimated with a sufficient degree of reliability, however, they may turn out to be significant from the point of view of the financial situation and/or economic activity of the Group as a whole. (g) Major terms of loan agreements Certain of the loan agreements contain covenants that impose restrictions on the purposes for which the loans may be utilised, covenants with respect to disposal of assets, incurrence of additional liabilities, issuance of loans or guarantees, obligations in respect of any future reorganisations procedures or bankruptcy of the borrowers, and also require that the borrowers maintain pledged assets to their current value and conditions. In addition, these agreements contain covenants with respect to compliance with certain financial ratios, clauses in relation to performance of the borrowers, including cross-default provisions, as well as to legal claims in excess of certain amount, where reasonable expectations of a negative outcome exist, and covenants triggered by any failure of the borrower to fulfill contractual obligations. The Group companies were in compliance with all debt covenants as at 31 December 2020, 2019 and 2018. (h) Assessment of the coronavirus impact on the Group In 2020, the COVID-19 pandemic had significant impact on business activity, that initially led to weakening of demand for steel in traditional sales markets and a temporary drop in steel product prices which however started to recover gradually in second half 2020. In order to keep capacity utilization rates high the Group made changes to regional sales structure and diversified product mix. Production and supply chains of the Group were not significantly impacted by the COVID-19 pandemic. At the date of issuing these consolidated financial statements the situation with the spread of coronavirus infection (COVID-19) is still evolving. The Group benefits from a strong financial position, with low leverage and significant liquidity. As at 31 December 2020 the Group has liquid resources of $991 comprising cash and cash equivalents as well as a committed and unutilised credit facilities amounting to $1,715 which significantly exceeds repayment of borrowings in 2021 disclosed in Note 22 (d). The Group management made an analysis of impairment indicators of the Group’s assets considering impact of macroeconomic situation and impairment testing for some of the Group cash generating units (Note 8). No significant increase of expected credit losses or cases of significant debtor defaults have been identified. Management closely monitors the development of the situation and takes necessary measures to mitigate negative effects. 50 Novolipetsk Steel Notes to the consolidated financial statements (millions of US dollars) 25 Significant accounting policies The principal accounting policies applied in the preparation of these consolidated financial statements are set out below. The Group from one reporting period to another has consistently applied these accounting policies. (a) Basis of consolidation Subsidiaries Subsidiaries are those entities that the Group controls because the Group has (a) power over the investees (that is, it can direct relevant activities of the investees that significantly affect their returns); (b) exposure, or rights, to variable returns from its involvement with the investees; and (c) the ability to use its power over the investees to affect the amount of investor returns. Subsidiaries are consolidated when the Group obtains control over an investee and terminates when the Group ceases to have control over the investee. Non-controlling interest is that part of the net results and of the equity of a subsidiary attributable to interests, which are not owned, directly or indirectly, by the Group. Non-controlling interest forms a separate component of the Parent Company’s equity. The acquisition method of accounting is used to account for the acquisition of subsidiaries other than those acquired from parties under common control. Identifiable assets acquired and liabilities and contingent liabilities assumed in a business combination are measured at their fair values at the acquisition date, irrespective of the extent of any non-controlling interest. The Group measures non-controlling interest that represents present ownership interest and entitles the holder to a proportionate share of net assets in the event of liquidation on a transaction-by-transaction basis, either at: (a) fair value, or (b) the non-controlling interest’s proportionate share of net assets of the acquiree. Goodwill is measured by deducting the net assets of an acquiree from the aggregate of: the consideration transferred for the acquiree, the amount of non-controlling interest in the acquiree, and the fair value of an interest in the acquiree held immediately before the acquisition date. Any negative amount (“negative goodwill”) is recognised in profit or loss, after management reassesses whether it identified all the assets acquired and all liabilities and contingent liabilities assumed, and reviews the appropriateness of their measurement. Consideration transferred for an acquiree is measured at the fair value of the assets given up, equity instruments issued and liabilities incurred or assumed, including the fair value of assets or liabilities from contingent consideration arrangements, but excludes acquisition-related costs such as fees for advisory, legal, valuation and similar professional services. Transaction costs related to an acquisition and incurred for issuing equity instruments are deducted from equity; transaction costs incurred for issuing debt as part of a business combination are deducted from the carrying amount of the debt and all other transaction costs associated with the acquisition are expensed. 51 Novolipetsk Steel Notes to the consolidated financial statements (millions of US dollars) 25 Significant accounting policies (continued) All intercompany transactions, balances and unrealised gains on transactions between the Group companies are eliminated. Unrealised losses are also eliminated, unless the cost cannot be recovered. The Parent Company and all of its subsidiaries use uniform accounting policies consistent with the Group’s policies. Joint ventures Joint ventures are entities over which the Group has joint control over financial or operating policies. Joint control is the contractually agreed sharing of control, which exists only when decisions about the relevant activities require the unanimous consent of the parties sharing control. Investments in joint ventures are initially recognised at cost (fair value of the consideration transferred). The Group uses the equity method of accounting to subsequent measurement for an investment in joint ventures. Dividends received from joint ventures reduce the carrying value of the investment in joint ventures. The Group’s share of profits or losses of joint ventures after acquisition is recorded in the consolidated statement of profit or loss for the year as share of financial result of joint ventures. The Group’s share in the change of other comprehensive income after the acquisition is recorded within other comprehensive income as a separate line item. All other changes in the Group’s share of the carrying amount of net assets of the joint ventures are recognised in profit or loss within the share of financial results of the joint ventures, or consolidated statement of changes in equity depending on the substance of the change. However, when the Group’s share of losses in a joint venture equals or exceeds its interest in the joint venture, including any other unsecured receivables, the Group does not recognise further losses, unless this is required by law or it has incurred obligations or made payments on behalf of the joint venture. Unrealised gains on transactions between the Group and its joint ventures are eliminated to the extent of the Group’s interest in these entities. Unrealised losses arising from transactions between the Group and its joint ventures are also eliminated unless the transaction provides evidence of an impairment of the transferred asset. In the consolidated statement of financial position, the Group’s share in the joint venture is presented at the carrying amount inclusive of goodwill at the acquisition date and the Group’s share of post-acquisition profits and losses net of impairment loss. In the consolidated statement of profit or loss the amount of impairment of investments in joint ventures is included in the line “Share of results of joint ventures and impairment of investments in joint ventures”. Disposals of subsidiaries and joint ventures When the Group ceases to have control or significant influence, any retained interest in the entity is re-measured to its fair value as at the date of ceasing control or significant influence, with the change in the carrying amount recognised in profit or loss. The fair value is the initial carrying amount for the purposes of subsequently accounting for the retained interest as a joint venture, or financial asset. In addition, any amounts previously recognised in other comprehensive income, in respect of that entity, are accounted for as if the Group had directly disposed of the related assets or liabilities. This may mean that amounts previously recognised in other comprehensive income are recycled to profit or loss. At the date when the Group’s control ceases, it de-recognises the assets and liabilities of the former subsidiary from the consolidated statement of financial position and recognises profit or loss connected with the loss of control attributable to the former controlling stake. If the ownership interest in a joint venture is reduced but joint control is retained, only a proportionate share of the amounts previously recognised in other comprehensive income are reclassified to profit or loss where appropriate. (b) Cash and cash equivalents Cash and cash equivalents include cash balances in hand, cash on current accounts with banks, bank deposits and other short-term highly liquid investments with original maturities of three months or less. 52 Novolipetsk Steel Notes to the consolidated financial statements (millions of US dollars) 25 (c) Significant accounting policies (continued) Value added tax (VAT) Output value added tax arising upon the sale of goods (performance of work, provision of services) is payable to the tax authorities on the earlier of: (a) collection of receivables from customers; or (b) delivery of goods (work, services) or property rights to customers. VAT is excluded from revenue. Input VAT on goods and services purchased (received) is generally recoverable against output VAT upon receipt of the VAT invoice. VAT related to sales / purchases and services provision / receipt payments to the budget which has not been settled with at the balance sheet date (deferred VAT) is recognised in the consolidated statement of financial position on a gross basis and disclosed separately within current assets and current liabilities. Where provision has been made for impairment of receivables, an impairment loss is recorded for the gross amount of the debt, including VAT. (d) Inventories Inventories are recorded at the lower of cost and net realisable value (the estimated selling price in the ordinary course of business, less the estimated cost of completion and selling expenses). Inventories include raw materials designated for use in the production process, finished goods, work in progress and goods for resale. Release to production or any other write-down of inventories is carried at the weighted average cost. The cost of finished goods and work in progress comprises raw materials, direct labour, other direct costs and related production overheads (based on normal operating capacity). Other costs are included in the cost of inventories only to the extent they were incurred to provide for the current location and condition of inventories. When inventories are sold, the carrying amount of those inventories shall be recognised as an expense in the period in which the related revenue is recognised. The amount of any write-down of inventories to net realisable value and all losses of inventories, including obsolete inventories written down, shall be recognised as an expense in the period in which the write-down or loss occurs. The amount of any reversal of any write-down of inventories, arising from an increase in net realisable value, shall be recognised as a reduction in the amount of inventories recognised as an expense in the period in which the reversal occurs. (e) Property, plant and equipment (PP&E) Measurement at recognition Property, plant and equipment are initially stated at cost (historical cost model). The PP&E cost includes: ▪ ▪ ▪ its purchase price, including import duties and non-refundable purchase taxes, after deducting trade discounts and rebates; costs directly attributable to bringing the asset to the location and condition necessary for it to be capable of operating in the manner intended by the relevant entity’s management; the initial estimate of the cost of subsequent dismantling and removal of a fixed asset, and restoring the site on which it was located, the obligation for which the relevant entity incurs either when the item is acquired or as a consequence of having used the item during a specific period for purposes other than to produce inventories during that period. The value of property, plant and equipment built using an entity’s own resources includes the cost of materials and labour, and the relevant portion of production overhead costs directly attributable to the construction of the PP&E. Borrowing costs directly attributable to the acquisition, construction or production of an asset which takes a substantial period of time to prepare for use or sale are included in the cost of this asset. 53 Novolipetsk Steel Notes to the consolidated financial statements (millions of US dollars) 25 Significant accounting policies (continued) Recognition of costs in the carrying amount of a property, plant and equipment item ceases when the item is in the location and condition necessary for it to be capable of operating in the manner intended by management of the relevant entity. Subsequent measurement Property, plant and equipment items are carried at cost less accumulated depreciation and recognised impairment losses. Subsequent expenditures The costs of minor repairs and maintenance are expensed when incurred. The costs of regular replacement of large components of property, plant and equipment items are recognised in the carrying amount of the relevant asset when incurred subject to recognition criteria. The carrying amount of the parts being replaced is de-recognised. When a large-scale technical inspection is conducted, related costs are recognised in the carrying amount of a fixed asset as replacement of previous technical inspection subject to recognition criteria. Any costs related to the previous technical inspection that remain in the carrying value shall be de-recognised. Other subsequent expenditures are capitalised only when they increase the future economic benefits embodied in these assets. All other expenses are treated as costs in the consolidated statement of profit or loss in the reporting period as incurred. Property, plant and equipment line of the consolidated statement of financial position also includes capital construction and machinery, and equipment to be installed. If PP&E items include major units with different useful lives, then each individual unit of the related asset is accounted for separately. Borrowing costs Borrowing costs are capitalised from the date of capitalisation and up to the date when the assets are substantially ready for utilisation or sale. The commencement date for capitalisation is when the Group (a) incurs expenditures for the qualifying asset; (b) incurs borrowing costs; and (c) undertakes activities that are necessary to prepare the asset for its intended use or sale. When funds borrowed for common purposes are used to purchase an asset, capitalised borrowing costs are determined through multiplying the capitalisation rate by expenses related to the asset. Interest payments capitalised under IAS 23 are classified in consolidated statement of cash flows in a manner that is consistent with the classification of the underlying asset on which the interest is capitalised. All other borrowing costs are attributed to expenses in the reporting period when incurred and recorded in the consolidated statement of profit or loss in the “Finance costs” line. Mineral rights Exploration and evaluation assets are carried at original cost and classified consistently within tangible or intangible assets depending on their nature. Mineral rights acquired as a result of a business combination are measured at fair value at the acquisition date. Other mineral rights and licenses are recorded at cost. Mineral rights are amortised using the straight-line basis over the license term given approximately even production output during the license period. 54 Novolipetsk Steel Notes to the consolidated financial statements (millions of US dollars) 25 Significant accounting policies (continued) Right-of-use assets The Group leases various land, buildings, equipment and transport. Contracts may contain both lease and non-lease components. The Group allocates the consideration in the contract to the lease and non-lease components based on their relative stand-alone prices. Assets arising from a lease are initially measured on a present value basis and accounted within Property, plant and equipment. Right-of-use assets are measured at cost comprising the following: • • • • the amount of the initial measurement of lease liability, any lease payments made at or before the commencement date less any lease incentives received, any initial direct costs, and costs to restore the asset to the conditions required by lease agreements. Depreciation Depreciation is charged on a straight-line basis over the estimated remaining useful lives of the individual assets through an even write-down of historical cost to their net book value. Right-of-use assets are depreciated over the shorter of the asset's useful life and the lease term on a straight-line basis. If the Group is reasonably certain to exercise a purchase option, the right-of-use asset is depreciated over the underlying assets’ useful lives. Depreciation commences from the time an asset is available for use, i.e. when the location and condition provide for its operation in line with the Group management’s intentions. Depreciation is not charged on assets to be disposed of and on land. In some cases, the land itself may have a limited useful life, in which case it is depreciated in a manner that reflects the consumption of benefits to be derived from it. The range of estimated useful lives of different asset categories is as follows: Buildings and land and buildings improvements Machinery and equipment Vehicles 10 – 70 years 2 – 30 years 5 – 25 years The residual value of an asset is the estimated amount that the Group would currently obtain from disposal of the asset less the estimated costs of disposal if the asset was already of the age and in the condition expected at the end of its useful life. The assets’ residual values and useful lives are reviewed, and adjusted if appropriate, at the end of each reporting period. If the cost of land includes the costs of site dismantlement, removal of PP&E items and restoration expenses, that portion of the land asset is depreciated over the period of consumption of benefits obtained by incurring those costs. Impairment of PP&E is outlined in section (h) “Impairment of non-current assets”. 55 Novolipetsk Steel Notes to the consolidated financial statements (millions of US dollars) 25 Significant accounting policies (continued) (f) Leases Applicable for the reporting periods starting 1 January 2019 Liabilities arising from a lease are initially measured on a present value basis. Lease liabilities include the net present value of the following lease payments: • • fixed payments (including in-substance fixed payments), less any lease incentives receivable, variable lease payment that are based on an index or a rate, initially measured using the index or rate as at the commencement date, • • • amounts expected to be payable by the Group under residual value guarantees, the exercise price of a purchase option if the Group is reasonably certain to exercise that option, and payments of penalties for terminating the lease, if the lease term reflects the Group exercising that option. Extension and termination options are included in a number of property and equipment leases across the Group. These terms are used to maximise operational flexibility in terms of managing the assets used in the Group’s operations. The majority of extension and termination options held are exercisable only by the Group and not by the respective lessor. Extension options (or period after termination options) are only included in the lease term if the lease is reasonably certain to be extended (or not terminated). Lease payments to be made under reasonably certain extension options are also included in the measurement of the liability. The lease payments are discounted using the interest rate implicit in the lease. If that rate cannot be readily determined, which is generally the case for leases of the Group, the Group’s incremental borrowing rate is used, being the rate that the Group would have to pay to borrow the funds necessary to obtain an asset of similar value to the right-of-use asset in a similar economic environment with similar terms, collateral and conditions. To determine the incremental borrowing rate, the Group: • where possible, uses recent third-party financing received by the individual lessee as a starting point, adjusted to reflect changes in financing conditions since third party financing was received, • • uses a build-up approach that starts with a risk-free interest rate adjusted for credit risk, and makes adjustments specific to the lease, e.g. term, country, currency and collateral. The Group is exposed to potential future increases in variable lease payments based on an index or rate, which are not included in the lease liability until they take effect. When adjustments to lease payments based on an index or rate take effect, the lease liability is reassessed and adjusted against the right-of-use asset. Lease payments are allocated between principal and finance costs. The finance costs are charged to profit or loss over the lease period so as to produce a constant periodic rate of interest on the remaining balance of the liability for each period. Applicable for the reporting periods earlier 1 January 2019 Leasing transactions are classified according to the relevant lease agreements, which specify the risks and rewards associated with the leased property and distributed between the lessor and lessee. Lease agreements are classified as financial leases or operating leases. In a financial lease, the Group receives the major portion of economic benefits and risks associated with the ownership of the asset. At the commencement of the lease term, the leased asset is recognised in the consolidated statement of financial position at the lower of fair value or discounted value of future minimum lease payments. The corresponding rental obligations are included in borrowings. Interest expenses within lease payments are charged to profit or loss over the lease term using the effective interest method. Accounting policies for depreciation of leased assets are consistent with the accounting policies applicable to owned depreciable assets. 56 Novolipetsk Steel Notes to the consolidated financial statements (millions of US dollars) 25 Significant accounting policies (continued) A lease is classified as an operating lease if it does not imply transferring the major portion of risks and rewards associated with the ownership of the asset. Payments made under operating leases are recorded as an expense on a straight-line basis over the lease term. (g) Goodwill and intangible assets Goodwill is the difference between: • • the comprehensive fair value of the consideration transferred on the acquisition date and non-controlling interest, and, where the entity is acquired in instalments, the acquisition date fair value of the non- controlling interest previously held by the buyer in the acquired entity; and the share of net fair value of identifiable assets acquired and liabilities assumed. The excess of the share of net fair value of identifiable assets bought and obligations assumed by the Group over the consideration transferred and the fair value of non-controlling interest at the acquisition date previously owned by the buyer in the acquired entity, represents income from a profitable acquisition. Income is recognised in the consolidated statement of profit or loss at the acquisition date. Goodwill on joint ventures is included in the carrying amount of investments in these entities. When interest in the previously acquired entity increases (within non-controlling interest) goodwill is not recognised. The difference between the acquired share of net assets and consideration transferred is recognised in equity. Goodwill is measured at historical cost and subsequently stated less accumulated impairment losses. Impairment of goodwill The goodwill is not amortised but tested for impairment at least annually and whenever there are indications that goodwill may be impaired. For the purpose of impairment testing, goodwill is allocated to each of the Group’s cash- generating units (“CGUs”) that are expected to benefit from the synergies of the combination. The evaluation of impairment for cash-generating units, among which goodwill was distributed, is performed once a year or more often, when there are indicators of impairment of such CGUs. If the recoverable amount of a cash-generating unit is less than its carrying amount, the impairment loss is allocated first to reduce the carrying amount of any goodwill allocated to the CGU and then to any other assets of the CGU pro-rata to the carrying amount of each asset in the unit. An impairment loss recognised for goodwill is not reversed in subsequent periods. Disposal of goodwill If goodwill is a part of the cash-generating unit, and a part of the unit is disposed of, the goodwill pertaining to that part of disposed operations is included in the carrying amount of that operation when profit or loss on its disposal is determined. In such circumstances, the goodwill disposed of is generally measured on the basis of the relative values of the operation disposed of and the portion of the cash-generating unit which is retained. Intangible assets Intangible assets are initially recognised at cost. The cost of a separately acquired intangible asset comprises: • • its purchase price, including non-refundable purchase taxes, after deducting trade discounts and rebates; directly attributable cost of preparing the asset for its intended use. If an intangible asset is acquired as a result of a business combination, the cost of the intangible asset equals its fair value at the acquisition date. 57 Novolipetsk Steel Notes to the consolidated financial statements (millions of US dollars) 25 Significant accounting policies (continued) If payment for an intangible asset is deferred beyond normal credit terms, its cost is the cash price equivalent. The difference between this amount and the total payments is recognised as interest expense over the entire period of credit unless it is capitalised in accordance with IAS 23, “Borrowing Costs”. If an intangible asset is an integral part of a fixed asset to which it belongs, then it is recorded as part of that asset. After the initial recognition of intangibles, they are carried at cost less sum of accumulated amortisation and accumulated impairment loss. If impaired, the carrying amount of intangible assets is written down to the higher of value in use and fair value less costs to sell. Amortisation Intangible assets with a definite useful life are amortised using the straight-line method over the shorter of: the useful life or legal rights thereto. The range of estimated useful lives of different asset categories is as follows: • • Mineral rights Industrial intellectual property 20-36 years 1-10 years (h) Impairment of non-current assets At each reporting date, the Group determines if there are any objective indications of potential impairment of an individual asset or group of assets. Intangible assets with indefinite useful lives are tested for impairment at least once a year and if their carrying amount impairment indicators are identified. Recoverable value measurement If any such impairment indicators exist, then the asset’s recoverable amount is estimated. In the event of impairment, the value of the asset is written down to its recoverable value, which represents the higher of: the fair value less costs to sell or the value in use. Fair value less costs to sell is the amount obtainable from the sale of an asset or payable on the transfer of a liability at the evaluation date, in an arm’s length transaction between knowledgeable, willing parties, less any direct costs related to the sale or transfer. Value in use is the present value of estimated future cash flows from expected continuous use of an asset and its disposal at the end of its useful life. In assessing value-in-use, the anticipated future cash proceeds are discounted to their current value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset. For the purposes of assessing impairment, assets are grouped at the lowest levels for which there are largely independent cash inflows (cash-generating units), which in most cases are determined as individual subsidiaries of the Group. Estimated cash flows are adjusted in line with the risk of specific conditions at sites and discounted at the rate based on the weighted average cost of capital. With regard to assets that do not generate cash regardless of cash flows generated by other assets, the recoverable amounts are based on the cash-generating unit to which such assets relate. 58 Novolipetsk Steel Notes to the consolidated financial statements (millions of US dollars) 25 Significant accounting policies (continued) Impairment loss The asset’s carrying amount is written down to its estimated recoverable value, and loss is included in the consolidated statement of profit or loss for the period. Impairment loss is reversed if there are indications that the assets’ impairment losses (other than goodwill) recognised in previous periods no longer exist or have been reduced, and if any consequent increase in the recoverable value can be objectively linked to the event that took place after the impairment loss recognition. Impairment loss is reversed only to the extent that the carrying amount of an asset does not exceed its carrying amount that would be established (less amortisation) if the asset impairment loss had not been recognised. An impairment loss is reversed for the relevant asset immediately through consolidated statement of profit or loss. (i) Provisions for liabilities and charges Provisions for liabilities and charges are accrued when the Group: • • has present obligations (legal or constructive) as a result of past events; it is probable that an outflow of resources embodying economic benefits will be required to settle such an obligation; • a reliable estimate of the amount of the obligation can be made. The amount recognised as a provision shall be the best estimate of the expenses required to settle the present obligation at the end of the reporting period. Where the impact of the time factor on the value of money is significant, the provision should equal the present value of the expected cost of settling the liability using the discount rate before taxes. Any increase in the carrying amount of the provision is recorded in the consolidated statement of profit or loss as finance costs. The nature and estimated value of contingent liabilities and assets (including court proceedings, environmental costs, etc.) are disclosed in notes to the consolidated financial statements where the probability of economic benefits outflow is insignificant. The creation and release of provision for impaired receivables have been included in impairment losses on financial assets in the consolidated statement of profit or loss. Amounts charged to the allowance account are generally written off, when there is no legal right to recover cash. (j) Income taxes Income tax expense comprises current and deferred tax. The current and deferred taxes are recognised in profit or loss for the period, except for the portion thereof that arises from a business combination or transactions or events that are recognised directly within equity. Current tax Current tax liabilities are measured in the amount expected to be paid to (recovered from) the tax authorities, applying the tax rates and tax laws that have been enacted or substantively enacted by the end of the reporting period. Deferred tax Deferred tax assets and liabilities are recognised for the differences between the carrying amount of an asset or liability in the consolidated statement of financial position and their tax base. 59 Novolipetsk Steel Notes to the consolidated financial statements (millions of US dollars) 25 Significant accounting policies (continued) Deferred tax is not recognised if temporary differences: • • arise at the goodwill initial recognition; arise at the initial recognition (except for business combination) of assets and liabilities that do not impact taxable or accounting profits; • are associated with investments in subsidiaries where the Group controls the timing of the reversal of these temporary differences, and it is probable that the temporary differences will not be utilised in the foreseeable future. Deferred tax assets and liabilities shall be measured at the tax rates that are expected to apply to the period when the asset is realised or the liability is settled, based on tax rates (and tax laws) that have been enacted or substantively enacted by the end of the reporting period. Estimation of deferred tax assets and liabilities reflects tax implications that would arise depending on the method to be used at the end of the reporting period to recover or settle carrying value of these assets or liabilities. Deferred tax assets are recognised in respect of the carry forward of unused tax losses and unused tax credits to the extent that it is probable that future taxable profit will be available against which the unused tax losses and unused tax credits may be utilised. The carrying amount of deferred tax assets is subject to revision at the end of each reporting period and is decreased to the extent of reduced probability of receiving sufficient taxable income to benefit from utilising the deferred tax assets partially or in full. Deferred tax assets and liabilities are offset if there is a legal right for the offset of current tax assets and liabilities, and when they relate to income taxes levied by the same tax authority or on the same taxpayer; and the Group intends to either settle on a net basis, or to realise the asset and settle the liability simultaneously. Uncertain tax positions The Group’s uncertain tax positions are reassessed by management at the end of each reporting period. Liabilities are recorded for income tax positions that are determined by management as more likely than not to result in additional taxes being levied if the positions were to be challenged by the tax authorities. The assessment is based on the interpretation of tax laws that have been enacted or substantively enacted by the end of the reporting period, and any known court or other rulings on such issues. Liabilities for penalties, interest and taxes other than on income are recognised based on management’s best estimate of the expenditure required to settle the obligations at the end of the reporting period. (k) Dividends payable Dividends are recorded as a liability and deducted from equity in the period in which they are declared and approved. Any dividends declared after the reporting date and before the consolidated financial statements have been authorised for issue are disclosed in the subsequent events note. 60 Novolipetsk Steel Notes to the consolidated financial statements (millions of US dollars) 25 (l) Significant accounting policies (continued) Revenue recognition Revenue from sales of goods and provision of services Revenue is recognised at a transaction price that represents an amount that reflects the consideration to which the Group expects to be entitled in exchange for transferring those goods or services. Revenue from sale of goods and services is recognised when a performance obligation is satisfied, i.e. when control over the goods or services underlying the particular performance obligation is transferred to the customer. If the Group agrees to transport goods to a specified location (typically under contracts based on certain Incoterms types), revenue is split into two performance obligations – sale of goods and rendering of transportation services. Revenue from sale of goods is recognised at a point of time, when control over the goods is transferred to the customer, normally when the goods are shipped and the risks, rewards and legal title are passed. Revenue from rendering of transportation services is recognised over time as the transportation service is provided to the customer. This is determined based on the actual days of transportation relative to the average expected days of transportation. The transaction price is allocated to the rendering of transportation services on an average transportation price per ton basis. Costs related to the rendering of transportation services are included in selling expenses. Revenue is recorded net of discounts, provisions, value added tax and export duties, and refunds, and after excluding intra-group sales turnover. No element of financing is deemed present as the sales are made with an average credit term of 60 days, which is consistent with market practice. Interest income Interest income is recognised on a time-proportion basis using the effective interest method. Dividend income Dividend income on investments is recognised when the Group becomes entitled to receive the payment. (m) Segment information The Group provides separate disclosures on each operating segment that meets the criteria outlined in paragraph 11 of IFRS 8, “Operating Segments”. The Group’s organisation comprises six reportable segments: • the Mining segment, which comprises mining, processing and sales of iron ore, fluxing limestone and metallurgical dolomite, and supplies raw materials to the steel segment and third parties; the Russian flat products segment, comprising production and sales of steel products and coke, primarily pig iron, steel slabs, hot rolled steel, cold rolled steel, galvanised cold rolled sheet and cold rolled sheet with polymeric coatings and also electro-technical steel; • • the Russian long products segment, comprising a number of steel-production facilities combined in a single production system beginning from scrap iron collection and recycling to steel-making, production of long products, reinforcing rebar and metalware; • • NLMK USA, comprising production and sales of steel products in the United States; NLMK DanSteel and Plates Distribution Network, comprising production and sales of plates in Europe and other regions of the world; • Investments in NBH, comprising production of hot rolled, cold rolled coils and galvanised and pre-pained steel, and also production of a wide range of plates as well as a number of steel service centers located in the European Union. The accounting policies of each segment consist with the principles outlined in significant accounting policies. 61 Novolipetsk Steel Notes to the consolidated financial statements (millions of US dollars) 25 Significant accounting policies (continued) Financial instruments (n) Financial assets The Group’s financial assets include cash and cash equivalents, trade and other accounts receivable and short-term financial instruments which are measured at amortised cost. Debt instruments have the following categories based on the business model for managing the financial assets and whether the contractual cash flows represent solely payments of principal and interest: ▪ debt instruments the payments on which represent solely payments of principal and interest and that are intended to collect payments are classified as those to be measured subsequently at amortised cost; ▪ debt instruments the payments on which represent solely payments of principal and interest and that are held in a portfolio where an entity both holds to collect assets’ cash flows and sells assets are classified as those to be measured subsequently at fair value through other comprehensive income; and ▪ other financial assets are measured subsequently at fair value through profit or loss. The Group does not have equity financial instruments. To assess the expected credit loss on financial assets measured subsequently at amortised cost the Group uses the expected credit losses model in accordance with a ‘three stage’ approach which is based on the change in credit quality of financial assets since initial recognition. The Group assesses expected credit losses using lifetime expected credit losses for cash and cash equivalents, trade and other accounts receivable and short- term financial investments since their terms are less than 12 months. Initial recognition of financial assets Financial investments measured subsequently at fair value are initially recorded at fair value. All other financial assets are initially recorded at fair value plus transaction costs. All purchases and sales of financial assets that require delivery within the time frame established by regulation or market convention (“regular way” purchases and sales) are recorded at the trade date, which is the date when the Group commits to buy or sell a financial asset. Write-off Financial assets are written-off, in whole or in part, when the Group exhausted all practical recovery efforts and has concluded that there is no reasonable expectation of recovery. The write-off represents a de-recognition event. Indicators that there is no reasonable expectation of recovery include expiration of statute of limitation. De-recognition The Group de-recognises financial assets when (a) the assets are redeemed or the rights to cash flows from the assets otherwise expire or (b) the Group has transferred the rights to the cash flows from the financial assets or entered into a qualifying pass-through arrangement while (i) also transferring substantially all risks and rewards of ownership of the assets, or (ii) neither transferring nor retaining substantially all risks and rewards of ownership but not retaining control in respect of these assets. Control of an asset is retained if the counterparty does not have the practical ability to sell the asset in its entirety to an unrelated third party without needing to impose additional restrictions on the sale. If the Group neither transfers nor retains substantially all risks and rewards of ownership of the asset, but retains control over such transferred asset, the Group continues recognition of its share in this asset and the related obligation in the amount of the anticipated consideration. 62 Novolipetsk Steel Notes to the consolidated financial statements (millions of US dollars) 25 Significant accounting policies (continued) Modification The Group sometimes renegotiates or otherwise modifies the contractual terms of the financial assets. The Group assesses whether the modification of contractual cash flows is substantial considering, among other, the following factors: any new contractual terms that substantially affect the risk profile of the asset, significant change in interest rate, change in the currency denomination, new collateral or credit enhancement that significantly affects the credit risk associated with the asset or a significant extension of a loan when the borrower is not in financial difficulties. If the modified terms are substantially different, the rights to cash flows from the original asset expire and the Group derecognises the original financial asset and recognises a new asset at its fair value. The date of renegotiation is considered to be the date of initial recognition for subsequent impairment calculation purposes, including determining whether a significant increase in credit risk has occurred. Any difference between the carrying amount of the original asset derecognised and fair value of the new substantially modified asset is recognised in profit or loss, unless the substance of the difference is attributed to a capital transaction with owners. In a situation where the renegotiation was driven by financial difficulties of the counterparty and inability to make the originally agreed payments, the Group compares the original and revised expected cash flows to assets whether the risks and rewards of the asset are substantially different as a result of the contractual modification. If the risks and rewards do not change, the modified asset is not substantially different from the original asset and the modification does not result in derecognition. The Group recalculates the gross carrying amount by discounting the modified contractual cash flows by the original effective interest rate (or credit-adjusted effective interest rate for purchased or originated credit impaired financial assets), and recognises a modification gain or loss in profit or loss. Financial liabilities The Group’s financial liabilities include trade and other payables, bank overdrafts, borrowings and financial guarantee agreements. Financial liabilities are respectively classified as: ▪ ▪ financial liabilities at fair value through profit or loss; borrowings and loans. Financial liabilities at fair value through profit or loss Financial liabilities at fair value through profit or loss include financial liabilities held for trade and financial liabilities designated initially at fair value through profit or loss. Financial liabilities are classified as held for trade if acquired for the purpose of selling in the short term. Income and expense on liabilities held for trade are recognised in the consolidated statement of profit or loss, except for the change of the fair value attributable to the change of own credit risk, which is recognized in other comprehensive income. Borrowings After initial recognition, interest-bearing borrowings are carried at amortised cost using the effective interest method. Gains and losses on such financial liabilities are recognised in consolidated statements of profit or loss upon their de-recognition and also as amortisation accrued using the effective interest method. Initial recognition of financial liabilities All financial liabilities are initially recorded at fair value less transaction costs incurred (except for financial liabilities at fair value through the consolidated statements of profit or loss). De-recognition A financial liability is de-recognised from the consolidated statement of financial position if it was settled, cancelled or expired. 63 Novolipetsk Steel Notes to the consolidated financial statements (millions of US dollars) 25 Significant accounting policies (continued) If the existing financial liability is replaced by another liability to the same creditor, on terms that significantly differ from the previous terms, or the terms of the existing liability significantly differ from the previous terms, such replacement or change is recorded as de-recognition of the initial liability and recognition of a new liability, and the difference in their carrying amount is recognised in the consolidated statement of profit or loss. Financial guarantee agreements Financial guarantee contracts are recognised as a financial liability at the time the guarantee is issued. The liability is initially measured at fair value and subsequently at the higher of: • the amount determined in accordance with the expected credit loss model under IFRS 9 Financial Instruments; or • the amount initially recognized, where applicable, less the cumulative amount of income recognised in accordance with the principles of IFRS 15 Revenue from Contracts with Customers. The fair value of financial guarantees is determined based on the present value of the difference in cash flows between the contractual payments required under the debt instrument and the payments that would be required without the guarantee, or the estimated amount that would be payable to a third party for assuming the obligations by the third party. Where guarantees in relation to loans or other payables of associates are provided for no compensation, the fair values are accounted for as contributions and recognised as part of the cost of the investment. Cash flow hedge accounting At inception of the hedge relationship, the Group documents its objective and strategy, identifies the hedging instrument and the hedged item, the nature of the hedged risk and method for evaluation whether the hedge relationship meets the hedge effectiveness requirements. The hedge relationship meets all of the hedge effectiveness requirements when: • • • an economic relationship exists between the hedged item and the hedging instrument; the effect of credit risk does not dominate the value changes; the hedge ratio reflects the ratio between the quantity of the hedged item and the quantity of the hedging instrument. The Group applies cash flow hedge accounting, the hedge objective is to protect the cash flows from exchange rate exposure by hedging the expected highly probable US dollars nominated revenue with the portion of US dollars nominated borrowings. The effective portion of changes in the fair value of the hedging instrument (i.e. that portion which is compensated by the change in the hedge reserve of cash flows) is recognised in other comprehensive income and accumulated in hedge reserve of cash flows in equity. The gain or loss relating to the ineffective portion is recognised immediately in the consolidated statement of profit or loss in separate line “Hedging result”. The amounts accumulated in equity are reclassified to profit or loss in the periods when payments on bonds and bonds’ coupons occur. The Group should revoke the hedge accounting prospectively when the hedge relationship (or part of the hedge relationship) no longer meets the criteria for hedge accounting. This requirement is also applied when the hedging instrument is expired or is sold, terminated, or exercised. 64 Novolipetsk Steel Notes to the consolidated financial statements (millions of US dollars) 26 Critical accounting estimates and judgements The preparation of the consolidated financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities as well as disclosures to this consolidated financial statements. Management also makes certain judgements in the process of applying the Group’s accounting policies. Estimates and judgements are continually evaluated based on historical experience and other factors, including forecasts and expectations of future events that are believed to be reasonable under the circumstances. Actual results may differ from these estimates, and management’s estimates can be revised in the future, either positively or negatively, based on the facts surrounding each estimate. Judgments that have the most significant effect on the amounts recognised in the consolidated financial statements, and estimates that can cause a significant adjustment to the carrying amounts of assets and liabilities within the next financial year are reported below. (a) Tax legislation and potential tax gains and losses The Group’s potential tax gains and losses are reassessed by management at every reporting date. Liabilities which are recorded for income tax positions are determined by management based on the interpretation of current tax laws. Liabilities for penalties, fines and taxes other than on income are recognised based on management’s best estimate of the expenditure required to settle tax liabilities at the reporting date (Note 24). The recognised deferred tax assets represent income taxes recoverable through future deductions from taxable profits and are recorded in the statement of financial position (Note 17). Deferred income tax assets are recorded to the extent that realisation of the related tax benefit is probable. This includes temporary difference expected to reverse in the future and the availability of sufficient future taxable profit against which the deductions can be utilised. The future taxable profits and the amount of tax benefits that are probable in the future are based on the medium term business plan prepared by management and extrapolated results thereafter. The business plan is based on management expectations that are believed to be reasonable under the circumstances. (b) Estimation of useful lives of property, plant and equipment The estimation of the useful life of an item of property, plant and equipment is a matter of management judgement based upon experience with similar assets. In determining the useful life of an asset, management considers the expected usage based on production volumes, inventories, technical obsolescence rates, physical wear and tear and the physical environment in which the asset is operated. Changes in any of these conditions or estimates may affect future useful lives (Note 8). (c) Impairment analysis of property, plant and equipment, goodwill and investments in joint ventures The estimation of forecasted cash flows for the purposes of impairment testing involves the application of a number of significant judgements and estimates to certain variables including volumes of production and extraction, prices on finished goods, operating costs, capital investment, and macroeconomic factors such as inflation and discount rates. In addition, judgement is applied in determining the cash-generating units assessed for impairment (Notes 8, 9). 65 Novolipetsk Steel Notes to the consolidated financial statements (millions of US dollars) 27 New or revised standards and interpretations The following amended standards became effective from 1 January 2020, but did not have a material impact on the Group: • • • • Amendments to the Conceptual Framework for Financial Reporting (issued on 29 March 2018 and effective for annual periods beginning on or after 1 January 2020); Amendments to IFRS 3 Definition of a business (issued on 22 October 2018 and effective for acquisitions from the beginning of annual reporting period that starts on or after 1 January 2020); Amendments to IAS 1 and IAS 8 Definition of materiality (issued on 31 October 2018 and effective for annual periods beginning on or after 1 January 2020); Amendments to IFRS 9, IAS 39 and IFRS 7 Interest rate benchmark reform (issued on 26 September 2019 and effective for annual periods beginning on or after 1 January 2020). Certain new standards and interpretations have been issued that are mandatory for the annual periods beginning on or after 1 January 2021 or later, and which the Group has not early adopted and are not expected to have any material impact on the Group financial statements when adopted: • • COVID-19-Related Rent Concessions Amendment to IFRS 16 issued on 28 May 2020 and effective for annual periods beginning on or after 1 June 2020; Sale or Contribution of Assets between an Investor and its Associate or Joint Venture – Amendments to IFRS 10 and IAS 28 (issued on 11 September 2014 and effective for annual periods beginning on or after a date to be determined by the IASB); • • • • IFRS 17 "Insurance Contracts" (issued on 18 May 2017 and effective for annual periods beginning on or after 1 January 2023); Classification of liabilities as current or non-current – Amendments to IAS 1 (issued on 23 January 2020 and effective for annual periods beginning on or after 1 January 2022); Classification of liabilities as current or non-current, deferral of effective date – Amendments to IAS 1 (issued on 15 July 2020 and effective for annual periods beginning on or after 1 January 2023); Proceeds before intended use, Onerous contracts – cost of fulfilling a contract, Reference to the Conceptual Framework – narrow scope amendments to IAS 16, IAS 37 and IFRS 3, and Annual Improvements to IFRSs 2018-2020 – amendments to IFRS 1, IFRS 9, IFRS 16 and IAS 41 (issued on 14 May 2020 and effective for annual periods beginning on or after 1 January 2022); • • Amendments to IFRS 17 and an amendment to IFRS 4 (issued on 25 June 2020 and effective for annual periods beginning on or after 1 January 2023); Interest rate benchmark (IBOR) reform – phase 2 amendments to IFRS 9, IAS 39, IFRS 7, IFRS 4 and IFRS 16 (issued on 27 August 2020 and effective for annual periods beginning on or after 1 January 2021). 28 Subsequent events In January 2021 the Group received refund of paid steel tariffs, enacted by Department of Commerce under Section 232 of the USA Trade Expansion Act., and accrued interests in the amount of $105 (included in other accounts receivable as at 31 December 2020). 66 Independent Auditor’s Report To the Shareholders and the Board of Directors of Novolipetsk Steel: Our opinion In our opinion, the accompanying financial statements present fairly, in all material respects, the financial position of Novolipetsk Steel (the “Company”) as at 31 December 2020, and the Company’s financial performance and cash flows for the year then ended in accordance with the reporting rules established in the Russian Federation. What we have audited The Company’s financial statements comprise:      the balance sheet as at 31 December 2020; the statement of financial results for the year then ended; the statement of changes in equity for the year then ended; the statement of cash flows for the year then ended; and the notes to the balance sheet and statement of financial results, which include significant accounting policies. Basis for opinion We conducted our audit in accordance with International Standards on Auditing (ISAs). Our responsibilities under those standards are further described in the Auditor’s responsibilities for the audit of the financial statements section of our report. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion. AO PricewaterhouseCoopers Audit White Square Office Center 10 Butyrsky Val Moscow, Russian Federation, 125047 T: +7 (495) 967 6000, F:+7 (495) 967 6001, www.pwc.ru TRANSLATION NOTE: This version of our report is a translation from the original, which was prepared in Russian. All possible care has been taken to ensure that the translation is an accurate representation of the original. However, in all matters of interpretation of information, views or opinions, the original language version of our report takes precedence over this translation. Independence We are independent of the Company in accordance with the International Code of Ethics for Professional Accountants (including International Independence Standards) issued by the International Ethics Standards Board for Accountants (IESBA Code) and the ethical requirements of the Auditor’s Professional Ethics Code and Auditor’s Independence Rules that are relevant to our audit of the financial statements in the Russian Federation. We have fulfilled our other ethical responsibilities in accordance with these requirements and the IESBA Code. Our audit approach Overview Materiality   Overall Company materiality: Russian Roubles (“RUB”) 4,370,000 thousand, which represents 1% of the Company’s revenue. Key audit matter Impairment of the investment in subsidiary LLC NLMK Overseas Holdings As part of designing our audit, we determined materiality and assessed the risks of material misstatement in the financial statements. In particular, we considered where management made subjective judgements; for example, in respect of significant accounting estimates that involved making assumptions and considering future events that are inherently uncertain. As in all of our audits, we also addressed the risk of management override of internal controls, including among other matters consideration of whether there was evidence of bias that represented a risk of material misstatement due to fraud. We tailored the scope of our audit in order to perform sufficient work to enable us to provide an opinion on the financial statements as a whole, taking into account the structure of the Company, the accounting processes and controls, and the industry in which the Company operates. Materiality The scope of our audit was influenced by our application of materiality. An audit is designed to obtain reasonable assurance whether the financial statements are free from material misstatement. Misstatements may arise due to fraud or error. They are considered material if individually or in aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of the financial statements. Based on our professional judgement, we determined certain quantitative thresholds for materiality, including the overall Company materiality for the financial statements as a whole as set out in the table below. These, together with qualitative considerations, helped us to determine the scope of our audit and the nature, timing and extent of our audit procedures and to evaluate the effect of misstatements, if any, both individually and in aggregate on the financial statements as a whole. TRANSLATION NOTE: This version of our report is a translation from the original, which was prepared in Russian. All possible care has been taken to ensure that the translation is an accurate representation of the original. However, in all matters of interpretation of information, views or opinions, the original language version of our report takes precedence over this translation. 2 Overall Company materiality RUB 4,370,000 thousand How we determined it 1% of the Company’s revenue Rationale for the materiality benchmark applied We chose revenue as the benchmark because, in our view, it is the benchmark which objectively best represents the performance of the Company over a period of time while financial results are volatile. We determined overall materiality as 1%, which in our experience is within the range of acceptable quantitative materiality thresholds applied for public companies in the relevant industry. We also consider misstatements or possible misstatements in the context of qualitative factors. TRANSLATION NOTE: This version of our report is a translation from the original, which was prepared in Russian. All possible care has been taken to ensure that the translation is an accurate representation of the original. However, in all matters of interpretation of information, views or opinions, the original language version of our report takes precedence over this translation. 3 Key audit matters Key audit matters are those matters that, in our professional judgment, were of most significance in our audit of the financial statements of the current period. These matters were addressed in the context of our audit of the financial statements as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters. Key audit matter How our audit addressed the key audit matter Impairment of the long-term financial investments in LLC NLMK Overseas We obtained, understood and evaluated management’s analysis of Holdings existence of impairment indicators of the Company’s financial investments and we did not identify any additional factors that should have been considered in the analysis. Annually at the reporting date management performs analysis of existence of impairment indicators of the Company’s long-term investments, including investments in the subsidiaries where the market value is not determined. We audited the recoverable amount of the investments in LLC NLMK Overseas Holdings subsidiaries which were calculated by management based on subsidiaries’ net assets. If impairment indicators are in place, management assesses investments’ recoverable amount and compares that with the carrying value. We involved our valuation experts to assist in the evaluation of the methodology, mathematical accuracy and assumptions used in the models. If the impairment test identifies a steady decline in the value of investments, impairment loss is recognized. Impairment loss is calculated as the difference between the recoverable amount and the carrying value of investment. During our work on verification of the recoverable amount of the investments in the subsidiary LLC NLMK Overseas Holdings that included audit of the recoverable value of its investments determined based on discounted cash flow models, we performed the following main procedures: The recoverable amount of the investment in the subsidiary LLC NLMK Overseas Holdings that has investments in its own subsidiaries, is defined as the value of its net assets adjusted for the recoverable value of investments. The latter is in turn defined based on discounted cash flow models of the major production companies and using net assets value for other investments. Respective models and calculations were prepared as at 31 December 2020. As a result of testing performed, significant excess of the carrying amount of investments in LLC NLMK Overseas Holdings over its recoverable amount was identified and additional impairment provision of RUB 12,870,000 thousand was recognized.  comparison of the key assumptions used within the impairment models to the historic performance of the LLC NLMK Overseas Holdings investments, approved estimates, and other supporting calculations;  sample benchmarking of the key assumptions used within the impairment models, including price forecasts for core raw materials and finished products, inflation and discount rates, against external We focused on this area because of the significant judgment involved in the evaluation of recoverable amount, and the significant carrying value of the assets in scope of the test and the amount of the impairment loss. TRANSLATION NOTE: This version of our report is a translation from the original, which was prepared in Russian. All possible care has been taken to ensure that the translation is an accurate representation of the original. However, in all matters of interpretation of information, views or opinions, the original language version of our report takes precedence over this translation. 4 Key audit matter How our audit addressed the key audit matter expert valuations, macroeconomic and industry forecasts, which corroborated their validity;  performing sensitivity analysis of the key assumptions in order to assess their potential impact on impairment results and ranges of possible outcomes of the recoverable amounts. The scope of the audit procedures for verification of impairment models for each investment of LLC NLMK Overseas Holdings was based on its significance, safety margin, sensitivity to assumptions and individual risks. Other information Management is responsible for the other information. The other information comprises the Annual Report for 2020 and the Issuer’s Report for the first quarter of 2021 (but does not include the financial statements and our auditor’s report thereon), which are expected to be made available to us after the date of this auditor’s report. Our opinion on the financial statements does not cover other information and we will not express any form of assurance conclusion thereon. In connection with our audit of the financial statements, our responsibility is to read other information identified above when it becomes available and, in doing so, consider whether the other information is materially inconsistent with the financial statements or our knowledge obtained in the audit, or otherwise appears to be materially misstated. When we read the Annual Report for 2020 and the Issuer’s Report for the first quarter of 2021, if we conclude that there is a material misstatement therein, we are required to communicate the matter to those charged with governance. Responsibilities of management and those charged with governance for the financial statements Management is responsible for the preparation and fair presentation of the financial statements in accordance with the reporting rules established in the Russian Federation, and for such internal control as management determines is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error. TRANSLATION NOTE: This version of our report is a translation from the original, which was prepared in Russian. All possible care has been taken to ensure that the translation is an accurate representation of the original. However, in all matters of interpretation of information, views or opinions, the original language version of our report takes precedence over this translation. 5 In preparing the financial statements, management is responsible for assessing the Company’s ability to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless management either intends to liquidate the Company or to cease operations, or has no realistic alternative but to do so. Those charged with governance are responsible for overseeing the Company’s financial reporting process. Auditor’s responsibilities for the audit of the financial statements Our objectives are to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor’s report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with ISAs will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these financial statements. As part of an audit in accordance with ISAs, we exercise professional judgment and maintain professional scepticism throughout the audit. We also:  Identify and assess the risks of material misstatement of the financial statements, whether due to fraud or error, design and perform audit procedures responsive to those risks, and obtain audit evidence that is sufficient and appropriate to provide a basis for our opinion. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control.  Obtain an understanding of internal control relevant to the audit in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control.   Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made by management. Conclude on the appropriateness of management’s use of the going concern basis of accounting and, based on the audit evidence obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on the Company’s ability to continue as a going concern. If we conclude that a material uncertainty exists, we are required to draw attention in our auditor’s report to the related disclosures in the financial statements or, if such disclosures are inadequate, to modify our opinion. Our conclusions are based on the audit evidence obtained up to the date of our auditor’s report. However, future events or conditions may cause the Company to cease to continue as a going concern.  Evaluate the overall presentation, structure and content of the financial statements, including the disclosures, and whether the financial statements represent the underlying transactions and events in a manner that achieves fair presentation. TRANSLATION NOTE: This version of our report is a translation from the original, which was prepared in Russian. All possible care has been taken to ensure that the translation is an accurate representation of the original. However, in all matters of interpretation of information, views or opinions, the original language version of our report takes precedence over this translation. 6 We communicate with those charged with governance regarding, among other matters, the planned scope and timing of the audit and significant audit findings, including any significant deficiencies in internal control that we identify during our audit. We also provide those charged with governance with a statement that we have complied with relevant ethical requirements regarding independence, and to communicate with them all relationships and other matters that may reasonably be thought to bear on our independence, and where applicable, actions taken to eliminate threats or safeguards applied. From the matters communicated with those charged with governance, we determine those matters that were of most significance in the audit of the financial statements of the current period and are therefore the key audit matters. We describe these matters in our auditor’s report unless law or regulation precludes public disclosure about the matter or when, in extremely rare circumstances, we determine that a matter should not be communicated in our report because the adverse consequences of doing so would reasonably be expected to outweigh the public interest benefits of such communication. The certified auditor responsible for the audit resulting in this independent auditor’s report is A. B. Fomin. 10 February 2021 Moscow, Russian Federation A. B. Fomin, certified auditor (licence No. № 01-000059), AO PricewaterhouseCoopers Audit Audited entity: Novolipetsk Steel Independent auditor: AO PricewaterhouseCoopers Audit Registered by the Government Agency Moscow Registration Chamber on 28 February 1992 under Nо. 008.890 Record made in the Unified State Register of Legal Entities on 28 January 1993 under State Registration Number 1024800823123 Record made in the Unified State Register of Legal Entities on 22 August 2002 under State Registration Number 1027700148431 Taxpayer Identification Number 4823006703 Taxpayer Identification Number 7705051102 2, Metallurgov sq., Lipetsk, 398040, Russian Federation Member of Self-regulatory organization of auditors Association «Sodruzhestvo» Principal Registration Number of the Record in the Register of Auditors and Audit Organizations – 12006020338 TRANSLATION NOTE: This version of our report is a translation from the original, which was prepared in Russian. All possible care has been taken to ensure that the translation is an accurate representation of the original. However, in all matters of interpretation of information, views or opinions, the original language version of our report takes precedence over this translation. 7 TRANSLATION NOTE: This version of our report is a translation from the original, which was prepared in Russian. All possible care has been taken to ensure that the translation is an accurate representation of the original. However, in all matters of interpretation of information, views or opinions, the original language version of our report takes precedence over this translation. 8 NOVOLIPETSK STEEL NLMK, 2 Metallurgov sq., 398040 Lipetsk Tel.: +7 (4742) 44 42 22 | fax: +7 (4742) 44 11 11 е-mail: [email protected] | www.nlmk.com ACCOUNTING (FINANCIAL) STATEMENTS NOVOLIPETSK STEEL FOR 2020 CONTENTS BALANCE SHEET.................................................................................................................................................................................................................................... 4 PROFIT AND LOSS STATEMENT............................................................................................................................................................................................................. 6 STATEMENT OF CHANGES IN EQUITY ................................................................................................................................................................................................... 8 CASH FLOW STATEMENT.................................................................................................................................................................................................................... 10 NOTES TO BALANCE SHEET AND PROFIT AND LOSS STATEMENT ...................................................................................................................................................... 12 1. GENERAL INFORMATION ................................................................................................................................................................................................................ 13 2. SIGNIFICANT ASPECTS OF ACCOUNTING POLICY AND BASIS OF ACCOUNTING (FINANCIAL) STATEMENTS PREPARATION.......................................................... 15 2. 1 INTANGIBLE ASSETS..................................................................................................................................................................................................................... 15 2. 2 R&D RESULTS............................................................................................................................................................................................................................... 16 2. 3 FIXED ASSETS AND CONSTRUCTION IN PROGRESS...................................................................................................................................................................... 16 2. 4 FINANCIAL INVESTMENTS............................................................................................................................................................................................................ 17 2. 5 INVENTORIES ............................................................................................................................................................................................................................... 17 2. 6 SHORT-TERM AND LONG-TERM ASSETS AND LIABILITIES ........................................................................................................................................................... 18 2. 7 ADVANCE PAYMENTS MADE AGAINST NON-CURRENT ASSETS .................................................................................................................................................. 18 2. 8 CASH AND CASH EQUIVALENTS ................................................................................................................................................................................................... 18 2. 9 CREDITS AND LOANS.................................................................................................................................................................................................................... 19 2. 10 ESTIMATED LIABILITIES .............................................................................................................................................................................................................. 19 2. 11 INCOME AND EXPENSES ............................................................................................................................................................................................................ 19 2. 12 TAXE........................................................................................................................................................................................................................................ 19 2. 13 ASSETS, LIABILITIES AND OPERATIONS IN FOREIGN CURRENCY................................................................................................................................................ 20 2. 14 INFORMATION BY SEGMENTS ................................................................................................................................................................................................... 20 2. 15 CHANGES IN ACCOUNTING POLICY ........................................................................................................................................................................................... 20 2. 16 COMPARATIVE DATA ................................................................................................................................................................................................................. 21 3. DISCLOSURE OF SIGNIFICANT INDICATORS .................................................................................................................................................................................... 22 3. 1 INTANGIBLE ASSETS..................................................................................................................................................................................................................... 22 3. 2 FIXED ASSETS AND CONSTRUCTION IN PROGRESS...................................................................................................................................................................... 23 3. 3 FINANCIAL INVESTMENTS............................................................................................................................................................................................................ 25 3. 4 INVENTORIES ............................................................................................................................................................................................................................... 27 3. 5 ACCOUNTS RECEIVABLE AND PAYABLE ....................................................................................................................................................................................... 28 3. 5. 1 Accounts Receivable ................................................................................................................................................................................................................ 28 3. 5. 2 Accounts payable..................................................................................................................................................................................................................... 30 3. 6 CASH AND CASH EQUIVALENTS ................................................................................................................................................................................................... 31 3. 7 CAPITAL AND DIVIDENDS............................................................................................................................................................................................................. 33 3. 8 CREDITS AND LOANS.................................................................................................................................................................................................................... 35 3. 9 ESTIMATED LIABILITIES ................................................................................................................................................................................................................ 36 3. 10 INCOME AND EXPENSES ............................................................................................................................................................................................................ 36 3. 10. 1 Income and expenses from ordinary activitie..................................................................................................................................................................... 36 3. 10. 2 Other income and expenses .................................................................................................................................................................................................. 37 3. 11 CURRENT INCOME TAX FORMATION......................................................................................................................................................................................... 38 3. 12 INFORMATION BY SEGMENTS ................................................................................................................................................................................................... 38 Accounting (Financial) statement for 2020 Notes 2 3. 13 SECURITY OF LIABILITIES............................................................................................................................................................................................................ 39 3. 14 INFORMATION ON RELATED PARTIES........................................................................................................................................................................................ 40 3. 14. 1 The list of related parties....................................................................................................................................................................................................... 40 3. 14. 2 Operations with related parties............................................................................................................................................................................................. 42 3. 15 CONTINGENT LIABILITIES .......................................................................................................................................................................................................... 49 3. 16 EVENTS AFTER THE REPORTING DATE ....................................................................................................................................................................................... 49 Accounting (Financial) statement for 2020 Notes 3 BALANCE SHEET as of 31 December 2020 CODES Form acc. to OKUD Date (day, month, year) 0710001 31/12/2020 05757665 4823006703 24.10.4 Accounting (Financial) statement for 2020 Entity NLMK OKPO TIN OKVED2 Taxpayer Identification Number Type of business Type of business entity / form of ownership Public Joint Stock Company / Production of cold-rolled steel flats Joint private and foreign property Unit of measurement – RUB k OKOPF/ OKFS OKEI 12247 / 34 384 Address The accounting statements are subject to obligatory auditing Auditor PWC Audit 2, Metallurgov sq., 398040 Lipetsk V YES NO The auditor’s taxpayer identification number The auditor’s main state registration number TIN 7705051102 OGRN 1027700148431 Disclosure in Description Code As of 31.12.2020 As of 31.12.2019 As of 31.12.2018 Notes 6 1 ASSETS 2 3 4 5 I. Non-current assets Intangible assets Results of research and developments Fixed assets Financial investments Deferred tax assets Other non-current assets 1110 1120 1150 1170 1180 1190 1100 1,401,412 2,765 1,707,636 2,510 1,666,241 5,760 2.1, 3.1 2.2 2.3, 3.2 192,736,224 169,674,801 2,482,779 8,316,059 374,614,040 165,776,831 158,223,497 1,222,741 7,563,601 334,496,816 139,314,267 177,809,199 1,770,135 7,043,877 327,609,479 2.4, 2.6, 3.3 2.12, 3.11 2.7, 3.5.1 Total for Section I II. Current assets Inventories Input VAT 1210 1220 1230 1240 1250 1260 1200 1600 57,259,269 1,049,657 78,512,363 10,605,000 47,458,916 43 55,675,785 1,176,619 109,715,882 9,481,811 26,636,800 43 61,111,447 553,567 126,333,555 2,497,606 60,339,735 67 2.5, 3.4 Accounts receivable Financial investments (excluding cash equivalents) Cash and cash equivalents Other current assets Total for Section II 2.6, 3.5.1 2.4, 2.6, 3.3 2.8, 3.6 194,885,248 569,499,288 202,686,940 537,183,756 250,835,977 578,445,456 BALANCE (sum of lines 1100 + 1200) Notes Balance 4 Sheet Form 0710001 p. 2 Disclosure in Notes Description Code 2 As of 31.12.2020 As of 31.12.2019 As of 31.12.2018 1 3 4 5 6 LIABILITIES III. Capital and reserves Accounting (Financial) statement for 2020 Charter capital 1310 1340 1350 1360 1370 1300 5,993,227 3,259,484 771,777 5,993,227 3,275,807 771,777 5,993,227 3,290,822 771,777 Revaluation of non-current assets Additional capital (without revaluation) Reserve capital 3.7 299,661 245,414,209 255,738,358 299,661 289,131,900 299,472,372 299,661 325,751,607 336,107,094 Retained earnings (uncovered loss) Total for Section III IV. Long-term liabilities Borrowings Deferred tax liabilities Other liabilities 1410 1420 1450 1400 152,793,410 12,056,430 -- 105,703,843 10,847,050 385,320 84,066,622 10,985,025 15,510 2.6, 2.9, 3.8 2.12, 3.11 2.6, 3.5.2 Total for Section IV 164,849,840 116,936,213 95,067,157 V. Short-term liabilities Borrowings 1510 1520 1540 1500 1700 43,916,850 100,325,861 4,668,379 148,911,090 569,499,288 30,406,203 86,497,982 3,870,986 120,775,171 537,183,756 21,823,828 118,357,751 7,089,626 147,271,205 578,445,456 2.6, 2.9, 3.8 2.6, 3.5.2 2.10, 3.9 Accounts payable Estimated liabilities Total for Section V BALANCE (sum of lines 1300 + 1400 + 1500) NLMK Manager Е. Morozova by virtue of Power of Attorney No.505-20/8 dd. 09.01.2020 10 February 2021 Balance Notes 5 Sheet PROFIT AND LOSS STATEMENT for 2020 CODES 0710002 31/12/2020 05757665 4823006703 24.10.4 Form under OKUD Date (day, month, year) under OKPO Accounting (Financial) statement for 2020 Entity NLMK Taxpayer’s identification number: Type of activity Type of business entity / form of ownership Public joint-stock company / Joint private and foreign property Unit of measurement – RUB k INN under OKVED2 Production of cold-rolled steel flats under OKOPF/ OKFS under OKEI 12247 / 34 384 Disclosure in Notes Description Code For 2020 3 For 2019 4 1 2 5 Revenue 2110 2110.1 2120 437,079,106 434,795,572 (325,865,606) (316,087,072) 421,816,321 419,595,963 2.11, 3.10.1 incl. sales of iron and steel products Cost of sales 2.11, 3.10.1 incl. iron and steel products sold 2120.1 2100 2210 2220 2200 2310 2320 2330 2340 2350 2300 2410 2411 2412 2460 2465 2400 (323,384,896) (313,940,919) Gross profit (loss) Selling expenses Administrative expenses Sales profit (loss) Income from shareholding in other organizations Interest receivable Interest payable Other income Other expenses Profit (loss) before tax Income tax incl. current income tax deferred income tax Other Profit tax redistribution among a consolidated group of taxpayers Net profit (loss) 111,213,500 (33,317,051) (18,460,815) 59,435,634 48,980,386 348,436 105,729,249 (30,065,720) (15,020,523) 60,643,006 72,099,211 571,485 3.3 2.4, 3.3 2.9, 3.8 (6,131,228) 20,397,324 (55,923,841) 67,106,711 (6,310,959) (6,361,617) 50,658 (4,651,585) 28,474,056 (61,338,214) 95,797,959 (12,930,691) (12,521,271) (409,420) 2.11, 3.10.2 2.12, 3.11 (3,167) (1,501) 332,529 554,305 2.12, 3.11 3.7 61,125,114 83,420,072 Profit and Loss Statement Form 0710002 p. 2 Notes 6 Description 1 Code 2 For 2020 3 For 2019 4 Disclosure in Notes 5 Consolidated financial performance for the period FOR REFERENCE 2500 61,125,114 83,420,072 Base profit (loss) per share (RUB) 2900 10.20 13.92 3.7 Accounting (Financial) statement for 2020 NLMK Manager Е. Morozova by virtue of Power of Attorney No.505-20/8 dd. 09.01.2020 10 February 2021 Profit and Notes Loss Statement 7 STATEMENT OF CHANGES IN EQUITY for 2020 CODES 0710004 31/12/2020 05757665 4823006703 24.10.4 Form under OKUD Date (day, month, year) under OKPO Accounting (Financial) statement for 2020 Entity NLMK Taxpayer’s identification number: Type of activity Type of business entity / form of ownership Public joint-stock company / Joint private and foreign property Unit of measurement – RUB k INN under OKVED2 Production of cold-rolled steel flats under OKOPF/ OKFS under OKEI 12247 / 34 384 1. Capital flow Additional capital 4 Reserve capital Retained earnings (uncovered loss) 6 Description Code Charter capital Total 7 336,107,094 1 Capital as of 31 December 2018 For 2019 2 3 5 3100 5,993,227 4,062,599 299,661 325,751,607 Capital increase – total: including: net profit 3210 3211 -- -- -- 83,469,552 83,469,552 Х Х Х 83,420,072 83,420,072 income directly pertaining to the capital increase Capital reduction – total: including: 3213 3220 Х -- -- -- Х -- 49,480 (120,104,274) 49,480 (120,104,274) dividends 3227 3230 3200 Х Х Х (15,015) 4,047,584 Х -- (120,104,274) 15,015 289,131,900 (120,104,274) Х 299,472,372 Additional capital change Capital as of 31 December 2019 For 2020 5,993,227 299,661 Capital increase – total: including: net profit 3310 3311 -- -- -- 61,207,393 61,125,114 61,207,393 61,125,114 Х Х Х income directly pertaining to the capital increase Capital reduction – total: including: 3313 3320 Х -- -- -- Х -- 82,279 (104,941,407) 82,279 (104,941,407) dividends Additional capital change Capital as of 31 December 2020 3327 3330 3300 Х Х Х (16,323) 4,031,261 Х -- (104,941,407) 16,323 245,414,209 (104,941,407) Х 255,738,358 5,993,227 299,661 Statement of changes in Notes equity 8 Form 0710004 p.2 3. Net assets Description Net assets Code 2 3600 As of 31.12.2020 3 As of 31.12.2019 4 As of 31.12.2018 Accounting (Financial) statement for 2020 1 5 255,738,358 299,472,372 336,107,094 NLMK Manager Е. Morozova by virtue of Power of Attorney No.505-20/8 dd. 09.01.2020 10 February 2021 Statement of changes in Notes equity 9 CODES CASH FLOW STATEMENT for 2020 0710005 31/12/2020 05757665 4823006703 24.10.4 Form under OKUD Date (day, month, year) under OKPO Entity NLMK Accounting (Financial) statement for 2020 Taxpayer’s identification number: Type of activity INN under OKVED2 Production of cold-rolled steel flats Type of business entity / form of ownership Public joint-stock company / Joint private and foreign property Unit of measurement – RUB k under OKOPF/ OKFS under OKEI 12247 / 34 384 Description Code 2 For 2020 3 For 2019 4 1 Cash flow from current operations 4110 458,410,301 408,881,905 Inflow – total including: from sales of goods, products, works and services from rent, license payments, royalties, commissions and other similar payments other inflow Payments - total 4111 4112 4119 4120 456,750,478 233,448 1,426,375 (381,756,350) 407,183,814 250,581 1,447,510 (367,992,527) including: to suppliers (contractors) for feedstock, materials, works and services related to employee salaries and wages interest on liabilities corporate income tax other payments 4121 4122 4123 4124 4129 4100 (328,063,076) (32,260,560) (6,134,854) (5,072,579) (10,225,281) 76,653,951 (308,494,446) (33,443,101) (4,783,662) (11,104,188) (10,167,130) 40,889,378 Balance of cash flows from current operations Cash flows from investment operations Inflow – total 4210 81,359,005 85,551,206 including: from sale of non-current assets (except financial investments) from sale of interest (shares) in other companies from repayment of loans granted, from sale of debt securities (rights of demand of funds from other persons) 4211 4212 4213 800,091 40,836 8,382,160 58,538 23,911 28,837,253 from dividends, interest on debt financial investments and similar incoming funds from participation in other organizations other inflow 4214 4219 72,135,918 -- 56,631,504 -- Cash flow statement Notes 10 Description 1 Code 2 For 2020 3 For 2019 4 4220 (63,844,996) (60,105,441) Payments – total including: those related to acquisition, set-up, upgrade, reconstruction and preparation for usage of non-current assets those related to acquisition of stock (shares) in other companies those related to acquisition of debt securities (rights of demand of monetary funds from other persons), granting of loans to other entities interest on debt liabilities included into the cost of an investment asset other payments 4221 4222 (39,743,605) (14,871,000) (36,796,408) -- Accounting (Financial) statement for 2020 4223 4224 4229 4200 (8,356,133) -- (874,258) 17,514,009 (12,631,076) -- (10,677,957) 25,445,765 Balance of cash flows from investment operations Cash flows from financial operations Inflow – total 4310 85,325,214 57,156,316 including: receiving loans and credits 4311 85,325,214 57,156,316 Payments – total 4320 (160,579,072) (152,005,832) including: payment of dividends and other payments related to profit distribution in favour of owners (participants) related to repayment (buy- back) of bills of exchange and other debt securities, repayment of loans and credits other payments Balance of cash flows from financial operations Balance of cash flows for the reporting period Balance of cash and cash equivalents as of the beginning of the reporting period Balance of cash and cash equivalents as of the end of the reporting period Foreign currency to RUB exchange rate fluctuation effect 4322 4323 4329 4300 4400 4450 4500 4490 (111,456,848) (130,848,683) (43,496,426) (5,625,798) (75,253,858) 18,914,102 26,636,609 47,458,761 1,908,050 (15,104,232) (6,052,917) (94,849,516) (28,514,373) 60,339,683 26,636,609 (5,188,701) NLMK Manager Е. Morozova by virtue of Power of Attorney No.505-20/8 dd. 09.01.2020 10 February 2021 Notes Cash flow statement 11 Accounting (Financial) statement for 2020 NOTES TO BALANCE SHEET AND PROFIT AND LOSS STATEMENT Notes 12 1. GENERAL INFORMATION Novolipetsk Steel (hereinafter referred to as “the Company”) is an integrated steel-making company specializing in production of a wide variety of flats. Abbreviated Company name: PJSC NLMK. Registered office of the Company: 2, Metallurgov sq., Lipetsk, Russia. Postal address of the Company: 2, Metallurgov sq., Lipetsk, 398040, Russia. Accounting (Financial) statement for 2020 The main activities of the Company are:       production and sale of iron and steel products; production and sale of mechanical engineering products (equipment, accessories, tools and spare parts); industrial construction, rendering construction and public utilities services; production of construction materials, structures, and products; foreign and domestic trade; generation, transmission and distribution of electrical and heat power; and others. The Company is licensed for all types of activities subject to licensing. The Company has a representative office in Moscow as well as a branch office in Yekaterinburg. As of 31.12.2020 the Company’s headcount was 27,207 employees, as of 31.12.2019 – 27,401 employees. Board of Directors as of 31 December 2020: Chairman of the Board of Directors Members: Vladimir Lisin  Oleg V. Bagrin Thomas Veraszto Nikolai Gagarin Sergey Kravchenko Joachim Limberg  Marjan Oudeman Stanislav Shekshnya Benedict Sciortino Management Board as of 31 December 2020: Grigory Fedorishin Tatyana Averchenkova Mikhail Arkhipov Ilya Guschin President (Chairman of the Management Board)  Vice-President, Operational Efficiency Vice President, HR & Management System Vice President, Sales Barend de Vos Sergey Likharev  Vice-President, International Operations  Vice President, Logistics Notes 13 Shamil Kurmashov Evgeny Ovcharov Sergei Chebotarev Vice President, CFO  Vice-President, Risk Management  Vice President, Energy and Environment President (Management Board Chairman) is a sole executive body of the Company. Information on risk management, internal control and internal audit is presented on the Company's website1. Accounting (Financial) statement for 2020 Information on the Register Holder and the Auditor: Register Holder of the Company is JSC Agency “RNR”; license No. 042-13984-000001, dd. 29.11.2002 with an unlimited validity. The Register of the issuer’s registered securities owners has been held by the registrar since 4 March 2004. The company’s auditor is PWC Audit Financial and tax accounting Financial and tax accounting of the Company's business to the extent established by the current legislation is conducted by the Corporate Solutions Centre in line with Service Contract No. 75757 dd. 31.12.2019. The authorized signatory of the accounting (financial) statements is E. Morozova, Director of the Accounting Division of Corporate Solutions Centre LLC, on the basis of a power of attorney. The Company’s operational environment The Russian economy demonstrates some characteristics typical of emerging markets. The country’s economy is mostly susceptible to oil and gas prices. Continuous political tension in the region as well as the extended international sanctions against some Russian companies and nationals are having a negative impact on the Russian economy. Moreover, the existing tax, currency and customs legislation is subject to various interpretations and thus creates additional difficulties for Russian companies. Such economic environment cannot but influence the Company’s business. In 2020, the COVID-19 pandemic caused serious headwinds for overall business activity, that initially led to weakening of demand for steel in traditional sales markets and a temporary drop in steel product prices which however started to recover gradually in second half 2020. In order to keep capacity utilization rates of the Company high the NLMK Group made changes to regional sales structure and diversified product mix. Production and supply chains of the Company were not significantly impacted by the COVID-19 pandemic. At the date of issuing these accounting (financial) statements, the situation with the spread of coronavirus infection (COVID-19) is still evolving. The Company benefits from a strong financial position, with low leverage and significant liquidity. The Company management made an analysis of impairment indicators of the Company's financial investments, as a result, impairment indicators were identified in relation to certain financial investments, and the corresponding financial investments of the Company were tested for possible impairment (clause 3.3. Explanations). Current economic environment cannot but influence the activities of the Company. The management takes the necessary measures to ensure a stable financial position of the Company and to provide support to its customers and employees. However future consequences of the economic situation are difficult to foresee and their influence on the Company’s business might differ from today’s expectations of the Management. Main financial risks intrinsic to the Company’s operations include market risks, credit risks, currency risks and underliquidity risks. Financial risk management is aimed at determination of risk limits and subsequent observance of the established limits. Risk management is to ensure proper functioning of the Company’s internal policy and procedures for the purpose of minimizing these risks. The Company discloses its procedures for management of these risks at its official website1. 1 Posted on the website of NLMK (http://www.nlmk.com) Notes 14 The Russian Law on transfer pricing provides for a possibility of additional charging of tax liabilities to monitored transactions (transactions with related parties and certain transactions between independent parties), if the transaction price does not correspond to the market one. In order to meet requirements of the applicable legislation on transfer pricing the Company’s Management introduced internal control procedures. In the reporting year the Company submitted the “Notice of controlled transactions for 2019” to the Tax authority (in 2019 - for 2018). The Company is preparing transfer pricing documentation which will confirm the compliance of prices used with the market level for tax purposes. Nevertheless, there is a possibility that due to further practice in application of transfer pricing rules these prices can be contested and consequences of such outcome cannot be securely evaluated. Accounting (Financial) statement for 2020 According to the Law on Controlled Foreign Companies (hereinafter - CFC) taxation on profit was introduced in the Russian Federation for foreign companies and foreign ventures without establishing an entity (including funds) being controlled by tax residents of the Russian Federation (controlling persons). Starting from 2015 CFCs’ income is taxed at 20% in line with the legislation requirements. The Company has established a consolidated taxpayer group (hereinafter - CTG) for the purpose of calculation and payment of corporate income tax, taking into account the total financial result of a business, in which it acts as the responsible party. 19 NLMK Group companies are included into the CTG. The Company concluded an agreement with various banks on accession to Cash pooling service for a Master account where NLMK acts as a Parent Company for the purpose of NLMK Group companies’ liquidity management by cash consolidation. Cash consolidation is performed through conducting operations under loan agreements between the Company and NLMK Group companies. 2. SIGNIFICANT ASPECTS OF ACCOUNTING POLICY AND BASIS OF ACCOUNTING (FINANCIAL) STATEMENTS PREPARATION The accounting (financial) statements have been prepared in accordance with the rules of accounting and reporting effective in the Russian Federation, in particular, with the Federal Law “Accounting” and Regulation on accounting and reporting in the Russian Federation approved by the RF Ministry of Finance. The unit of measurement for accounting indicators is RUB thousand without decimal digits. In the accounting (financial) statements, negative figures or figures deductible from relevant indicators in order to calculate intermediate or total values, are given in round brackets. The companies whose names were brought in line with the Civil code requirements (renaming to Public Company, Joint-Stock Company or Production Cooperative) as of the reporting date, are presented with their names changed. The Company’s consolidated financial statements have been compiled in line with the International Financial Reporting Statements (IFRS). 2. 1 INTANGIBLE ASSETS Intangible assets are reflected in balance sheets upon actual costs of acquisition, manufacture and additional expenses in order to bring assets to a state in which they could be used as intended, less depreciation charged. Depreciation of intangible assets is calculated by a straight-line method with an exclusion of cases when application of another method to determine depreciation can be justified by a reliable calculation of expected receipt of future economic benefits from using the intangible asset, including financial result from potential sale of that asset. When useful life of an intangible asset is checked in order to revise it, more accurate definition of the useful life is performed in case of significant change in the period (for 12 months and longer of the previously defined one) within which the Company plans to use that asset. Should it be impossible to define useful life for intangible assets accounted before 1 January 2008, standard depreciation charges are established on the basis of a 20-year term. For similar intangible assets accounted from 1 January 2008, depreciation is not charged. There are no regular revaluations of intangible assets or checks for their impairment. Notes 15 Expenses for purchasing non-exclusive rights for using the result of intellectual activity or the means of individualization (computer software etc.) are charged to relevant accounts on a monthly basis by equal portions and in the amount determined by the Company’s agreements or calculations, during the period they refer to. 2. 2 R&D RESULTS Scientific research, development- and- design and process works the results of which are used for production or management purposes are shown on account 04 “Intangible assets” separately and are reflected in the balance sheet under item “R&D results”. They are written off on a straight-line basis as operational expenses within three years starting from the first day of the month following the month of their actual use commencement. Accounting (Financial) statement for 2020 2. 3 FIXED ASSETS AND CONSTRUCTION IN PROGRESS Structure of fixed assets Fixed assets acquired from 1 January 2011 with the initial cost of RUB 40 thou. per item and below, are accounted within inventories. Special tools, devices and equipment the lifetime of which is longer than 12 months and the cost of which is over RUB 40 thou. per item are accounted under the procedure established for fixed asset accounting. Evaluation basis The original value of fixed assets acquired by the Company for payment, is formed by the actual costs of acquisition, construction and manufacture less taxes refundable. The initial cost of fixed assets received under agreements which provide for the fulfilment of liabilities (payments) by non-monetary means shall be recognized as the price of valuables handed over or to be handed over, based on the price upon which the Company usually defines the value of similar valuables in comparable circumstances. Costs related to completion, additional supply of equipment, modernization and upgrading increase the initial cost of fixed assets. Over the period from 1992 to 1997, the Company conducted annual re-evaluations of fixed assets in accordance with the Russian Government regulations. Currently, no annual re-evaluation of fixed assets is conducted. Fixed assets purchased before 01.01.1997 are shown in the balance sheet at replacement cost, and those purchased after 01.01.1997 – at initial cost, minus accumulated depreciation amounts respectively. Depreciation Depreciation of fixed asset items is charged on a straight-line basis from the initial (replacement) value of items and using depreciation norms calculated for established useful lives of such items. Useful life (years) of items taken onto the books Groups of fixed assets before 01.01.2003 since 01.01.2003 Buildings Structures 5-256 8-106 5-45 2-47 Machinery and equipment including household equipment and other items Vehicles 5-100 13-34 40 1-42 3-25 30 Cultivated resources of plant origin Notes 16 For fixed asset items commissioned before 01.01.2003, useful life is set on the basis of depreciation norms approved by USSR Ministers Council’s Resolution No. 1072 "On uniform norms of depreciation for complete recovery of national economy of the USSR" dd. 22.10.1990, and for those acquired starting from 01.01.2003 - according to the norms calculated based on the useful lives set by the Company. Depreciation is not charged for objects under preservation for longer than three months as well as within renewal period longer than 12 months. Retirement, writing-off and disposal Accounting (Financial) statement for 2020 Retired or disposed fixed asset items are written off from the balance sheet along with the accrued depreciation amount. The revaluation surplus amount of a retired fixed asset item shall be transferred from additional capital to retained profit of the Company, remaining within the equity. Any profits and expenses induced by fixed asset retirement shall be reflected in the Profit and Loss Statement for the reporting period when they were incurred as other income and expenses. Construction in progress The Construction in Progress reflects the scope of construction works which the Company accepted from its contractors. Settlements between the Company (Builder) and contractors are performed on a monthly basis according to the agreements on construction, after step-by-step (intermediate) acceptance of the construction and installation works done. Information on value of works done contained in Forms KC-2 and KC-3 is a basis for reflection of expenses related to construction of fixed assets. The value of works is reflected in the contract prices, also in the estimated costs according to which the settlements of NLMK with the contractors are effected with the progressive total since the beginning of the works, the beginning of the year also including the reporting period. 2. 4 FINANCIAL INVESTMENTS A unit of financial investment accounting is: for shares – a share; for bonds – a bond; for nominal capital contributions – interest; for certificates of deposit, notes – series and number of a security; for loans, deposits, assignment and special partnership contracts – a contract. Financial investments are accounted on the basis of actual acquisition costs. Debt securities for which current market value is not determined are accounted before the retirement at original cost. Financial investments, for which the current market value is determined under the established procedure, are reflected as of the quarter end at their current market value. Debt securities and granted loans are not estimated in terms of discounted value. Financial investments in securities (shares, bonds), for which the current market value is not defined, are depreciated at time of retirement upon the average acquisition cost for that type of securities. Interests on loans granted and other similar agreements are accrued as of the month end. In order to show the impairment of the Company’s financial investments a provision for their impairment is set up calculated according to the method summarizing information on cost reduction factors and signs of depreciation. If there are signs of impairment of financial investments for which market value is not defined, as of the end of reporting year the Company generates a provision amounting to the excess of book value of such investments over their estimated value determined based on the information available to the Company. Short- term deposits placed for a period not exceeding 3 months, are classified as cash equivalents and reported as part of other cash assets. 2. 5 INVENTORIES Evaluation of inventories acquired at a charge, as of the end of the reporting period is done at actual costs. In the reporting period accounting is carried out at book prices, determined when first assigning a nomenclature number. When materials arrive, their cost is determined based on the price specified in the delivery order on the basis of a contract or other data. Subsequently actual first cost of materials based on the data for the period preceding the previous period is used as accounting price of the acquired materials. Entry of materials purchased is accounted using control accounts 15 “Procurement and acquisition of tangible assets” and 16 “Deviation of tangible assets cost”. In the end of a reporting period, any deviations of the actual cost of materials from their cost of acquisition are written off pro rata the value of materials consumed in the reporting period at book prices to accounting accounts in accordance with the purposes of materials usage and to account 10 “Materials" for the adjustment of its balance by the amount of deviations related to the unused materials balance. Inventories received without settlement documents of suppliers are recorded as non-invoiced deliveries at book prices. Notes 17 When tangible assets are released into production or otherwise retire they are valued within the reporting period at book prices with subsequent writing off of deviations of actual cost from the book prices to the relevant accounts at the end of the reporting period. When materials are written off, their evaluative calculation includes their quantity and cost as per the nomenclature number as of the beginning of the month, and also all incomings during the month. Finished products are valued as of the end of the reporting period at actual costs for each product type, which is formed by the cost of finished product balances as of the beginning of the reporting period and the first cost of the reporting period. Within the reporting period, finished products accounting is carried out on the basis of book prices without application of account 40 “Product (works, services) output”. Actual first cost of the finished products upon the data of the reporting period before the last one is used as a book price. Difference between actual first cost and book price of the finished goods is charged to a separate subaccount of account 43 “Finished goods” broken down to product types. Finished goods are written off at book prices when dispatched. At the same time deviations related to finished goods sold are written off to sales accounts pro rata their quantity. Deviations related to the balance of finished goods are written off from deviations subaccount to finished goods subaccounts at the end of the reporting period, when actual calculation is formed, by product type for the purpose of determination of actual first cost. Accounting (Financial) statement for 2020 Work-in-progress as of the reporting period end is valued on the basis of the actual first cost generated based on work-in-progress value as of the period beginning and production costs of the reporting period. The order-by-order calculation of work-in-progress is evaluated on the basis of actual costs. In the balance sheet inventories, including work-in-progress, are accounted less the assessed reserves charged quarterly. The method of reserves estimation takes into account the value of identified non-used long-term stored stocks and probable price of their sale. 2. 6 SHORT-TERM AND LONG-TERM ASSETS AND LIABILITIES Accounts payable and receivable, including indebtedness under credits and loans, are accounted as short- term assets and liabilities, if their maturity does not exceed 12 months from the balance sheet date in accordance with contractual conditions, or if not fixed. Financial investments are classified as short- term or long- term depending on estimated time of their use (circulation, ownership or repayment). As of the end of a reporting period, long-term assets and liabilities are shown in the balance sheet as short-term ones when their remaining maturity (repayment period) does not exceed 12 months from the balance sheet date. 2. 7 ADVANCE PAYMENTS MADE AGAINST NON-CURRENT ASSETS For a more reliable accounting of information on the property status of the Company, the amounts of advances, given for capital construction, purchasing fixed asset items and other non-current assets, are reflected in Section I of the Balance sheet in line 1190 “Other non-current assets”. 2. 8 CASH AND CASH EQUIVALENTS Short-term deposits placed for a period not exceeding 90 days, are classified as cash equivalents and reported in the accounting (financial) statements as part of other cash assets. Interest received on cash equivalents is accounted in cash flow statement as part of current operations. Cash flow amount in foreign currency is converted into roubles at the official rate of this foreign currency to rouble established by the Central Bank of the Russian Federation as of the date of the payment effecting or receipt. In the presentation of cash flows in the cash flow statement, the following items are presented in summarized form as cash inflow (payments) in accordance with cash flow type:      placement and refund of deposits for 3 months and up; indirect taxes as part of cash inflow from buyers and customers, payments to suppliers and contractors and payments to / refunds from the RF budget system; inflow from contractors as refund of payments made earlier; currency exchange transactions; execution and receipt of payments as refunds under earlier transactions; Notes 18  receipt and granting of loans in the framework of cash pooling. Cash flows from current, investment and financial transactions are included in the same reporting segment identified by the type of activity. The cash flow necessary to maintain the current Company’s business volume is included in current operations. The cash flow associated with the Company’s business expansion is included in investment operations. Proceeds and payments on the investment activities include cash flows related to interest-free loans granted to related parties on the grounds of the economic benefits the Company receives from them as dividends or in any other indirect way. Accounting (Financial) statement for 2020 2. 9 CREDITS AND LOANS Interest payable to a lender (creditor) is recognized in the cost of an investment asset or as part of other expenses evenly over the contract validity period. Additional borrowing costs for the received credits and loans are accounted in the balance sheet and statements in the reporting period which they belong to. The discount on placed bonds is reflected in other expenses proportionally over the term of the loan agreement. 2. 10 ESTIMATED LIABILITIES The Company accepts estimated liabilities for forthcoming expenses on vacation pays and on payment of bonuses to employees. In the Balance Sheet such liabilities are reported within short-term liabilities. The procedure for such estimated liabilities accrual and their further accounting is governed by the methodologies approved by the Company. The necessity of recognizing other estimated liabilities is subject to consideration by the Company on the basis of the financial and economic activity. 2. 11 INCOME AND EXPENSES Income and expenses of the Company are classified as operational and other income and expenses. Sales proceeds are defined as of transfer date of title for products, goods, results of works, services rendered (for charge) on the basis of settlement documents presented to buyers (customers). Production costs of products (works, services) sold domestically or exported are defined by straight-line calculation on the basis of types of products and their actual costs. Expenses related to the sales of products (services, works) and general expenses are recognized in full in costs of products (services, works) sold in the reporting period as operational expenses. Expenses for licenses, certificates are included into the cost of goods manufactured (works, services) on a monthly basis by equal amounts during their validity. Actual expenses related to routine and major repairs are recognized as current period expenses upon repairs completion. Income generated from granting of assets, rights, arising out of patents for inventions, industrial models and other kinds of intellectual property for temporary use and possession subject to payment, from holding shares in nominal capitals of other organizations, interests received from granting organization’s monetary funds for use, and other income from securities not related to the organization’s core activity is attributed to other income. The Company generates provisions for inventory impairment, shortage and losses from tangible assets impairment, for financial investment depreciation, provisions for bad debts. Accrual of evaluation reserves is effected on the account of other expenses. 2. 12 TAXES Income tax Accounting and taxable profit are defined according to current legislative requirements of the Russian Federation using different methods of assessment. The current profit tax is calculated based on the income tax return. Every month, the Company calculates deferred tax assets, deferred tax liabilities, deferred income tax, expenses (income) on income tax, contingent expenses (income) on income tax, permanent tax expenses (income). Notes 19 Deferred tax assets and liabilities are shown in the balance sheet as non-current assets and long-term liabilities, respectively. CTG’s consolidated taxation base shall be defined as arithmetic sum of the profits of all CTG participants decreased by the arithmetic sum of all CTG participants’ expenses taking into account the provisions of the Tax Code of the Russian Federation. Settlements with participants in respect of CTG’s income tax are included in other receivables (line 1230 "Accounts Receivable") and other payables (line 1520 "Accounts Payable"). The Company states individually calculated income tax in line 2411 "Current income tax" of the Profit and Loss statement. The due share of savings on CTG’s operating results is shown in the Profit and Loss statement in line 2465 "Redistribution of income tax of the consolidated group of taxpayers". Cash flows of CTG members are reflected within the cash flows from current operations of the Cash Flow Statement. Accounting (Financial) statement for 2020 Land tax The Company pays land tax since it has property right to industrial area land. The Company pays rent for the rest of the land used. 2. 13 ASSETS, LIABILITIES AND OPERATIONS IN FOREIGN CURRENCY For accounting items in foreign currencies, the official exchange rate of a foreign currency to the Russian ruble as of the date of operation is used. In order to prepare accounting (financial) statements, funds on bank accounts (bank deposits), cash and payment documents, securities (except for the shares), accounts receivable including for borrowing liabilities (except for granted and received advance payments and down-payments, prepayments) expressed in foreign currency are recalculated into rubles at the exchange rate valid for the reporting date. Exchange rate differences are shown in the balance sheet as part of other income and expenses separately from other kinds of income and expenses including financial results from operations with foreign currency during the period they occurred in. Exchange rates of foreign currencies to Russian ruble set by the RF Central Bank: (RUB) Foreign currency USD 1 EUR 1 As of 31.12.2020 As of 31.12.2019 As of 31.12.2018 73.8757 90.6824 61.9057 69.3406 69.4706 79.4605 2. 14 INFORMATION BY SEGMENTS The Company owns assets only in the territory of the Russian Federation and is a sole integrated facility for the production and sale of ferrous products. The Company identifies reporting segments based on the activity type. Key indicators: proceeds from sale of products, financial result (profit or loss). The information on assets and liabilities within a reporting segment is not disclosed, because for the Company as a whole the segment share in the production and sales is exceeding. Besides the key indicators, proceeds from sales by product types, the share of proceeds from export sales are disclosed additionally. Reporting segment information is stated using the same valuation techniques as used for the presentation of similar figures in the Company’s financial statements taken as a whole. Besides, the Company discloses segment information in its consolidated financial statements in line with the International Financial Reporting Standards (IFRS), where the Company is included in the Russia Strip Segment without further subdivision by product types. 2. 15 CHANGES IN ACCOUNTING POLICY The Company applied changes in RAS 18/02 “Corporate income tax accounting” in the preparation of the accounting (financial) statements for 2020. The changes resulted in an adjustment of the amount of accrued and settled deferred tax assets (DTA) and deferred tax liabilities (DTL) for 2019 (lines 2450 and 2430) in the Profit Notes 20 and Loss Statement. Starting from 2020, changes in the deferred tax assets and liabilities have been shown in a summarized form in line 2412 “Deferred income tax”. Appropriate adjustments have been made in the comparative data, included in the accounting (financial) statements for 2020. No significant changes have been made to the accounting policy. Accounting (Financial) statement for 2020 2. 16 COMPARATIVE DATA In these accounting (financial) statements the comparative data have been derived by carrying over the respective reporting parameters for the previous reporting period, excluding reclassification of other cash flow proceeds and payments from current operations. The changes made do not significantly affect the Company's reporting, however, they improve its understanding. (RUB k) Description Line code before adjustment adjustment after adjustment Cash flow from current operations payments to suppliers (contractors) for feedstock, materials, works and services other payments 4121 4129 (307,353,266) (11,308,310) (1,141,180) 1,141,180 (308,494,446) (10,167,129) Notes 21 3. DISCLOSURE OF SIGNIFICANT INDICATORS 3. 1 INTANGIBLE ASSETS Availability of intangible assets (RUB k) Accounting (Financial) statement for 2020 As of 31.12.2020 As of 31.12.2019 As of 31.12.2018 Description Groups of intangible assets – total including: research and development 1,484,837 (122,511) 1,362,326 1,790,481 (118,767) 1,671,714 1,748,155 (122,539) (12,766) 1,625,616 22,818 36,939 (16,467) 20,472 36,739 (15,180) 21,559 35,584 software and data bases 1,445,529 (103,692) 1,341,837 1,751,019 (100,903) 1,650,116 1,709,844 (107,111) (565) 1,602,733 64 trademarks and service marks original works of entertainment books or art 275 (258) 17 -- 629 (590) 39 -- 629 2,069 (2,069) 2,069 (2,069) 2,073 (2,072) 1 other intellectual property items Costs for purchase of intangible assets Total 25 Х Х (25) Х -- 39,086 1,401,412 25 Х Х (25) Х -- 35,922 1,707,636 25 Х Х (25) Х -- 40,625 1,666,241 Х Х Х For reference: intangible assets, created by the organization itself intangible assets with fully repaid value 31,574 99,925 (13,358) (99,925) 18,216 -- 31,373 100,030 (100,030) (12,399) 18,974 -- 30,219 105,659 (10,313) (105,659) 19,906 -- There are no intangible assets with undetermined useful life. Notes 22 3. 2 FIXED ASSETS AND CONSTRUCTION IN PROGRESS Availability of fixed assets and capital investments in progress (RUB k) As of 31.12.2020 As of 31.12.2019 As of 31.12.2018 Accounting (Financial) statement for 2020 Description Fixed assets Buildings Structures 38,348,838 (13,151,761) 50,437,539 (19,998,962) 25,197,077 30,438,577 35,773,855 35,227,726 (11,882,138) (17,784,886) 23,891,717 17,442,840 33,764,420 33,432,076 (10,895,534) (16,559,848) 22,868,886 16,872,228 Machinery and equipment including household equipment and other items 209,651,315 (125,674,284) 83,977,031 186,947,935 (114,806,928) 72,141,007 156,284,039 (104,631,896) 51,652,143 2,000,473 857 Vehicles 6,745,323 1,370 (3,085,900) (592) 3,659,423 778 5,318,957 1,370 (2,768,108) (553) 2,550,849 817 4,600,444 1,370 (2,599,971) (513) Cultivated resources of plant origin Land lots and land improvement expenses 1,345,426 -- 1,345,426 1,345,426 -- 1,345,426 1,343,370 -- 1,343,370 Total 306,529,812 (161,911,500) 144,618,312 264,615,269 (147,242,613) 117,372,656 229,425,719 (134,687,762) 94,737,957 For reference: the cost of real estate objects, received for use and undergoing state registration. cost of leased out main assets Capital investments in progress Facilities construction1 8,727,773 2,971,177 х х 6,122,476 1,513,213 х х 4,655,283 1,523,186 Х Х (1,327,340) 1,643,837 (938,194) 575,019 (880,753) 642,433 х х х х х х Х х х 36,969,565 972,912 Х х х 37,429,523 850,685 Х Х Х Х Х Х 32,910,122 304,607 Acquisition of objects Equipment to be installed 5,471,515 6,809,043 8,259,617 Materials and spare parts for construction and installation works Total х х х х х х х х 4,703,920 3,314,924 Х Х 3,101,964 48,117,912 48,404,175 Х Х 44,576,310 1The largest constructions in progress as of 31.12.2020 are construction of a set of stoves, revamping of BF-4 and BF-6 complex. Notes 23 Fixed assets flow (initial value) Description (RUB k) For 2020 Acquired1 2,613,438 For 2019 Retired (38,455) Acquired 2,036,819 Retired Buildings (27,384) Accounting (Financial) statement for 2020 Structures 15,392,203 (182,389) 1,927,640 (131,990) Machinery and equipment including household equipment and other items Vehicles Land lots and land improvements expenses Total 24,977,868 1,493,291 -- (2,274,488) (66,926) -- 31,992,646 825,786 2,056 36,784,947 (1,328,750) (107,273) -- 44,476,800 (2,562,258) (1,595,397) For reference: The increase of the objects’ value due to additional construction, installation of additional equipment, reconstruction 12,789,716 -- 3,320,403 -- the decrease of the objects’ value as a result of partial liquidation (25,901) (55,680) (RUB k) 1 Major assets commissioned within the reporting year are the assets acquired within the frames of NLMK Investment Programme, please see the details at www.nlmk.com. Depreciation of the retired fixed assets amounted to RUB 1,810,003 thou. over 2020 and RUB 1,512,831 thou. over 2019. Non-depreciable fixed assets Original value As of 31.12.2019 1,345,426 Description As of 31.12.2020 1,345,426 As of 31.12.2018 Land plots 1,343,369 704,708 17,541 Facilities under preservation Housing facilities Total 693,299 17,541 2,056,266 694,231 17,541 2,057,198 2,065,618 As of 31.12.2020 the Company rents fixed assets (including land lots) for the amount of RUB 4,249,662,000, as of 31.12.2019 – RUB 4,267,248,000, as of 31.12.2018 – RUB 4,792,233,000 (off-balance sheet price under lease agreements). The Company rents land lots with the total area of 2,369 thousand square meters. The land lots rented are located in Lipetsk and Lipetsk Region. Notes 24 3. 3 FINANCIAL INVESTMENTS Availability of financial investments (RUB k) As of 31.12.2020 As of 31.12.2019 As of 31.12.2018 Accounting (Financial) statement for 2020 Description Long-term financial investments - total Investments in charter capitals of other entities 233,837,396 (64,162,595) 169,674,801 209,619,174 (51,395,677) 158,223,497 189,469,630 (11,660,431) 177,809,199 233,339,221 (63,712,684) 169,626,537 209,128,494 (50,945,128) 158,183,366 189,017,696 (11,225,918) 177,791,778 of which: NLMK Overseas Holdings NLMK Kaluga Stoilensky Altai Koks VIZ Steel Uralvtorchermet NLMK Metalware Zhernovsky-1 Mining & Concentration Complex Usinsky-3 Mining & Concentration Complex Loans granted 116,234,843 39,185,090 21,196,293 18,477,302 14,754,878 12,901,320 4,196,960 (43,770,000) (7,218,000) 72,464,843 31,967,090 21,196,293 18,477,302 14,754,878 441,991 90,362,843 (30,900,000) 59,462,843 31,967,090 21,196,293 18,477,302 14,754,878 1,675,402 4,196,960 70,362,843 39,185,090 21,196293 18,477,302 14,754,878 12,901,320 4,196,960 -- -- -- -- 70,362,843 39,185,090 21,196293 18,477,302 14,754,878 1,675,402 4,196,960 39,185,090 21,196,293 18,477,302 14,754,878 (7,218,000) -- -- -- -- -- -- (12,459,329) -- -- (11,225,918) -- 12,901,320 (11,225,918) 4,196,960 4,196,960 -- 2,772,287 (265,355) - 2,506,932 2,772,287 -- 2,772,287 2,772,287 -- 2,772,287 - 48,264 449,911 - 48,264 -- 1,624,717 40,131 (1,601,210) -- 23,507 40,131 -- 1,624,717 15,971 435,963 -- -- 1,624,717 15,971 1,450 Other financial investments (449,911) 450,549 (450,549) (434,513) Short-term financial investments - total Loans granted of which: 10,606,000 (1,000) (1,000) 10,605,000 9,482,811 (1,000) (1,000) 9,481,811 2,498,606 2,497,950 (1,000) (1,000) 2,497,606 2,496,950 62,580 61,580 12,926 11,926 NLMK Kaluga Deposits Total - 10,543,420 244,443,396 - - 10,543,420 180,279,801 -- -- -- -- 2,489,342 656 191,968,236 -- -- 2,489,342 656 9,469,885 9,469,885 (64,163,595) 219,101,985 (51,396,677) 167,705,308 (11,661,431) 180,306,805 As of 31.12.2020, 31.12.2019 and 31.12.2018 there were no financial investments for which the current market value was to be determined. Notes 25 Financial investments flow In April 2020, Usinsky-3 Mining & Concentration Complex Usinsky-3 was liquidated, the cost of the retired financial asset is RUB 1,624,717,000. Due to the retirement of financial asset Usinsky-3 Mining & Concentration Complex Usinsky-3, the earlier accrued provision in the amount of RUB 1,601,210,000 was recovered. In July, Novolipetsk Printing House was liquidated, the cost of the retired financial asset is RUB 36,556,000. Due to the retirement of financial asset Novolipetsk Printing House, the earlier accrued provision in the amount of RUB 36,556,000 was recovered. Accounting (Financial) statement for 2020 In order to increase net assets of LLC NLMK Overseas Holdings the Company in 2020 made a contribution into its assets in cash in the amount of RUB 14,871,000,000 by offsetting the Company’s cash claims under the interest-free loans granted in the amount of RUB 11,001,000,000 (in 2019: a contribution into the assets by offsetting the Company’s cash claims under the interest-free loans granted in the amount of RUB 20,000,000,000) recognizing it as financial investments in accordance with clause 7 of RAS 1/2008 “Accounting Policy of an Organization”. The Company granted loans to its related parties. Impairment of financial investments Based on the results of an impairment test for investments in NLMK Overseas Holdings LLC, a reserve provision in the amount RUR, 12,870,000 thousand was accrued in the reporting year. In Uralvtorchermet in the amount of RUR 1,233,411,000, in Zhernovsky-1 Mining & Concentration Complex Zhernovsky-1 in the amount of RUR 265,355,000. Notes 26 Income from financial investments Description Income, RUB k For 2020 For 2019 227,510 Income from short-term deposits (from 3 months up to 1 year) 101,191 Dividends from subsidiaries Interests on loans granted Total 48,980,386 3,988 49,085,565 72,099,211 13,229 72,339,950 Accounting (Financial) statement for 2020 3. 4 INVENTORIES Structure of inventories (RUB k) As of 31.12.2020 As of 31.12.2019 As of 31.12.2018 Type of stock Raw and other materials, other similar valuables 28,456,170 (1,908,513) 26,547,657 30,949,980 (1,909,124) 29,040,856 31,278,579 (1,981,883) 29,296,696 WIP costs 13,430,094 (346,073) 13,084,021 11,181,845 (358,371) 10,823,474 11,277,562 (277,791) 10,999,771 Finished products and goods for reselling Goods shipped Deferred expenses Total 8,553,718 8,841,876 231,997 -- -- -- 8,553,718 8,841,876 231,997 8,208,828 7,439,395 163,232 -- -- -- 8,208,828 7,439,395 12,269,445 163,232 177,871 8,367,664 -- -- 12,269,445 -- 177,871 8,367,664 59,513,855 (2,254,586) 57,259,269 57,943,280 (2,267,495) 55,675,785 63,371,121 (2,259,674) 61,111,447 Inventories to be sold to buyers instead of further processing are accounted in finished products. Notes 27 3. 5 ACCOUNTS RECEIVABLE AND PAYABLE 3. 5. 1 Accounts Receivable Structure of accounts receivable (RUB k) As of 31.12.2020 As of 31.12.2019 As of 31.12.2018 Accounting (Financial) statement for 2020 Type of debt Long-term accounts receivable - total 12,101,872 -- 12,101,872 60,988,431 -- 60,988,431 5,598,831 -- 5,598,831 including: settlements with buyers and customers -- -- -- -- -- -- -- -- -- -- -- -- advance payments made1 - total 198,000 198,000 1,400,653 1,400,653 716,043 716,043 including: under current operations for non-current assets3 other 103,481 94,519 11,903,872 -- -- -- 103,481 94,519 11,903,872 77,664 1,322,989 59,587,778 -- -- -- 77,664 1,322,989 59,587,778 79,796 636,247 4,882,788 -- -- -- 79,796 636,247 4,882,788 Short- term accounts receivable - total including: 83,802,923 (9,076,373) 74,726,550 64,729,561 (8,438,509) 56,291,052 136,396,105 (8,617,504) 127,778,601 settlements with buyers and customers advance payments made - total 13,952,510 12,202,196 (193,290) (594,771) 13,759,220 11,607,425 13,189,398 8,754,720 (169,846) (142,353) 13,019,552 8,612,367 8,662,779 9,941,378 (396,393) (177,281) 8,266,386 9,764,097 including: under current operations for non-current assets3 3,979,338 8,222,858 (593,453) (1,318) 3,385,885 8,221,540 2,512,790 6,241,930 (141,035) (1,318) 2,371,755 6,240,612 3,532,430 6,408,948 (175,963) (1,318) 3,356,467 6,407,630 57,648,217 (8,288,312)2 49,359,905 86,828,422 42,785,443 (8,126,310)2 125,717,992 (8,438,509) 34,659,133 117,279,483 117,791,948 (8,043,830)2 141,994,936 (8,617,504) 109,748,118 133,377,432 other Total 95,904,795 (9,076,373) 1 Here and hereafter the advance payments made are shown VAT included. 2 There were no significant changes in the structure and composition of the provisions. Including the provision for Stalkonstruktsiya Concern in the amount of RUB 2,046,892,000, to N. Maksimov in the amount of RUB 5,583,697,000. 3 Advance payments, given for the purposes of capital construction, purchase of fixed assets and other non-current assets, reflected in line 1190 “Other non-current assets” of the balance sheet. Notes 28 Other debtors Type of debt (RUB k) As of 31.12.2018 4,882,788 As of 31.12.2020 11,903,872 As of 31.12.2019 59,587,778 Other long-term receivables– total including: Accounting (Financial) statement for 2020 settlements with personnel on other operations interest-free loans granted interest-free loan to NLMK Overseas Holdings LLC interest on long-term financial investments Other short-term receivables- total including: 217,012 3,113,758 -- 257,209 48,003,296 45,736,6593 11,327,2732 34,659,133 296,044 2,400,492 -- 8,573,1022 49,359,905 2,186,252 109,748,118 interest-free loans granted 476,186 1,923,308 66,961,937 of which interest-free loan to NLMK Overseas Holdings LLC received non-interest bearing notes settlements on interest accrued calculations of assignment of claims including: 32,483,3813 1,300,862 1,976,378 -- -- 1,822,526 167,459 -- 64,636,685 1,766,000 10,266,0861 9,594,590 debt related to claim assignment transactions NLMK Overseas Holdings LLC settlements with budget and off-budget funds in terms of taxes and duties budget settlements on VAT settlements with customs claim settlements settlements with CTG participants settlements related to reimbursable services lease settlements -- 25,525 -- 43,310 9,594,590 39,545 5,883,978 333,429 201,728 1,468,309 36,772 5,762,672 321,288 133,519 238,902 31,913 6,872,621 483,163 153,754 1,092,704 33,178 83,288 15,942 36,746 settlements with personnel on salaries and other operations settlements with reporting persons settlements related to dividends interest-free loans granted (cash pooling) other 11,944 18,165 6,723 60,324 22,155,942 1,776,782 198,523 94,246,911 2,390 20,578 5,550,034 6,615,627 259,165 114,630,906 -- 4,554,889 505,071 61,263,777 Total 1 Including the interest on NLMK Ural’s loan as of 31.12.2018 in the amount of RUB 10,181,855,000 maturing in 2019. 2 Including the interest on NLMK Ural’s long-term loan as of 31.12.2019 in the amount of RUB 8,483,517,000 maturing on 31.12.2022 (as of 31.12.2019 in the amount of RUB 10,181,855,000 maturing in 2022, 1,145,380 maturing in 2021). 3 Interest-free loan as of 31.12.2020 maturing on 31.12.2021, (as of 31.12.2019 maturing on 31.12.2021). Notes 29 Overdue accounts receivable Type of debt (RUB k) As of 31.12.2020 Accounted for by the Contract terms As of 31.12.2019 Accounted for by the Contract terms As of 31.12.2018 Accounted for by the Contract terms Book value Book value Book value Accounting (Financial) statement for 2020 Total including: settlements with buyers and 3,307,793 1,863,327 2,481,211 1,674,609 2,407,029 1,421,432 customers advance payments made - total including: 915,518 1,543,518 722,228 950,065 1,277,607 574,710 1,107,761 433,675 1,256,149 566,669 859,756 390,706 under current operations other 1,543,518 848,757 950,065 191,034 574,710 628,894 433,675 133,173 566,669 584,211 390,706 170,970 3. 5. 2 Accounts payable Structure of accounts payable (RUB k) Type of debt As of 31.12.2020 As of 31.12.2019 As of 31.12.2018 Long-term accounts payable - total including: -- 385,320 15,510 settlements with suppliers and contractors Short-term accounts payable - total including: -- 385,320 86,497,982 15,510 118,357,751 100,325,861 advances received1 48,468,030 37,913,965 1,027,276 3,676,872 665,696 31,556,300 31,356,508 962,781 1,777,048 655,058 45,586,665 32,537,043 834,152 1,986,221 615,138 suppliers and contractors settlements related to payables to employees settlements related to taxes and duties settlements related to debt to state off-budget funds debt to shareholders in terms of dividends other 7,862,227 711,795 19,666,723 523,564 36,475,355 323,177 Total 100,325,861 86,883,302 118,373,261 1 Hereinafter advance payments received from buyers and customers are indicated net of VAT to be paid to the budget. Notes 30 Overdue accounts payable Description (RUB k) As of 31.12.2020 7,190,579 As of 31.12.2019 6,226,536 As of 31.12.2018 Total 7,419,724 including: Accounting (Financial) statement for 2020 settlements with suppliers and contractors advance payments received other 7,108,975 39,250 5,454,612 716,298 55,626 4,328,335 3,060,404 30,985 42,354 3. 6 CASH AND CASH EQUIVALENTS (RUB k) Description As of 31.12.2020 1,325,552 As of 31.12.2019 As of 31.12.2018 Settlement accounts Currency accounts Deposits (up to 3 months) Other cash equivalents of which: financial documents Total 478,934 2,869,096 21,293,916 23,871,338 968,110 155 47,458,916 14,948,889 11,203,786 5,191 17,510,928 39,954,627 5,084 191 52 26,636,800 60,339,735 Other income and payments from current operations (RUB k) Description For 2020 For 2019 Other income from current operations Income from litigation, claims Interest on cash equivalents Remuneration under the program of Depositary Receipts Purchase - sale of currency Other income 1,426,375 1,447,510 607,295 363,027 169,143 -- 547,892 213,950 198,769 301,700 164,064 308,045 Notes 31 End For 2019 Description For 2020 (10,225,281) (6,498,130) (4,911,932) (888,324) (120,054) (649,068) (565,935) -- Other payments under the current operations Tax payments Including VAT Other settlements with personnel Settlements with various creditors Settlements related to claims Charity expenses Settlements with the pension fund Purchase - sale of currency Other remittance (10,167,129) (7,626,361) (6,091,005) (901,270) (337,171) (691,442) (273,359) (85,833) Accounting (Financial) statement for 2020 (1,422,866) (80,904) (197,162) (54,531) Within the cash flows of current operations under line 4124 “Corporate income tax”, CTG participants’ cash transfers to the Company as well as CGT income tax payments to the budget have been shown in summarized form. Other inpayments from investment activitie (RUB k) Description For 2020 (874,258) For 2019 Other payments on investment activities Placement of deposits for a period of over 3 months and up to one year Refund of deposits from over 3 months to one year Other payments on investment activities (10,677,957) ,(61,119,611) 60,388,183 (142,831) (57,156,471) 46,590,471 (111,957) As part of other payments under financial transactions, there is reflection of cash flow for the transfer of tax withheld when paying dividends in the amount of RUB 5,107,316 thou. (in 2019 - RUB 5,832,550 thou.). Notes 32 Cash flows with Subsidiaries and Affiliates (including VAT) Description (RUB k) For 2019 (159,016,858) (158,622,747) (394,111) Inflow For 2020 248,547,963 Payments For 2020 (175,906,552) For 2019 206,560,874 Cash flow from current operations Subsidiarys Accounting (Financial) statement for 2020 16,301,199 232,246,764 15,781,524 190,779,350 (174,909,862) (996,960) Other companies1 of which: NLMK Trading SA Cash flow from investment operations Subsidiaries3 232,241,959 72,005,750 72,005,750 30,819,672 2,487,494 190,774,184 72,835,139 72,835,139 22,382,637 22,382,637 -- (996,960) (19,192,070) (19,192,070)2 (17,246,710) (509,999) (294,795) (4,124,018) (4,124,018) (1,760,622) -- Cash flow from financial operations Subsidiarys Other companies1 28,332,179 351,373,386 (16,736,711) (212,345,332) (1,760,622) (164,901,498) Total 301,778,650 1 Cash flows of NLMK Trading SA, Novexco (Cyprus) Limited, NLMK DanSteel A/S. 2 Including a contribution to the property of LLC NLMK Overseas Holdings LLC in order to increase net assets in the amount of RUB 14,871,000,000 reflected under line 4222 “related to acquisition of stock (shares) in other companies” of the Cash Flow Statement. Receipt and granting of loans in the framework of cash pooling were reflected in summarized form. 3 3. 7 CAPITAL AND DIVIDENDS (RUB k) Description As of 31.12.2020 5,993,227 As of 31.12.2019 5,993,227 As of 31.12.2018 Authorized capital Reserve capital Paid in capital– total including: 5,993,227 299,661 4,062,599 299,661 4,031,261 299,661 4,047,584 revaluation of fixed assets other sources 3,259,484 771,777 3,275,807 771,777 3,290,822 771,777 Retained profit (loss) Total 245,414,209 255,738,358 289,131,900 299,472,372 325,751,607 336,107,094 Notes 33 Company`s shares As of 31.12.2020 the authorized capital is paid up in full and consists of 5,993,227,240 common shares at par value 1 ruble each. Shareholders holding more than 5% of the nominal capital Share, % As of 31.12.2019 Accounting (Financial) statement for 2020 Description As of 31.12.2020 79.25 As of 31.12.2018 FLETCHER GROUP HOLDINGS LIMITED 81 84 Other free-floating shares (including: global depositary shares traded on London Stock Exchange (Deutsche Bank Trust Company Americas is NLMK’s depositary bank) and shares traded on Moscow Stock Exchange. Earnings per share Description For 2020 For 2019 Net profit for the reporting period, RUB k Weighted average number of outstanding common shares, pcs. Basic profit (loss) per share, RUB 61,125,114 5,993,227,240 10.20 83,420,072 5,993,227,240 13.92 Diluted profit per share was not calculated due to absence of factors, having the diluting effect on the basic profit per share indicator. Dividends The Annual General Shareholders’ Meeting held on 29.05.2020 approved payment of dividends in the amount of RUB 17.36 per common stock upon 2019 performance results that made in total RUB 104,042,556,000 with account of interim dividends of RUB 85,343,556,000 accrued in 2019. In 2020 the following interim dividends were declared: 3.21 ruble per common stock for Q1 which made RUB 19,238,259,000; 4.75 ruble per common stock for H1 which made RUB 28,47,829 thou.; 6.43 ruble per common stock for 9 months which made RUB 38,536,450 thou. As of 31.12.2020 the dividends for 2019, Q1 and H1 of 2020, accrued to the main company running business, are paid in full. Detailed information on the dividend structure and dividend policy is published on the Company's web-site (http://www.nlmk.com) Notes 34 3. 8 CREDITS AND LOANS Structure of credits and loans (RUB k) As of 31.12.2018 Type of liabilities Long-term liabilities– total including: As of 31.12.2020 152,793,410 As of 31.12.2019 105,703,843 84,066,622 Accounting (Financial) statement for 2020 loans credits 125,588,690 27,204,720 43,916,850 105,703,843 -- 30,406,203 84,066,622 -- 21,823,828 Short-term liabilities– total including: loans 11,899,989 814,132 12,763,225 of which: NLMK Trading SA Loans under cash-pooling agreement of which: 11,236,646 32,014,750 -- -- 29,497,258 7,099,572 Stoilensky Altai Koks NLMK Trade House NLMK Kaluga Novolipetsk Steel Service Center SMT NLMK 24,739,612 3,189,836 1,422,305 647,373 600,000 428,906 2,111 196,710,260 22,081,120 1,453,136 99,552 2,745,339 382,712 312,476 94,813 136,110,046 2,426,330 -- 107,872 -- 289,879 266,334 1,961,031 105,890,450 credits Total Bank credits As of 31.12.2020, 31.12.2019 and 31.12.2018 the Company signed agreements with ALFA-BANK, Sberbank and VTB Bank on the opening of the credit facilities with the limit not exceeding RUB 85,000,000,000, for working capital financing and for other corporate purposes. Unused credit limit for all the credit facility agreements makes RUB 57,795,280,000. Bank credits (RUB k) As of 31.12.2019 As of 31.12.2018 1,960,905 -- Lender description Maturity As of 31.12.2020 -- Deutsche Bank AG1 ALFA-BANK Other credit institutions Total bank credits, incl. interest accrued 2019 2022 2020 -- -- 27,206,831 -- 27,206,831 94,813 94,813 126 1,961,031 including: with maturity up to 1 year, incl. current portion of long-term credits 2,111 94,813 1,961,031 1 This loan was obtained from a syndicate of banks, the agent bank is specified as the creditor here. Notes 35 Loans Lender name (RUB k) As of 31.12.2018 94,104,6842 2,725,163 As of 31.12.2020 126,252,0322 11,236,647 -- As of 31.12.2019 105,795,5522 722,423 Steel Funding DAC (Eurobonds)2 Subsidiaries and other related parties of which: interest-free loans Loans under cash-pooling of which: interest-free loans Accounting (Financial) statement for 2020 150,000 150,000 32,014,7501 30,806,250 169,503,429 29,497,2581 25,246,398 136,015,233 7,099,5721 5,922,538 103,929,419 Total loans, incl. interest accrued including: with maturity up to 1 year, incl. current portion of long-term loans 43,914,739 30,311,390 19,862,797 1 Including the interest accrued. 2 As of 31.12.2020 three issues of Eurobonds due in 2023-2026. The rest of the debt is a short-term debt. Detailed information on the structure and terms and conditions of the debt portfolio is published on the Company's web-site (http://www.lipetsk.nlmk.com) 3. 9 ESTIMATED LIABILITIES (RUB k) As of 31.12.2018 7,089,626 Name of the estimated liability Estimated liabilities - total As of 31.12.2020 4,668,379 As of 31.12.2019 3,870,986 including: on upcoming expenses for vacations on upcoming expenses for bonuses on unsettled court proceedings and claims 1,917,835 2,420,994 329,550 1,667,478 1,904,749 298,759 1,536,035 5,239,128 314,463 3. 10 INCOME AND EXPENSES 3. 10. 1 Income and expenses from ordinary activities Income from ordinary activities (RUB k) Description For 2020 228,197,950 For 2019 Revenue from sales of products (services) outside the RF 217,814,677 204,001,644 421,816,321 Revenue from sales in the RF Total 208,881,156 437,079,106 Notes 36 Expenses for production (RUB k) Description For 2020 319,928,307 For 2019 Material expenses - total including: raw and other materials fuel, energy 303,071,463 208,202,825 56,913,336 37,955,302 22,717,625 7,583,720 223,499,492 57,088,776 39,340,039 25,449,708 7,656,094 Accounting (Financial) statement for 2020 work and services rendered by third parties1 Labour costs Social allocations Depreciation Other costs Total by components 16,297,423 12,665,125 381,996,657 13,983,065 9,386,301 356,742,174 Balance change (increase [-], decrease [+]): construction in progress, semi-finished products, finished products Total expenses on ordinary activities -4,353,185 377,643,472 15,525,815 4,431,141 361,173,315 16,435,159 For reference: Expenses for capital and routine repair 1Including expenses related to the sale of products in the amount of RUB 30,089,305 thou. (over 2019– RUB 27,879,910 thou.). 3. 10. 2 Other income and expenses Other income and expense (RUB k) For 2020 For 2019 Description Income Expenses 6,382,322 Income Expenses 3,381,428 Sale of foreign currency including: 5,262,236 3,200,162 swap transactions -- -- 1,421,786 18,143,952 9,136,061 15,062,671 60,063 1,664,739 1,128,201 584,249 1,072,572 304,526 77,490 855,348 -- 6,327,099 13,660,496 286,739 23,911 2,000,124 114,344 -- -- -- Exchange rate difference The right of claim assignment Valuation reserves Transactions with securities Sales of inventories Profit and loss of previous years Expenses on credits Retirement of fixed assets, capital investments Writing-off of inventories, tare, inventories from repairs Other expenses over the Group of Companies Charity expenses 9,169,673 64,863 -- 2,003,160 333,584 -- 1,035,623 1,071,072 -- 13,653,928 39,858,270 19,308 1,708,838 325,113 328,719 142,613 487,323 203,129 276,412 953,133 61,338,214 406,811 1,658,454 -- -- -- Other Total 1,457,114 20,397,324 1,451,647 55,923,841 795,916 28,474,056 Notes 37 3. 11 CURRENT INCOME TAX FORMATION Calculation of profit tax according to the requirements of RAS 18/02 (RUB k) For 2019 Description Book profit (loss) before tax Contingent expenses (income) for income tax (according to accounting data) Deferred income tax For 2020 67,106,712 95,797,959 19,159,592 (409,420) (6,228,901) 12,521,271 62,606,356 -- (43,775,638) (154,780) 8,042,342 Accounting (Financial) statement for 2020 13,421,343 50,658 Permanent tax expenses (income) (7,110,384) 6,361,617 31,808,083 15,136,579 (50,688,500) (6,046,898) 6,300,190 Current profit tax1 Taxable profit (according to the tax accounting data) Permanent difference leading to the taxable profit increase according to the tax accounting data Permanent difference leading to taxable profit decrease according to the tax accounting data Taxable temporary differences Deductible temporary differences 1Income tax rate - 20% Calculation of the taxation base with reference to the profit tax does not include profits in the form of dividends from participation in authorized capitals. Taxable temporary differences are associated with differences in recognition in accounting and taxation of initial appraisal of property to be depreciated, accumulated depreciation, depreciation premium, appraisal of construction-in-progress, WIP, semi-finished products and materials produced in-house, finished products. The Deductible temporary differences are die to differences in recognition in accounting and taxation of deferred expenses, losses from servicing facilities and companies, losses from sale of depreciated property, estimated liability. In 2020, deferred tax assets for provisions for inventory impairment and for doubtful debts were recognized. Expenses not used for taxation purposes are mainly related to the accrual of impairment of financial investments. 3. 12 INFORMATION BY SEGMENTS The Company discloses information on a single segment based on the type of activity. Segment Not distributed Company as a whole Indicator 2020 2019 2020 2019 2020 2019 Sales revenue, RUB k 435,284,110 99.59 376,699,922 58,584,188 98.57 418,999,111 99.33 359,088,130 59,910,981 98.79 1,794,996 0.41 943,550 851,446 1.43 2,817,210 0.67 2,085,185 732,025 1.21 437,079,106 100.00 377,643,472 59,435,634 100.00 421,816,321 100.00 361,173,315 60,643,006 100.00 Share of sales revenue in total proceeds, % Total production cost, RUB k Sales profit (loss), RUB k Share of profit in total profit, % Notes 38 (RUB k) Sales revenue 33,557,966 156,221,709 98,685,882 57,217,698 62,921,168 20,050,793 6,628,894 Type of product Change for 2020 for 2019 Pig iron Slabs Hot-rolled coils Cold-rolled coils Coated steel Electrical Steel 9,705,606 169,814,242 90,688,176 59,740,497 61,137,598 20,283,245 7,629,747 23,852,360 (13,592,533) 7,997,706 (2,522,799) 1,783,570 (232,452) Accounting (Financial) statement for 2020 Other by-products and energy resources (1,000,853) 16,284,999 Total 435,284,110 418,999,111 In the reporting year the proceeds from sales to foreign customers accounted for 52.43 % (51.98 % in 2019) of the total sales revenue in the segment. In 2020 the share of the largest customer NLMK Trading SA (at least 10% of sales) amounted to 49.93 % (in 2019 – 48.40 %) of the Company’s sales revenue in total (see Explanation 3.14.2) 3. 13 SECURITY OF LIABILITIES (RUB k) Description Received - total As of 31.12.2020 3,743,552 As of 31.12.2019 5,037,995 As of 31.12.2018 4,379,463 including: Bank guarantees for advance payment return and payment guarantees 3,743,552 5,037,995 4,379,463 Granted sureties 124,946,058 76,720,020 72,259,568 including: Contribution liability of Steel Invest&Finance (Luxembourg) S.A.1 1,360,236 4,507,139 -- 1The Company is liable to provide a contribution of EUR 15,000,000 in 2021 (EUR 65,000,000 in 2020-2021) under the contract between the Company, Steel Invest & Finance (Luxembourg) S. A. and the Belgian investment fund SOGEPA for effecting additional contributions to the authorized capital of NLMK Belgium Holdings. As of 31.12.2020, 31.12.2019, 31.12.2018 the Company has liabilities under the surety agreements (RUB 123,230,163,000, RUB 76,289,420,000, and RUB 71,491,738,000 accordingly) issued against related parties loans. The liabilities in accordance with the terms and conditions of the agreements will remain valid until 2030 and will cease to exist pro rata the repayment of the loans by the related parties. Notes 39 3. 14 INFORMATION ON RELATED PARTIES 3. 14. 1 The list of related parties1 The list of related parties includes the affiliates of the Company1 in accordance with the RF legislation as well as related parties acting on other grounds. The main business entity owning 79.25 % of the Company’s stock is FLETCHER GROUP HOLDINGS LIMITED. The Beneficiary of the above companies in accordance with definition of this notion by the Russian legislation is Mr. Vladimir Lisin. There are no predominant (participating) business entities. Accounting (Financial) statement for 2020 In addition to those listed in this disclosure, the related ones are the members of the Board of Directors and the Management Board, disclosed in the General Information. List of NLMK’s subsidiaries and affiliates as of 31.12.2020: Stake in authorized capital as of 31.12.2020, % Stake in authorized capital as of Description Description 31.12.2020, % VIZ-Steel 100 100 100 100 100 100 100 100 100 100 100 NLMK Overseas Holdings NLMK Trade House Construction and Erection Trust NLMK Stoilensky NLMK Long Products Novolipetsk Steel Service Center Hotel Complex “Metallurg” NLMK Engineering 100 100 100 100 100 100 100 100 92.59 25.00 NLMK Communications Vtorchermet NLMK Stagdok Dolomit Uralvtorchermet NLMK-Metalware NLMK Kaluga Mining & Concentration Complex Zhernovsky-1 Altai Koks NLMK Ural Neptune NLMK Information Technologies All the companies specified are registered in the Russian Federation. Operations with the affiliate Neptune are insignificant and are not disclosed in the reporting and comparative period. 1 The complete list of the Company’s affiliates is subject to mandatory disclosure by the Issuer of issue-grade securities and is published on NLMK’s web-site (http://www.nlmk.com). Notes 40 Other related parties Other related parties include entities belonging to the same group as the Company does, as well as organizations and their subsidiaries, which are significantly influenced by the members of the Company’s Board of Directors and/or the Company’s management by way of voting interest ownership / participation in management. Other related parties with whom the Company had operations in the reporting year and/or in regards of which there are balances under settlements of operations not completed on the reporting date Accounting (Financial) statement for 2020 Freight One PO TatVtorchermet Universalny Expeditor JSC “Vtorchermet” Tuapse Sea Trade Port JSC ChuvashVtormet Taganrog Sea Trade Port Saint-Petersburg Sea Port UNIVERSAL FORWARDING COMPANY (UFC) LIMITED Novexco (Cyprus) Limited1 NLMK Trading SA1 Vtorchermet NLMK Center Vtorchermet NLMK North Vtorchermet NLMK Siberia Vtorchermet NLMK Western Siberia Vtorchermet NLMK Ural Vtorchermet NLMK Black Belt Region Vtorchermet NLMK South Vtorchermet NLMK East Vtorchermet NLMK Perm Vtorchermet NLMK West Vtorchermet NLMK Republic Vtorchermet NLMK Povolzhie Vtorchermet NLMK Bashkortostan Vtorchermet NLMK Volga NLMK Plate Sales S.A. NLMK DanSteel A/S1 NLMK Pennsylvania LLC1 Steel Funding DAC VIZ-Broker NLMK - Ural Service Railcar Repair Company "Gryazi" InServicePlus Gazobeton 481 NLMK Verona SpA NLMK Belgium Holdings S.A. NLMK Indiana LLC NLMK La Louvière S.A. NLMK India Service Centre Pvt Ltd Social Security Charity Fund “Miloserdiye” Verkh-Isetsky Steel Plant Blinovskoye NLMK Sales Europe S.A. NLMK Clabecq S.A. Novolipetsk Medical Centre Association SC Lipetsk Metallurg Lisya Nora Pride Media Ural Health-Center Nizhnie Sergi Association of ferrous metallurgy enterprises “Russian Steel” Advocate Bureau "Reznik, Gagarin & Partners", Moscow NLMK International B.V.1 Corporate Solutions Centre NLMK India Coating Pvt Ltd NLMK Strasbourg Steel Invest & Finance (Luxembourg) S.A. 1Other affiliates controlled by Novolipetsk Steel through NLMK Overseas Holdings Notes 41 3. 14. 2 Operations with related parties Operations related to individual companies are disclosed for the period of their actual inclusion into the list of related parties including VAT. The Company makes transactions with the related parties in line with market principles. Sales to related parties Accounting (Financial) statement for 2020 (RUB k) For 2020 For 2019 Description Products, commodities Products, commodities Total Inventories Services 838,395 676,690 Rent Total Inventories Services Rent Subsidiary companies of which: 16,538,692 15,003,084 20,523 15,146,468 13,971,688 586,710 559,204 28,866 LLC VIZ-Steel 7,934,728 7,864,972 18,030 51,726 -- 7,884,953 7,850,314 1,755 32,884 -- Novolipetsk Steel Service Center NLMK Trade House Other related parties of which: 3,227,731 3,226,324 3,194,871 3,214,967 16,740 1,995 7,380 679,029 10,395 8,500 5,725 862 4,328,502 498,279 4,254,079 494,777 36,341 489 8,743 256,908 25,347 2,261 12,735 752 38,819 219,776,110 219,044,922 218,336,576 218,261,562 236,314,802 234,048,006 44,779 205,305,563 205,001,093 NLMK Trading SA -- 75,014 1,355,71 9 -- 204,177,163 204,148,188 -- 28,975 -- Total 845,775 65,302 220,452,031 218,972,781 595,453 816,112 For 2019 67,685 Purchases from other related parties (RUB k) For 2020 Description Total Inventories Services Rent Total Inventories Services Rent Subsidiary companies of which: Altai Koks 183,130,653 177,169,518 5,950,131 11,004 162,341,960 156,688,940 5,642,799 10,221 36,841,163 36,840,972 -- -- -- 191 170 -- 39,274,837 39,274,646 94,044,024 94,043,824 21,270,732 21,270,732 -- -- -- 191 200 -- Stoilensky 111,021,571 111,021,401 Vtorchermet NLMK Other related parties of which: 26,875,164 26,236,772 26,875,164 813,509 25,094,358 328,905 23,439,610 726,898 22,371,316 341,396 Freight One 20,545,571 -- 20,216,866 328,705 19,469,632 290,051 18,838,183 341,396 Total 209,367,425 177,983,027 31,044,489 339,909 185,781,570 157,415,838 28,014,115 351,617 Notes 42 Accounts receivable Description (RUB k) As of 31.12.2020 As of 31.12.2019 As of 31.12.2018 Accounting (Financial) statement for 2020 Subsidiaries of which: NLMK-Ural NLMK Overseas Holdings LLC Stoilensky GOK GOK Other related parties of which: 12,616,669 (64,107) 12,552,562 (13,073) 10,504,131 35,451,349 (42,309) 35,409,040 29,535,768 (175,060) 29,360,708 10,517,204 -- 128,560 2,710,235 11,376,449 -- 20,098,892 1,647,721 (23,215) 11,353,234 12,385,445 -- -- 9,594,626 (4,819) 20,094,073 (86,317) 1,561,404 (30,434) -- 12,355,011 9,594,626 5,083,327 1,850,727 -- (16,414) (277,036) -- 112,145 2,433,199 5,189,590 (106,263) 1,927,250 (76,523) Freight One 1,652,039 -- 1,652,039 1,423,895 (84,029) 1,339,866 1,821,481 (64,999) 1,756,482 Total 15,326,904 (341,143) 14,985,761 37,099,070 (128,626) 36,970,444 31,463,018 (251,583) 31,211,435 Accounts payable (RUB k) Description Subsidiaries As of 31.12.2020 As of 31.12.2019 As of 31.12.2018 11,280,261 15,487,965 11,014,524 of which: Stoilensky GOK Altai-Koks 11,706,721 2,854,232 40,687,128 6,858,162 3,362,928 27,389,844 6,500,365 3,994,568 40,745,593 Other related parties of which: NLMK Trading SA1 Total 40,268,472 56,175,093 27,145,681 38,404,368 40,634,698 52,025,854 1Advance payments received Notes 43 Dividends received from subsidiaries (RUB k) Description For 2020 For 2019 Stoilensky GOK Altai-Koks VIZ-Steel NLMK - Kaluga Novolipetsk Steel Service Center NLMK Engineering Dolomit NLMK-Metalware Stagdok 60,033,260 4,477,590 2,250,000 2,000,000 208,000 400,368 145,279 200,000 15,166 50,018,987 -- Accounting (Financial) statement for 2020 2,700,000 2,000,000 403,000 75,113 165,202 -- -- Uralvtorchermet Construction and Erection Trust NLMK NLMK Trade House NLMK Information Technologies Total 1,250,000 100,000 -- -- 85,000 37,000 9,000 -- 71,079,663 55,493,302 Total amount of accrued dividends from subsidiaries is shown in cl. 3.3 of the Explanation. Loans granted to related parties In the reporting year the Company granted short-term and long-term loans, repayment of which is envisioned not later than by 2026: (RUB k) Description As of 31.12.2020 Repaid 26,664,772 For 2019 Granted 28,356,370 Granted 13,411,495 Repaid Subsidiaries 47,256,396 including: interest-free loans to NLMK Overseas Holdings LLC 13,411,495 16,173 26,664,772 8,040 28,356,370 30,000 47,256,396 9,840 Other related parties1 including: Blinovskoye -- 3,840 -- 7,840 Total 13,427,668 26,672,812 28,386,370 47,266,236 1 Including long-term loans in the amount of RUB 16,173 thou. (in 2019- RUB 30,000 thou.), repaid – RUB 8,040 thou. (RUB 5,840 thou. in 2019). Notes 44 Outstanding short-term and long term loans: (RUB k) As of 31.12.2018 Borrower’s name Subsidiaries1 As of 31.12.2020 36,073,325 As of 31.12.2019 49,925,603 69,362,429 including: NLMK-Ural NLMK Overseas Holdings Vtorchermet NLMK Other related parties2 Total Accounting (Financial) statement for 2020 1,666,638 32,483,381 1,923,306 48,264 2,265,638 45,736,659 1,923,306 40,131 2,802,438 64,636,685 1,923,306 19,971 36,121,589 49,965,734 69,382,400 1 Including the interest-free loans to the subsidiaries as of 31.12.2020, 31.12.2019 and 31.12.2018 in the amount of RUB 36,073,325 thousand, RUB 49,925,603 thousand and RUB 69,362,428 thousand. 2Interest-bearing loans The Company granted loans to the related parties under cash pooling agreement: (RUB k) Repaid For 2020 Granted 89,110,465 For 2019 Granted 76,290,757 Borrower’s name Repaid 86,906,239 Subsidiaries1 84,141,204 including: NLMK-Ural 39,795,231 36,363,513 237,428 38,580,507 36,314,456 237,428 37,554,920 22,629,103 3,914,373 -- 3,952,428 911,889 40,228,785 21,869,227 6,403,715 2,781,383 3,952,428 914,513 Vtorchermet NLMK NLMK - Kaluga Stoilensky GOK NLMK-Metalware Other related parties2 Total 3 -- -- 6,166,619 1,215,615 90,326,080 5,889,692 1,192,080 88,098,319 77,202,646 85,055,717 1 Including interest-free-free loans for 2020 in the amount of RUB 88,807,626 thou. (in 2019 - RUB 72,332,695 thou.), repaid – RUB 86,653,054 thou. (RUB 77,704,717 thou. in 2019). 2 Interest-free loans. 3 Repayment and provision of loans are shown in detail. Notes 45 Outstanding loans granted under cash pooling agreement: (RUB k) As of 31.12.2018 Borrower’s name Subsidiaries As of 31.12.2020 4,557,503 As of 31.12.2019 1,754,276 9,067,923 including: Accounting (Financial) statement for 2020 interest-free loans Other related parties including: 4,496,931 57,958 1,743,358 34,424 6,578,581 37,048 interest-free loans 57,958 34,424 37,048 Total 4,615,461 1,788,700 9,104,971 Returns on loans: (RUB k) Borrower’s name Subsidiaries Other related parties Total for 2020 For 2019 1,540 2,214 3,754 10,718 2,163 12,881 Loans granted by related parties The Company received loans from subsidiaries and other related parties. (RUB k) For 2020 For 2019 Lender name Received Repaid 615,386 Received Repaid Subsidiaries including: -- -- -- -- -- -- Uralvtorchermet Construction and Erection Trust NLMK 1 Other related parties including: -- -- 465,386 150,000 16,854,155 28,332,179 1,859,735 NLMK Trading SA1 Total 1 28,332,179 28,332,179 16,745,885 17,469,541 -- -- 1,859,735 1,859,735 1 Interest-free loans 1 Including the interest accrued. No interest-free loans were granted or repaid in 2020 and 2019. Notes 46 Interest payable: (RUB k) Lender name Subsidiaries Other related parties Total For 2020 For 2019 1,233 11,920 13,153 20,520 18,252 38,772 Accounting (Financial) statement for 2020 In addition, the Company received loans from subsidiaries and other related parties under cash-pooling agreement. Outstanding loans received under the cash pooling agreement are disclosed in paragraph 3.8 of the Notes. (RUB k) For 2020 Received 221,946,070 For 2019 Lender name Repaid 219,606,612 Received Repaid 176,405,739 Subsidiaries 198,607,578 including: Stoilensky GOK NLMK - Kaluga Altai-Koks NLMK Trade House VIZ-Steel NLMK-Metalware Other related parties Total 1 118,980,358 33,331,167 26,191,933 15,616,931 11,290,129 3,794,365 116,321,866 35,528,033 24,455,233 14,294,179 11,840,426 3,797,428 121,909,084 24,386,383 8,956,685 4,412,674 12,476,178 4,525,860 392,319 102,254,294 21,723,345 7,503,549 4,420,993 14,093,576 4,780,492 363,463 658,084 222,604,154 557,844 220,164,456 198,999,897 176,769,202 Including interest-free loans for 2020 in the amount of RUB 186 ,263 ,186 thou. (in 2019 - RUB 171,543,389 thou.), repaid – RUB 180,667,623 thou. (in 2019 – RUB 152,219,528 thousand), repayment and provision of loans are shown in detail. Interest payable for loans received from subsidiaries under cash pooling agreement: (RUB k) Lender name Subsidiaries Total For 2020 For 2019 134,460 134,460 166,992 166,992 Notes 47 Security of liabilities The Company stood surety for subsidiaries and other related parties: (RUB k) As of 31.12.2018 Security granted by the Company NLMK - Kaluga VIZ-Steel Stoilensky GOK NLMK DanSteel A/S NLMK Trading SA As of 31.12.2020 As of 31.12.2019 279,189 -- 667,144 812,997 9,137,703 7,364,511 19,891,501 50,013 Accounting (Financial) statement for 2020 358,571 4,611,729 6,895,793 85,750,040 46,011 430,600 5,872,494 5,637,077 36,783,570 -- VIZ-Broker NLMK Pennsylvania LLC NLMK-Metalware 3,193,697 -- 7,247,402 -- 12,826,077 11,248 Dolomit -- -- 37,461 NLMK Belgium Holdings S.A. NLMK Plate Sales S.A. NLMK Verona SpA NLMK Strasbourg NLMK La Louveiere SA NLMK-Ural 6,356,020 4,940,955 6,569,461 1,245,759 3,612,273 5,513 3,471,162 4,884,130 7,575,435 -- 3,973,599 7,948,875 9,538,438 -- -- -- -- -- 31,822 4,507,139 76,720,020 Steel Invest & Finance (Luxembourg) S.A. (Explanation 3.13) Total 1,360,236 124,946,058 72,259,567 Liabilities under the above securities are valid till 2030. Operations with key management personnel Members of the Board of Directors and the Management Board are the top management of the Company. Conditions and procedure for payment of remuneration and reimbursement of expenses related to the execution of the Board of Directors member’s functions, is provided for by NLMK’s Regulations on the Board of Directors members' Remuneration (“Regulations”) approved by the General Shareholders Meeting. Terms and procedure of remuneration payment to the members of the Management Board are determined by the contract concluded with the members on the proposal of the Committee for Human Resources, Remuneration and Social Policy. Data for 2019 is adjusted with consideration of the actual payments in 2020. (RUB k) Description For 2020 For 2019 Bonuses and salaries (without estimated liabilities for upcoming expenses for vacations) Remunerations Other payments3 Total 530,7361 167,8462 1,770 534,219 170,693 9,185 700,352 714,097 1 2 Bonuses to the members of the Management Board in 2020 include liabilities on their payment based on a preliminary calculation upon the reporting year performance. Remuneration to the members of the Board of Directors in 2020 are determined on the basis of a preliminary calculation according to the Regulation. Notes 48 3. 15 CONTINGENT LIABILITIES In the ordinary course of business the Company participates in several legal proceedings acting as a claimant or a defendant. The Company’s management believes that its liabilities, which may arise from these proceedings, cannot have a material adverse effect on financial status and performances. Since the Company fulfils the requirements of regulatory authorities within the framework of environment protection and takes actions aimed at improvement of environmental situation in the region, at present there are no liabilities related to damage to the environment and its elimination. The Russian tax law admits various interpretations and is subject to frequent changes. The Company’s Management does not rule out some possible disputes with supervisory agencies on any transactions that took place in the reporting and previous periods, which could result in changes of performance results. Tax audits may cover three calendar years of business immediately preceding the year of audit. Earlier periods may be subject to auditing under certain circumstances. In the Company management’s opinion, as of 31.12.2020 the respective legal regulations have been interpreted correctly by it, and the Company’s position in terms of tax laws is going to be stable. Accounting (Financial) statement for 2020 3. 16 EVENTS AFTER THE REPORTING DATE There have been no material events after December 31, 2020 till the signing date of these statements subject to disclosure herein. Manager, NLMK Е. Morozova by virtue of Power of Attorney No.505-20/8 dd. 09.01.2020 10 February 2021 Notes 49

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