As a global steel and mining group, EVRAZ is exposed to a range of risks and inherent uncertainties that are explained more fully in this section. The Group’s principal risks and its approach to managing them, together with the latest financial forecasts and five-year strategic plan, have formed the basis of this long-term viability assessment. EVRAZ believes that a five-year period is optimal for the viability analysis, as it corresponds to the period used in the Group’s strategic planning and therefore reflects the information available to management regarding the future performance of the business. Visibility of performance and risks beyond the strategic planning cycle is limited, and scenarios beyond this five-year period have not been analysed for the purposes of the viability statement. The Group considered the emerging risk of climate change but determined that it did not pose a material threat to the business over the period of the viability assessment. As a result, no specific climate change scenario was modelled.
In accordance with provision 31 of the UK Corporate Governance Code 2018, the Board has assessed the Group’s prospects over the period of the current strategic plan to December 2025 and considers it possible to form a reasonable expectation of the Group’s viability over this five-year period. The assessment included consideration of the stress-testing detailed below, with particular attention paid to the forecast cash position and compliance with financial maintenance covenants in each scenario, as well as the mitigation plan developed by management.
The assessment was underpinned by scenarios that encompass a wide spectrum of potential events. These scenarios are designed to explore the Group’s resilience to the significant risks set out on Principal risks and uncertainties and combinations of correlated risks. Some risks are outside the Group’s control and the potential implications are difficult to predict in the current environment and considered remote. The key scenarios tested can be summarised as:
- Base scenario:
- The key assumptions as disclosed in Note 6 to the financial statements under Impairment of assets on Consolidated financial statements with notes
- Future pricing of steel and raw materials is within the range of the external analyst forecasts set out in Note 6.
- Annual steel volumes are assumed to vary from -2.5% to 10.5%, compared with the 2020 level over the five-year period to December 2025.
- Global economic decline:
- Steel and raw material prices and exchange rates during 2021 and future periods are at the lower end of the external analyst forecast set out in Note 6.
- Sales volumes are assumed to decrease by 3.0% in comparison with the base scenario.
- Increased conversion costs in the CIS.
- Increased CAPEX.
- Potential changes in HSE requirements and standards.
- Appreciation of local operating currencies.
- Cybersecurity failure resulting in production delays or shutdowns at a major operation.
- Introduction of new tariffs and duties.
- Business interruption, leading to lost production and restoration costs.
- Combinations of correlated risks/scenarios.
The scenarios are designed to be severe but plausible. They take full account of the potential actions available to mitigate the occurrence and impact of the risk, and the likely effectiveness of such action. The process makes certain assumptions about the normal level of capital recycling likely to occur and considers whether additional financing facilities will be required and available in each scenario. EVRAZ considers this assessment of its prospects based on stress-testing to be reasonable, given the risks and inherent uncertainties facing the business.
The directors confirm that their assessment of the principal risks facing the Group is robust. Based on this robust assessment and the stress-testing of the Group’s prospects across several risk-related scenarious, including the possible impacts of the potential coal assets demerger, the directors have a reasonable expectation that EVRAZ will be able to continue in operation and meet its liabilities as they fall due over the five-year period to December 2025.
In making this statement, the directors have made the following key assumptions:
- Funding or refinancing, by way of capital markets, bank debt and asset financing, continues to be available.
- Selling prices over the five year viability period will not fall significantly below the lower end of the external analyst forecasts assumed in the severe but plausible scenarios.