2012// Integrated report

Transcription

1 2012// Integrated report annual AND SUSTAINABILITY REPORT

2 overview of the past year president s report 4 continued good profitability 4 business concept, strategy and vision 8 strategic focus areas 9 performance in ironmaking 10 a clear-cut customer promise 11 flexibility 16 quick adaptation to change 17 safe and resource-efficient production 22 a sustainable value chain 23 growth 32 we grow with our customers 33 urban transformation 40 in close collaboration with all stakeholders 41 attractive lkab 48 a long-term strong brand 49 sustainability strategy and governance 56 ambitions for future development 57 gri index 62 auditor s report 64 corporate governance report 65 corporate governance structure 66 corporate governance at lkab 67 board of directors 72 group management 74 auditor s opinion 76 group overview 77 financial accounting 78 administration report 80 financial statements and notes 90 proposed appropriation of profits 128 auditor s report 129 appendix glossary 130 addresses 131 annual general meeting and financial information 132 table of 2012 contents ABOUT LKAB S 2012 INTEGRATED REPORTING According to owner directives, LKAB shall each year present an annual report and a sustainability report in accordance with the Global Reporting Initiative (GRI) framework. For 2012, LKAB chose to integrate its annual and sustainability reports, since it reflects how LKAB s operations are run. The basis of the integrated report is LKAB s business strategy, in which each strategic focus area has sustainability dimensions. These strategic focus areas also constitute the very structure of and navigation through the report. This means that information previously reported in a separate sustainability section is now integrated into the description of LKAB s products and services, market, growth and other strategic areas of focus. The integrated report is followed by information on sustainability management, the corporate governance report, administration report and financial statements.

3 26,971 sales SEK millions in ,023 tax profit before in SEK millions 4,199 Number of permanent employees 31 December % of Sweden s total explosives production is done by LKAB Kimit LKAB s position among SweDIsh export companies in 2011: no By 2015 LKAB FASTIGheter will have built 500 new homes in THE municipalities OF KIRUNA AND GÄLLIVARE +2.3% LKAB s deliveries in % lkab s sales in 2012 LKAB reallocated 2 million TONNES among its customers during the year, both within Europe and between continents 26.3mt RECORD DELIVERIES: 26.3 million tonnes of iron ore products 37mt three new mines in Svappavaara will ensure a delivery volume of 37 million tonnes of finished iron ore products in Minelco, which is changing its name to LKAB Minerals 1 July 2013, has 360 employees 250,000m3 cost in SE production of over 250,000 m 3 of concrete per year makes LKAB Berg & Betong the world's LARGest producer of shotcrete. lkab wassara 2012 lkab m

4 Ensure new ore reserve for at least 20 years to 2020 through active prospecting. committed. innovative. responsible. number of iron ore pellets 755 lkab s values lkab produces per second ATTRActive communities housing LKAB will build 500 new dwellings with varying rental rates in Malmfälten by energy and climate New generation of climate-smart iron ore pellets by Max 130 kwh of energy use per tonne of finished products by resource- EFFIcient production LKAB Academy shall foster Sweden s best school in Malmfälten. LKAB secondary school generates increased interest in technical education. school Annual average for falling particulates will be reduced by 10% and sulphur dioxide emissions from pelletizing plants will be halved from 2011 to local environment responsible operation competitiveness LKAB generates prosperity by being one of the most innovative and resource-efficient mining companies in the world. A longterm competitive mining operation creates secure jobs and opportunities for suppliers, other local businesses and community services. The proportion of women at LKAB will be at least 25% by diversity and equality long-term ORE supply Maximum 2.5 accidents per million hours worked by Long-term sickness absences continue to be less than 0.8%. health and safety ATTRActive lkab Do it yourself Fold your own cootie catcher and learn more about LKAB's strategy for sustainable development, approved by the Board in December K million to expand flue gas treatment to all six pelletizing plants 1,500 Drill rigs like the LKAB wassara can drill fans up to 55 metres deep. This means that each fan gives more than eight times as much iron ore as it did 25 years ago. 55 m 5,808 LKAB invested SEK 5,808 million in its facilities in Optimism is strong.

5 2012 ore with added value world leader in pellets LKAB is one of the world s largest producers of iron ore pellets for the global steel industry. Iron ore pellets are a premium product that constitute percent of the global iron ore market. LKAB s main market is the EU, where we account for about 40 percent of all pellet deliveries. Today, we are a quality leader, technical pioneer and innovative driving force in our industry. LKAB s worldleading R&D projects are conducted in close collaboration with customers. Our vision is to offer them tangible added value. lkab processes Pellets, LKAB s main product, are a highly upgraded iron ore product which constitute 84 percent of deliveries. We also produce fines, a fine-grained iron ore sand that is the dominant product in the global iron ore trade. In addition, LKAB develops and produces processed industrial minerals that are sold to customers outside the steel industry and give the Group a complementary leg to stand on. a clear-cut customer promise Performance in Ironmaking is our customer promise and is about delivering products that are tailored to the ironmaking processes of the customer. With LKAB s iron ore pellets, our steelworks customers increase their efficiency and productivity, and reduce their carbon dioxide footprint. The higher the proportion of LKAB s iron ore pellets that customers use in their ironmaking, the more efficient the process. LKAB pellets have a unique advantage, since they are made of magnetite, an iron ore mineral that gives off heat during the pellet manufacture. This makes LKAB s production process less energy intensive and reduces carbon dioxide emissions throughout the chain, as compared to the manufacture and use of iron ore pellets made of hematite ore. That is why LKAB Green Pellets are the world s most climate-smart iron ore product. a swedish heavyweight Iron ore and other minerals make up 40 percent of Sweden's net exports. In 2011 LKAB was Sweden's ninth largest export company. A third of all goods transported on Swedish railways are linked to LKAB. In recent years, LKAB has also been one of the country's major industrial investors. During the 2000s, capital expenditures totalled about SEK 5 billion annually. focus on growth Long-term forecasts point to a strong increase in demand for steel around the world. LKAB s customers are growing and need more iron ore. It is against this backdrop that the LKAB 37 programme is being implemented. This initiative represents an increase in LKAB s annual production capacity to at least 37 million tonnes of finished iron ore products. A parallel programme will also be implemented whose purpose is to ensure that LKAB s costs remain competitive. This focus on growth requires that LKAB employ upwards of 700 new qualified employees from 2013 to secure access to raw materials LKAB s ore mining is concentrated to the orefields of northern Sweden. The area has a unique geology with orebodies of magnetite that have an unusually high iron content. The world s two largest underground iron ore mines are located in Kiruna and Malmberget. The new main levels that are being established in both locations ensure LKAB s access to raw materials to in Kiruna and to 2023 in Malmberget. Mining in Gruvberget, Leveäniemi and Mertainen will increase LKAB s delivery capacity by about 12 million tonnes per year over the next decade. LKAB is also prospecting in existing mines and starting new projects to gradually secure additional raw material for the future. new communities emerge Over the next 20 years, large areas of Kiruna and Malmberget will be affected by continuing mining. People and buildings must be moved. Changes in infrastructure will be required. At the same time, it enables new and attractive communities to take shape. LKAB takes responsibility for both the practical and financial implications of this. Everything is done in close consultation with all stakeholders, particularly the municipalities that are responsible for planning the new developments. It is all about building a future based on a fruitful symbiosis between a growing economy and a vibrant community.

6 the past year the steel and iron ore market Iron ore is the main raw material in steel production. Besides iron ore, scrap metal is also used as a raw material. Demand for LKAB's iron ore is therefore closely linked to global production and consumption of steel. Since 2000, the balance in the steel market has shifted strongly from Western economies to Asia, mainly China. Today, China accounts for almost half of world crude steel production. With the exception of a brief downturn during the financial crisis of , world production has shown steady growth. From 2000 through 2012, production increased from 800 to 1,500 million tonnes, an increase of nearly 90 percent. Global exports of iron ore and production of crude steel (Mt) 1,600 1,400 1,200 1, Global exports of iron ore (prelim. 2012) Global production of crude steel ( 2012) (Source: CRU, December 2012, worldsteel, January 2013) total income by market region by product by division MINING DIVISION The division's core business is to mine, process and sell high-quality iron ore products for steelmaking. External sales in 2012 totalled SEK 24,909 million, representing 92 percent of Group sales. Other countries 5% Middle East/ Asia 28% Iron ore products 92% Minerals division LKAB develops, produces and markets various industrial mineral products through its company Minelco. Customers include companies in the construction and engineering, oil and gas production, chemical, and automotive industries. Sales for the year totalled SEK 1,760 million, representing 7 percent of Group sales. Special businesses division The division brings together a number of companies with diverse activities that support the work of the Mining and Minerals divisions in different ways, but the companies also have external customers. These activities include essential construction services like sophisticated drilling, rock reinforcement, drifting and explosives expertise, along with property management, insurance and power transmission. External sales were SEK 302 million, representing 1 percent of Group sales. Europe 67% Industrial minerals 7% Other 1% Significant events in 2012 first quarter Early in the year we were pleased to break several production records while also breaking the record for lowest number of accidents. In 2011, accidents at LKAB had declined by a third over the previous year. On 1 February, LKAB launched a new brand image with a refreshed logo and clarification of our values. Several of LKAB's subsidiaries changed their names to include the LKAB name so as to clarify that they belong to the Group. LKAB launched a new external website to more effectively reach out to more people and to stimulate dialogue on the web. The County Administrative Board decided not to rescind the detailed development plan for Gruvstadspark 1 in Kiruna. Accordingly, the agreement on urban transformation and construction of the first phase of Gruvstadspark that Kiruna's municipal management approved in February 2011 went into effect. LKAB welcomed the decision, since it means that we will not risk exceeding the environmental conditions of our mining operations. Also, that LKAB and Kiruna have a common view on the management of important cultural sites in the city. A decision was made to invest in new, supplementary flue gas treatment installations for the pelletizing plants in Malmberget and Svappavaara. second quarter On 23 April, extensive cracking was discovered on the bearing ring of the rotary furnace in the KK4 pelletizing plant in Kiruna. The replacement of the bearing ring caused a one-month outage. LKAB and the Municipality of Gällivare signed a partnership agreement that regulates urban transformation in Malmberget over the next 20 years. LKAB's agreement with the Municipality of Gällivare was appealed by homeowners in Malmberget, so the agreement was not legally binding at the end of the year. On 24 May a strike broke out among Jernbaneverket's public employees in Norway. District traffic controllers in Narvik were involved in the conflict. All ore deliveries to and from Narvik were stopped for nine days. On 14 June the new main level in mine M1250 in Malmberget was officially opened by King Carl XVI Gustaf. The event took place in LKAB's new research and visitor centre in Malmberget. Mining at the Gruvberget open-pit was forced to cease in June due to the ongoing environmental permit process. The detailed development plan for Gruvstadsparken in Kiruna became legally binding via notification from the Land and Environment Court of Appeal on 5 June.

7 lkab group Group (SEK million) Special Group mining Minerals Businesses Consolidated Division Division Division adjustments Eliminations External income 24,909 1, ,971 31,122 Intra-Group income ,049-2,286 Total income 25,144 1,762 2,350-2,286 26,971 31,122 Operating profit 10, ,595 14,705 Net financial items Profit before tax 11,023 14,801 Tax -2,234-3,842 Net income for the year 8,789 10,960 LKAB's production and deliveries sustained record levels in 2012, while lower iron ore prices affected sales and earnings negatively. Uncertainty about developments in China led to big swings in iron ore prices during the year. Net sales and operating profit (SEK million) Production and productivity Return on equity (%) 30,000 Mt Tonnes/employee 30 12, , , , , , ,000 10, , , , Net sales ( 2012) Operating profit Net sales were SEK 26,971 (31,122) million. Operating profit was SEK 10,595 (14,705) million. Production, Mt ( 2012) Productivity, tonnes/employee Return on equity (after tax) Targeted return on equity (after tax) Targeted return is 10 percent after tax over a business cycle. Production of iron ore products (Mt) Deliveries (Mt) Pellets Fines* Total *including special products Pellets Fines* Total *including special products third quarter LKAB was granted a permit to drain the water from the Leveäniemi open-pit mine. To start mining, 30 million cubic metres of water needs to be pumped to a separate physical system. Drainage is expected to take up to two years and is designed to limit environmental impact. To reduce the amount of dust over central Kiruna, LKAB Berg & Betong invested in improved technology and moved the crushing plant that was causing dust problems to a more sheltered location. The investment will be monitored via continuous measurements of falling particulates. The rail approach to central Kiruna was rerouted behind Mt. Kirunavaara. In a joint project, the Transport Administration and LKAB built 7.5 km of new track and a rail yard in Kiruna. The route was officially opened and operational in late August. The government's party leaders held a press conference at LKAB in Kiruna and proposed that SEK 800 million be allocated in the autumn budget for work on the Ore Railway. fourth quarter In October it was clear that the demand for steel products was considerably lower than supply. Things were especially bad for the steel industry in northern Europe. The market situation led LKAB to reallocate deliveries from customers in northern Europe to the Middle East and China. The first link in the production chain for the Kiruna mine's new main level reached the stage at which a test run could be conducted. Commissioning is planned for the first quarter of LKAB Fastigheter took the decision to build new homes in Kiruna and Gällivare. Land with building rights in the Terrassen and Glaciären residential areas in Kiruna was acquired from municipallyowned Kirunabostäder. A total of 26.3 million tonnes of iron ore products were shipped in 2012 and pellet production hit a record high of 23.8 million tonnes. A new delivery record was set for Narvik harbour; more than 18.5 million tonnes of iron ore products shipped in The year ended on a happy note when LKAB received news of a temporary permit being issued for mining in Gruvberget in Production was thus able to resume after a six month stop.

8 4 INTEGRATED RepoRT 2012 lars-eric aaro, president and ceo

9 CoNTINued good profitability PresideNT s report 5 The year 2012 was full of challenges for LKAB. The company maintained its ability to adapt to changing market conditions. When deliveries are summed up, we can conclude that it was yet another record year. Now we continue to build a bigger, stronger LKAB that will have three open-pit mines in operation in Svappavaara in Net income before tax for the year was SEK 11 billion on sales of SEK 27 billion. Thus, LKAB s profitability remains strong despite both lower iron ore prices and an increased supply on the world market. We are also pleased to report continued low sickness absence rates and a decrease in the number of workplace accidents, even though the outcome was worse in terms of the total number of accidents in the business. LKAB 37, which is LKAB s growth plan, ran into obstacles when we were forced into a nearly seven-month mining hiatus at the Gruvberget open-pit mine in Svappavaara. But since 28 December 2012 production has been in full scale again after the Land and Environment Court issued a temporary permit for There have been many legal turns with regard to Gruvberget. The actual content of the environmental conditions has never been a contentious issue, though. LKAB is now working on realizing plans for three new mines to start producing no later than Continued good profitability The global steel market was characterized in 2012 by the slowdown in GDP growth around the world. Crude steel production increased by 1.2 percent, but in Europe, LKAB's largest market, it decreased by 4.9 percent. Many steelworks are running at reduced capacity and some have chosen to shut down blast furnaces. In the Middle East, LKAB s second home market, large construction and infrastructure projects are helping boost steel production, as is also the case in China and the United States (US). The price of natural gas in the US has been halved in recent years due to increased extraction of so-called shale gas. Over time, shale gas will radically change the global playing field for steelmaking. A large number of iron ore projects were started in the latter half of the 2000s, and in 2012 the supply from Australia increased. This coincided with a slowdown in the Chinese economy and lower demand from several European steelworks. As a result, iron ore prices fell during the summer and autumn, leading to cost inflation in the mining sector and increased cost consciousness. Several mining companies have reviewed their expansion plans. Since the Lehman crash in 2008, we have seen increased volatility in prices in the global iron ore market. The pricing of iron ore products is mainly governed by Chinese demand, since China accounts for over half the world's iron ore imports. The market has largely switched to a more short-term pricing system, compared to the annual pricing that was common until about five years ago. Spot-price trading of iron ore has also emerged in recent years. Divided steel market Long-term growth In the long term, however, the demand for iron ore from China and other Asian countries is expected to remain high. China s dependence on imports is actually expected to increase. This implies a growing iron ore market in which LKAB is well placed to take advantage of the fact that billions of people in other parts of the world are moving into the middle class and what that entails in terms of demand for household appliances, automobiles, infrastructure and more. In 2012 the Swedish government decided on a new mining research programme, major expenditures on the Ore Railway and more resources to the environmental courts for faster permit processing. There is a better understanding of the mining industry s growth challenges. The trade association SveMin launched a growth strategy for the Swedish mining industry in October. It highlights the potential for a tripling of the Swedish

10 6 INTEGRATED RepoRT 2012 LKAB s growth will NECESSiTATE recruitment of up to 700 people through 2015 mining industry by 2025 and the creation of 50,000 new jobs, while underlining challenges like access to expertise, infrastructure and resources as well as processes for permit management. LKAB s planned growth is in line with the developments SveMin outlines and, in the autumn of 2012 the plan for production of 37 million tonnes of finished products by 2015 was intensified and specified. LKAB needs to grow to avoid losing market shares. New business opportunities are arising for LKAB s direct reduction pellets in countries with natural-gasbased ironmaking, especially in the US and the Middle East. Besides the new mines, a new main level was opened in Malmberget in 2012 and in 2013 the new main level in the Kiruna mine will also open. These expenditures, totalling about SEK 17 billion, will prolong the life of the two underground mines by about 20 years. Controlling costs is crucial to securing LKAB s long-term competitiveness. Larger delivery volumes reduce the cost per shipped tonne. In 2012, a three-year cost-efficiency programme was also launched, which in the autumn identified an efficiency potential to date of SEK 2.2 billion. Our sights are set on a financially sustainable business. regardless of economic conditions. Record deliveries Production disruptions in the pelletizing plants as well as a district traffic controller strike on the Ofotbanen Line disrupted our deliveries in the spring and early summer. The year s second half was marked by record production and became a test of LKAB's flexibility in rerouting deliveries between customers and continents. At year-end, when production and deliveries were summarized, we found that, despite the difficulties, 2012 was LKAB's best year yet. Although only 5 10 percent of LKAB s deliveries go to China, and although we have agreements with many customers on long-term pricing of our products, our terms and conditions are influenced by developments in China. This means that we must be prepared to fend off rapid fluctuations in both demand and price. In 2012 we managed to maintain and even increase volumes and to sell everything LKAB produced, while profitability fell slightly as a result of lower prices. Recruitment needs LKAB's growth plans mean that we will need to hire nearly 700 people through 2015, of which half for the new open-pit mines and an equal number to cover the generation shift occurring in the production operations. Interest in working at LKAB has increased in recent years. The number of applicants is rising for most positions. The proportion of female applicants is increasing, and currently 17.5 percent of the company s employees are women. In various studies in which university and college students rank potential employers, LKAB is becoming more popular. The challenge in the coming years is, as usual, the recruitment of specialists. Ventures like our new research centre in Malmberget, which opened in June 2012, pave the way for continued technical leadership in pellet research. LKAB s ambition to maintain its lead over rival pellet manufacturers, both in terms of product characteristics, function and climate impact, requires a continuous injection of new talent. LKAB is therefore continuing its efforts to modernize the image of the company and raise awareness of our operations. An important aspect of these efforts is our increased focus on developing leadership within the company. In 2012 the company s values were integrated into manuals and training courses for performance appraisals and new employees. An effective brand platform was launched with a focus on increased clarity and improved recognition. As a consequence, all subsidiaries except Minelco changed their name in 2012 and are now easily recognized as part of the LKAB Group. Minelco will change its name to LKAB Minerals on 1 July Attractive communities LKAB's recruitment process does not stop at an attractive company. Equally important to our ability to attract and retain talented employees in the future is the attractiveness of the communities in which we operate. This is something LKAB must promote, especially in light of the challenges we pose for Kiruna and Gällivare, as continued operation of the underground mines necessitates relocation of large parts of these communities within the next 20 to 30 years. Urban transformation is necessary to secure jobs and the continuing operation of the underground mines, and requires a sound relationship between LKAB, the municipalities and the people involved. Together, we have the opportunity to lay the groundwork for attracting newcomers to Malmfälten by working for a stimulating, rich living environment that attracts men, women and young people alike. Our success is crucial to LKAB s human resources management.

11 CoNTINued good profitability PresideNT s report 7 In 2012 LKAB signed a partnership agreement with the Municipality of Gällivare concerning Malmberget s future, but because the agreement was challenged, it is not yet legally binding. A partnership agreement with the Municipality of Kiruna already exists. Vision projects funded by LKAB are being conducted in both municipalities. LKAB also works actively to support the schools in our business locations through the LKAB Academy Foundation, among others, and by sponsoring recreational activities for children and youth. Various collaborative projects with local business development companies relate to such diverse areas as improved flight connections and World Cup competitions in cross-country skiing. We also signed a partnership agreement with Narvik s local business development company during the year. Attractive communities require a variety of housing options. In 2012 LKAB decided on new construction and acquisition of residential areas that need refurbishment. There are currently plans to build about 500 new homes in Malmfälten by But that s just the beginning. LKAB hopes to lead the way for other housing developers. Adequate housing construction is a prerequisite for urban transformation to work according to plan. People who need to move must know in advance what options are available, whether they rent or own their home today. Therefore, an increased housing supply with good advance planning is essential. Natural chain reactions can also proceed that give individuals the choice of both new and older homes. Sustainability challenges Urban transformation is LKAB s single greatest sustainability challenge for the future, and yet it is essential to our continued operation. If mining is to proceed at greater depths, people and buildings must move. The same is true of LKAB s sustainability efforts in general. These issues are tightly woven into the company's business, from the climate-smart aspects of our products, through the importance of diversity to our human resources management, and the effect of energy use on costs, to our impact on the environments in which we conduct our business. A sustainable approach is a necessity in a business like LKAB s, where mining takes place in capital-intensive facilities one kilometre under ground. In 2012 LKAB s initiatives and objectives for sustainable development were formulated in a comprehensive sustainability strategy that has four focus areas closely linked to the Group's business strategy. Sustainability is an integral part of LKAB s business. That is why we chose to submit an integrated annual and sustainability report this year. Confidence in the future LKAB s new mines create opportunities for developing housing, schools, trade and vibrant communities in Norrbotten. The geological conditions immediately surrounding our existing mines are also very promising. LKAB s exploration operation was therefore expanded in 2012 through a number of strategic recruitments that will help secure ore reserves for many decades of continued mining. While the mining industry foresees new opportunities, other public interests question the impact of new mines on the nature and culture of northern Sweden. It is important for that debate to be conducted with a holistic approach, while accountability must rule the actions of mining companies. LKAB has a long tradition of good relationships with local stakeholders in our region. We want to preserve and spread that tradition. Steel is a recyclable material. Today scrap constitutes a third of the iron needed for steel production. The greater proportion of the remaining two-thirds that comes from the world s most climate-smart pellet producer, the better for the global environment and climate. Swedish iron ore mining inevitably leaves behind wounds in the landscape. But other than that, the environmental risks are small. LKAB s planned resumption of mining in the Leveäniemi open-pit mine in Svappavaara is a striking illustration of this. Where mining has been discontinued since 1983, there is now an 80-metre-deep, water-filled basin. When the fish are taken care of and the water is pumped out in about a year, the mine will be ready to start up. And it will be done without polluting or the need for any costly decontamination. The Swedish bedrock is a treasure that is worth taking advantage of. LKAB is well positioned to play a leading role in this process. With 122 years of experience in Malmfälten, we embody the continuity that will ensure continued prudent mining in Sweden. Luleå, March 2013 Lars-Eric Aaro, President And CEO

12 8 INTEGRATED RepoRT 2012 business concept, STRATEGy and vision// 8-9 LKAB s business concept is to manufacture and deliver products and services from Malmfälten that generate added value for customers on the world market. Other closely related products that are based on LKAB s know-how and that support the main business are also included in the operation. LKAB s business strategy is to develop, manufacture and sell iron ore products with properties that surpass those of our competitors. An important, business-critical objective is to also be a major supplier to each customer. To maintain and strengthen its industry position and to not be marginalized, LKAB must be able to guarantee the availability of iron ore products in pace with its customers growth. Drastically increasing production over the next few years is consequently LKAB s Groupwide objective. LKAB s vision is to be perceived by its customers as the supplier that provides the best added value, thus becoming the market leader in its chosen segments. LKAB s strategy for sustainable development Our objective is for LKAB to generate prosperity by being one of the most innovative and resource-efficient mining companies in the world.

13 BusINess concept, strategy and vision 9 LKAB has identified six strategic focus areas that are decisive for the company s business strategy and for reaching targeted annual production exceeding 37 million tonnes of finished iron ore products by Performance in Ironmaking Flexibility Committed Innovative Responsible A brand must be built from the ground up. LKAB s values Committed, Innovative and Responsible govern our behaviour and permeate our entire operations. Together, our values clarify and encourage the behaviour that we want others to associate with LKAB and that will help us realize our ambitious growth plans, while we ensure delivery according to our customer promise: Performance in Ironmaking. Safe and resource-efficient production Growth Urban transformation Attractive LKab Committed Innovative Responsible Performance in IronmaKIng LKAB is the world s technologically leading supplier of iron ore pellets to the global steel industry. Performance in Ironmaking is our promise to customers and means that we consistently provide our customers with the market s best added value. On a long-term, growing world market, we want to be the innovator that drives development. read more on page 10 FlexIBILIty The market for our iron ore products has long-term, strong growth. But the major shifts in the global economy mean that we must be prepared to quickly manage temporary fluctuations in demand along the way. This assumes that the actions we take are flexible, from production of finished products to deliveries to the world market. read more on page 16 Safe and resource-efficient production LKAB's competitiveness is directly linked to the fact that we make continuous and sustainable improvements that increase operating efficiency. Safe, smooth, uninterrupted production is the backbone of LKAB s business, which is large-scale and based on continuous optimisation. We have the world's most energy-efficient pellet manufacturing process. With accountability in focus, our ongoing efforts will benefit customers and the environment. Read more on page 22 Growth For continued prosperity it is business-critical for LKAB to be a major supplier to every one of our customers. To do that, we must have the resources to grow with them. This is done by stepping up our delivery capacity, where increased access to ore is key. read more on page 32 Urban transformation LKAB s continued mining and growth plans depend on large parts of Kiruna and Malmberget being gradually moved. This urban transformation is being realized in close collaboration with all stakeholders in order to create long-term, sustainable solutions. LKAB and municipal authorities in our operating locations have a shared interest in building attractive communities that are able to draw people to the area during the entire urban transformation process. read more on page 40 Attractive LKAB A condition of LKAB s planned expansion is that we hire nearly 700 new skilled employees from 2013 to Successful human resources management is based on LKAB having a strong brand that builds on a well-defined customer promise, clear-cut values, equality and diversity, and a safe, pleasant, stimulating work environment. It is just as important for our local communities to be attractive as it is for LKAB to be an attractive employer. read more on page 48

14 10 INTEGRATED RepoRT 2012 performance in ironmaking flexibility safe and resource-efficient production growth urban transformation attractive lkab performance in ironmaking// LKAB is the world s technologically leading supplier of iron ore pellets to the global steel industry. Our goal is to consistently provide our customers with the market's best added value. This is founded on LKAB s basic understanding of the function of its products in its customers reduction processes combined with high-quality, consistent pellet manufacturing. With our experimental blast furnace and agglomeration lab as a base, we have unique tools and research resources for developing processes and products together with our customers. Our Performance in Ironmaking customer promise means that our steelworks customers increase their process efficiency by using LKAB's products. Together, we also put less of a burden on the global climate by making and using LKAB Green Pellets. In a steadily growing world market, we want to be the innovator that drives development.

15 A clear-cut customer promise PeRFormANce in IronmAKING 11 A clear-cut customer promise LKAB has access to a uniquely rich and pure raw material, which we cannot see the end of yet. We process our Norrbotten magnetite into iron ore pellets with the market s best added value. Our products help customers to be more efficient and competitive, and they provide climate benefits. LKAB is the innovator that drives technological development in close collaboration with customers. Together, we create Performance in Ironmaking. Look around you. You see iron and steel everywhere. In infrastructure. In buildings. In vehicles of all kinds. No other material means as much to the development of modern society as iron and steel. The material is a crucial requirement for the continued growth of world prosperity. This is based on a sustainable perspective, since iron and steel produce structures are sustainable over time, while the material remains fully recyclable and is part of the industrial ecosystem. A GROWING MARKET China currently represents the largest, most important market for iron ore products. It is a society undergoing rapid development, which includes better living standards and more migration to cities, requiring continued investments in infrastructure. Although developments are currently marked by uncertainty, nothing fundamental has changed in the iron ore market in the long term. Growth in China is expected to require more steel and the country will be dependent on iron ore imports. In the past ten years, the use of iron ore has more than doubled. Forecasts by independent market analyst CRU indicate a growth market of more than 40 percent over the next ten years. It is easy to see that iron ore is a strategically important product in a global perspective. Scrap shortage more iron ore required Currently, iron ore constitutes about 70 percent of the raw material in iron and steel production. The rest is recycled scrap. However, scrap is becoming a scarce commodity, especially in the fastest-growing countries. This leads us to believe that the expected need for virgin iron ore will increase in the long term. Today, there are basically two methods for making iron and steel. More than 90 percent of production is via the traditional blast furnace process. Of the other methods, the natural-gas-based direct reduction (DR) processes dominate. The DR process is expected to take a larger share of production in the long term. Increased availability of natural gas combined with environmental benefits means that new construction of iron and steel plants will likely be focussed on this process. Currently, iron ore constitutes about 70 percent of the raw material in iron and steel manufacturing

16 12 INTEGRATED RepoRT 2012 Bright future for DR process Blast furnace process most common The blast furnace process is by far the most widely used method for producing iron. By adding coke, which is combusted with blasts air, oxygen is removed from the iron ore. The method produces large amounts of carbon dioxide and uses large amounts of energy. LKAB works with several blast furnace customers to tune processes, develop new and better products, and develop new technologies in order to help improve product quality and reduce environmental impact. These partnerships are based on LKAB s ability to offer customers the opportunity to test possible improvements in the world s only experimental blast furnace. It is a unique tool and an offer that creates opportunities for long-term, frequent collaborations. During the 1970s a new steelmaking process known as the direct reduction process was developed. This process uses natural gas as energy input instead of coke. The process also operates at lower temperatures. The end product from the DR process is sponge iron that is refined into various grades of steel. The DR process has environmental benefits compared to the blast furnace process, since it generates less carbon dioxide per tonne of steel produced. In the Middle East, the vast, inexpensive supply of gas has created a major market for the DR process. The new steel and iron plants under consideration in the US are also based on this process. Natural-gas prices, halved in the US over the past two years, present good opportunities. New technology has enabled exploitation of large deposits of shale gas, which is not completely straightforward from an environmental perspective. PELLET QUALITY THAT ALWAYS HOLDS UP For iron ore pellets to survive transportation, loading and unloading, while maintaining quality, they must be very robust. Before commencing their journey to customers around the world, they are fired in LKAB's pelletizing plant at 1,250 degrees.

17 A clear-cut customer promise PeRFormANce in IronmAKING 13 pellet RESEARch Investments made in the agglomeration laboratory, which was completed in 2012 will strengthen LKAB's technological lead as the best quality pellet manufacturer on the global market. The new laboratory is working with both the cold part of the process (rolling the pellets) and the hot part (sintering the pellets). Leading pellet innovator The raw material for both the blast furnace and DR processes is iron ore. It can be delivered as lump ore, fines (concentrates) or pellets. Pellets are concentrates mixed with additives important to the iron and steel process and formed into small spheroids. The spherical shape of the pellets enables a smoother, more efficient reduction process in steelworks. Pellets are LKAB s main product, representing 84 percent of the company s deliveries. Most deliveries now go to the blast furnace process. But every year we see a significant increase in demand for pellets used in the DR process. The increased availability of natural gas is expected to accelerate this transition. LKAB intends to be at the forefront of this development and is planning in parallel with the experimental blast furnace to also build an experimental installation for the DR process. This will further strengthen LKAB's position as the technologically leading supplier of iron ore pellets. In terms of capacity, with about 15 percent of the global market, we are now one of the three largest pellet suppliers on the market. LKAB will never be the biggest in terms of shipped tonnage. But we ll be number one for customers who demand quality and productivity. That is what the Performance in Ironmaking concept stands for. product development part of the sustainability strategy In 2012 LKAB revised and updated its sustainability strategy. An important focus area is ensuring product competitiveness and process efficiency. That is why LKAB has formulated an objective on developing a new generation of climatesmart pellets by Read about the strategy and the new objectives under the Sustainability Strategy and Governance section on pages Our unique raw material Iron is one of the most common elements in the earth's crust. But it is the quality of the geology in general and the volume that determine whether it is worth mining and being called iron ore. Ore mining is usually done in open-pit mines around the world. Australia and Brazil are the largest producers, with almost half of world production and two-thirds of the global seaborne trade in iron ore. From a global perspective, Sweden is a small producer, but we have a unique geology that means unusually good conditions for iron ore mining. LKAB mines the world s two largest underground iron ore mines. We have managed to make it profitable by being innovative and adapting iron ore mining to large-scale underground mining in a cost-effective manner. Another explanation is that LKAB s iron ore mainly consists of high-grade magnetite. It has an iron content of between 60 and 70 percent, which is outstanding. The major presence of magnetite is also unique to Malmfälten. Ninety percent of the world s known iron ore resources consist of hematite. The difference between magnetite and hematite is in itself only a small oxygen atom. But this small difference means a lot in the production of pellets. Did you know that LKAB has a strong foothold in the Middle East, where there is a shortage of steel?

18 14 INTEGRATED RepoRT 2012 Climate-smart pellets In pellet manufacturing, LKAB s magnetite ore has major advantages over competitors hematite. More than half of the energy requirement is derived from the heat liberated by magnetite when it is converted to hematite. The positive consequence of this is that LKAB does not need to use as much fossil fuel as its competitors that use hematite ore. A full 60 percent CO 2 emissions during sintering and of the energy needed for pelletizing is pelletizing (kg C0 2 /tonne) supplied in this way. That is why we call our pellets LKAB Green Pellets. LKAB has the world s most energy-efficient manufacturing process, even when compared with other magnetite-based pellet manufacturers Learn more about our manufacturing process in the Safe and Resource- Efficient Production section on page Sinter Hematite-based pellets LKAB pellets The total carbon dioxide emissions for production of crude steel, about 2,000 kg CO 2 /tonne, is reduced when LKAB pellets are used as iron raw material. Production of LKAB pellets generates seven times lower carbon dioxide emissions compared to sintering at steelworks and three times lower than in hematite-based pellet production. The reduction is about 215 kg and about 95 kg CO 2 /tonne of crude steel, respectively. Source: Benchmarking of Carbon Dioxide Emissions from Iron Ore Pelletizing, Lawrence Hooey, MEFOS, We help set the agenda Our external research collaboration causes synergy effects and drives development.. For example, we are currently working closely with technology suppliers within the DR process. As rapid growth is expected, we aim to participate in and contribute to the next stage of development. As for the blast furnace process, the challenge is to minimize its weaknesses. Carbon dioxide emissions and energy use must be reduced. Consequently, LKAB is participating, as the only iron ore supplier, in a European collaborative project in the iron and steel industry. The aim of the project, called ULCOS, is to eventually reduce carbon dioxide emissions by 50 percent. LKAB s experimental blast furnace plays an important role in this context. It is also the key to the Course 50 project, of which the aim is to reduce carbon emissions from Japanese steelworks by about 30 percent. research centre IN MALMBERGET New premises and instruments for material parameters are now in place for research and evaluation of how our deposits are affected in the pelletizing process and what product quality can be achieved.

19 A clear-cut customer promise PeRFormANce in IronmAKING 15 Research and development that delivers results Our business strategy is based on LKAB being the technology leader. Our ambition is to be a significant partner to each of our customers. To live up to this, we do extensive research and development in many different dimensions. LKAB has long had extensive partnerships with external centres of excellence, both nationally and internationally. Our own research is closely linked to Luleå University of Technology and the Hjalmar Lundbohm Research Centre, where 25 highly qualified researchers are now employed. Our process and product development aims to leave direct, measurable impressions on our productivity. LKAB s unique agglomeration laboratory plays an important role in this context. Interdisciplinary research is done here in areas such as mineral processing, chemistry, metallurgy and process control and automation, and new pellet types are developed and tested. All with a view to more effective and energy-efficient production. A one percent higher iron content per tonne of ore from the mine gives a significant boost to production in the processing plants, which leads to increased profitability. lkab s experimental blast furnace is unique The experimental blast furnace in Luleå is a unique test facility and the steel industry is showing great interest in it. The furnace provides considerable benefits to process and product development. It is appreciated by our customers, especially since many of the risks of performing fullscale tests in a production blast furnace can be avoided.

20 16 INTEGRATed RepoRT 2012 performance in ironmaking flexibility safe and resource-efficient production growth urban transformation attractive lkab flexibility// LKAB shipped 26.3 million tonnes of iron ore products in That is the largest volume in modern times. The market for our iron ore products shows long-term, strong growth. But major shifts in the global economy mean that we must be prepared to quickly respond to temporary fluctuations in demand along the way. This assumes that the actions we take are flexible in production as well as logistics. When certain markets decline, we must be able to quickly redirect our efforts towards markets with higher demand. We must also be prepared to deal with fluctuations in the market by focussing sharply on customers outside the steel market. All of this requires a high level of flexibility.

21 Quick adaptation to change FlexIBILITy 17 QUIck adaptation to change That the market for iron ore products shows strong, long-term growth is in itself no guarantee of success for LKAB. In the short term, we must have a capacity for flexibility, and preferably benefit from a constantly changing world. Living with change is a normal state for us. Geographic flexibility LKAB Other LKAB produces 90 percent of Europe s iron ore. Our strengths are clear: we have a strong profile in the pellet area, our products are climate-smart, our quality is admittedly high, we can offer a unique combination of experience and expertise. In short, we provide our customers with functional products. A volatile market With a world market share of less than two percent, LKAB is a small iron ore supplier. We operate in a market that is indeed experiencing strong, long-term growth, but which may fluctuate widely in the short term. We must keep this in mind at all times. We must always act in such a way that we can respond to economic downturns and equally important, benefit from upturns in the market. By doing this, we will strengthen our market position. What is important is to have different dimensions of flexibility. The ongoing European debt crisis put its stamp on Uncertainty about economic developments led to a decline in demand for steel and hence iron ore. Europe is LKAB s main market and traditionally represents about two-thirds of the company s sales. This market showed a declining trend in Although LKAB s markets in Germany, the Netherlands and the UK grew, sales of blast furnace pellets decreased sharply in the Nordics. Therefore, we quickly reprioritized the geographic distribution of delivery volumes so as to continue to maintain a high production level. The company already has a strong foothold in the Middle East, so it was a natural step to increase deliveries to customers in this region. There is a shortage of steel in this part of the world and it is an important market for LKAB s DR pellets. In the latter part of 2012 we were also able to increase deliveries to China. Overall, this geographic redistribution led to LKAB reaching its highest delivery-volume ever in Global trade in iron ore (Mt) GLOBAL trade in iron ore products The world market for iron ore products did not generally change in LKAB s sales in the Nordic countries and Europe decreased, while deliveries to the Middle East and China increased during the year. Countries with most exports Australia (521 Mt) Brazil (327 Mt) South Africa (58 Mt) India (37 Mt) Ukraine (36 Mt) Canada (35 Mt) Source: CRU Countries/regions with most imports China (739 Mt) EU 27 (126 Mt) Japan (124 Mt) South Korea (62 Mt) Middle East (27 Mt)