SCM Annual Report 2007

KEY FINANCIAL INDICATORS, SCM

Assets, US $ million

+75%
19,903
11,372

2006 2007

Equity, US $ million

+85%
9,668
5,220

2006 2007

EBITDA, US $ million

+71%
2,715
1,585

2006 2007

Revenue, US $ million

+42%
9,563
6,719

2006 2007

Profit for the year, US $ million

+94%
1,366
704

2006 2007

4 SCM Group Annual Report 2007

CONTENTS

CEO STATEMENT 6
KEY EVENTS OF 2007 9

SCM: IN STEP WITH THE MILLENNIUM 12
THE HISTORY OF THE GROUP 13
MISSION, VISION, VALUES 16
GROUP MANAGEMENT 18
THE GROUP’S CORPORATE STRUCTURE 34
Management Structure 34
Business Structure 38

SCM GROUP’S BUSINESSES 42
CORE BUSINESS AREAS
Mining and metals 43
Energy 48
Financial services 52

ALTERNATIVE COMMERCIAL DEVELOPMENT
Telecommunications 54
Real estate 56
Media 58
Clay mining 60
Retail trade 61
Petroproduct retailing 63

Contents 5

SOCIAL RESPONSIBILITY
AND SUSTAINABLE GROWTH 64
THE SIX CSR POLICIES OF THE SCM GROUP
Business and corporate ethics 67
Working conditions 68
The environment 71
Local communities 73
Social investments 75
Sponsorships and charity 77

BEST INFORMATION ANALYSIS CENTER
(BUREAU FOR ECONOMIC AND SOCIAL TECHNOLOGIES) 78

SHAKHTAR FOOTBALL CLUB 79

FOUNDATION FOR THE DEVELOPMENT OF UKRAINE 80

KEY DIRECTIONS: STRATEGIC GROWTH
AREAS FOR 2008-2012 82

KEY EXPECTED EVENTS FOR 2008 86


CEO STATEMENT

Dear Colleagues and Partners, The management model we have chosen
enables us to diversify our investment priori-
I am proud to present to you the 2007 Public
ties across six main areas: mining and metals;
Report of the SCM Group, Ukraine’s largest
energy; finance; telecommunications; media
diversified holding company. For SCM, this
and real estate. As well as being present in
year was marked by the continued restructur-
each of these areas as a strategic investor, we
ing of the Group and the dynamic growth and
also understand the specifics of each industry
strengthening of our positions in our priority
and possess a wide range of resources to real-
markets. From this report, you will find out
ize their full potential. We paid special attention
about SCM’s most important development
this year to the structuring and development of
milestones, achievements of the businesses we
our telecommunications and media businesses,
invest in, as well as our strategic plans.
as well as to laying the foundation for success-
2007 was a year of tremendous growth op- ful development in real estate.
portunities for SCM, of which we have taken
By rigorously following our balanced diversifi-
full advantage. In 2007 we have completed
cation strategy, in 2007 we focused on strength-
our main goal – we laid the firm foundation of
ening our positions in the six priority areas
our long-term sustainability that will allow us
through both organic growth and new acquisi-
to remain effective both in times of dynamic
tions. To achieve this goal, SCM as a strategic
growth, as 2007 demonstrated, as well as in
investor, contributed to our target markets’
less favorable times.
development financially and by soliciting the
In 2007, SCM Group made a further step necessary skills and expertise from the best
towards completing the large-scale corpo- professionals.
rate restructuring program, launched in 2006.
We also made a number of important steps in
The expected results of this program, to be
new business areas in 2007. As of this moment,
achieved by 2008, are a transparent share-
these areas are not strategic for SCM, but we
holding structure for the Group, a corporate
regard them as having significant long-term
governance system in line with the world best
growth potential. In particularly, we entered
practice, and a well-balanced investment
the retail sector, structured our assets in clay
portfolio.
mining, and began the restructuring process in
petroleum products retail.

CEO statement 7

In 2007 SCM Group started a second pivotal
process – exiting from businesses that do not
meet our investment strategy. We sold our
shareholding and exited the boards of sev-
eral machine-building enterprises, as well as
withdrawing from the baking business. We also
started the preparations for withdrawal from
the brewing business.
To fully realize our development plans, we
entered the international debt capital markets
and secured syndicated loans. We did, however,
remain true to our rather conservative ap-
proach to soliciting external funding. The share
of debt in SCM Group’s capital structure is
relatively small.
This year we publicly presented SCM Group’s
corporate social responsibility strategy. As
Ukraine’s largest company, SCM contributes
to the social and economic development of its
regions of presence and recognizes its respon-
sibilities to Ukrainian society. We pay significant
attention to advancing our social policy and
reporting system, allowing us to harmonize
business interests and development priorities
at both national and regional levels.
Within its corporate responsibility strategy,
SCM Group initiated and actively participated
in several public events dedicated to introduc-
ing the ISO 26000 standard on CSR which is
currently being developed and promoting best
practice in corporate social responsibility in
Ukraine. Implementing CSR best practices
allows us to increase our assets’ productiv-
ity. To further implement the SCM Group CSR
strategy, responsible employer practices were
introduced at all Metinvest and DTEK enterpris-
es, including employee professional develop-
ment, and performance based compensation
and bonus systems.


At the end of 2007 we can definitely say that Each day we discover new opportunities before
SCM Group has systematically achieved the us, allowing us to build the future day by day.
goals set before us in 2006. To keep up the pace We embrace the rapidly changing world around
and remain focused on the key business goals, us, as well as understand the scale of those
we have defined the Group’s strategic develop- changes and we are ready for the challenges
ment areas for the next five years. Those entail: ahead. We are prepared to perform in any
further improvement of corporate governance circumstances and – we are willing to walk the
and ongoing asset portfolio structuring; devel- road to leadership together with our part-
opment of the Group’s industrial businesses ners. Our goal for the next five years will be to
(mining, metals and energy) and active invest- enhance SCM Group’s competitiveness and ef-
ment in non-industrial, opportunity businesses; fectiveness on both a national and global scale.
as well as enhancing our businesses’ manage-
ment teams by recruiting leading profession-
als. In addition, we are constantly aware of our
responsibility to society and this motivates us to
abide by the highest performance standards at
all levels.

OLEG POPOV
Chief Executive
Officer

Key events of 2007 9

KEY EVENTS OF 2007

JANUARY
SCM became an industry partner of the World Economic Forum in Davos, the leading international
talk shop for global development issues. Today, SCM is one of only two Ukrainian companies that are
represented in the international economic club. SCM representatives participated in meetings with
top managers of the leading mining and metal companies in the world, where discussion focused on
development trends in the sector for the next 5 to 10 years.

MARCH
SCM signed an agreement with BNP Paribas (Suisse) for a 4-year credit line worth US $400 million.
This money will be drawn on to finance the further expansion of the SCM Group’s businesses.

MAY
SCM and BNP Paribas (Suisse) successfully completed the first stage of credit syndication estab-
lished two months earlier raising US $545 million. As a result of the syndication, four leading inter-
national banks became the sub-underwriters of this loan. Those banks were: NATIXIS, Raiffeisen
Zentralbank Osterreich, Standard Bank, and Bayerische Hypo- und Vereinsbank (UniCredit Group).


JULY
Metinvest Holding, which manages SCM Group’s mining and metal businesses, received a syndi-
cated loan worth US $1.5 billion. The lead managers of the loan were the prominent international
banks: ABN AMRO, BNP Paribas, Deutsche Bank, and ING. BNP Paribas was the creditor and docu-
ment coordinator. This credit will be issued in two tranches, the first of which was for pre-export
financing (lending collateralized by export contracts) that was transferred on July 23 in the amount
of US $1.0 billion. The second tranche worth US $500 million is a revolving line of credit. This loan
is unique in many aspects. Firstly, it is the largest loan ever issued to a private Ukrainian company.
Secondly, Metinvest Holding received the most favorable terms ever given to a private Ukrainian
company: interest on the syndicated loan is LIBOR+1.7%.

AUGUST
SCM became a member of the European Business Association (EBA). The EBA is one of the leading
international business associations in Ukraine, bringing together around 750 European, Ukrainian,
and international companies. This organization sees itself as an instrument for the open and trans-
parent representation of business interests by lobbying government policy-makers. The participa-
tion of a major player on the Ukrainian market, such as the SCM Group, with an active presence on
European Union markets, in the EBA not only strengthens the position of this business association,
but can also foster the process of European integration of Ukraine.

SEPTEMBER
In September, a steel company on a global scale was formed in Ukraine when SCM and Smart Hold-
ing agreed to merge their mining and metal assets. During the course of negotiations concerning
a joint modernization of Makeyevka Steel Plant, a decision was made to expand SCM’s cooperation
with Smart Holding in the mining and metal business. As a result of the merger, Smart Holding will
become the second shareholder in Metinvest Holding, in exchange for its stake in Makeyevka Steel
Plant, Ingulets Mining and Enrichment Plant (InGOK) and Promet Steel in Bulgaria. The planned
merger will help strengthen the position of the domestic steel industry on world markets, will sup-
port the growth of Ukraine’s economy, and will give the country a higher profile in the global steel
sector.

Key events of 2007 11

PricewaterhouseCoopers completed its review of the consolidated financial statements of SCM
Group for 2006. The Consolidated Statement was presented in compliance with International
Financial Reporting Standards. This is the third consolidated statement issued by SCM Group that
complies with IFRS and passed an international audit (the Group issued its first such statement for
2004).

OCTOBER
SCM Group launched a new business - retail trading. The Ukrainian Retail company made a public
presentation of its plans to develop its own chain of stores under Brusnytsya brand name.

NOVEMBER
А decision was made to set up a television media holding company on the basis of the TRK Ukraine
Television Channel. In addition to its own channel, TRK Ukraine, the new media company will also
set up specialized television channels, such as News (an information channel with an accent on
social and regional issues) and Football.

In November, Metinvest Holding signed an agreement with the Malacalza Group (Italy) to acquire
a 100% stake in two companies: Trametal (Italy) and Spartan UK (Great Britain). The future plan is
to combine the two companies with the Ferriera Valsider steelmill, which is part of the Metinvest
Holding. It is also planned to consolidate milling capacities into a single company with an output
capacity of more than 1 million tonnes of thick rolled steel a year for EU markets. This will improve
the position of the domestic steel industry on world markets and support the growth of Ukraine’s
economy. Metinvest’s long-term strategy is to form a balanced steel company that will be a major
player on European and world markets. Expanding the holding’s rolling capacities will make it pos-
sible to maximize the use of raw materials and the Group’s production capacities. It will also bring
significant added shareholder value through synergies and a stronger global competitive edge for
SCM’s business and for Ukraine’s entire mining and metal complex.


SCM: IN STEP WITH
THE MILLENIUM

SCM: in step with the millennium | The story of the group 13

THE HISTORY OF THE GROUP

System Capital Management (SCM) was founded in 2000 in Donetsk. Its main purpose is to invest strategically in key sectors
of the Ukrainian economy. These are primarily mining and metals, energy, telecommunications, banking, insurance, real
estate, media, clay mining, retail, and petroleum retail sectors. Since its foundation, SCM has been building up its business
areas based on the industrial assets it owns and making large-scale investments, both in Ukraine and abroad. Today, the
history of the Group can be presented in four major stages.

2000–2002 GROWING THE PORTFOLIO
The first stage of SCM’s development concentrated on expanding the Group’s investment portfolio. It was during this
period that the company acquired most of its businesses and began to introduce a single standard of management across
the Group.

2002–2004 INVESTING
During this period, the main focus was on establishing world standards of business management at all of the company’s key
assets. Meanwhile, enterprises were modernized and production indicators were raised, where possible, using experience
and know-how accumulated by SCM professionals.
The company began to implement its long-term growth strategy and to increase the effectiveness of its business. This
meant building vertically-integrated industrial organizations at the company’s two main holdings (Metinvest and DTEK)
and forming a team of world-class managers capable of running them.

2004–2006 EXPANDING
Banking and insurance businesses joined the list of key areas SCM was expanding into.
During the same period, SCM began actively expanding its telecom business. With this goal in mind, the company
acquired Farlep Invest and Optima Telecom. A strategic investment was made in Astelit, a mobile telecoms business
operating under the life:) brand.
The company instituted the preparation of consolidated financial statements in accordance with international financial
reporting standards (IFRS) and began the process of building a transparent business and management structure for the
Group.

2007–TODAY LOOKING AT THE FUTURE
SCM group continued the implementation of large-scale corporate restructuring program, launched in 2006. An expected
result of this programm to be completed in 2008 will be clear and transparent group shareholder structure.
SCM group has formulated a clear development strategy. The company plans to expand its business based on organic
growth and also through new acquisitions in important areas of the economy and industry (metal, energy, financial
services, telecommunications, real estate, retail trade, and so on). The goal is to make SCM not only the leading financial
industrial group (FIG) in ukraine and a national business leader, but also a truly competitive and successful global business.


KEY EVENTS IN THE EVOLUTION OF SCM

15 November 2000 System Capital Management company is registered.

30 June 2003 SCM Group acquires Pavlogradugol Mining & Extraction Complex.

28 August 2003 SCM acquires a controlling stake in the Khartsyzsk Pipe Plant.

27 January 2004 SCM gets the green light from the Anti-Monopoly Committee to acquire Vostokenergo, an
energy generation utility.

19 July 2004 SCM Group acquires a controlling stake in the Northern and Central Ore Mining and Enrich-
ment Plants (SevGOK and CGOK).

20 August 2004 SCM acquires three companies that were part of UkrRudProm State Joint Stock Company
(Dokuchayevsk Flux and Dolomite Plant, Novotroitskoye Ore Mining (NTRU), and Krivbass-
vzryvprom Explosives Company), an ore conglomerate, through privatization tenders.

25 February 2005 SCM Group increases its stake of shareholder capital in the First Ukrainian International
Bank from 49% to 99%.

6 July 2005 SCM Group forms DTEK, a holding company, to manage its enterprises in the energy sector.

27 September 2005 SCM acquires a 91% stake in Farlep Invest.

10 October 2005 SCM concludes a deal to acquire Leman Commodities (Switzerland), a metal trader.

25 November 2005 SCM acquires a controlling stake in Ferriera Valsider, an Italian engineering rolled steel producer.

6 December 2005 Oleg Popov becomes General Manager of SCM.

17 April 2006 SCM purchases 100% ownership stake in Optima Telecom.

21 April 2006 SCM becomes one of the founding members of the UN Global Compact in Ukraine.

30 May 2006 SCM Group forms SCM Estate to manage its enterprises in the real estate sector, later re-
named ESTA Holding.

6 June 2006 SCM Group forms Metinvest Holding to manage its enterprises in the mining and metal complex.

7 June 2006 SCM announces the merger of Optima Telecom and Farlep Invest into a single telecom group.

SCM: in step with the millennium | The story of the group 15

20 July 2006 SCM becomes the general sponsor of Shakhtar Football Club.

2 November 2006 For the first time, a consolidated financial statement is published for SCM Group in accor-
dance with IFRS (audited by PriceWaterhouseCoopers).

21 December 2006 SCM Group purchases a 100% ownership stake in Avlita Stevedoring Company. This pur-
chase expands the raw materials import opportunities for for the Group’s metal companies,
as well as product export opportunities for Metinvest Holding companies.

26 January 2007 SCM Group becomes an industry partner of the World Economic Forum in Davos.

2 March 2007 United Minerals Group (UMG) is formed, to manage SCM Group’s assets in the clay mining
sector.

6 March 2007 SCM signs an agreement with BNP Paribas (Suisse) for a syndicated loan worth US $545
million.

11 July 2007 SCM Group approves its long-term business development strategy and announces its inten-
tions to invest more than US $6.2 billion in the expansion of its business over the next five
years.

26 July 2007 Metinvest Holding signs a syndicated loan worth US $1.5 billion.

25 September 2007 SCM and Smart Holding announced the intention to combine their assets in mining and me-
tals, within the framework of Metinvest Holding.

6 October 2007 Metinvest Holding is the first Ukrainian company to become a permanent member of the
International Iron and Steel Institute (now the World Steel Association), the leading global
association in this sector.

12 October 2007 DTEK is given a long-term credit rating of B2 by Moody’s. This offers the company direct ac-
cess to world capital markets.

17 October 2007 SCM Group presents a new business venture, Ukrainian Retail, to manage a shopping chain
under the Brusnytsya brand.

12 November 2007 Metinvest Holding signs a deal to acquire two steelmills, Trametal (Italy) and Spartan UK
(Great Britain).

11 December 2007 Metinvest Holding completes the restructuring of its sales division. This allowes the consoli-
dation of sales by region into the four channels, provided by different companies.


MISSION, VISION, VALUES

THE SCM MISSION: SUCCESS, TOGETHER
We invest in the continuous growth and improvement of our businesses, and through this support
the economic and social development of society as a whole.

THE SCM VISION: CREATING THROUGH DEVELOPMENT
We build effective businesses and manage them according to best world standards and practice,
ensuring long-term growth in the value of our investments and participating in the multifaceted
development of the regions, in which we have a presence.

SCM: in step with the millennium | Mission, vision, values 17

OUR VALUES: EFFECTIVENESS, PROFESSIONALISM,
ACCOUNTABILITY
Effectiveness as a means to achieve the best results in everything that we do.
For us, effectiveness is:
• reaching the goals we set
• using contemporary technologies and approaches to doing business
• constantly improving the processes and methods of doing business
• rational allocation and use of resources
• seeking new opportunities
• being ready for change

Professionalism in doing business, including investing in people and stimulating innovation and
enthusiasm towards work.
For us, there is particular importance in:
• meeting the highest standards
• stimulating initiative and innovation
• investing in professional development
• attracting and keeping highly qualified employees

Accountability to our employees, our partners, our communities, and society as a whole.


GROUP MANAGEMENT
Roman Vodolazkyy
Chief Financial
Officer
Ilya Arkhipov
Oleg Popov
Business Development
Chief Executive Director
Officer

SCM: in step with the millennium | Group management 19

Jock Mendoza-Wilson
International and Investor
Relations Director

Nikolai Nesterenko Natalia Yemchenko
New Business Roman Bugayov
Public Relations and Com-
Development Director munications Director Corporate Rights and
Foreign Asset
Management Director


Oleg Popov
Chief Executive Officer

CEO OF SCM SINCE DECEMBER 2005.
2001-2005 – EXECUTIVE DIRECTOR.
2000 – HIRED BY SCM AS DEPUTY TO THE CEO.
1992-2000 – WORKED IN VARIOUS GOVERN-
MENT OFFICES AND PRIVATE COMPANIES.

CHAIRMAN OF THE BOARD FOR FC SHAKHTAR.
REPRESENTS SCM INTERESTS ON THE
BOARDS OF DTEK, FIRST UKRAINIAN INTER-
NATIONAL BANK, DONGORBANK, UKRAINIAN
RETAIL, AND ON THE METINVEST HOLDING
AUDITING COMMITTEE.

AREAS OF RESPONSIBILITY: TAKING AND
CONFIRMING KEY FINANCIAL, INVESTMENT
AND PERSONNEL DECISIONS, BOTH DIRECTLY
AT SCM AND IN THE GROUP ASSETS, AS WELL
AS EVALUATING THE PERFORMANCE OF THE
MANAGERS OF THESE ASSETS.

EDUCATION
GRADUATED FROM DONETSK STATE UNIVER-
SITY IN 1996.
GRADUATED FROM DONETSK POLYTECHNICAL
INSTITUTE IN 1990.


— WHAT EVENTS WOULD YOU SAY WERE KEY TO THE GROWTH OF THE GROUP IN 2007?

— The main event was the merger of Metinvest Holding with the metallurgical assets of Smart
Holding, within the framework of Metinvest Holding. This was an important launching pad for
the further development of the Group’s metal business because we strengthened our position
in supplying iron ore and now we have the opportunity to expand our steel making capacities. In
addition, in 2007 we embarked on areas of business that were new for us: real estate and retail
trade. Plus, we made a decision to get out of some of our non-core areas. For instance, we sold
a minority stake in the Ukrainian Industrial Transport Company and prepared to exit the baked
goods business. Altogether, 2007 was a year in which we actively worked on structuring our port-
folio of assets.

— WHAT, IN YOUR OPINION, IS THE MOST IMPORTANT ACHIEVEMENT IN SCM’S CORPORATE
POLICY?

— The most important point when we were in the midst of such major corporate transformations
was that the best and the brightest professionals remained with the Group, both in SCM Company
and in the holdings. We’ve been able to create a highly effective team.

— WHAT ARE THE GROUP’S KEY STRATEGIC GROWTH OBJECTIVES?

— First, to improve the management of Metinvest Holding and DTEK. Second, to invest in attrac-
tive sectors, such as: telecom, media, real estate, and so on. Third, to decide on the future of
other businesses in our portfolio, that is to continue the process of structuring. Fourth, to look for
new opportunities for investing. Today, these are our four strategic growth objectives.


Roman Vodolazkyy
Chief Financial Officer

CFO OF SCM SINCE JUNE 2005.
FEBRUARY-JUNE 2005 – SENIOR FINANCIAL
MANAGER (TITLE CHANGED TO CFO).
2002 – BEGAN AT SCM AS MANAGER FOR THE
GROUP’S METAL DIVISION.
OCTOBER 2000-SEPTEMBER 2002 – AUDITOR
FOR PRICEWATERHOUSECOOPERS IN KIEV.
MARCH 1999-OCTOBER 2000 – WORKED IN THE
FINANCIAL DEPARTMENT OF MCDONALD’S
UKRAINE.
1994-1999 – ACCOUNTANT AND CHIEF ACCOUN-
TANT FOR VARIOUS UKRAINIAN COMPANIES.

REPRESENTS THE INTERESTS OF SCM ON THE
BOARDS OF DTEK AND FC SHAKHTAR.
CHAIRS THE AUDITING COMMITTEES FOR MET-
INVEST HOLDING AND DTEK.

AREAS OF RESPONSIBILITY: MANAGING THE
GROUP’S FINANCIAL DEPARTMENT, BUDGETING,
PREPARING FINANCIAL REPORTS, TREASURY
FUNCTIONS, AND INTERNAL AUDIT. UNDER
HIS LEADERSHIP, SCM HAS SHOWN ITSELF TO
BE A COMPANY WITH IMPECCABLE FINANCIAL
REPORTING THAT HAS BEEN APPROVED BY
TOP INTERNATIONAL AUDITING COMPANIES.
AS RESULT, THE GROUP STRENGTHENED ITS
REPUTATION IN INTERNATIONAL CREDIT MAR-
KETS AND WAS ABLE TO ORGANIZE THE FIRST
SYNDICATED LOAN FOR SCM AT THE HOLDING
COMPANY LEVEL IN THE GROUP’S HISTORY.

EDUCATION
MBA FROM INSEAD (FRANCE), A TOP EUROPE-
AN BUSINESS SCHOOL IN 2007, AND MEMBER
OF THE BRITISH ASSOCIATION OF CERTIFIED
CHARTERED ACCOUNTANTS (ACCA) SINCE 2004.
GRADUATED FROM THE KHERSON STATE
TECHNICAL UNIVERSITY AS A SPECIALIST IN
ACCOUNTING AND COMPUTER SOFTWARE IN
1998.


— WHICH EVENTS IN 2007 WOULD YOU SAY WERE THE MOST IMPORTANT FOR THE GROUP’S
DEVELOPMENT?

— 2007 was a dynamic year filled with important milestones. Among the main ones, I would
name two huge steps in the development of the Group. First, in 2007, SCM went to foreign credit
markets for the first time, as a holding company. Second, at the end of the year, the decision was
made about the merger of SCM Group’s mining and metal assets with those of Smart Holding.

— WHAT KEY ACHIEVEMENTS IN THE FINANCIAL DEPARTMENT WOULD YOU SINGLE OUT FOR
2007?

— First of all, the support of BNP Paribas (Suisse) SA in our bid for a syndicated loan worth US
$545 million. Borrowing on foreign markets is an enormous task, and one that we were already
looking at in 2006. In 2007, we started a project to automate the process of preparing consoli-
dated financial reports, according to international standards. This is a very challenging task that
requires serious resources, and we will continue it in 2008.

— WHAT OPPORTUNITIES FOR FURTHER GROWTH DO YOU SEE?

— We plan to secure a credit rating for SCM as a holding company, which should offer us much
broader options for borrowing. We also intend to continue our expansion into capital markets.


Ilya Arkhipov
Business Development Director

BUSINESS DEVELOPMENT DIRECTOR FOR SCM
SINCE OCTOBER 2005.
2001-2005 – CONSULTANT, MCKINSEY & CO,
MOSCOW.
2000-2001 – OPERATIONS MANAGER FOR
RUSSIA’S LARGEST ON-LINE AUCTION SITE,
MOLOTOK.RU FOR NETBRIDGE, AN INTERNET
COMPANY.
1995-2000 – CONSULTANT, COOPERS & LY-
BRAND AND PRICEWATERHOUSECOOPERS,
MOSCOW.

REPRESENTS SCM INTERESTS ON THE
BOARDS OF FARLEP INVEST, FIRST UKRAI-
NIAN INTERNATIONAL BANK, DONGORBANK,
UASK ASKA, SEGODNYA MULTIMEDIA AND THE
TRK UKRAINE TELEVISION CHANNEL.

AREAS OF RESPONSIBILITY: PARTICIPATING
IN DETERMINING THE OVERALL PORTFOLIO
STRATEGY OF THE GROUP, AS WELL AS IN
CORPORATE RESTRUCTURING. IN PARTICU-
LAR, MR. ARKHIPOV IS INVOLVED IN DEVE-
LOPING SCM’S BUSINESS STRATEGY REGAR-
DING TELECOMS, BANKING AND INSURANCE
SERVICES, AND THE MEDIA.

EDUCATION:
MBA FROM INSEAD (FRANCE), A TOP EURO-
PEAN BUSINESS SCHOOL, IN 2004.
GRADUATED FROM THE PLEKHANOV ACAD-
EMY OF ECONOMICS IN RUSSIA AS A SPECIA-
LIST IN ENTERPRISE MANAGEMENT IN 1999.


— WHICH EVENTS IN 2007 WOULD YOU SAY WERE THE MOST SIGNIFICANT IN THE HISTORY OF
THE GROUP?

— When it comes to SCM Group, then the most important event was the decision to merge mining
and metal assets with Smart Holding. This was a major business event in Ukraine and the world
of metallurgy as a whole.
As to those areas that I’m in charge of, then I would say that 2007 was a breakthrough year for the
development of the Group’s telecommunications business. In addition to that, our insurance busi-
ness maintained its share and developed positively in a rather competitive market. We also began
forming the publishing holding, Segodnya Multimedia, and we now have a centralized publi-
shing business that includes one of the most popular Ukrainian papers, Segodnya, and a range
of regional publications in Eastern Ukraine.

— IN 2007, SCM ACTIVELY INVESTED IN THE TRK UKRAINE TELEVISION CHANNEL. WHAT ARE
THE RESULTS OF THAT?

— Firstly, we completed the team with top foreign specialists. Secondly, we continued to work on
program content so that our channel would be interesting to a wide range of audiences. We’ve
been making considerable efforts and we’ve had matching results, as the channel’s ratings have
picked up considerably.

— PLEASE, NAME THE MOST IMPORTANT GROWTH PLANS IN YOUR AREAS.

— The main focus for television business, I would say, is on forming a media group that becomes
one of Ukraine’s leaders by 2009. This means that a range of thematic channels will be estab-
lished, our own production of original programming will be set up, as well as we will draw on new
creative resources. In telecommunications business – it will be further securing the market posi-
tions of our fixed-line operator and expansion of our geography of presence. In finances, we are
also aimed at strengthening the market positions of our financial institutions, as well as expand-
ing the product lines of our banks (including the introduction of retail products) and insurance
companies.


Nikolai Nesterenko
New Business Development Director

NEW BUSINESS DEVELOPMENT DIRECTOR AT
SCM SINCE SEPTEMBER 2007.
2002-2007 – SENIOR MANAGER FOR STRATEGY
DEVELOPMENT IN A RANGE OF THE GROUP’S
COMPANIES. WITH THE GROWTH OF SCM
GROUP, THIS AREA BECAME MORE AND MORE
SIGNIFICANT AND A DECISION WAS MADE TO
INSTITUTE THE POSITION OF DIRECTOR FOR
NEW BUSINESS DEVELOPMENT.
2001 – STARTED AT SCM AS MANAGER OF THE
FINANCIAL CONTROL DEPARTMENT.
1997-2001 – WORKED AT KERAMET INVEST,
RISING FROM STOCK BROKER TO GENERAL
MANAGER.

AREAS OF RESPONSIBILITY: DETERMINING
STRATEGIC BUSINESS DEVELOPMENT IN REAL
ESTATE, MACHINE-BUILDING AND TRANS-
PORT SECTORS AT SCM; SEEKING NEW AREAS
OF INVESTMENT.

GENERAL MANAGER OF ESTA HOLDING,
WHICH MANAGES SCM GROUP PROJECTS IN
REAL ESTATE.

EDUCATION:
MBA FROM INSEAD (FRANCE), A LEADING
EUROPEAN BUSINESS SCHOOL, IN 2007.
GRADUATED FROM THE FINANCIAL AC-
COUNTING DEPARTMENT OF DONETSK STATE
UNIVERSITY IN 1998.


— WHAT PROJECTS AND MANAGEMENT BODIES ARE YOU INVOLVED IN AT SCM?

— My main area of responsibility at SCM is business development in real estate. Being General
Manager of ESTA Holding and a member of the Investment Committee under the Holding’s Board,
I have a fairly broad remit in business development in this area at SCM.

— WHAT KEY ACHIEVEMENTS WOULD YOU NOTE IN THIS SPHERE?

— What is most important is the consolidation of SCM property assets under the various holdings.
We began this process in 2006 and we’re still working on it. We’ve put together a solid team and
we’ve worked out the corporate procedures for these activities. Among 2007’s projects, I would
say that three were key: developing a concept for the Pushkinskiy Multi-functional Complex in
Donetsk, acquiring a 50% stake in the Leonardo project, and starting construction of a warehouse
and distribution center in Dnepropetrovsk.

— What are your future plans at ESTA?

— We’re moving in three major directions. First, concentrating our operations in the Ukrainian
market, which is promising but not fully developed. Second, we’re planning to actively develop
management of outside projects, that is, managing property in the broadest sense. Third, we’re
preparing the launches of a number of our own projects. It’s wonderful how many major develop-
ment opportunities the Ukrainian property market represents.


Jock Mendoza-Wilson
International and Investor
Relations Director

INTERNATIONAL AND INVESTOR RELATIONS
DIRECTOR AT SCM SINCE 2006.
2005-2006 – DIRECTOR OF CORPORATE COM-
MUNICATIONS FOR THE SCM GROUP.
1989 – LAUNCHED HIS OWN PR CONSULTANCY
IN LONDON AND ADVISED US GOVERNMENT
AGENCIES ON THEIR PUBLIC DIPLOMACY
PROGRAMS IN THE MIDDLE EAST.
1984 – BEGAN HIS CAREER WITH THE FORD
EUROPE COMPANY.

AREAS OF RESPONSIBILITY: DEVELOPING AND
IMPLEMENTING COMMUNICATIONS STRATE-
GIES AND PROGRAMS AIMED AT ESTABLI-
SHING CONTACTS WITH BOTH GOVERNMENT
OFFICES AND NGOS; DEVELOPING RELATIONS
WITH INTERNATIONAL GOVERNMENTS, INSTI-
TUTIONS, BUSINESSES, AND MEDIA, AS WELL
AS BUILDING RELATIONS WITH THE INVEST-
MENT AND FINANCE INDUSTRY.

EDUCATION:
GRADUATED AS AN ECONOMIST FROM HERI-
OT-WATT UNIVERSITY IN EDINBURGH IN 1984.


— WHAT ARE SOME OF THE INTERNATIONAL ORGANIZATIONS SCM WORKS WITH?

— As a business leader in Ukraine, SCM is involved in many global and regional initiatives.
Among others, the Group signed an agreement on a strategic partnership with the United Na-
tions regarding the development of corporate social responsibility (CSR) in Ukraine. SCM is also
a member of the European Business Association and an industry partner of the World Economic
Forum in Davos.

— WHAT ARE SCM’S MAIN ACCOMPLISHMENTS IN CSR?

We put considerable emphasis on developing policy and accountability in the company in terms of
corporate responsibility. For us, it is not just a passing fad. We see major benefits to the manage-
ment and value of our business from implementing a systematic approach to corporate respon-
sibility, which we believe will lead to sustainable growth. In 2007, we prepared a CSR report that
will be published in 2008, and we established a system for regular internal CSR reporting within
the Group.

— WHAT ARE SCM’S PRIORITIES IN THIS AREA?

— One important goal for 2008 is to bring our CSR reporting in line with international standards.
We will be improving and developing the principles underlying the company’s environmental
policy and projects to promote health and safety in the work place.


Natalia Yemchenko
Public Relations and
Communications Director

PUBLIC RELATIONS AND COMMUNICATIONS
DIRECTOR AT SCM SINCE DECEMBER 2006.
2005-2006 – PUBLIC RELATIONS MANAGER
FOR SCM GROUP.
2003 – BEGAN WORKING FOR SCM GROUP AS
MANAGER OF A SECTOR GROUP.
2001-2003 – DIRECTOR, KERAMET INVEST.
1998-2001 – FINANCIAL MANAGER OF KOLO,
AN INVESTMENT COMPANY.

CHAIR OF THE AUDITING COMMITTEE OF THE
TRK UKRAINE TELEVISION CHANNEL.

AREAS OF RESPONSIBILITY: COMMUNICATING
WITH TARGET AUDIENCES, INCLUDING THE
MEDIA, EMPLOYEES, RESIDENTS OF REGIONS
WHERE THE COMPANY HAS A PRESENCE, THE
GOVERNMENT, COMMUNITY ORGANIZATIONS,
AND THE GENERAL PUBLIC, AS WELL AS
MANAGING THE COMPANY’S REPUTATION.

EDUCATION:
GRADUATED FROM DONETSK NATIONAL UNI-
VERSITY AS A SPECIALIST IN FINANCE AND
CREDIT IN 1998.


— WHICH EVENTS DO YOU CONSIDER THE MOST IMPORTANT IN THIS REPORTING YEAR?

— First of all is the restructuring of the Group’s core business areas, then the merger with Smart
Holding, and the formation of holding companies for new business areas. One significant event I
think was starting to work on the Brusnytsya retail chain.

— WHAT ARE THE PRIORITY DEVELOPMENT AREAS FOR THE GROUP?

— In its evolution, SCM holds to the principle of deliberate diversification, which means both gro-
wing our industrial holdings and activating alternative areas of investment, especially our presence
on the services market. Of course, we’re also talking about working effectively in capital markets.
Yet another important point is improving our standards of corporate governance. Ukraine is and will
remain the main ‘address‘ for SCM investments.

— WHAT WOULD YOU SAY WAS SCM’S BIGGEST ACHIEVEMENT IN CSR IN 2007? WHAT SPECIFIC
AREAS ARE PRIORITIES WHEN IT COMES TO CORPORATE SOCIAL RESPONSIBILITY?

— Among our main accomplishments, I would distinguish the Foundation for the Development of
Ukraine, under whose aegis we’ve launched a range of comprehensive charity programs, as well as
simply more active corporate philanthropy and cooperation with international organizations.
One of SCM’s policy priorities is ecology and an environmental program in the regions where it has
a presence, ensuring on-the-job safety, as well as the development of local communities. Naturally,
the company’s development strategy includes social investment not only on the national level, but
also in the regions.


Roman Bugayov
Corporate Rights and Foreign Asset
Management Director

CORPORATE RIGHTS AND FOREIGN ASSET
MANAGEMENT DIRECTOR AT SCM SINCE SEP-
TEMBER 2007.
2005–2007 – MANAGER OF THE CORPORATE
RIGHTS DEPARTMENT FOR SCM GROUP.
2003 – JOINED SCM GROUP AS AN ECONO-
MIST.
2002-2003 – ECONOMIST AT KERAMET INVEST.
1996-2002 – WORKED IN THE DONETSK
OBLAST OFFICE OF THE ANTI-MONOPOLY
COMMITTEE OF UKRAINE AS A SPECIALIST,
SENIOR SPECIALIST, THEN DEPARTMENT
MANAGER.

REPRESENTS SCM INTERESTS ON THE BOARD
OF DTEK.
SITS ON THE AUDITING COMMITTEES OF THE
TRK UKRAINE TELEVISION CHANNEL AND BU-
REAU OF ECONOMIC AND SOCIAL TECHNOLO-
GIES (BEST) ANALYTICAL CENTER.

AREAS OF RESPONSIBILITY: DETERMIN-
ING AND IMPLEMENTING COMPANY POLICY
REGARDING THE MANAGEMENT OF CORPO-
RATE RIGHTS, ORGANIZING AND HANDLING
OPERATIONS INVOLVING CORPORATE RIGHTS
BELONGING TO THE COMPANY AND ITS SUB-
SIDIARIES, AND ORGANIZING THE ACTIVITIES
OF FOREIGN COMPANIES BELONGING TO SCM.

EDUCATION:
GRADUATED FROM THE DONETSK INSTITUTE
OF ENTREPRENEURSHIP AS A SPECIALIST
IN ORGANIZATIONAL MANAGEMENT IN 2000,
WITH MAJOR IN THE ECONOMIC AND LEGAL
ASPECTS OF COMMERCIAL ACTIVITY.


— WHAT WOULD YOU SAY WERE THE MOST IMPORTANT EVENTS IN 2007?

— We undertook the structuring of our sectoral holdings, and I consider four events of utmost signifi-
cance in this area. Firstly, handing over the bulk of corporate rights to the Group’s mining and metal
businesses to Metinvest Holding. Secondly, handing over corporate rights to those of our companies
that are involved in extracting and processing thermal coal to DTEK. Thirdly, setting up the UMG hol-
ding, which manages companies involved in mining clay.
Last, but not least, we began to work on forming a publishing holding based on the company Segod-
nya Multimedia.

— NAME THE KEY ACHIEVEMENTS IN THE DEVELOPMENT OF ALTERNATIVE AREAS OF COMMER-
CIAL ACTIVITY.

— We started the process of setting up new holdings in telecommunications, in real estate and
in retail trading of petroleum products, as well as of transferring corporate rights over our compa-
nies that work in those areas of business.

— WHAT ARE THE PRIORITY AREAS FOR FURTHER DEVELOPMENT IN THE GROUP?

— In 2008, plans are to complete the transfer of corporate rights of our mining and ore companies
to Metinvest Holding. We hope to finish establishing new holdings in real estate and in petroleum
products retail trading.


THE GROUP’S
CORPORATE STRUCTURE

MANAGEMENT STRUCTURE
THE GROUP’S ASSET MANAGEMENT key features and the basic principles on which
SYSTEM it is built.
Until the beginning of 2006, when the deci- The key features of SCM’s system of corporate
sion was made to restructure the business, governance are:
SCM Group saw itself as the conglomeration
of different assets that were directly run by the • simplicity and intelligence, clearly-defined are-
company. The program of corporate transfor- as of competence along all the links in the chain
mation that was approved has the institution a • effective decision-making processes
modern, understandable system of corporate
governance and the switch to a targeted corpo- • suitability for the business’s target structure
rate structure as its goals. for managing corporate rights

SCM Group’s target business model provides, • compliance with best world standards
first and foremost, for a change in the role of SCM Group’s system of corporate governance
the SCM Company in the system of manage- is based on the principles of transparency and
ment: a switch from operational management compliance with the law that lie at the heart of
of individual enterprises to strategic manage- all its activities.
ment of newly-formed sectoral holdings or
Group business areas. In accordance with RESTRUCTURING SCM GROUP’S
the program approved in 2006, the process of BUSINESSES
combining the Group’s operational companies
SCM Group undertook reform of its asset
within the framework of specific sectoral hol-
management structure during 2007, with the
dings began. Those holdings received the right
objective of increasing the effectiveness of
to own and manage SCM assets in their specific
enterprise management and forming focused
sectors. The sectoral holdings were also tasked
sectoral holdings. The Group’s holding system
with managing the assets that were handed
of structuring business is in line with its vision
over to them, including devising and imple-
of the development of SCM as a professio-
menting their business development strategies.
nally managed company, as well as in line with
This new business structure and the important global corporate standards.
change in the role of the SCM Company in the deci-
sion-making system, as well as SCM’s unswerving THE SYSTEM OF CORPORATE
determination to match international standards GOVERNANCE
drove the switch to what was, for SCM, a funda- SCM’s system of corporate governance is
mentally new system of corporate governance. oriented towards the highest international
In working on formulating a target structure standards and is based on best world practice.
of corporate governance, SCM studied best For this reason, SCM is able to quickly and
international practice and clearly designated its effectively make the decisions necessary to en-

SCM: in step with the millennium | The group’s corporate structure 35

sure the dynamic growth of each of our sector of internal and external audits; and the process
holdings and the Group’s business areas. of ensuring compliance with the laws and
norms governing business ethics.
Based on the approved program of corporate
transformation, the company began a radi- The Strategy and Investment Committee
cal restructuring of its business in 2006. This prepares and submits for review to the Su-
particular program called for a transition from pervisory Board recommendations regarding
the historical structure of managing corporate opportunities for the holdings to be involved
rights and decision-making system to a new in investment projects and exit strategies for
business model. One of the key components specific projects; recommendations regarding
of the program was the establishment of a the strategic goals and objectives of the various
contemporary, transparent, and highly effective holdings, and the implementation of agree-
system of corporate governance. ments on mergers and acquisitions (M&A).
As the majority shareholder and main inves- The Appointment and Compensation Commit-
tor, SCM decides who will represent it on the tee recommends to the Supervisory Boards
Boards of the various sectoral holdings. candidates for management positions in the
sectoral holdings. With this purpose in mind,
The participation of minority shareholders
the Committee organizes interviews with
in the governing of these holdings is also
applicants for specific positions and decides
executed through their representatives on the
whom to recommend for those positions. The
Board.
Committee also prepares recommendations re-
The Supervisory Board governs the sectoral garding the rotation of top managers within the
holdings. For individual areas of business sectoral holdings, proposes ways to incentivize
where there are no sectoral holdings, the top managers, and participates in shaping the
system of corporate governance works through corporate culture and staffing, in determi-
the immediate Supervisory Boards of these ning the prospects for personal development of
operating companies. These Boards include managers, and so on.
representatives of SCM, minority shareholders
The General Manager of a sectoral holding is
and independent (external) experts. The mem-
appointed by the Supervisory Board in order to
bers of each Board vote to elect a Chair from
manage the holding’s operations. As a member
among their number. The Boards determine
of the Board, this person takes an active part in
business development areas and the standards
the strategic planning of the holding’s activities.
for engaging in specific businesses; they ap-
prove strategies, budgets and major contracts The Executive Council is the highest body in
and oversee their implementation; they track the operational management of a holding. Each
business indicators, appoint top managers, es- holding’s Executive Council is established col-
tablish incentives for them, and evaluate their legially. The Chair of the Executive Council is
performance. The members of the Supervisory the General Manager of the holding.
Boards, together with independent experts,
The Supervisory Boards of operating com-
may also participate in specialized committees
panies are responsible for their sustainable
including: the Audit Committee, the Strategy
financial and commercial growth, greater effec-
and Investment Committee, and the Appoint-
tiveness in their activities and increased com-
ment and Compensation Committee.
petitiveness. They keep track of the upholding
The Audit Committee prepares recommenda- of shareholder rights, make decisions about
tions for the Supervisory Boards regarding the when to hold General Shareholders’ Meetings,
approval of accounting policy and procedures establish the agenda for such meetings, draft
for preparing financial reports; the depth and corporate policy, and so on.
accuracy of financial reporting provided by
The members of the Supervisory Boards of
each holding; the reliability and effectiveness
operating companies are appointed by their exe-
of the internal auditing system, internal over-
cutives and approved by the Supervisory Board
sight, and risk management; the independence
of the relevant sectoral holding.


CORPORATE GOVERNANCE
STRUCTURE OF SCM GROUP

SCM Minority
shareholders

Supervisory
Boards of holding
companies

Audit Strategy and Appointment and
Committee Investment Compensation
Committee Committee


Holding company Supervisory
for sectoral Boards of operating
holding companies

General
Operating
Holding Board Manager
companies
of holding

In cases where a decision is made to form a holding company.
In cases where a decision is made not to form a holding company.


BUSINESS STRUCTURE

CORE BUSINESS AREAS

Mining and metal

As part of restructuring its business, in 2007, stakes in certain of the Group’s mining and metal enterprises that belonged
to SCM and its subsidiaries – SCM Ltd. (Cyprus) and USH (cyprus) – were transferred to Metinvest Holding, which handles
the strategic management of SCM Group’s mining and metal business.
Specifically, Metinvest Holding was given the shares of northern ore mining and enrichment plant (SevGOK), Avdeyevka
coke and chemical plant (AKHZ), Yenakiyevo steel plant (YeMZ), Azovstal steel plant (AZOVSTAL), Khartsyzsk pipe plant
(KhTZ), and Prometei.
At the end of 2007, the restructuring of SCM Group’s mining and metal businesses remained in progress and will be
completed in 2008.

Energy

As part of restructuring SCM Group’s business, DTEK, which manages the Group’s energy assets, was given the shares of
Pavlogradugol, Oktyabrskaya and Dobropolye central enrichment plants (CEP).
At the end of 2007, the restructuring of SCM Group’s energy businesses remained in progress and will be completed in
2008.

Financial services

Previously, the financial assets of the SCM Group were combined under the aegis of a managing company called SCM
Finance. As part of the further restructuring of the Group’s business, SCM took certain steps in 2007 to strengthen its
financial institutions. This process was accompanied by the delegation of a range of key functions from the holding com-
pany to the Group’s financial institutions and, as a result, a change in the role of SCM Finance.
These measures meant that SCM Finance was no longer at the center of key strategic decision-making, retaining only the
function of corporate center.


ALTERNATIVE COMMERCIAL DEVELOPMENT

Telecommunications

In 2007, the consolidation of fixed-line telecommunications assets was begun in relation to the Group’s Farlep Optima
company. The shares of all telecom assets related to the Group’s fixed line business were consolidated through Farlep
Invest as the managing company. This year was spent focusing on strengthening the Group’s presence in the telecoms
business by acquiring new assets. The formation of a Telecom Holding will be concluded in 2008.
SCM Group is also one of the shareholders in Astelit, a company that provides mobile communications services under the
brand life:) and which is among the top three mobile operators in Ukraine.

Real estate

To provide effective management of property assets, the SCM Estate Holding was set up in 2006. Later, it was renamed
ESTA Holding. Today, SCM Group has a major portfolio of real estate properties, land bank, and developments, which have
considerable investment appeal.

Media

In 2007, the process of organizing media assets continued, with the aim of improving the effectiveness of their commer-
cial activities. Given the fundamental differences in the natures of print media and television broadcasting, the Group
established two major media holdings: Segodnya Multimedia and the TRK Ukraine Broadcasting Company.

Clay mining

In 2007, SCM Group strengthened its presence in the clay mining business by increasing its stake in enterprises that
belong to the Group. Those were consolidated into a sectoral holding called United Minerals Group, which was given the
right to own and manage three clay mining assets: Ogneupornerud, Vesko, and Druzhkovskoye Mines Management.

Retail trade

In 2007, SCM Group began to expand into a new area of business, retailing, with the establishment of Ukrainian Retail.
The development priority for the Group’s retail chain is a “neighborhood store” format, which operates under the Brus-
nytsya brand. Ukrainian Retail plans to open 400 stores over the next five years in a chain that will cover all of Eastern
Ukraine.

Petroproduct retailing

SCM Group’s companies have been successfully wholesaling and retailing petroleum products for more than 12 years.
This business area is represented by a network of filling stations under the Parallel, Gefest and PitStop brand names.
SCM owns 70 gas stations, mostly located in Eastern Oblasts of Ukraine and in Crimea.


STRUCTURE OF SCM GROUP ASSETS AS OF 2007 *

Mining &
Metal Energy Financial
(Metinvest (DTEK) Services
Holding)

MIning Coal and Coal Mining Power
& Metal Coke and Generation Banking
Division Division Enrichment

Northern Ore Mining Krasnodonugol Pavlogradugol Vostokenergo First Ukrainian
and Enrichment Plant International Bank
(SevGOK) Komsomolets Tekhrempostavka
Avdeyevka Coke Donbassa Dongorbank
Central Ore Mining and Chemical Plant
and Enrichment Plant Pavlogradskaya CEP
(CGOK) Avlita Stevedoring
Mospino Coal
Power
Inguletsky Ore Processing Insurance
DIstribution
Mining and Company
Enrichment Plant Steel and
(InGOK) Rolled Dobropolye CEP
Products Service Invest ASKA
Dokuchayevsk Division Oktyabrskaya CEP
Flux and Dolomite
Plant (DFDK) Kurakhovskaya CEP PES Energougol ASKA–Life
Azovstal
Novotroitskoye Steel Plant
Mines
Management Khartsyzk
Pipe Plant
Krivoy Rog
Mining Equipment Ferriera
Plant Valsider
Krivbassvzryvprom Prometei
Explosives Company
Skif Shipping

Sales YEMZ Group

Metinvest Yenakiyevo
Int. Steel Plant
Metinvest Metalen
Ukraine

Metinvest
SMTs

Metinvest
Eurasia


Clay Mining
Telecom Real Estate Trade in
(United Retail Trade
(Farlep– (ESTA Media Petroleum Other Assets
Minerals
Optima) Holding) Products
Group)

Optima Leonardo Vesko TRK Ukraina Ukrainian Retail Parallel
Telecom Television (retail chain
Druzhkovskoye Channel under Brusnytsya Gefest
Farlep Mines brand)
Management Segodnya PitStop
IP Telecom Hotels Multimedia
Ogneupornerud
Ucomline

Vilcom
Donbass
Palace

Opera

Other
Properties
Under
Development

Heavy Sarmat
Engineering** Group

Druzhkovka
Krym***
*The chart does not include businesses Heavy Engineering Plant
where SCM Group is a minority shareholder. Lugansk Brewery***
Gorlovskiy Mashinostroitel
Engineering Plant
** SCM Group’s machine-building restructuring Dnipro***
process will be continued in 2008. Donetskiy Energozavod
Poltavpyvo***
Engineering Plant
*** These assets are to be sold in 2008 to outside
investors as part of the restructuring of the Group. Sverdlovskiy Heavy
Engineering Plant


SCM GROUP’S
BUSINESSES

SCM Group’s businesses | Core business areas 43

CORE BUSINESS AREAS

MINING AND METALS: METINVEST HOLDING

THE MINING AND METAL COMPLEX IS THE FOUNDATION OF MUCH OF UKRAINE’S ECONOMY. METAL OUTPUT ALONE AC-
COUNTS FOR NEARLY A QUARTER OF ALL OF UKRAINE’S INDUSTRIAL PRODUCTION. DURING 2006–2007, METALS WERE
ONE OF THE ENGINES DRIVING UKRAINE’S ECONOMIC PROGRESS: ANNUAL GROWTH IN THIS SECTOR WAS AROUND 8–9%.
THE MINING AND METAL COMPLEX IS ONE OF UKRAINE’S CONTRIBUTIONS IN THE GLOBAL ECONOMY. UKRAINE IS
8TH IN THE WORLD AMONG STEEL PRODUCERS AND IS THE THIRD LARGEST EXPORTER, AFTER CHINA AND JAPAN.
FERROUS AND NON-FERROUS METALS AND METAL PRODUCTS CONSTITUTE CLOSE TO 40% OF ALL OF UKRAINE’S
EXPORTS. IN 2007, THE GROWTH IN WORLD MARKETS AND FAVORABLE PRICES FOR RAW MATERIALS HAVE OPENED
UP GOOD OPPORTUNITIES FOR UKRAINE’S MINING AND METAL BUSINESSES.

Metinvest Holding includes all SCM Group’s as-
sets in the mining and metal complex, as well
as companies that service it. The Holding is the
biggest vertically integrated mining and metal
company in Ukraine, with a total of 110,000
employees across all its companies.
Metinvest Holding is highly diversified in terms
of its sales markets. This helps provide protec-
tion for the company against fluctuations in any
of these markets. At the same time, Metinvest
Holding is focusing on the dynamic domestic
market. In 2007, the share of income
from the Ukrainian market in the holding’s
turnover was over 33%, up from 30% in 2006.

Geographic breakdown of
Metinvest Holding sales in 2007
33% UKRAINE
24% EUROPE
15% MIDDLE EAST &
NORTH AFRICA
13% CIS (INCL. RUSSIA)
11% SOUTHEAST ASIA
4% OTHER COUNTRIES


To improve effectiveness in managing the • Dokuchayevsk Flux and Dolomite Plant
assets of the vertically-integrated Metinvest (DFDK) is the largest producer of fired metal-
Holding, the business is organized into three lurgical dolomite in Ukraine and the only plant
divisions: producing powders for converter firebricks.
Annual output capacity of the company is 7.7
• the iron ore division
mn tonnes of finished product.
• the coal and coke division
• Novotroitskoye Mines Management (NTRU)
• the steel and rolled products division extracts metallurgical alums and dolomite with
annual capacity of 2.7 mn tonnes of finished
THE IRON ORE DIVISION product.
The main objective of the Iron Ore Division of • Krivoy Rog Central Ore Mining Equipment
Metinvest is to supply the holding’s companies Repair Plant (KCRZ-KZGO) is one of the lea-
with iron ore as a raw material. This division ding companies in Ukraine producing a wide
manages seven assets: selection of mining, enriching and transporting
• Northern Ore Mining and Enrichment Plant equipment and spare parts.
(SevGOK), one of the largest mining companies • Krivbassvzryvprom Explosives Company
in Europe with a closed production cycle for provides detonation services in the mining and
iron ore concentrate and pellets. Annual output extraction industry and produces explosive
capacity at SevGOK is 13.4 mn tonnes of iron materials.
ore concentrate and over 11.0 mn tonnes of iron
ore pellets. THE COAL AND COKE DIVISION
• Central Ore Mining and Enrichment Plant The Coal and Coke Division provides a critically
(CGOK) is a unique enterprise in Ukraine, important resource – coking coal – for holding
combining opencast and shaft mining for the companies. The Division manages three key
extraction of ores, and recycling enrichment assets:
wastes. Annual output capacity at the CGOK is
• Krasnodonugol is one of the biggest compa-
6.9 mn tonnes of iron ore concentrate and 2.2
nies in Ukraine extracting and enriching high
mn tonnes of pellets.
energy coal for coke production. This produc-
• Inguletsky Ore Mining and Enrichment Plant tion conglomerate includes seven mines and
(InGOK) uses a technology that is unique for ore plants, two enrichment plants, and service
Ukraine, flotation concentration. The company departments. Total volume of extracted coal is
became part of the Metinvest Holding portfo- up to 5.7 mn tonnes per year, which is nearly
lio at the end of 2007, based on an agreement 20% of all coking coal extracted in Ukraine.
with Smart Holding. Annual output capacity at
InGOK is 14 mn tonnes of iron ore concentrate.

Key indicators for Metinvest Holding
2006 2007 Change

Sales volume, mn $ 5,271.0 7,425.0 +40.9%
Asset value, mn $ 7,063.0 12,439.0 +76.1%
EBITDA, mn $ 1,482.0 2,279.0 +53.8%
Net profit, mn $ 813.0 1,321.0 +62.5%
Iron ore output, mn tonnes 16.8 18.5 +10.1%
Steel output, mn tonnes 8.6 9.1 +5.8%
Rolled steel output, mn tonnes 9.2 9.5 +3.3%


• Avdeyevka Coke and Chemical Plant (AKHZ) market of ferrous scrap metals. It supplies the
is the largest high-technology company in holding’s companies with raw materials.
Europe’s coking coal industry. Annual output of
• Skif Shipping is a logistics company that pro-
coke is over 3 mn tonnes.
vides the entire range of services for transpor-
• Avlita Stevedoring Company controls two ting, loading and documenting cargo.
deep water berths in Sevastopol Bay that are
• Spartan and Trametal are key players in the
open all year round. The company specializes in
European market for thick sheet steel: total an-
handling dry cargo (metals, grains).
nual capacity between the two pants is 530,000
tonnes of high-quality thick rolled sheet. Met-
THE STEEL AND ROLLED PRODUCTS
invest Holding reached an agreement with the
DIVISION
Malacalza Group concerning purchasing from
The Steel and Rolled Products Division controls the family-owned Italian group 100% ownership
the final links in the added-value process at stakes in Spartan and Trametal companies in
Metinvest Holding: smelting steel, manufactu- November 2007. The expansion of the holding’s
ring rolled products and selling finished goods. rolling capacity will provide for the most effec-
This division includes both Ukrainian and for- tive usage of the Group’s mining and production
eign assets: potential. As well as it will lead to significant
• Azovstal Steel Plant is a modern, high-tech- growth in the Group mining and metal assets’
nology company that produces a wide assort- value due to the potential synergies and will
ment of metal products and is among the top increase the competitiveness of the SCM Group
three steelmakers in Ukraine in terms of output business and of the Ukrainian mining and metal
volume. Annual production capacities for the complex as a whole. Approval from the Euro-
company are 6.4 mn tonnes of pig iron, 6.4 mn pean Commission is expected at the beginning
tonnes of steel, and 4.7 mn tonnes of rolled of 2008.
steel. In 2007, Metinvest Holding completed the reor-
• YeMZ Group includes Yenakiyevo Steel Plant ganization of its sales department in the Steel
and the Joint Venture Limited Liability Company and Rolled Products Division. As a result, four
Metalen, which have a consolidated produc- sales channels provided by four different com-
tion cycle. YeMZ Group produces various types panies have been established to ensure sales
of rolled steel (rods, cast billets, rolled bars, in the regions. At the same time, efforts were
graded sections). Annual output capacity is 2.8 undertaken to unify standards and business
mn tonnes of steel. processes across sales departments. Today,
four companies handle sales of the holding’s
• Khartsyzsk Pipe Plant (KHTZ) is the biggest products:
producer of straight-seam electro-welded large
diameter (478–1,420 mm) piping in the CIS, • Metinvest International (previously Leman
which is primarily used in the oil and gas in- Commodities) is a wholesale channel, respon-
dustries. Annual production capacities are over sible for external markets outside the CIS. Its
1.5 mn tonnes of piping, including up to 700,000 headquarters are in Geneva, with representa-
tonnes of pipes with anticorrosion coating. tive offices in 11 countries, which allows the
company to cover the largest steel markets in
• Ferriera Valsider (Italy) is a plant that makes the world.
structural rolled steel. Its supply of raw materi-
als is 80–90% provided by the Azovstal plant. • Metinvest Ukraine is a wholesale channel that
Annual production capacity is around 500,000 sells the holding’s products in Ukraine and CIS
tonnes of thick sheet steel and 700,000 tones of countries, with the exception of Russia by the
hot rolled coil. railcar load quantities (from 65 tons).

• The Prometei Financial Industrial Company • Metinvest Eurasia is the channel for sales of
is one of the largest operators on the Ukrainian the division’s steel and rolled steel in Russia.


It handles both wholesale and retail sales of • Metinvest SMTs is a retail channel for the
metal products in Russia, which is one of the holding’s products and those of other CIS
main markets for Ukrainian steel products. companies in Ukraine and Eastern Europe.
This network of companies includes 11 metal
centers.

IN 2007, SCM GROUP AND SMART HOLDING MADE A DECISION REGARDING THE MERGER OF THEIR MINING AND
METAL ASSETS. THIS WAS THE FIRST SECTORAL AGREEMENT OF SUCH A SCALE IN THE CIS.THE JOINT COMPANY
WILL TAKE SECOND PLACE IN THE CIS REGION IN TERMS OF IRON ORE OUTPUT AND FOURTH PLACE IN TERMS OF
SMELTED STEEL.

2007 through the prism of Metinvest Holding’s investment projects
Completed:
• Construction of two new sections at the ore enrichment facility #1 at Northern Ore Mining and Enrichment
Plant (SevGOK). Result: annual volumes of iron ore concentrate increased by 750,000 tonnes. Total invest-
ment: $6.2 mn.
• Launch of a facility for preliminary enrichment of settled sands in the slurry ponds at Central Ore Mining and
Enrichment Plant (CGOK). Result: improved operational efficiency, increased production of concentrate, and
increased processing of production wastes. According to the results of 2007, the project allowed to grow the
volume of production wastes processing by 60%. Total investment: $5.7 mn.
• Construction of the blast furnace №5 at Yenakiyevo Steel Plant (YeMZ). Result: additional output of 1.05 mn
tonnes of pig iron per year. Total investment: $140 mn.
• Launch of a new facility at Yenakiyevo Steel Plant (YeMZ) for production of technical oxygen from air. Result:
steel production capacity growth and quality enhancement potential increased. Total investment: $45 mn.
• Launch of a new facility at Azovstal Steel Plant for production of technical oxygen from air. Result: annual
steel production capacity growth increased by 1.5 mn tonnes. Total investment: $72 mn.
• Construction of the first part of the large diameter pipe production line at Khartsyzsk Pipe Plant (KHTZ).
Such pipes are used for main gas and oil pipelines construction. Result: single-joint tubes of up to 1,420 cm
in diameter can now be produced. Total investment: $24.3 mn.
Launched:
• Upgrade of two sections at the №1 ore enrichment facility of Northern Ore Mining and Enrichment Plant
(SevGOK). Expected result: annual volumes of iron ore concentrate increased by 750,000 tonnes. Total in-
vestment: $46.8 mn. Completion: Q2 2008
• Installation of the 5th stage of magnetic separation at the №1 ore enrichment facility of Northern Ore Mi-
ning and Enrichment Plant (SevGOK). Expected result: better quality iron ore concentrate. Total investment:
$4.6 mn. Completion: Q2 2008
• Repair of the №3 blast furnace at Azovstal Steel Plant. Expected result: greater efficiency in the blasting
conversion, reduced negative impact on the environment. Total investment: $31 mn. Completion: Q2 2008
• Construction of a new №3 blast furnace at Yenakiyevo Steel Plant (YeMZ). Expected result: increased vo-
lumes of smelted pig iron output, greater production efficiency, reduced negative impact on the environment.
New blast furnace planned production capacity is 1 mn tones of pig iron per year. Total investment: $262
mn. Completion: 2010
• Reconstruction of the benzol scrubber in the capturing facility №1 at Avdeyevka Coke and Chemical Plant.
Expected result: greater energy efficiency in the process of benzol extracting and reducing exhaust into the
air. Total investment: $2.4 mn. Completion: Q1 2008


Investment in
Metinvest Holding up-to-date equipment
Development Strategy Vertical integration
Strengthening
positions on highly
Minimal costs
profitable markets

We are We can ensure
a leader long-term
in efﬁciency competitiveness

SUCCESS

We are an We are a safe and
important company friendly company

For employees On-the-job safety
For consumers Minimal
For partners environmental
and investors impact

Greater social
responsibility


ENERGY. DONBASS FUEL & ENERGY COMPANY (DTEK)

THE FUEL & ENERGY COMPLEX IS A MAJOR COMPONENT IN THE INFRASTRUCTURE OF UKRAINE’S ECONOMY. AL-
THOUGH UKRAINE IS A NET IMPORTER OF FUELS, THE COUNTRY HAS A STRONG ENERGY SECTOR AND RANKS 7TH IN
THE WORLD FOR CONFIRMED COAL RESERVES.
UKRAINE HAS ENORMOUS POTENTIAL IN TERMS OF ELECTRICITY AND IN TERMS OF THE VARIETY OF FUEL RESOUR-
CES. THE RATIO BETWEEN THE VOLUMES EXTRACTED AND CONFIRMED RESERVES IS CONSIDERABLY LOWER THAN
THE AVERAGE IN THE WORLD TODAY. STILL, THESE OPPORTUNITIES ARE NOT BEING TAKEN ADVANTAGE OF SUFFI-
CIENTLY. EXTRACTION OF FUEL AND ENERGY MATERIALS CONTRACTED BY 2% IN 2007, AGAINST OVERALL INDUSTRI-
AL GROWTH OF 10.2% FOR THE YEAR. PRODUCTION OF READY COAL SHRANK EVEN MORE, BY 4.5% IN 2007. ENERGY
GENERATION IS ALSO LAGGING IN GROWTH, COMPARED TO AVERAGE INDICATORS FOR INDUSTRIAL OUTPUT.
IN A SITUATION WHEN THE GLOBAL TREND IS TOWARDS HIGHER PRICES FOR FUEL AND ENERGY, IT BECOMES CRITI-
CALLY IMPORTANT TO INCREASE ENERGY EFFICIENCY USING INNOVATION. THIS APPROACH IS PARTICULARLY SIG-
NIFICANT FOR UKRAINE, WHOSE ECONOMY IS ONE OF THE MOST ENERGY INTENSIVE IN THE WORLD. DEALING WITH
SUCH CHALLENGES IS WITHIN THE CAPACITIES OF VERTICALLY-INTEGRATED COMPANIES WITH HIGHLY EFFECTIVE
MANAGERS, AS THEY ARE THE MOST INTERESTED IN MINIMIZING COSTS ON PRIMARY RESOURCES IN THEIR OWN
VALUE-ADDED CHAIN.

The Donbass Fuel & Energy Company combines DTEK’s TESs boast one of the lowest indicators
all SCM Group’s assets in energy. This hol- for the share of gas in fuel consumed, with only
ding is the first and largest vertically-integrated 1%, whereas the Ukrainian average is 9.7%.
company in this sector in Ukraine. Its share
In order to maximize the effectiveness of the
of extracted coal is 21%, its share of energy
way these assets are managed, DTEK has de-
generation 27%, and its share of electricity
fined three main areas of business:
distribution in Ukraine is over 5%. More than
50,000 people are employed by the holding’s • coal extraction and enrichment;
companies.
• energy generation;
DTEK’s thermoelectric generating stations
• energy distribution.
(TES) are protected from an anticipated
increase in the price of imported natural
gas in Ukraine to match European prices.

Key indicators for DTEK
2006 2007 Change

Sales volume, mn $ 1,000.0 1,776.0 +77.6%
Asset value, mn $ 1,736.0 2,654.0 +52.9%
EBITDA, mn $ 233.0 477.0 +104.7%
Net profit, mn $ 98.0 236.0 +140.8%
Coal extracted, mn tonnes 15.3 15.8 +3.3%
Energy generated, KWH 16.3 18.1 +11.0%

SCM Annual Report 2007

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SCM Annual Report 2007